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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K/A**

**Amendment No. 1**

 

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**(Mark One)**

 

**x**    **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For thefiscal year ended December 31, 2009**

 

**OR**

 

**o**      **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition periodfrom            to           **

 

**CommissionFile Number 1-16017**

 

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**ORIENT-EXPRESSHOTELS LTD.**

(Exact name of registrant asspecified in its charter)

 

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

 

**22 VictoriaStreet,Hamilton HM 12, Bermuda**

(Address of principalexecutive offices)

 

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

 

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SECURITIES REGISTEREDPURSUANT TO SECTION 12(b) OF THE 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 REGISTEREDPURSUANT TO SECTION 12(g) OF THE ACT: **None.**

 

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

 

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

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Act during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x   No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate website, if any, everyInteractive Data File required to be submitted and posted pursuant toRule 405 of Regulation S-T during the preceding 12 months (or for suchshorter period that the registrant was required to submit and post suchfiles).  Yes o  No o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. (Not applicable. See thirdparagraph under Item 1—Business on page 4 of Form 10-K)

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company.  Seedefinition of “large accelerated filer”, “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the 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) |   |                              |

 

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

 

The aggregate market value of the Class A commonshares held by non-affiliates of the registrant computed by reference to theclosing price on June 30, 2009 (the last business day of the registrant’ssecond fiscal quarter in 2009) was approximately $647,000,000.

 

As of June 14, 2010, 90,797,225 Class Acommon shares and 18,044,478 Class B common shares of the registrant wereoutstanding.  All of the Class B sharesare owned by a subsidiary of the registrant (see Note 14(d) to theFinancial Statements (Item 8) in Form 10-K).

 

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DOCUMENTS INCORPORATED BYREFERENCE:  **None**

 

 

 

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**EXPLANATORY NOTE**

 

Orient-Express Hotels Ltd.(the “registrant”) is filing this Amendment No. 1 (the “Amendment”) to itsAnnual Report on Form 10-K for the fiscal year ended December 31,2009, filed with the U.S. Securities and Exchange Commission (“SEC”) on February 26,2010 (The “Original Filing”).

 

This Amendment is beingfiled because, pursuant to Rule 3-09 of SEC Regulation S-X, the registrantis required to file audited financial statements of Hotel Ritz Madrid S.A.,Ferrocarril Transandino S.A. and Perurail S.A. and audited combined financial statements of Peru OEH S.A.and Peru OEH Machu Picchu S.A., each a 50% owned unconsolidated company.  The audited financial statements of thesefive unconsolidated companies are filed in this Amendment under Item 15 -Exhibits and Financial Statement Schedules.

 

Except as described above,no other changes have been made to the Original Filing, and this Form 10-K/Adoes not amend, update or change any other items or disclosures in the OriginalFiling.  This Form 10-K/A does notreflect events occurring after the Original Filing and, other than providingthe audited financial statements of the five unconsolidated companies namedabove under Item 15, does not modify or update the disclosures in the OriginalFiling in any way.

 

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**PART IV**

 

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

 

1.  Financial Statements

 

(a) Hotel Ritz Madrid S.A.

 
| ** **                                                          | **Page Number** |
|---------------------------------------------------------------------|----------------------|
| Report of  independent registered public accounting firm            | 4                    |
| Financial  statements - year ended December 31, 2009 and 2008: |                 |
| Balance sheets  (December 31, 2009 and 2008)                   | 5                    |
| Statements of  operations                                           | 6                    |
| Statements of cash  flows                                           | 7                    |
| Statements of  shareholders’ equity                            | 8                    |
| Notes to financial  statements                                      | 9                    |

 

Also presented are theunaudited statements of operations, cash flows and shareholders’ equity for theyear ended December 31, 2007.

 

(b) Ferrocarril Transandino S.A.

 
| ** **                                                 | **Page Number** |
|------------------------------------------------------------|----------------------|
| Report of  independent registered public accounting firm   | 23                   |
| Financial  statements - year ended December 31, 2009: |                 |
| Balance sheet  (December 31, 2009)                    | 24                   |
| Statement of  operations                                   | 25                   |
| Statement of cash flows                                    | 26                   |
| Statement of  shareholders’ equity                    | 27                   |
| Notes to financial  statements                             | 28                   |

 

Also presented are theunaudited balance sheet as at December 31, 2008 and the unauditedstatements of operations, cash flows and shareholders’ equity for the yearsended December 31, 2008 and 2007.

 

(c) Perurail S.A.

 
| ** **                                                 | **Page Number** |
|------------------------------------------------------------|----------------------|
| Report of independent registered public accounting firm    | 45                   |
| Financial  statements - year ended December 31, 2009: |                 |
| Balance  sheet (December 31, 2009)                    | 46                   |
| Statement  of operations                                   | 47                   |
| Statement  of cash flows                                   | 48                   |
| Statement of shareholders’ equity                     | 49                   |
| Notes to financial statements                              | 50                   |

 

Also presented are theunaudited balance sheet as at December 31, 2008 and the unauditedstatements of operations, cash flows and shareholders’ equity for the yearsended December 31, 2008 and 2007.

 

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(d) Peru OEH S.A. and Peru OEHMachu Picchu S.A.

 
| ** **                                                 | **Page Number** |
|------------------------------------------------------------|----------------------|
| Report of independent registered public accounting  firm   | 66                   |
| Financial  statements - year ended December 31, 2009: |                 |
| Combined  balance sheet (December 31, 2009)           | 67                   |
| Combined statement of operations                           | 68                   |
| Combined statement of cash flows       | 69                   |
| Combined statement of shareholders’ equity            | 71                   |
| Notes to financial statements                              | 72                   |

 

Also presented are theunaudited combined balance sheet as at December 31, 2008 and the unauditedcombined statements of operations, cash flows and shareholders’ equity for theyears ended December 31, 2008 and 2007.

 

2.  Financial Statement Schedule

 

Incorporated by reference tothe financial statement schedule filed with the Original Filing.  No additional financial statement schedule isfiled with this report on Form 10-K/A.

 

3.  Exhibits

 

The index to exhibitsappears below, on the pages immediately following the signature page tothis report.

 

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Report of IndependentRegistered Public Accounting Firm

 

To the Board of Directorsand Shareholders of Hotel Ritz Madrid S.A.:

 

We have audited theaccompanying balance sheets of Hotel Ritz Madrid S.A. as of December 31,2009 and 2008, and the related statements of operations, shareholders’ equityand cash flows for the years then ended.  These financial statements arethe responsibility of the Company’s management.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe that our audits provide a reasonablebasis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Hotel Ritz Madrid S.A. at December 31,2009 and 2008, and the results of its operations and its cash flows for theyears then ended in conformity with accounting principles generally accepted inthe United States of America.

 

The accompanying financialstatements have been prepared assuming that the Company will continue as agoing concern. As discussed in Note 1(b) to the financial statements, theCompany has suffered recurring losses from operations and is out of compliancewith its mortgage loan facility covenants that raise substantial doubt aboutits ability to continue as a going concern. Management’s plans in regard tothese matters are also described in Note 1(b). The financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 

PricewaterhouseCoopers

Madrid, Spain

June 7, 2010

 

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**Hotel Ritz Madrid S.A.**

**Balance Sheets**

** **
| ** **                                                                                       | ** ** | **December 31,**    | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                       | ** ** | **(Euros in thousands)** | ** ** |
| ** **                                                                                       | ** ** | **2009**                 | ** ** | **2008** | ** ** |
| ** **                                                                                       | ** ** | ** **               | ** ** | ** ** | ** ** |
| **Assets**                                                                                       |       |                     |       |   |   |
| Cash  and cash equivalents                                                                       |       | €                   | 521        |   | € | 1,147 |   |
| Accounts  receivable, net of allowances of €56 and €56                                 |       | 1,533                    |       | 1,930 |   |
| Prepaid  expenses                                                                                |       | 87                       |       | 51 |   |
| Inventories                                                                                      |       | 1,701                    |       | 2,014 |   |
| Total  current assets                                                                            |       | 3,842                    |       | 5,142 |   |
|                                                                                             |       |                     |       |   |   |
| Property,  plant and equipment, net of accumulated depreciation of €15,341 and €13,080 |       | 123,011                  |       | 124,930 |   |
| Goodwill                                                                                         |       | 4,200                    |       | 4,200 |   |
| Trademark                                                                                        |       | 22,000                   |       | 22,000 |   |
| Deferred  financing costs                                                                        |       | 1,134                    |       | 1,215 |   |
|                                                                                             |       | €                   | 154,187    |   | € | 157,487 |   |
| **Liabilities and Shareholders’ Equity**                                                    |       |                     |       |   |   |
| Working  capital facilities                                                                      |       | €                   | 2,191      |   | € | 11,210 |   |
| Accounts  payable                                                                                |       | 2,120                    |       | 1,772 |   |
| Due  to related parties                                                                          |       | 15,309                   |       | 2,422 |   |
| Accrued  liabilities                                                                             |       | 2,823                    |       | 2,502 |   |
| Deferred  revenue                                                                                |       | 438                      |       | 555 |   |
| Current  portion of long-term debt                                                               |       | 75,800                   |       | 78,700 |   |
| Total  current liabilities                                                                       |       | 98,681                   |       | 97,161 |   |
|                                                                                             |       |                     |       |   |   |
| Long-term  debt                                                                                  |       | 800                      |       | — |   |
| Other  liabilities                                                                               |       | 1,532                    |       | 1,470 |   |
| Deferred  income taxes                                                                           |       | 27,511                   |       | 29,700 |   |
|                                                                                             |       | 128,524                  |       | 128,331 |   |
| Commitments  and contingencies                                                                   |       |                     |       |   |   |
|                                                                                             |       |                     |       |   |   |
| Shareholders’  equity:                                                                      |       |                     |       |   |   |
| Common  shares €3.00 par value (20,000 shares authorized):                                  |       |                     |       |   |   |
| Issued  – 20,000 (2008 – 20,000)                                                       |       | 60                       |       | 60 |   |
| Additional  paid-in capital                                                                      |       | 37,235                   |       | 37,235 |   |
| Retained  earnings                                                                               |       | (11,632                  | )          | (8,139 | ) |
| Total shareholders’ equity                                                                  |       | 25,663                   |       | 29,156 |   |
|                                                                                             |       |                     |       |   |   |
|                                                                                             |       | €                   | 154,187    |   | € | 157,487 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**Hotel Ritz Madrid S.A.**

**Statements of Operations**

 
| ** **                           | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                           | ** ** | ** **                       | ** ** | ** ** | ** ** | **(unaudited)** | ** ** |
| ** **                           | ** ** | **(Euros in thousands)**         | ** ** |
| Revenue                              |       | €                           | 23,127     |   | € | 29,966 |   | € | 30,979 |   |
|                                 |       |                             |       |   |   |   |   |
| Expenses:                            |       |                             |       |   |   |   |   |
| Depreciation                         |       | 2,343                            |       | 2,410 |   | 2,415 |   |
| Operating                            |       | 14,789                           |       | 17,374 |   | 16,709 |   |
| Goodwill  impairment loss            |       | —                           |       | 7,105 |   | — |   |
| Trademark  impairment loss           |       | —                           |       | 2,000 |   | — |   |
| Selling,  general and administrative |       | 6,968                            |       | 6,693 |   | 6,966 |   |
| Total  expenses                      |       | 24,100                           |       | 35,582 |   | 26,090 |   |
|                                 |       |                             |       |   |   |   |   |
| (Loss)/earnings  from operations     |       | (973                             | )          | (5,616 | ) | 4,889 |   |
|                                 |       |                             |       |   |   |   |   |
| Interest  expense, net               |       | (4,709                           | )          | (4,974 | ) | (4,940 | ) |
| Net  finance costs                   |       | (4,709                           | )          | (4,974 | ) | (4,940 | ) |
|                                 |       |                             |       |   |   |   |   |
| Loss  before income taxes            |       | (5,682                           | )          | (10,590 | ) | (51 | ) |
|                                 |       |                             |       |   |   |   |   |
| Provision  for income taxes          |       | 2,189                            |       | 1,494 |   | 19 |   |
|                                 |       |                             |       |   |   |   |   |
| Net  loss                            |       | €                           | (3,493     | ) | € | (9,096 | ) | € | (32 | ) |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**Hotel Ritz Madrid S.A.**

**Statements of Cash Flows**

 
| ** **                                                                                  | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                  | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                  | ** ** | ** **                       | ** ** | ** ** | ** ** | **(unaudited)** | ** ** |
| ** **                                                                                  | ** ** | **(Euros in thousands)**         | ** ** |
| Cash  flows from operating activities:                                                      |       |                             |       |   |   |   |   |
| Net  loss                                                                                   |       | €                           | (3,493     | ) | € | (9,096 | ) | € | (320 | ) |
|                                                                                        |       |                             |       |   |   |   |   |
| Adjustment  to reconcile net loss to net cash provided by operating activities:             |       |                             |       |   |   |   |   |
| Depreciation                                                                                |       | 2,343                            |       | 2,410 |   | 2,415 |   |
| Amortization  of deferred finance costs                                                     |       | 81                               |       | 114 |   | 84 |   |
| Impairment  loss                                                                            |       | —                           |       | 9,105 |   | — |   |
| Loss  from disposal of fixed assets                                                         |       | 52                               |       | 24 |   | 21 |   |
| Other  non-cash items                                                                       |       | —                           |       | 14 |   | (3 | ) |
| Change  in deferred tax                                                                     |       | (2,189                           | )          | (1,494 | ) | (19 | ) |
| Change  in assets and liabilities:                                                          |       |                             |       |   |   |   |   |
| Decrease/(increase)  in accounts receivable, prepaid expenses and other                     |       | 361                              |       | 863 |   | (587 | ) |
| Decrease/(increase)  in inventories                                                         |       | 312                              |       | (123 | ) | (120 | ) |
| Increase  in accounts payable, accrued liabilities, deferred revenue and other  liabilities |       | 781                              |       | 200 |   | 386 |   |
| Total  adjustments                                                                          |       | 1,741                            |       | 11,114 |   | 2,176 |   |
| Net  cash (used in)/provided by operating activities                                        |       | (1,752                           | )          | 2,018 |   | 2,144 |   |
|                                                                                        |       |                             |       |   |   |   |   |
| Cash  flows from investing activities:                                                      |       |                             |       |   |   |   |   |
| Capital  expenditures                                                                       |       | (476                             | )          | (1,471 | ) | (1,400 | ) |
| Net  cash used in investing activities                                                      |       | (476                             | )          | (1,471 | ) | (1,400 | ) |
|                                                                                        |       |                             |       |   |   |   |   |
| Cash  flows from financing activities:                                                      |       |                             |       |   |   |   |   |
| Proceeds  from long-term debt                                                               |       | 1,000                            |       | — |   | — |   |
| Proceeds  from shareholder loans                                                            |       | 12,721                           |       | — |   | — |   |
| Net  proceeds from working capital facilities                                               |       | (9,019                           | )          | 2,646 |   | 2,031 |   |
| Principal  payments under long-term debt                                                    |       | (3,100                           | )          | (2,800 | ) | (2,500 | ) |
| Net  cash provided by/(used in) financing activities                                        |       | 1,602                            |       | (154 | ) | (469 | ) |
|                                                                                        |       |                             |       |   |   |   |   |
| Net  (decrease)/increase in cash and cash equivalents                                       |       | (626                             | )          | 393 |   | 275 |   |
| Cash  and cash equivalents at beginning of year                                             |       | 1,147                            |       | 754 |   | 479 |   |
| Cash  and cash equivalents at end of year                                                   |       | €                           | 521        |   | € | 1,147 |   | € | 754 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**Hotel Ritz Madrid S.A.**

**Statements of Shareholders’ Equity**

** **
| **(Euros in  thousands)**                   | ** ** | **Common********Shares********At Par********Value** | ** ** | **Additional********Paid-In********Capital** | ** ** | **Retained********Earnings** | ** ** | **Total********Comprehensive********Income/(Loss)** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------|------------|
| Balance,  January 1, 2007(unaudited)   |       | €                                              | 60         |                                         | €     | 37,235                       |       | €                                              | 989        |   |   |   |
|                                        |       |                                                |       |                                         |       |                         |       |                                                |       |
| Comprehensive  income:                      |       |                                                |       |                                         |       |                         |       |                                                |       |
| Net  loss for the year                      |       | —                                              |       | —                                       |       | (32                          | )          | €                                              | (32        | ) |
|                                        |       |                                                |       |                                         |       |                         |       | €                                              | (32        | ) |
| Balance,  December 31, 2007(unaudited) |       | 60                                                  |       | 37,235                                       |       | 957                          |       |                                                |       |
|                                        |       |                                                |       |                                         |       |                         |       |                                                |       |
| Comprehensive  income:                      |       |                                                |       |                                         |       |                         |       |                                                |       |
| Net  loss for the year                      |       | —                                              |       | —                                       |       | (9,096                       | )          | €                                              | (9,096     | ) |
|                                        |       |                                                |       |                                         |       |                         |       | €                                              | (9,096     | ) |
| Balance,  December 31, 2008            |       | 60                                                  |       | 37,235                                       |       | (8,139                       | )          |                                                |       |
|                                        |       |                                                |       |                                         |       |                         |       |                                                |       |
| Comprehensive  income:                      |       |                                                |       |                                         |       |                         |       |                                                |       |
| Net  loss for the year                      |       | —                                              |       | —                                       |       | (3,493                       | )          | €                                              | (3,493     | ) |
|                                        |       |                                                |       |                                         |       |                         |       | €                                              | (3,493     | ) |
| Balance,  December 31, 2009            |       | €                                              | 60         |                                         | €     | 37,235                       |       | €                                              | (11,632    | ) |   |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**Hotel Ritz Madrid S.A.**

**Notes to Financial Statements**

 

**1.****                          ****Summary ofsignificant accounting policies and basis of presentation**

 

*(a)          Business*

 

In this report Hotel RitzMadrid SA is referred to as the “Company”. The Company owns and operates TheHotel Ritz in Madrid, Spain.

 

The Company is 50% ownedindirectly by Orient-Express Hotels Ltd. (“OEH”) and 50% owned indirectly byOmega Capital S.L. (“Omega”).

 

*(b)          Basis of presentation and liquidity*

 

The accompanying financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America and reflect the results ofoperations, financial position and cash flows of the Company.  Thefinancial statements have been prepared using the historical cost basis in theassets and liabilities and the historical results of operations directlyattributable to the Company in the normal course of business.

 

As noted in Note 6 below, atDecember 31, 2009, the Company was out of compliance with a debt servicecoverage ratio in its first mortgage loan facility, which is non-recourse toand not credit-supported by the shareholders. A total of €75,600,000 had beenborrowed under this loan facility at December 31, 2009. The Companycontinues to service fully the interest and principal repayments as these falldue, including a principal repayment of €3,400,000 in April 2010, and iscontinuing to negotiate with the lender to determine how to bring the Companyback into compliance.

 

The risk that the Companymay not successfully complete this renegotiation with the lender and obtain therelated amendment of certain financial covenants included in the loan facility,and/or the risk that the Company may not have adequate liquidity to fund itsoperations as a result of not meeting its projected financial results, even ifthe renegotiation is completed, raise substantial doubt about the Company’sability to continue as a going concern.

 

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During2009 and 2010, the Company has taken steps to reduce its operating and selling,general and administrative expenses. In addition, the Company is developingrenovation plans that should enhance future revenue growth.  Managementbelieves these actions will enable the Company to improve its futureprofitability. While these activities are on-going, shareholders continue toprovide participative loan financing as necessary to support the operations ofthe Company.  As a result, the financial statements do not include anyadjustments to reflect the possible future effects on the recoverability andclassification of assets or the amounts and classification of liabilities thatmay result from the outcome of the Company’s ability to continue as a goingconcern.

 

“FASB” means FinancialAccounting Standards Board.  “SFAS” meansStatement of Financial Accounting Standards of the FASB, and “FIN” means anaccounting interpretation of the FASB. “ASC” means the Accounting StandardsCodification of the FASB.

 

*(c)           Cash and cash equivalents*

 

Cash and cash equivalentsinclude all cash balances and highly-liquid investments having originalmaturities of three months or less.

 

*(d)          Foreign currency*

 

The functional currency ofthe Company is Euros which is also the local currency and reporting currency ofthe Company. Foreign currency transaction gains and losses are recognized inearnings as they occur.

 

*(e)           Estimates*

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reportingperiod.  Significant estimates include, but are not limited to, the allowancefor doubtful accounts, valuation of intangible assets and goodwill,depreciation and amortization, taxes and contingencies.  Actual resultscould differ materially from management’s estimates.

 

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*(f)            Accounts receivable*

 

The Company states itsaccounts receivable at their estimated net realizable value. The Companymaintains allowance for doubtful accounts for specifically identified estimatedlosses resulting from the inability of its customers to make required payments.

 

*(g)          Deferred financing costs*

 

Debt issuance costs incurredin connection with the placement of long-term debt are capitalized andamortized to interest expense over the lives of the related debt.

 

*(h)          Revenue recognition*

 

Hotel and restaurant revenueis recognized when the rooms are occupied and the services are performed. Deferred revenue consisting of deposits paid in advance is recognized asrevenue when the services are performed.

 

*(i)           Marketing costs*

 

Marketing costs are expensedas incurred and are reported in selling, general and administrativeexpenses.  Marketing costs include costs of advertising and othermarketing activities.  These costs were €836,500 in 2009 (2008-€1,164,000;2007-€1,158,000 (unaudited)).

 

*(j)            Interest expense, net*

 

The Company capitalizesinterest during the construction of assets. Interest expense, net excludesinterest which has been capitalized in the amount of €136,000 in 2009(2008-€119,000; 2007-€86,000 (unaudited)).

 

*(k)          Income taxes*

 

The Company accounts forincome taxes in accordance with ASC 740 “Income Taxes” (formerly SFAS 109 “Accountingfor Income Taxes”).  The objectives of accounting for income taxes are torecognize the amount of taxes payable or refundable for the current year and torecognize deferred tax liabilities and assets for the future tax consequencesof events that have been recognized in the Company’s financial statements ortax returns.

 

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Current and deferred taxassets and liabilities are recognized for estimated taxes payable or refundabledue to temporary differences and carryforwards. All available evidence, bothpositive and negative, is considered to determine whether, based on the weightof that evidence, a valuation allowance is needed for some portion or all of adeferred tax asset. Judgment is used in considering the relative impact ofnegative and positive evidence.

 

ASC 740-20 (formerly FIN 48 “Accountingfor Uncertainty of Income Taxes”) requires that any liability created forunrecognized tax benefits is disclosed. The application of ASC 740-20 may alsoaffect the tax bases of assets and liabilities and therefore may change orcreate deferred tax liabilities or assets. The Company would recognize interestand penalties related to unrecognized tax benefits in provision for income taxes.At December 31, 2009 and 2008, respectively, the Company did not recordany liabilities for uncertain tax positions.

 

*(l)           Inventories*

 

Inventories include food,beverages, certain operating stocks and retail goods.  Inventories arevalued at the lower of cost or market value under the first-in, first-outmethod.

 

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

 

Property, plant andequipment, net are stated at cost less accumulated depreciation.  The costof significant renewals and betterments is capitalized and depreciated, whileexpenditures for normal maintenance and repairs are expensed as incurred.

 

Depreciation expense iscomputed using the straight-line method over the following estimated usefullives:

 
| **Description**                    | ** ** | **Useful lives** | ** ** |
|------------------------------------|------------|------------------|------------|
|                               |       |             |       |
| Building                           |       | Up to 40 years   |       |
| Machinery  and equipment           |       | 5 to 25 years    |       |
| Furniture,  fixtures and equipment |       | 5 to 15 years    |       |

 

Art and certain antiques arenot depreciated.

 

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*(n)          Impairment of long-lived assets*

 

In accordance with ASC360-10-35 “Impairment or Disposal of Long-Lived Assets-Subsequent Measurement”(formerly SFAS 144 “Accounting for the Impairment or Disposal of Long-LivedAssets”), the Company’s management reviews long-lived assets whenever events orchanges in circumstances indicate that the carrying amount of the assets maynot be recoverable.  In the event that an impairment occurs, the Companyrecords a charge to income calculated as the excess of the asset’s carryingvalue over the estimated fair value.

 

*(o)       Goodwill*

 

In accordance with ASC 350 “Intangibles-Goodwilland Other” (formerly SFAS 142 “Goodwill and Other Intangible Assets”), goodwillmust be evaluated at least annually to determine impairment.  Goodwill isnot amortized.  The goodwill impairment testing under ASC 350 is performedin two steps, first, the determination of impairment based upon the fair valueof a reporting unit as compared with its carrying value and, second, if thereis an implied impairment, the measurement of the amount of impairment loss isdetermined by comparing the implied fair value of goodwill with the carryingamount of that goodwill.  Impairment testing is performed annually at yearend.  Other intangible assets with indefinite useful lives are alsoreviewed for impairment in accordance with ASC 350. During 2009, no impairmentlosses relating to goodwill have been identified or recorded (2008-€7,105,000)(see Note 3).

 

*(p)          Trademark*

 

Trademark has indefiniteuseful life and is reviewed annually for impairment in accordance with ASC 350 “Intangibles-Goodwilland Other” (formerly SFAS 142 “Goodwill and Other Intangible Assets”). During 2009, no impairment losses relating to the trademark have beenidentified or recorded (2008-€2,000,000) (see Note 4).

 

*(q)          Concentration of credit risk*

 

Due to the nature of theleisure industry, concentration of credit risk with respect to tradereceivables is limited.  The Company’s customer base is comprised ofnumerous customers across different geographic areas.

 

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*(r)           Other liabilities*

 

Other liabilities consist ofprovision for severance payments that are due to be paid to certain employeeson their retirement according to local legislation. Employees who are at least50 years old and worked for the Company for at least 10 years are entitled toreceive a lump-sum payment when they leave employment with the Company. Theprovision is recorded based on the information about staff ages, years ofservice and history of staff turnover in the Company.

 

*(s)           Risks and uncertainties*

 

The Company’s futureoperating results are subject to a number of risks, including, but not limitedto, competition, competitive pricing pressures, economic slowdowns, the Company’sability to sustain and manage growth and the Company’s ability to attract andretain key personnel.

 

The Company’s primaryfinancial market exposure related to changes in interest rates.

 

*(t)           Subsequent events*

 

For the year ended December 31,2009, the Company has evaluated subsequent events for potential recognition anddisclosure through June 7, 2010, the date of financial statement issuance.

 

*(u)          Recent accounting pronouncements*

 

*ASU2009-13*

 

In October 2009, theFASB issued ASU 2009-13 “Revenue Recognition” on multiple-deliverable revenuearrangements. ASU 2009-13 codifies the consensus in EITF Issue 08-1, whichsupersedes Issue 00-21 (codified in ASC 605-25). The ASU was issued in responseto concerns related to the accounting for revenue arrangements with multipledeliverables under Issue 00-21 and applies to all deliverables in contractualarrangements in all industries in which a vendor will perform multiplerevenue-generating activities, except when some or all deliverables in amultiple-deliverable arrangement are within the scope of other, more specificsections of the ASC (e.g., ASCs 840, 952, 360-20 (pre-ASC guidance from SFAS13, 45, and 66) and other sections of ASC 605 on revenue recognition (e.g.,pre-ASC guidance from SOPs 81-1 and 97-2)).

 

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ASU 2009-13 is effective forfiscal years beginning on or after June 15, 2010. The Company does notexpect any material impact from the adoption of the ASU.

 

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

 

The major classes ofproperty, plant and equipment are as follows (Euros in thousands):

 
| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                               | ** ** | ** **            | ** ** | ** ** | ** ** |
| Building                                 |       | €                | 129,820    |   | € | 129,654 |   |
| Machinery  and equipment                 |       | 3,922                 |       | 3,875 |   |
| Fixtures,  fittings and office equipment |       | 4,610                 |       | 4,481 |   |
|                                     |       | 138,352               |       | 138,010 |   |
| Less:  accumulated depreciation          |       | (15,341               | )          | (13,080 | ) |
|                                     |       | €                | 123,011    |   | € | 124,930 |   |

 

**3.             Goodwill**

 

The change in the carryingamount of goodwill for the year ended December 31, 2009 is as follows(Euros in thousands):

 
| ** **                            | ** ** | **Year ended********December 31, 2009** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|
| Balance  as of January 1, 2009   |       | €                                       | 4,200      |   |
| Goodwill  impairment                  |       | —                                       |       |
| Balance  as at December 31, 2009 |       | €                                       | 4,200      |   |

 

During 2009, the Company didnot have any goodwill impairment charges as part of its annual impairmenttesting as of December 31, 2009. Under the first step of the 2009 testing, the fair value of thereporting unit was approximately 5% in excess of its carrying value. There isno guarantee that the Company ́s business will achieve the forecasted resultswhich have been included in its impairment analysis due to the impact of theeconomic downturn in the Spanish market. If the Company is unable to meet theseforecasted results in future reporting periods, the Company may be required torecord a charge in a future statement of operations for goodwill impairmentcharges.

 

The change in the carryingamount of goodwill for the year ended December 31, 2008 is as follows(Euros in thousands):

 

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| ** **                            | ** ** | **Year ended********December 31, 2008** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|
| Balance  as of January 1, 2008   |       | €                                       | 11,305     |   |
| Goodwill  impairment                  |       | (7,105                                       | )          |
| Balance  as at December 31, 2008 |       | €                                       | 4,200      |   |

 

The gross goodwill amount atJanuary 1, 2009 was €4,200,000 (January 1, 2008-€11,305,000) and theaccumulated impairment at that date was €7,105,000 (2008-€nil).

 

The Company’s goodwillimpairment testing is performed in two steps: first, the determination ofimpairment based upon the fair value of the reporting unit as compared with itscarrying value and, second, if there is an implied impairment, the measurementof the amount of the impairment loss is determined by comparing the impliedfair value of goodwill with the carrying value of the goodwill. If the carryingvalue of the reporting unit’s goodwill exceeds its implied fair value, thegoodwill is deemed to be impaired and is written down to the extent of thedifference.

 

The determination of theimpairment incorporates various assumptions and uncertainties that the Companybelieves are reasonable and supportable considering all available evidence,such as the future cash flows of the business, future growth rates and therelated discount rate. However, these assumptions and uncertainties are, bytheir very nature, highly judgmental.

 

During 2008, due to thedownturn in the economy the Company identified and recorded goodwill impairmentloss in the amount of €7,105,000.

 

**4.             Trademark**

 

Thechanges in the carrying amount of the trademark (an unamortized intangibleasset) for the years ended December 31, 2009 and 2008 are as follows(Euros in thousands):

** **
| ** **                            | ** ** | **Year ended********December 31, 2009** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|
| ** **                            | ** ** | ** **                                   | ** ** |
| Balance  as of January 1, 2009   |       | €                                       | 22,000     |   |
| Impairment                            |       | —                                       |       |
| Balance  as of December 31, 2009 |       | €                                       | 22,000     |   |

 

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| ** **                            | ** ** | **Year ended********December 31, 2008** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|
| ** **                            | ** ** | ** **                                   | ** ** |
| Balance  as of January 1, 2008   |       | €                                       | 24,000     |   |
| Impairment                            |       | (2,000                                       | )          |
| Balance  as of December 31, 2008 |       | €                                       | 22,000     |   |

 

The Company’s trademarkasset was reviewed for impairment by comparing its carrying value with the fairvalue. An impairment loss has been identified and recorded as atDecember 31, 2008. The fair value was estimated based on expected futurecash flows, growth rates and discount rates which were lower than in previousyears due to the downturn in the market that occurred over the last few monthsof 2008.

 

**5.             Working capital facilities**

 

Working capital facilitiesare composed of the following, all repayable within one year (Euros inthousands):

 
| ** **                                                                                                            | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                            | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                                                                                                            | ** ** | ** **            | ** ** | ** ** | ** ** |
| Unsecured  working capital facilities, with a weighted average annual interest rate of  3.28% and 5.53%, respectively |       | €                | 2,191      |   | € | 11,210 |   |
|                                                                                                                       |            |                       |            |  |  |  |  |

 

The Company had a €3,000,000working capital line of credit at December 31, 2009 (2008-€13,000,000)issued by one financial institution and having an expiration date ofApril 9, 2010, of which €809,000 was undrawn (2008-€1,790,000).  OEHand Omega each guaranteed, through 2009, €1,500,000 of this working capitalfacility of the Company in which they each have an indirect 50% equityinvestment.

 

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**6.****                                     ****Long-term debt**

 

Long-term debt consists ofthe following (Euros in thousands):

 
| ** **                                                                                                                                                                             | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                             | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                                                                                                                                                                             | ** ** | ** **            | ** ** | ** ** | ** ** |
| Loans  from banks collateralized by property, plant and equipment payable over  periods of 1 to 14 years, with a weighted average annual interest rate of  5.5% and 5.5%, respectively |       | €                | 75,600     |   | € | 78,700 |   |
| Loans  from governmental financial institution payable over 5 years, with a weighted  average annual interest rate of 1.5%                                                             |       | 1,000                 |       | — |   |
|                                                                                                                                                                                   |       | 76,600                |       | 78,700 |   |
| Less:  current portion                                                                                                                                                                 |       | (75,800               | )          | (78,700 | ) |
|                                                                                                                                                                                   |       | €                | 800        |   | € | — |   |

 

In July 2009, the Companyborrowed €1,000,000 from a governmental financial institution (Instituto deCrédito Oficial) at a fixed rate of 1.5% and with semi-annual installments overfive years.

 

At December 31, 2009,the Company was out of compliance with a debt service coverage ratio in itsfirst mortgage loan facility, which is non-recourse to and not credit-supportedby the shareholders. A total of €75,600,000 had been borrowed under this loanfacility at December 31, 2009. The Company continues to service fully theinterest and principal repayments as these fall due, including a principalrepayment of €3,400,000 in April 2010, and is continuing to negotiate withthe lender to determine how to bring the Company back into compliance.  Noassurances can be given that the Company will be successful in completing thesenegotiations and therefore the €75,600,000 borrowings have been shown in thecurrent portion of long-term debt.

 

The following is a summaryof the aggregate maturities of long-term debt at December 31, 2009 (Eurosin thousands):

 
| **Year  ending December 31,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
|                               |       |       |       |
| 2009                               |       | €     | 75,600     |   |
| 2010                               |       | 194        |       |
| 2011                               |       | 197        |       |
| 2012                               |       | 200        |       |
| 2013                               |       | 203        |       |
| 2014  and thereafter               |       | 206        |       |
|                               |       | €     | 76,600     |   |

 

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** **

**7.****                                     ****Other liabilities**

 

Other liabilities atDecember 31, 2009 amount to €1,532,000 (2008-€1,470,000) relating todeferred retirement benefit obligations of the Company. There are no assets tobe disclosed.

 

**8.****                                     ****Income taxes**

 

The provision for incometaxes consists of the following (Euros in thousands):

 
| ** **           | ** ** | **Year ended December 31** | ** ** |
|----------------------|------------|---------------------------------|------------|
| ** **           | ** ** | **2009**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **           | ** ** | ** **                      | ** ** | ** ** | ** ** | **(unaudited)** | ** ** |
| Pre-tax  loss        |       |                            |       |   |   |   |   |
| Spain                |       | €                          | (5,682     | ) | € | (10,590 | ) | € | (51 | ) |
|                 |       |                            |       |   |   |   |   |
| Current  tax         |       |                            |       |   |   |   |   |
| Spain                |       | €                          | —     |   | € | — |   | € | — |   |
|                 |       |                            |       |   |   |   |   |
| Deferred  tax credit |       |                            |       |   |   |   |   |
| Spain                |       | €                          | 2,189      |   | € | 1,494 |   | € | 19 |   |

 

No income taxes were paidduring 2009, 2008 and 2007.

 

The reconciliations of theSpanish income tax rate to the Company’s effective tax rate for the three yearsended December 31, 2009 are as follows:

 
| ** **                                            | ** ** | **Year ended December 31** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **2009**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                            | ** ** | ** **                      | ** ** | ** ** | ** ** | **(unaudited)** | ** ** |
|                                                  |       |                            |       |   |   |   |   |
| Spanish  income tax rate                              |       | 30                              | %          | 30 | % | 32.5 | % |
| Permanent  difference relating to goodwill impairment |       | 10                              | %          | (16 | )% | — |   |
| Other  permanent differences                          |       | (1                              | )%         | — |   | 4.5 | % |
| Effective  tax rate                                   |       | 39                              | %          | 14 | % | 37 | % |

 

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamount of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes.  The following represents theCompany’s net deferred tax liabilities (Euros in thousands):

 

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| ** **                                                | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                                                | ** ** | ** **            | ** ** | ** ** | ** ** |
| Gross  deferred tax assets:                               |       |                  |       |   |   |
| Operating  loss carryforwards                             |       | €                | 5,292      |   | € | 3,475 |   |
| Employee  retirement provision                            |       | 460                   |       | 441 |   |
| Less:  valuation allowance                                |       | —                |       | — |   |
| Net  deferred tax assets                                  |       | 5,752                 |       | 3,916 |   |
| Deferred  tax liabilities (depreciation and amortization) |       | (33,263               | )          | (33,616 | ) |
| Net  deferred tax liabilities                             |       | €                | (27,511    | ) | € | (29,700 | ) |

 

The deferred tax assetsconsist primarily of tax loss carryforwards. The gross amount of tax losscarryforwards is €17,638,894. Of this amount, €nil will expire in the fiveyears ending December 31, 2014, €201,000 will expire in the five yearsending December 31, 2019, a further €11,382,271 will expire in the fiveyears ended December 31, 2024. The remaining losses of €6,055,427 willexpire in the year ended December 31, 2025. No valuation allowance hasbeen provided against gross deferred tax assets as it is not thought morelikely than not that the benefits associated with these assets will not berealized.

 

The deferred tax liabilitiesconsist primarily of differences between the tax basis of depreciable assetsand the adjusted basis as reflected in the financial statements.

 

**9.****                           ****Supplemental cash flow information**

** **
| ** **      | ** ** | **Year ended December 31,** | ** ** |
|-----------------|------------|----------------------------------|------------|
| ** **      | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **      | ** ** | ** **                       | ** ** | ** ** | ** ** | **(unaudited)** | ** ** |
| ** **      | ** ** | **(Euros in thousands)**         | ** ** |
| Cash  paid for: |       |                             |       |   |   |   |   |
| Interest        |       | €                           | 4,717      |   | € | 4,913 |   | € | 4,989 |   |
|                 |            |                                  |            |  |  |  |  |  |  |  |

 

**10.****                    ****Shareholders’ equity**

 

*(a)**                              **Sharecapital and additional-paid in capital*

 

At December 31, 2009,the Company’s share capital consisted of 20,000 fully subscribed and paidshares with a par value of three euros each, all carrying the same rights. Theadditional paid-in capital amounts to €37,235,000 and is a distributablereserve, except an amount of €1,500,000 at December 31, 2009 (2008-€nil)which is non-distributable under Spanish Law.

 

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The shareholders of theCompany are as follows:

 
| ** **                            | ** ** | **Number of********shares** | ** ** | **Percent of********ownership** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
|                                  |       |                        |       |                            |       |
| Orient-Express  Spanish Holding, S.L. |       | 9,995                       |       | 49.98                           |       |
| Landis  Inversiones S.L.              |       | 9,995                       |       | 49.98                           |       |
| Other                                 |       | 10                          |       | 0.04                            |       |
|                                  |       | 20,000                      |       | 100.00                          |       |

 

Landis Inversiones S.L. is awholly-owned subsidiary of Omega Capital S.L.

 

*(b)**                   **Retainedearnings*

 

Within retained earningsthere is an amount of €3,202,000 at December 31, 2009 (2008-€3,202,000)which is non-distributable under Spanish Law.

 

**11.****                              ****Commitments and contingencies**

 

Outstanding contracts topurchase fixed assets were approximately €nil at December 31, 2009(2008-€nil). There are no operating leases.

 

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

 

The components ofcomprehensive loss are as follows (Euros in thousands):

 
| ** **          | ** ** | **Year ended December 31,** | ** ** |
|---------------------|------------|----------------------------------|------------|
| ** **          | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **          | ** ** | ** **                       | ** ** | ** ** | ** ** | **(unaudited)** | ** ** |
| Net  loss           |       | €                           | (3,493     | ) | € | (9,096 | ) | € | (32 | ) |
| Comprehensive  loss |       | €                           | (3,493     | ) | € | (9,096 | ) | € | (32 | ) |

 

**13.****                              ****Fair value**

 

Certain methods andassumptions were used to estimate the fair value of each class of financialinstruments for which it is practicable to estimate fair value. The carryingamount of cash and cash equivalents and working capital facilities approximatesfair value because of the short maturity of those instruments. The fair valueof debt is calculated by discounting back future interest and principalpayments using a discount factor which reflects the Company’s current creditmetrics. This factor is derived from credit analysis using inputs such asprofit, cash generation, and level of debt.

 

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The estimated fair values ofthe Company’s financial instruments as of December 31, 2009 and 2008 areas follows (Euros in thousands):

 
| ** **                                 | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|
| ** **                                 | ** ** | **Carrying amount**        | ** ** | **Fair value** | ** ** |
| Cash  and cash equivalents                 |       | €                     | 521        |   | € | 521 |   |
| Working  capital facilities                |       | €                     | 2,191      |   | € | 2,191 |   |
| Long-term  debt, including current portion |       | €                     | 76,600     |   | € | 58,866 |   |

 
| ** **                                 | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|
| ** **                                 | ** ** | **Carrying amount**        | ** ** | **Fair value** | ** ** |
| Cash  and cash equivalents                 |       | €                     | 1,147      |   | € | 1,147 |   |
| Working  capital facilities                |       | €                     | 11,210     |   | € | 11,210 |   |
| Long-term  debt, including current portion |       | €                     | 78,700     |   | € | 53,112 |   |

 

The carrying values ofnon-financial assets that are measured on a non-recurring basis approximatetheir fair values.

 

**14.****                              ****Related party transactions**

 

OEH holds an indirect 50%interest in the Company accounted for under the equity method.  For theyear ended December 31, 2009, OEH earned €694,000 (2008-€883,000;2007-€1,218,000 (unaudited)) in management fees, which are included in theCompany’s selling, general and administrative expenses.  The amount due toOEH from the Company at December 31, 2009 was €7,380,000(2008-€1,219,000), with the increase primarily due to OEH providingparticipative loans to the Company in 2009 of €6,100,000 (2008–€nil) to fundoperations in 2009, at an interest rate of 3.05% with an original maturity in April 2010and subject to renewal for additional periods as necessary.

 

The amount due to Omega fromthe Company at December 31, 2009 was €7,926,000 (2008-€1,203,000), withthe increase due to Omega providing participative loans to the Company in 2009 of€6,621,000 (2008-€nil) to fund operations in 2009, at an interest rate of 3.05%with an original maturity in April 2010 and subject to renewal foradditional periods as necessary.

 

In July 2009, theCompany entered into a restructuring plan involving certain employees. All theemployees took their cases to court.  Asof December 31, 2009, several of the cases had been resolved and theremaining ones were scheduled for a hearing in February 2010.  In February 2010,the Company settled with the Union (cancelling all court hearings) and agreedthe employment status of several of the employees and signed voluntaryagreements with the remaining employees to leave employment with the Company.

 

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BDO — Pazos, López de Romaña,Rodriguez S.C.

 

Report ofIndependent Registered Public Accounting Firm

 

Board of Directors and Shareholders

Ferrocarril Transandino S.A.

Lima, Peru

 

We haveaudited the accompanying balance sheet of Ferrocarril Transandino S.A. as of December 31,2009, and the related statements of operations, cash flows, and shareholders’equity for the year ended December 31, 2009. These financial statementsare the responsibility of the Company ́s management. Our responsability is toexpress an opinion on these financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Ferrocarril Transandino S.A. at December 31,2009, and the results of its operations and its cash flows for the year ended December 31,2009, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

Pazos, López de Romaña,Rodriguez S.C.

Lima, Peru

June 4,2010

 

Countersigned by:

 
| /s/ MANUEL PAZOS VÉLEZ |   |   |
|-----------------------------|--------|--------|
| Manuel Pazos Vélez     |

CertifiedChartered Public Accountant

Register No. 01-05095

 

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**Ferrocarril Transandino S.A.**

**Balance Sheets**

 
| ** **                                                                                           | ** ** | **December 31,**      | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                           | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| ** **                                                                                           | ** ** | ** **                 | ** ** | **(unaudited)** | ** ** |
| ** **                                                                                           | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                                                                                           |       |                       |       |   |   |
| Cash  and cash equivalents                                                                           |       | $                          | 1,304      |   | $ | 452 |   |
| Restricted  cash                                                                                     |       | 5,464                      |       | 5,902 |   |
| Accounts  receivable                                                                                 |       | 5,957                      |       | 11,560 |   |
| Prepaid  expenses                                                                                    |       | 2,145                      |       | 1,166 |   |
| Inventories                                                                                          |       | 2,363                      |       | 5,061 |   |
| Total  current assets                                                                                |       | 17,233                     |       | 24,141 |   |
|                                                                                                 |       |                       |       |   |   |
| Deferred  employees’ profit sharing, net                                                        |       | —                     |       | 1 |   |
|                                                                                                 |       |                       |       |   |   |
| Consideration  to the state                                                                          |       | 23,400                     |       | — |   |
| Property,  plant and equipment, net of accumulated depreciation of $9,968 and $8,444                 |       | 67,018                     |       | 40,164 |   |
| Intangibles,  net                                                                                    |       | 263                        |       | 287 |   |
|                                                                                                 |       | $                          | 107,914    |   | $ | 64,593 |   |
| **Liabilities  and Shareholders’ Equity**                                                       |       |                       |       |   |   |
| Working  capital facilities                                                                          |       | $                          | 3,131      |   | $ | 809 |   |
| Accounts  payable                                                                                    |       | 947                        |       | 1,093 |   |
| Accrued  liabilities                                                                                 |       | 6,821                      |       | 8,047 |   |
| Due  to related parties                                                                              |       | 6,729                      |       | 4,039 |   |
| Current  portion of long-term debt                                                                   |       | 6,981                      |       | 1,725 |   |
| Total  current liabilities                                                                           |       | 24,609                     |       | 15,713 |   |
|                                                                                                 |       |                       |       |   |   |
| Deferred  revenue                                                                                    |       | 23,400                     |       | — |   |
| Long-term  debt                                                                                      |       | 20,678                     |       | 13,994 |   |
| Deferred  employees’ profit sharing, net                                                        |       | 134                        |       | — |   |
| Deferred  tax liability, net                                                                         |       | 11,063                     |       | 9,255 |   |
|                                                                                                 |       | 79,884                     |       | 38,962 |   |
| Commitments  and contingencies                                                                       |       |                       |       |   |   |
|                                                                                                 |       |                       |       |   |   |
| Shareholders’  equity:                                                                          |       |                       |       |   |   |
| Common  shares S/1.00 par value (7,460,210 shares authorized) Issued - 7,460,210  (2008 - 7,460,210) |       | 2,098                      |       | 2,098 |   |
| Legal  reserve                                                                                       |       | 546                        |       | 526 |   |
| Retained  earnings                                                                                   |       | 25,386                     |       | 23,007 |   |
| Total  shareholders’ equity                                                                     |       | 28,030                     |       | 25,631 |   |
|                                                                                                 |       |                       |       |   |   |
|                                                                                                 |       | $                          | 107,914    |   | $ | 64,593 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**Ferrocarril Transandino S.A.**

**Statements of Operations**

** **
| ** **                           | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                           | ** ** | ** **                       | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **                           | ** ** | **(Dollars in thousands)**       | ** ** |
| ** **                           | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                              |       | $                                | 17,365     |   | $ | 19,234 |   | $ | 17,872 |   |
|                                 |       |                             |       |   |   |   |   |
| Expenses:                            |       |                             |       |   |   |   |   |
| Operating                            |       | (2,122                           | )          | (2,265 | ) | (1,667 | ) |
| Depreciation  and amortization       |       | (1,627                           | )          | (1,500 | ) | (1,390 | ) |
| Impairment  loss                     |       | (2                               | )          | — |   | (151 | ) |
| Selling,  general and administrative |       | (6,769                           | )          | (7,692 | ) | (6,549 | ) |
| Total  expenses                      |       | (10,520                          | )          | (11,457 | ) | (9,757 | ) |
|                                 |       |                             |       |   |   |   |   |
| Earnings  from operations            |       | 6,845                            |       | 7,777 |   | 8,115 |   |
|                                 |       |                             |       |   |   |   |   |
| Interest  expense, net               |       | (1,649                           | )          | (1,410 | ) | (1,551 | ) |
| Foreign  currency, net               |       | 421                              |       | 138 |   | (23 | ) |
| Net  finance costs                   |       | (1,228                           | )          | (1,272 | ) | (1,574 | ) |
|                                 |       |                             |       |   |   |   |   |
| Earnings  before income tax          |       | 5,617                            |       | 6,505 |   | 6,541 |   |
|                                 |       |                             |       |   |   |   |   |
| Provision  for income taxes          |       | (2,258                           | )          | (1,835 | ) | (2,163 | ) |
|                                 |       |                             |       |   |   |   |   |
| Net  earnings                        |       | $                                | 3,359      |   | $ | 4,670 |   | $ | 4,378 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**Ferrocarril Transandino S.A.**

**Statements of Cash Flows**

 
| ** **                                                                          | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                          | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                          | ** ** | ** **                       | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **                                                                          | ** ** | **(Dollars in thousands)**       | ** ** |
| Cash  flows from operating activities:                                              |       |                             |       |   |   |   |   |
| Net  earnings                                                                       |       | $                                | 3,359      |   | $ | 4,670 |   | $ | 4,378 |   |
|                                                                                |       |                             |       |   |   |   |   |
| Adjustment  to reconcile net earnings to net cash provided by operating activities: |       |                             |       |   |   |   |   |
| Depreciation                                                                        |       | 1,570                            |       | 1,466 |   | 1,352 |   |
| Amortization                                                                        |       | 57                               |       | 34 |   | 38 |   |
| Impairment  loss                                                                    |       | 2                                |       | — |   | 151 |   |
| Change  in deferred tax                                                             |       | 1,808                            |       | 1,044 |   | 1,101 |   |
| Change  in employees’ profit sharing                                           |       | 135                              |       | — |   | (1 | ) |
| Change  in assets and liabilities:                                                  |       |                             |       |   |   |   |   |
| Decrease/(increase)  in accounts receivable                                         |       | 5,257                            |       | (6,939 | ) | 5,782 |   |
| Decrease/(increase)  in inventories                                                 |       | 2,698                            |       | (2,937 | ) | (511 | ) |
| (Increase)/decrease  in prepaid expenses                                            |       | (979                             | )          | 952 |   | (780 | ) |
| (Decrease)/increase  in accounts payable                                            |       | (146                             | )          | 23 |   | 213 |   |
| Decrease  in accrued liabilities                                                    |       | (880                             | )          | (1,869 | ) | (1,574 | ) |
| Increase  in due to related parties                                                 |       | (357                             | )          | 652 |   | (687 | ) |
| Total  adjustments                                                                  |       | 9,165                            |       | (7,574 | ) | 5,084 |   |
| Net  cash provided by/(used in) operating activities                                |       | 12,524                           |       | (2,904 | ) | 9,462 |   |
|                                                                                |       |                             |       |   |   |   |   |
| Cash  flows from investing activities:                                              |       |                             |       |   |   |   |   |
| Proceeds  from sale of fixed assets                                                 |       | —                           |       | — |   | 21 |   |
| Capital  expenditures                                                               |       | (28,459                          | )          | (4,989 | ) | (4,524 | ) |
| Decrease/(increase)  in restricted cash                                             |       | 438                              |       | (381 | ) | (764 | ) |
| Net  cash used in investing activities                                              |       | (28,021                          | )          | (5,370 | ) | (5,267 | ) |
|                                                                                |       |                             |       |   |   |   |   |
| Cash  flows from financing activities:                                              |       |                             |       |   |   |   |   |
| Payment  of dividends                                                               |       | (960                             | )          | (1,200 | ) | (210 | ) |
| Net  proceeds from/(repayments of) working capital facilities                       |       | 2,322                            |       | 252 |   | (959 | ) |
| Proceeds  from long-term debt                                                       |       | 23,505                           |       | 9,515 |   | 36 |   |
| Principal  payments under long-term debt                                            |       | (11,565                          | )          | (3,263 | ) | (3,225 | ) |
| Increase  in working capital loans from related parties                             |       | 3,047                            |       | 2,557 |   | 996 |   |
| Net  cash provided by/(used in) financing activities                                |       | 16,349                           |       | 7,861 |   | (3,362 | ) |
|                                                                                |       |                             |       |   |   |   |   |
| Net  increase in cash and cash equivalents                                          |       | 852                              |       | (413 | ) | 833 |   |
|                                                                                |       |                             |       |   |   |   |   |
| Cash  and cash equivalents at beginning of year                                     |       | 452                              |       | 865 |   | 32 |   |
| Cash  and cash equivalents at end of year                                           |       | $                                | 1,304      |   | $ | 452 |   | $ | 865 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**Ferrocarril Transandino S.A.**

**Statements of Shareholders’ Equity**

** **
| **(Dollars  in thousands)**                  | ** ** | **Common********Shares********At Par********Value** | ** ** | **Legal Reserve** | ** ** | **Retained********Earnings** | ** ** | **Total********Comprehensive********Income/(Loss)** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------|------------|-------------------|------------|------------------------------|------------|-----------------------------------------------------|------------|
| Balance,  January 1, 2007 (unaudited)   |       | $                                                   | 2,098      |              | $          | 32                           |       | $                                                   | 16,983     |   |   |   |
|                                         |       |                                                |       |              |       |                         |       |                                                |       |
| Dividends                                    |       | —                                              |       | —            |       | (1,330                       | )          |                                                |       |
| Net  earnings                                |       | —                                              |       | —            |       | 4,378                        |       | $                                                   | 4,378      |   |
| Legal  reserve                               |       | —                                              |       | 65                |       | (65                          | )          |                                                |       |
|                                         |       |                                                |       |              |       |                         |       | $                                                   | 4,378      |   |
| Balance,  December 31, 2007 (unaudited) |       | 2,098                                               |       | 97                |       | 19,966                       |       |                                                |       |
|                                         |       |                                                |       |              |       |                         |       |                                                |       |
| Dividends                                    |       | —                                              |       | —            |       | (1,200                       | )          |                                                |       |
| Net  earnings                                |       | —                                              |       | —            |       | 4,670                        |       | $                                                   | 4,670      |   |
| Legal  reserve                               |       | —                                              |       | 429               |       | (429                         | )          |                                                |       |
|                                         |       |                                                |       |              |       |                         |       | $                                                   | 4,670      |   |
| Balance,  December 31, 2008 (unaudited) |       | 2,098                                               |       | 526               |       | 23,007                       |       |                                                |       |
|                                         |       |                                                |       |              |       |                         |       |                                                |       |
| Dividends                                    |       | —                                              |       | —            |       | (960                         | )          |                                                |       |
| Net  earnings                                |       | —                                              |       | —            |       | 3,359                        |       | $                                                   | 3,359      |   |
| Legal  reserve                               |       | —                                              |       | 20                |       | (20                          | )          |                                                |       |
|                                         |       |                                                |       |              |       |                         |       | $                                                   | 3,359      |   |
| Balance,  December 31, 2009             |       | $                                                   | 2,098      |              | $          | 546                          |       | $                                                   | 25,386     |   |   |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**Ferrocarril Transandino S.A.**

**Notes to Financial Statements**

 

**1.****                          ****Summary ofsignificant accounting policies and basis of presentation**

 

*(a)**                              **Business*

 

Ferrocarril Transandino S.A.(hereinafter the “Company”) was incorporated in the city of Lima, Peru in 1999.

 

The Company is 50% owned byOrient-Express Hotels Ltd. (“OEH”) incorporated in Bermuda, and 50% owned byPeruval Corp S.A. (“Peruval”) incorporated in Panama.

 

Its headquarters andregistered address are located at Av. Alcanfores # 775, District ofMiraflores, Department of Lima.

 

The purpose of the Companyis to act as the concessionaire of the South and South-East Railways of Peru,for which it is authorized to engage mainly in the management of the right ofuse of the railways and all types of supplementary services, as well as in theconstruction, maintenance and repair of railway infrastructure, except forcargo and/or passenger services.

 

To be able to engage in thisbusiness, in September 1999, the Company was awarded the South andSouth-East Railways operation by the Peruvian State through public biddingcalled by the Ministry of Transport and Communications (“MTC”). The term of theconcession is 30 years extendable for up to a maximum of 60 years. Each renewalis approved in five-year increments. In 2003, MTC granted the Company its firstextension of the concession contract, but in 2008, MTC denied the secondextension. Therefore, the Company has adjusted its useful life of theconcession for a period of up to 55 years.

 

*(b)**                              **Basisfor the presentation*

 

The accompanying financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America and reflect the results ofoperations, financial position and cash flows of the Company.  Thefinancial statements have been prepared using the historical cost basis in theassets and liabilities and the historical results of operations directlyattributable to the Company in the normal course of business.

 

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As noted in Note 7 below, atDecember 31, 2009, the Company was out of compliance with the currentratio in one of its loans that has been guaranteed by OEH. At that date,$3,642,860 was owed under this loan facility. The Company continues to servicefully the interest and principal repayments as these fall due, and is continuingto negotiate with the lender to determine how to bring the Company back intocompliance. Because the Company was out of compliance, the balance outstandingat December 31, 2009 has been shown in the current portion of long-termdebt.

 

*(c)**                               **Estimates*

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reportingperiod.  Significant estimates include, but are not limited to, theallowance on devaluation of various supplies, valuation of fixed assets,depreciation, taxes and contingencies.  Actual results could differmaterially from management’s estimates.

 

*(d)**                              **Foreigncurrency*

 

The functional currency ofthe Company is the US Dollar, which is also the reporting currency of theCompany. The local currency is Nuevos Soles. Foreign currency transaction gainsand losses are recognized in earnings as they occur.

 

*(e)**                               **Cashand cash equivalents*

 

Cash and cash equivalentsinclude all cash balances and highly-liquid investments having originalmaturities of three months or less.

 

*(f)**                                  **Restrictedcash*

 

In the statements of cashflows for the years ended December 31, 2009, 2008 and 2007, changes inrestricted cash balances have been reported in investing activities.

 

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*(g)**                              **Inventories*

 

Inventories include suppliesfor the maintenance of fixed assets.  Inventories are valued at the lowerof cost or market value under the average cost method.

 

*(h)**                              **Incometaxes*

 

*Currentportion of income tax*

 

Income tax for the currentperiod is measured at the amount expected to be paid to the taxationauthorities. The rates and laws used to compute the amount are those in forceas of the balance sheet date.

 

*Deferredportion of income tax*

 

Deferred income taxes areprovided using the balance sheet method on temporary differences at the balancesheet date between the tax and book bases of assets and liabilities.

 

All deductible temporarydifferences and loss carryforwards generate the recognition of deferred taxassets to the extent that it is probable that they can be used in calculatingtaxable income in future years. Deferred income tax is recognized for alldeductible temporary differences and tax loss carryforwards, to the extent thatis more likely than not that taxable profit will be available against which thedeductible temporary differences and unused tax losses can be utilized. Thecarrying amount of the deferred income tax assets is reviewed at each balancesheet date and reduced to the extent that it is no longer probable thatsufficient taxable profit will be available to allow all or part of thedeferred asset to be utilized. Unrecognized deferred assets are reassessed ateach balance sheet date.

 

Deferred income tax assetsand deferred income tax liabilities are offset if a legally enforceable rightexists to set off current tax assets against current income tax liabilities andthe deferred income taxes relate to the same taxable entity and the sametaxation authority.

 

ASC 740-20 “Income Taxes”(formerlyFIN 48 “Accounting for Uncertainty of Income Taxes”) requires that anyliability created for unrecognized tax benefits is disclosed. The applicationof ASC 740-20 may also affect the tax bases of assets and liabilities andtherefore may change or create deferred tax liabilities or assets. The Companywould recognize interest and penalties related to unrecognized tax benefits inprovision for income taxes. At December 31, 2009 and 2008, the Company didnot record any liabilities for uncertain tax positions.

 

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

 

Property, plant andequipment, net are stated at cost less accumulated depreciation.  The costof significant renewals and betterments is capitalized and depreciated, whileexpenditures for normal maintenance and repairs are expensed as incurred.

 

Depreciation expense iscomputed using the straight-line method over the following estimated usefullives:

 
| Installations                                 |   | 33 years       |
|-----------------------------------------------|--------|----------------|
| Machinery and equipment                       |   | 10 years       |
| Transport units                               |   | 5 years        |
| Furniture and fixtures                        |   | 10 years       |
| Various equipment                             |   | 4 to 10 years  |
| Goods of the concession                       |   |           |
| Improvements  in railway infrastructure       |   | 10 to 52 years |
| Improvements  in locomotive and rolling stock |   | 10 to 27 years |
| Improvements  in other infrastructure         |   | 33 years       |
| Machinery  and equipment                      |   | 10 to 33 years |
| Transport  units                              |   | 5 years        |
| Various  equipment                            |   | 4 to 10 years  |

 

*(j)**                                  **Intangibles,net*

 

Software costs are recordedunder assets and classified as intangibles if such costs are not part of therelated hardware. Software is amortized using the straight-line method.

 

Amortization expense iscomputed using the straight-line method over the following estimated usefullives:

 
| Concessions  and rights |   | 55  years |   |
|-------------------------|--------|-----------|--------|
| Logo and trademarks     |   | 30  years |   |
| Software and licenses   |   | 4  years  |   |

 

*(k)**                              **Impairmentof long-lived assets*

 

In accordance with ASC360-10-35 “Impairment or Disposal of Long-Lived Assets-Subsequent Measurement”(formerly SFAS 144 “Accounting for the Impairment or Disposal of Long-LivedAssets”), the Company’s management reviews long-lived assets whenever events orchanges in circumstances indicate that the carrying amount of the assets maynot be recoverable.  In the event that an impairment occurs, the Companyrecords a charge to income calculated as the excess of the asset’s carryingvalue over the estimated fair value.

 

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*(l)**                                 **Employees’length of service compensation*

 

The provision for employees’length of service compensation included under taxes and other accounts payableis charged to operations as the compensation becomes due.

 

*(m)**                            **Revenuerecognition*

 

Revenue is primarily earned on a per kilometer basisas locomotives and rolling stock move along rail tracks managed under theconcession granted to the Company.  Revenue is also earned from themanagement of assets (i.e., rental of locomotives (including self-propelledcars) and rolling stock) provided under the concession for use in the operationof the railway infrastructure.

 

Revenues in providing theseservices are recognized, as appropriate, when:

 

1.                          The amount ofrevenues can be reliably quantified;

 

2.                          Thetransaction-related economic benefits are likely to flow to the Company;

 

3.                          The degree of completionof the transaction, on the date of the balance, can be reliably quantified; and

 

4.                          The costsincurred in providing the services, as well as those still to be incurred untilcompleted, can be reliably quantified.

 

*(n)**                              **Interestexpense, net*

 

The Company capitalizesinterest during the construction of assets. Interest expense, net excludesinterest which has been capitalized in the amount of $898,450 in 2009 and$98,382 (unaudited) in 2008.

 

*(o)**                              **Deferredfinancing costs*

 

Debt issuance costs incurredin connection with the placement of long-term debt are capitalized andamortized to interest expense over the term of the related debt.

 

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*(p)**                              **Riskand uncertainties*

 

The Company ́s activitiesexpose it to a variety of financial risks: market risks (including interestrate risk and exchange risk), credit risk, and liquidity risk. The Company’srisk management program tries to minimize the potential adverse effects on itsfinancial performance. Management is aware of the market conditions and, basedon its knowledge and experience, controls the exchange, interest rate, creditand liquidity risks, following the policies approved by the Board of Directors.The most important aspects of these risks are:

 

*Liquidity risk*

 

Liquidity risk is the riskthat cash may not be available to pay obligations at their maturity at a fairvalue. The Company controls the required liquidity through a proper managementof asset and liability maturity dates, so that the flow of cash matches futurepayments

 

*Credit risk*

 

The Company ́s financialassets that are potentially exposed to concentration of credit risk are mainlytrade accounts receivable, accounts receivable from related parties and fromshareholders, and various accounts receivable.

 

*Interest rate risk*

 

The Company’s exposure tothis risk arises from changes in the interest rates in its financial assets andliabilities. The Company keeps mainly long-term debt subject to a floatinginterest rate.  Management does notexpect to incur significant losses due to interest rate risk.

 

*Exchange risk*

 

The Company carries out itstransactions mostly in foreign currency, but management estimates that anyfluctuation will not adversely affect the results of the Company’s operations.

 

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*(q)**                              **Deferredemployee profit sharing*

 

In accordance with Peruvianlaw, employee profit sharing is limited to 18 times an employee’s monthly averagesalary. The excess of calculated statutory employee profit sharing is paid tothe Peruvian government and is treated as an additional tax. The Company’spractice is to recognize the employee profit sharing as part of operating costand any excess profit sharing is recognized as part of current income tax. TheCompany has a 5% rate for calculating employee profit sharing.  To date, no excess profit sharing has beenrecognized.

 

*(r)**                                **Recentaccounting pronouncements*

 

*ASU2009-13*

 

InOctober 2009, the FASB issued ASU 2009-13 “Revenue Recognition” onmultiple-deliverable revenue arrangements. ASU 2009-13 codifies the consensusin EITF Issue 08-1, which supersedes Issue 00-21 (codified in ASC 605-25). TheASU was issued in response to concerns related to the accounting for revenuearrangements with multiple deliverables under Issue 00-21 and applies to alldeliverables in contractual arrangements in all industries in which a vendorwill perform multiple revenue-generating activities, except when some or alldeliverables in a multiple-deliverable arrangement are within the scope ofother, more specific sections of the ASC (e.g., ASCs 840, 952, 360-20 (pre-ASCguidance from SFAS 13, 45, and 66) and other sections of ASC 605 on revenuerecognition (e.g., pre-ASC guidance from SOPs 81-1 and 97-2)).

 

ASU 2009-13 is effective forfiscal years beginning on or after June 15, 2010. The Company does notexpect any material impact from the adoption of the ASU.

 

**2.****                           ****Considerations paid to the Peruvian State**

 

In 1999, the Companyreceived a concession from the Peruvian State represented by MTC relating tothe use of rail track, rail stations and other ancillary rail-related servicesand businesses of the South and South-East Railways in Peru.  Through this concession, the Company investsin and develops rail tracks, stations and other rail services where it has beengranted rights to perform such services, and receives revenues from charges itassesses various users of those services. In exchange for this concession, the Company pays consideration to MTCas follows:

 

·                                Main consideration, amounting to 37.25% of gross revenues as defined inthe concession contract, not including any revenues from the lease of locomotivesand rolling stock, which is to be paid annually.

 

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·                                Specialconsideration, amounting to 50% of the revenues obtained from the lease oflocomotives and rolling stock, which is to be paid on a monthly basis.

 

According to thespecifications provided in the public bidding documents, during the first fiveyears of the concession (up to September 2004), the Company was releasedfrom paying 100% of these considerations, provided that it invested in railwayreconditioning or maintenance in amounts equal to or higher than those computedas considerations. Between the sixth and the tenth years of the concession (asfrom September 2004), the percentage reduced to 50%. Between the tenth and20th years of the concession (as from September 2009), the Company isentitled to apply annually towards the payment of the main consideration 10% ofany balance amount of officially recognized track investments made during theperiod from September 2004 through September 2009 which had notpreviously been applied towards the 50% reduction.

 

The total amount invested inevery period must be reported to Organismo Supervisor de la Inversión enInfraestructura de Transporte de Uso Público (“OSITRAN”) which requiresfinancial statements presented to OSITRAN by the Company to reflect thefavorable balance resulting from its higher investments which will be appliedagainst future settlements. The balance of the accounts will be progressivelyapplied during ten years, 10% annually, against the settlements ofcompensations due the State.

 

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

 

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

 
| ** **                      | ** ** | **December 31,** | ** **                                          |
|---------------------------------|------------|-----------------------|-----------------------------------------------------|
| ** **                      | ** ** | **2009**              | ** **                                          | **2008** | ** ** |
| ** **                      | ** ** | ** **            | ** **                                          | **(unaudited)** | ** ** |
| Installations                   |       | $                     |          20 |   | $ |           20 |   |
| Machinery  and equipment        |       | 34                    |                                                | 34 |   |
| Transport  units                |       | 176                   |                                                | 201 |   |
| Furniture  and fixtures         |       | 45                    |                                                | 45 |   |
| Various  equipment              |       | 854                   |                                                | 844 |   |
| Goods  of the concession        |       | 75,056                |                                                | 46,850 |   |
| Works  in progress              |       | 801                   |                                                | 614 |   |
| Less:  accumulated depreciation |       | (9,968                | )                                                   | (8,444 | ) |
|                            |       | $                     |      67,018                     |   | $ |       40,164 |   |

 

Notwithstanding the Companyconsiders that all disbursements related to purchases and improvements of thegoods installed in the railway infrastructure are fixed assets, for concessioncontract purposes, they are the property of the Peruvian State, to which theywill be delivered upon termination of the concession contract. As soon as anyof the assumptions for property transfer provided in the concession contractmaterializes, the concessionaire must record the related cost as an intangibleand start amortizing it. The Company recognizes investments as intangibleassets and amortizes them over a period of up to 55 years. If at the end of theconcession, the Company has amortized completely the value of the intangibleasset, the State is under no obligation to make any payment. If the intangibleasset has not been fully amortized, the State is obliged to pay to the Companyits net accounting value.

 

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**4****.         Intangibles, net**

 

Intangibles consist of thefollowing as of December 31, 2009 and 2008 (dollars in thousands):

 
| ** **                       | ** ** | **Year  ended December 31, 2009** | ** ** |
|----------------------------------|------------|-----------------------------------|------------|
| ** **                       | ** ** | **Concessions  and rights**       | ** ** | **Logo  and  trademarks** | ** ** | **Software  and  licenses** | ** ** | **Total** | ** ** |
| Carrying  amount:                |       |                              |       |   |   |   |   |   |   |
| Balance  as of January 1, 2009   |       | $                                 | 227        |   | $ | 110 |   | $ | 740 |   | $ | 1,077 |   |
| Additions                        |       | —                            |       | — |   | 33 |   | 33 |   |
| Balance  as at December 31, 2009 |       | $                                 | 227        |   | $ | 110 |   | £ | 773 |   | $ | 1,110 |   |
|                             |       |                              |       |   |   |   |   |   |   |
| Accumulated  amortization:       |       |                              |       |   |   |   |   |   |   |
| Balance  as of January 1, 2009   |       | $                                 | 70         |   | $ | 32 |   | $ | 688 |   | $ | 790 |   |
| Charge  for the period           |       | 8                                 |       | 3 |   | 46 |   | 57 |   |
| Balance  as at December 31, 2009 |       | $                                 | 78         |   | $ | 35 |   | $ | 734 |   | $ | 847 |   |
|                             |       |                              |       |   |   |   |   |   |   |
| Net  book value:                 |       |                              |       |   |   |   |   |   |   |
| As  at December 31, 2008         |       | $                                 | 157        |   | $ | 78 |   | $ | 52 |   | $ | 287 |   |
|                             |       |                              |       |   |   |   |   |   |   |
| As  at December 31, 2009         |       | $                                 | 149        |   | $ | 75 |   | $ | 39 |   | $ | 263 |   |

 
| ** **                       | ** ** | **Year  ended December 31, 2008 (unaudited)** | ** ** |
|----------------------------------|------------|-----------------------------------------------|------------|
| ** **                       | ** ** | **Concessions  and rights**                   | ** ** | **Logo  and  trademarks** | ** ** | **Software  and  licenses** | ** ** | **Total** | ** ** |
| Carrying  amount:                |       |                                          |       |   |   |   |   |   |   |
| Balance  as of January 1, 2008   |       | $                                             | 227        |   | $ | 110 |   | $ | 702 |   | $ | 1,040 |   |
| Additions                        |       | —                                        |       | — |   | 37 |   | 37 |   |
| Balance  as at December 31, 2008 |       | $                                             | 227        |   | $ | 110 |   | $ | 740 |   | $ | 1,077 |   |
|                             |       |                                          |       |   |   |   |   |   |   |
| Accumulated  amortization:       |       |                                          |       |   |   |   |   |   |   |
| Balance  as of January 1, 2008   |       | $                                             | 63         |   | $ | 28 |   | $ | 664 |   | $ | 755 |   |
| Charge  for the period           |       | 7                                             |       | 4 |   | 24 |   | 35 |   |
| Balance  as at December 31, 2008 |       | $                                             | 70         |   | $ | 32 |   | $ | 688 |   | $ | 790 |   |
|                             |       |                                          |       |   |   |   |   |   |   |
| Net  book value:                 |       |                                          |       |   |   |   |   |   |   |
| As  at December 31, 2007         |       | $                                             | 164        |   | $ | 82 |   | $ | 39 |   | $ | 285 |   |
|                             |       |                                          |       |   |   |   |   |   |   |
| As  at December 31, 2008         |       | $                                             | 157        |   | $ | 78 |   | $ | 52 |   | $ | 287 |   |

 

Amortization expense for theyear ended December 31, 2009 was $57,000 (2008-$35,000 (unaudited);2007-$38,000 (unaudited))

 

Estimated amortizationexpense for each of the years 2010 to 2014 is $57,000.

 

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**5.         Working capital facilities**

 

Working capital facilitiesare composed of the following, all repayable within one year (dollars inthousands):

 
| ** **                 | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                 | ** ** | ** **            | ** ** | **(unaudited)** | ** ** |
| ** **                 | ** ** | ** **            | ** ** | ** ** | ** ** |
| Working capital facilities |       | $                     | 3,131      |   | $ | 809 |   |
|                            |            |                       |            |  |  |  |  |

 

Bank loans accrue an annualaverage interest rate of 3.71% (2008—6.85% (unaudited)) and reach maturity inMarch 2010.

 

The Company hadapproximately $3,200,000 of working capital lines of credit atDecember 31, 2009 (2008-$2,200,000 (unaudited)) issued by variousfinancial institutions and having various expiration dates, of which $69,000was undrawn (2008-$1,391,000 (unaudited)).

 

**6.****                           ****Accrued liabilities and deferred revenue**

 

A breakdownof accrued liabilities and deferred revenue is as follows (dollars inthousands):

 
| ** **                                                | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                                                | ** ** | ** **            | ** ** | **(unaudited)** | ** ** |
|                                                      |       |                  |       |   |   |
| Compensation to OSITRAN (a)                               |       | $                     | 2,499      |   | $ | 3,360 |   |
| Employees’ profit sharing                            |       | 177                   |       | 228 |   |
| Interest payable                                          |       | 67                    |       | 116 |   |
| Other taxes and contributions                             |       | 149                   |       | 96 |   |
| Remuneration and vacation payable                         |       | 66                    |       | 58 |   |
| Provision for purchases and services                      |       | 170                   |       | 442 |   |
| Deferred revenue (see Note 2)                             |       | 26,000                |       | 2,946 |   |
| Employees’ length of service compensation            |       | 13                    |       | 11 |   |
| Other liabilities                                         |       | 1,080                 |       | 790 |   |
|                                                      |       | $                     | 30,221     |   | $ | 8,047 |   |
|                                                      |       |                  |       |   |   |
| Current  portion                                          |       | $                     | 6,821      |   | $ | 8,047 |   |
| Non-current  portion — Deferred revenue (see Note 2) |       | 23,400                |       | — |   |
|                                                      |       | $                     | 30,221     |   | $ | 8,047 |   |

 

----

(a)               Corresponds to the main consideration payments thatthe Company has computed since September 2004 under the concession contractentered with the Peruvian State.

 

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**7.****                           ****Long-termdebt and fair value disclosures**

 

*Long-term debt*

 

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

 
| ** **                                                                                                                                                                            | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                                                                                                                                                                            | ** ** | ** **            | ** ** | **(unaudited)** | ** ** |
| Loans  from banks collateralized by property, plant and equipment payable over  periods of 1 to 7 years, with a weighted average interest rate of 6.10% and  7.59%**,** respectively. |       | $                     | 27,659     |   | $ | 15,719 |   |
| Less:  current portion                                                                                                                                                                |       | 6,981                 |       | 1,725 |   |
|                                                                                                                                                                                  |       | $                     | 20,678     |   | $ | 13,994 |   |

 

At December 31, 2009,the Company was out of compliance with the current ratio in one of its loanswhich has been guaranteed by OEH. At that date, $3,642,860 was owed under thisloan facility. The Company continues to service fully the interest andprincipal repayments as these fall due, and is continuing to negotiate with thelender to determine how to bring the Company back into compliance. Because theCompany was out of compliance, the balance outstanding at December 31, 2009 hasbeen shown in the current portion of long-term debt.

 

The following is a summaryof the aggregate maturities of long-term debt at December 31, 2009(dollars in thousands):

 
| **Year  ending December 31,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
|                               |       |       |       |
| 2010                               |       | $          | 6,981      |   |
| 2011                               |       | 3,273      |       |
| 2012                               |       | 3,347      |       |
| 2013                               |       | 3,265      |       |
| 2014                               |       | 3,423      |       |
| 2015  and thereafter               |       | 7,370      |       |
|                               |       | $          | 27,659     |   |

 

In April 2009, theCompany signed two loan agreements totaling $23,505,000 to finance itsinvestments in railway infrastructure.

 

Deferred financing costsrelated to the above outstanding long-term debt were $1,041,619 atDecember 31, 2009 (2008-$185,599 (unaudited)) and are amortized tointerest expense over the term of the corresponding long-term debt.

 

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The outstanding long-termdebt of the Company is partially guaranteed by OEH, and is collateralized bycash balances held in restricted cash and the value of the concession contractwith the Peruvian government.

 

*Fair value of financialinstruments*

 

Certain methods andassumptions were used to estimate the fair value of each class of financialinstruments for which it is practicable to estimate fair value. The carryingamount of cash and cash equivalents and working capital facilities approximatesfair value because of the short maturity of those instruments. The fair valueof debt is calculated by discounting back future interest and principalpayments using a discount factor which reflects the Company’s current creditmetrics. This factor is derived from credit analysis using inputs such asprofit, cash generation, and level of debt.

 

The estimated fair values ofthe Company’s financial instruments as of December 31, 2009 are as follows(dollars in thousands):

 
| ** **                                 | ** ** | **December 31, 2009,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **Carrying amount**    | ** ** | **Fair value** | ** ** |
| Cash  and cash equivalents                 |       | $                      | 1,304      |   | $ | 1,304 |   |
| Working  capital facilities                |       | $                      | 3,131      |   | $ | 3,131 |   |
| Long-term  debt, including current portion |       | $                      | 27,659     |   | $ | 26,461 |   |

 

The carrying values ofnon-financial assets that are measured on a non-recurring basis approximatetheir fair values.

 

**8****.         Income taxes**

 

The provision for incometaxes consists of the following (dollars in thousands):

 
| ** **           | ** ** | **Year ended December 31,** | ** ** |
|----------------------|------------|----------------------------------|------------|
| ** **           | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **           | ** ** | ** **                       | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
|                 |       |                             |       |   |   |   |   |
| Pre-tax  income      |       | $                                | 5,617      |   | $ | 6,505 |   | $ | 6,541 |   |
|                 |       |                             |       |   |   |   |   |
| Current  tax charge  |       | $                                | 450        |   | $ | 791 |   | $ | 1,062 |   |
|                 |       |                             |       |   |   |   |   |
| Deferred  tax charge |       | $                                | 1,808      |   | $ | 1,044 |   | $ | 1,101 |   |

 

The reconciliations of thePeru income tax rate to the Company’s effective tax rate for the three yearsended December 31, 2009 are as follows:

 

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| ** **             | ** ** | **Year ended December 31,** | ** ** |
|------------------------|------------|----------------------------------|------------|
| ** **             | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **             | ** ** | ** **                       | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
|                   |       |                             |       |   |   |   |   |
| Peru  income tax rate  |       | 30                               | %          | 30 | % | 30 | % |
| Permanent  differences |       | 24                               | %          | (1 | )% | 6 | % |
| Effective  tax rate    |       | 54                               | %          | 29 | % | 36 | % |

 

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamount of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes.  The following represents theCompany’s net deferred tax liabilities (dollars in thousands):

 
| ** **                                                | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                                                | ** ** | ** **            | ** ** | **(unaudited)** | ** ** |
| Provisions  included in books                             |       | $                     | —     |   | $ | 19 |   |
| Other  deferred tax assets                                |       | —                |       | 2 |   |
| Net  deferred tax assets                                  |       | —                |       | 21 |   |
| Fixed  assets and intangibles                             |       | 9,960                 |       | 8,983 |   |
| Claims  to OSITRAN                                        |       | —                |       | 23 |   |
| OEH  consultancy cost                                     |       | 167                   |       | 174 |   |
| Structure  fee loans and deferred cost                    |       | 174                   |       | 95 |   |
| Other  deferred tax liabilities                           |       | 762                   |       | 1 |   |
| Deferred  tax liabilities (depreciation and amortization) |       | 11,063                |       | 9,276 |   |
| Net  deferred tax liabilities                             |       | $                     | 11,063     |   | $ | 9,255 |   |

 

**9.         Shareholders’ equity**

 

*(a)          Share capital*

 

At December 31, 2009,the Company’s share capital consisted of 7,460,210 fully subscribed and paidshares with a par value of S/1.00 each, all carrying the same rights. The issueof 685,955 shares corresponding to the capitalization of the restatement ofNuevos Soles to constant currency of years 2000 to 2004 is pending.

 

The shareholders of theCompany are as follows:

 
| ** **                  | ** ** | **Number of********shares** | ** ** | **Percent of********ownership** | ** ** |
|-----------------------------|------------|-----------------------------|------------|---------------------------------|------------|
|                        |       |                        |       |                            |       |
| Orient-Express  Hotels Ltd. |       | 3,730,105                   |       | 50.00                           |       |
| Peruval  Corp S.A.          |       | 3,730,105                   |       | 50.00                           |       |
|                        |       | 7,460,210                   |       | 100.00                          |       |

 

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*(b)      Legal reserve*

 

In accordance with Peruvianlaw, a minimum 10% of the annual profits that can be distributed must betransferred to a legal reserve until it equals 20% of the paid-in capital. Thelegal reserve can be used only to offset losses, but must be replenished andcannot be distributed as dividends, except in case of liquidation. The Companymay capitalize the legal reserve but must replenish it in the year immediatelyafter profits are obtained.

 

*(c)       Retained earnings*

 

Retained earnings may becapitalized or distributed as dividends, by resolution of the shareholders. TheCompany’s distributable profits are limited to the amount of retained earningsavailable under local statutory provisions. As from 2003, dividends and anyother form of distributed profit are subject to withholding tax at a 4.1% rateon the distributed amount to be borne by the shareholders who are individuals,whether or not domiciled in Peru, or who are juridical persons not domiciled inPeru. Any distribution must be proportionate to the shareholders’ contribution.

 

**10.       Deferred employees’ profit sharing**

 

According to Peruvian law,employees have a share of 5% of the Company profits before income tax.Employees’ profit sharing and income tax are computed on the taxable net incomebalance of the year subject to tax, as assessed for local purposes. Employeeprofit sharing is impacted by both current and deferred tax balances.  Therefore, the balance in employee profitsharing can result in either an asset or liability, depending on the underlyingdeferred tax balance.

 

**11.       Information by segments**

 

Accounting standards requirethat the Company present financial information by segments. Segments aredetermined by the form in which management organizes the Company to make decisionsand assess the business performance. In this regard, management considers thatthe Company operates in a single reportable segment.

 

**12.       Commitments and contingencies**

 

The Peruvian Association ofRailway Operators began in January 2009, through the National Institute ofAntitrust and Intellectual Property Protection (“INDECOPI”), an administrativesanctioning proceeding against the Company, Perurail S.A., Peruval Corp S.A.,and Peruvian Trains & Railways S.A., for alleged abuse of dominant positionin the form of abuse of legal proceedings.

 

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In May 2010, the Company wasnotified by INDECOPI’s agency in charge of free competition (in the firstinstance) that no financial penalties were to be assessed against the Company,although the Company did receive a warning on the alleged abuse of dominantposition. The Company filed an appeal to the tribunal ofINDECOPI (in the second instance) on this ruling, and will exhaust all futurejudicial remedies as it believes the warning is unjustified.

 

**13.       Supplemental cash flow information andrestricted cash**

 
| ** **      | ** ** | **Year ended December 31,** | ** ** |
|-----------------|------------|----------------------------------|------------|
| ** **      | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **      | ** ** | ** **                       | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **      | ** ** | **(Dollars in thousands)**       | ** ** |
| Cash  paid for: |       |                             |       |   |   |   |   |
| Interest        |       | $                                | 2,006      |   | $ | 772 |   | $ | 1,178 |   |
| Income  taxes   |       | $                                | 629        |   | $ | 1,082 |   | $ | 1,355 |   |

 

*Restrictedcash*

 

At December31, 2009, $4,126,000 (2008-$4,148,000 (unaudited)) was held in a separate trustfund for the payment of obligations to OSITRAN and certain of the Company’slenders. Also at December 31, 2009, $1,338,000 (2008-$1,754,000 (unaudited))was held in a separate reserve account for investment in railway infrastructureimprovements to be made by the Company.

 

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

 

The components ofcomprehensive income were as follows (dollars in thousands):

 
| ** **            | ** ** | **Year ended December 31,** | ** ** |
|-----------------------|------------|----------------------------------|------------|
| ** **            | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **            | ** ** | ** **                       | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| Net  earnings         |       | $                                | 3,359      |   | $ | 4,670 |   | $ | 4,378 |   |
| Comprehensive  income |       | $                                | 3,359      |   | $ | 4,670 |   | $ | 4,378 |   |

 

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**15.       Related party transactions**

 

Accounts receivable due fromPerurail S.A. arise mainly from access charges for use of the railway, lease oflocomotives and rolling stock, and lease of stations and yards. These accountsare non-interest bearing and amounts outstanding at December 31, 2009 areexpected to be collected in 2010.  In2009 the Company invoiced Perurail S.A. $20,218,000 (2008-$22,467,000(unaudited); 2007-$21,267,000 (unaudited)), including value added tax (19%).The amount due from Perurail S.A. to the Company at December 31, 2009 was$38,476 (2008—$39,957 (unaudited)).

 

Accounts payable to PerurailS.A. correspond to non-interest bearing working capital loans, and are expectedto be paid in 2010. The amount due to Perurail S.A. at December 31, 2009 was$6,599,619 (2008—$3,552,398 (unaudited)). They accrue no interest.

 

The amount due toOrient-Express Peru S.A. at December 31, 2009 was $622,776 (2008-$651,494(unaudited)) and represents fees and personnel charges of the corporatepayroll. They accrue no interest.

 

Accounts receivable from theCompany’s shareholders represent non-interest bearing loans extended to theshareholders, and are expected to be collected in 2010. At December 31, 2009the amount due from shareholders was $455,000 (2008—$125,000 (unaudited)).

 

**16.       Subsequent events**

 

During the last week ofJanuary 2010, heavy rains caused floods that destroyed various sections of therailway on the Cusco - Machu Picchu route. As a result, train operators couldnot operate on this route for approximately three months while repairs werecarried out, and the Company could not charge those operators for use of therailway. Management is claiming under the Company’s insurance for the costs ofrepairs and the disruption of the Company’s business.

 

For purposes of the Company’sDecember 31, 2009 financial statements, management has evaluated subsequentevents through June 4, 2010.

 

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BDO —Pazos, López de Romaña, Rodriguez S.C.

 

Report ofIndependent Registered Public Accounting Firm

 

Board of Directors and Shareholders

Perurail S.A.

Lima, Peru

 

We haveaudited the accompanying balance sheet of Perurail S.A. as of December 31,2009, and the related statements of operations, cash flows and shareholders’equity for the year ended December 31, 2009. These financial statementsare the responsibility of the Company ́s management. Our responsability is toexpress an opinion on these financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Perurail S.A. at December 31,2009, and the results of its operations and its cash flows for the year ended December 31,2009, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

Pazos, López de Romaña, Rodriguez S.C.

Lima, Peru

June 4, 2010

 
| Countersigned by:                      |   |
|----------------------------------------|--------|
|                                   |   |
| /s/  MANUEL PAZOS VÉLEZ           |   |   |
| Manuel  Pazos Vélez               |   |
| Certified  Chartered Public Accountant |   |
| Register No. 01-05095             |   |
|                                        |        |  |

 

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**Perurail S.A.**

**Balance Sheets**

 
| ** **                                                                                                     | ** ** | **December 31,**      | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                     | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| ** **                                                                                                     | ** ** | ** **                 | ** ** | **(unaudited)** | ** ** |
| ** **                                                                                                     | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                                                                                                     |       |                       |       |   |   |
| Cash  and cash equivalents                                                                                     |       | $                          | 3,377      |   | $ | 3,216 |   |
| Accounts  receivable, net of allowances of $nil and $1                                                         |       | 4,713                      |       | 4,318 |   |
| Due  from related parties                                                                                      |       | 2,758                      |       | 2,669 |   |
| Prepaid  expenses                                                                                              |       | 1,042                      |       | 1,409 |   |
| Inventories                                                                                                    |       | 6,645                      |       | 4,671 |   |
| Total  current assets                                                                                          |       | 18,535                     |       | 16,283 |   |
|                                                                                                           |       |                       |       |   |   |
| Deferred  employees’ profit sharing, net                                                                  |       | —                     |       | 18 |   |
|                                                                                                           |       |                       |       |   |   |
| Property,  plant and equipment, net of accumulated depreciation of $6,273 and $4,615                           |       | 29,023                     |       | 24,130 |   |
| Intangibles,  net                                                                                              |       | 215                        |       | 150 |   |
|                                                                                                           |       | $                          | 47,773     |   | $ | 40,581 |   |
| **Liabilities  and Shareholders’ Equity**                                                                 |       |                       |       |   |   |
| Working  capital facilities                                                                                    |       | $                          | 4,855      |   | $ | 868 |   |
| Accounts  payable                                                                                              |       | 2,892                      |       | 3,677 |   |
| Accrued  liabilities                                                                                           |       | 2,309                      |       | 4,771 |   |
| Current  portion of long-term debt                                                                             |       | 2,013                      |       | 1,261 |   |
| Total  current liabilities                                                                                     |       | 12,069                     |       | 10,577 |   |
|                                                                                                           |       |                       |       |   |   |
| Long-term  debt                                                                                                |       | 5,333                      |       | 7,629 |   |
| Deferred  employees’ profit sharing, net                                                                  |       | 2                          |       | — |   |
| Deferred  tax liability, net                                                                                   |       | 4,439                      |       | 3,039 |   |
|                                                                                                           |       | 21,843                     |       | 21,245 |   |
| Commitments  and contingencies                                                                                 |       |                       |       |   |   |
|                                                                                                           |       |                       |       |   |   |
| Shareholders’  equity:                                                                                    |       |                       |       |   |   |
| Common  shares S/1.00 par value (20,000,000 shares authorized) Issued — 20,000,000  (2008 — 202,000) |       | 6,684                      |       | 59 |   |
| Legal  reserve                                                                                                 |       | 14                         |       | 14 |   |
| Retained  earnings                                                                                             |       | 19,232                     |       | 19,263 |   |
| Total  shareholders’ equity                                                                               |       | 25,930                     |       | 19,336 |   |
|                                                                                                           |       |                       |       |   |   |
|                                                                                                           |       | $                          | 47,773     |   | $ | 40,581 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**Perurail S.A.**

**Statements of Operations**

 
| ** **                               | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                               | ** ** | ** **                       | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **                               | ** ** | **(Dollars in thousands)**       | ** ** |
| ** **                               | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                  |       | $                                | 63,509     |   | $ | 70,187 |   | $ | 58,088 |   |
|                                     |       |                             |       |   |   |   |   |
| Expenses:                                |       |                             |       |   |   |   |   |
| Operating                                |       | (35,204                          | )          | (39,611 | ) | (33,545 | ) |
| Depreciation  and amortization           |       | (1,820                           | )          | (1,701 | ) | (1,389 | ) |
| Selling,  general and administrative     |       | (10,536                          | )          | (11,725 | ) | (10,421 | ) |
| Total  expenses                          |       | (47,560                          | )          | (53,037 | ) | (45,355 | ) |
|                                     |       |                             |       |   |   |   |   |
| Gain/(loss)  on disposal of fixed assets |       | 149                              |       | (12 | ) | (11 | ) |
|                                     |       |                             |       |   |   |   |   |
| Earnings  from operations                |       | 16,098                           |       | 17,138 |   | 12,722 |   |
|                                     |       |                             |       |   |   |   |   |
| Interest  expense, net                   |       | (1,031                           | )          | (906 | ) | (931 | ) |
| Foreign  currency                        |       | 429                              |       | (660 | ) | 171 |   |
| Net  finance costs                       |       | (602                             | )          | (1,566 | ) | (760 | ) |
|                                     |       |                             |       |   |   |   |   |
| Earnings  before income tax              |       | 15,496                           |       | 15,572 |   | 11,962 |   |
|                                     |       |                             |       |   |   |   |   |
| Provision  for income taxes              |       | (4,102                           | )          | (5,817 | ) | (3,951 | ) |
|                                     |       |                             |       |   |   |   |   |
| Net  earnings                            |       | $                                | 11,394     |   | $ | 9,755 |   | $ | 8,011 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**Perurail S.A.**

**Statements of Cash Flows**

 
| ** **                                                                          | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                          | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                          | ** ** | ** **                       | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **                                                                          | ** ** | **(Dollars in thousands)**       | ** ** |
| Cash  flows from operating activities:                                              |       |                             |       |   |   |   |   |
| Net  earnings                                                                       |       | $                                | 11,408     |   | $ | 9,744 |   | $ | 8,005 |   |
|                                                                                |       |                             |       |   |   |   |   |
| Adjustment  to reconcile net earnings to net cash provided by operating activities: |       |                             |       |   |   |   |   |
| Depreciation                                                                        |       | 1,778                            |       | 1,675 |   | 1,365 |   |
| Amortization                                                                        |       | 42                               |       | 26 |   | 24 |   |
| (Gain)/loss  on disposal of fixed assets                                            |       | (149                             | )          | 12 |   | 11 |   |
| Change  in deferred tax                                                             |       | 1,386                            |       | 675 |   | 482 |   |
| Change  in employees’ profit sharing                                           |       | 20                               |       | (4 | ) | (2 | ) |
| Change  in allowance for doubtful accounts                                          |       | (1                               | )          | (21 | ) | — |   |
| Change  in assets and liabilities:                                                  |       |                             |       |   |   |   |   |
| (Increase)/decrease  in accounts receivable                                         |       | (483                             | )          | 3,048 |   | (6,984 | ) |
| Increase  in inventories                                                            |       | (1,974                           | )          | (1,207 | ) | (866 | ) |
| Decrease/(increase)  in prepaid expenses                                            |       | 367                              |       | (943 | ) | (14 | ) |
| (Decrease)/increase  of accounts payable                                            |       | (785                             | )          | 1,488 |   | 258 |   |
| (Decrease)/increase  in accrued liabilities                                         |       | (2,462                           | )          | (2,208 | ) | 4,220 |   |
| Decrease  in due to related parties                                                 |       | —                           |       | — |   | (5,059 | ) |
| Total  adjustments                                                                  |       | (2,261                           | )          | 2,541 |   | (6,565 | ) |
| Net  cash provided by operating activities                                          |       | 9,147                            |       | 12,285 |   | 1,440 |   |
|                                                                                |       |                             |       |   |   |   |   |
| Cash  flows from investing activities:                                              |       |                             |       |   |   |   |   |
| Proceeds  from disposal of fixed assets                                             |       | 460                              |       | — |   | — |   |
| Capital  expenditures                                                               |       | (7,089                           | )          | (6,314 | ) | (3,522 | ) |
| Net  cash used in investing activities                                              |       | (6,629                           | )          | (6,314 | ) | (3,522 | ) |
|                                                                                |       |                             |       |   |   |   |   |
| Cash  flows from financing activities:                                              |       |                             |       |   |   |   |   |
| Payment  of dividends                                                               |       | (4,800                           | )          | (6,360 | ) | (2,196 | ) |
| Net  proceeds from working capital facilities                                       |       | 3,987                            |       | 348 |   | 57 |   |
| Principal  payments under long-term debt                                            |       | (1,617                           | )          | (1,281 | ) | (3,518 | ) |
| Proceeds  from long-term debt                                                       |       | 73                               |       | 2,267 |   | 8,240 |   |
| Net  cash (used in)/provided by financing activities                                |       | (2,357                           | )          | (5,026 | ) | 2,583 |   |
|                                                                                |       |                             |       |   |   |   |   |
| Net  increase in cash and cash equivalents                                          |       | 161                              |       | 945 |   | 501 |   |
|                                                                                |       |                             |       |   |   |   |   |
| Cash  and cash equivalents at beginning of year                                     |       | 3,216                            |       | 2,271 |   | 1,770 |   |
| Cash  and cash equivalents at end of year                                           |       | $                                | 3,377      |   | $ | 3,216 |   | $ | 2,271 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**Perurail S.A.**

**Statements of Shareholders’ Equity**

** **
| **(Dollars in thousands)**              | ** ** | **Common********Shares********At Par********Value** | ** ** | **Legal Reserve** | ** ** | **Retained********Earnings** | ** ** | **Total********Comprehensive********Income/(Loss)** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------|------------|------------------------------|------------|-----------------------------------------------------|------------|
| Balance,  January 1, 2007 (unaudited)   |       | $                                                        | 59         |                   | $          | 14                           |       | $                                                   | 10,053     |   |   |   |
|                                              |       |                                                     |       |                   |       |                         |       |                                                |       |
| Dividends                                         |       | —                                                   |       | —                 |       | (2,196                       | )          |                                                |       |
| Net  earnings                                     |       | —                                                   |       | —                 |       | 8,011                        |       | $                                                   | 8,011      |   |
|                                              |       |                                                     |       |                   |       |                         |       | $                                                   | 8,011      |   |
| Balance,  December 31, 2007 (unaudited) |       | 59                                                       |       | 14                     |       | 15,868                       |       |                                                |       |
|                                              |       |                                                     |       |                   |       |                         |       |                                                |       |
| Dividends                                         |       | —                                                   |       | —                 |       | (6,360                       | )          |                                                |       |
| Net  earnings                                     |       | —                                                   |       | —                 |       | 9,755                        |       | $                                                   | 9,755      |   |
|                                              |       |                                                     |       |                   |       |                         |       | $                                                   | 9,755      |   |
| Balance,  December 31, 2008 (unaudited) |       | 59                                                       |       | 14                     |       | 19,263                       |       |                                                |       |
|                                              |       |                                                     |       |                   |       |                         |       |                                                |       |
| Capitalization                                    |       | 6,625                                                    |       | —                 |       | (6,625                       | )          |                                                |       |
| Dividends                                         |       | —                                                   |       | —                 |       | (4,800                       | )          |                                                |       |
| Net  earnings                                     |       | —                                                   |       | —                 |       | 11,394                       |       | $                                                   | 11,394     |   |
|                                              |       |                                                     |       |                   |       |                         |       | $                                                   | 11,394     |   |
| Balance,  December 31, 2009                  |       | $                                                        | 6,684      |                   | $          | 14                           |       | $                                                   | 19,232     |   |   |   |

 

The accompanying notes are an integral part of these financialstatements.

 

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**Perurail S.A.**

**Notes to Financial Statements**

 

**1.****                          ****Summary ofsignificant accounting policies and basis of presentation**

 

*(a)          Business*

 

Perurail S.A. (hereinafterthe “Company”) was incorporated in the city of Lima, Peru in 1999.

 

The Company is 50% owned byOrient-Express Hotels Ltd. (“OEH”) incorporated in Bermuda, and 50% owned byPeruvian Train & Railways S.A. incorporated in Peru.

 

Its headquarters andregistered address are located at Av. Alcanfores # 775, District ofMiraflores, Department of Lima.

 

The purpose of the Companyis the operation of passenger and freight transport by rail, as well as groundcargo transport services for the Cerro Verde mine.

 

In order to perform itscorporate purpose, in August 2000 the Company entered a lease withFerrocarril Transandino S.A. by which the Company was granted access to and useof the tracks, locomotives, coaches, wagons, machine shops and parts of thetrain stations of the South and South-East Railways operated by FerrocarrilTransandino S.A. Under this contract, various rates are established and payablefor the use of locomotives, coaches and wagons based on traveled kilometers,which are settled on a monthly basis.

 

*(b)          Basis for the presentation*

 

The accompanying financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America and reflect the results ofoperations, financial position and cash flows of the Company.  Thefinancial statements have been prepared using the historical cost basis in theassets and liabilities and the historical results of operations directlyattributable to the Company in the normal course of business.

 

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*(c)           Estimates*

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reportingperiod.  Significant estimates include, but are not limited to, theallowance for doubtful accounts, allowance on devaluation of various supplies,valuation of fixed assets, depreciation, taxes and contingencies. Actualresults could differ materially from management’s estimates.

 

*(d)          Foreign currency*

 

The functional currency ofthe Company is the US Dollar which is also the reporting currency of theCompany. The local currency is Nuevos Soles. Foreign currency transaction gainsand losses are recognized in earnings as they occur.

 

*(e)           Cash and cash equivalents*

 

Cash and cash equivalentsinclude all cash balances and highly-liquid investments having originalmaturities of three months or less.

 

*(f)            Accounts receivable*

 

The Company states itsaccounts receivable at their estimated net realizable value. The Companymaintains allowance for doubtful accounts for specifically identified estimatedlosses resulting from the inability of its customers to make required payments.

 

*(g)          Inventories*

 

Inventories include suppliesfor maintenance of fixed assets.  Inventories are valued at the lower ofcost or market value under the average cost method.

 

*(h)          Income taxes*

 

*Currentportion of income tax*

 

Income tax for the currentperiod is measured at the amount expected to be paid to the taxationauthorities. The rates and laws used to compute the amount are those in forceas of the balance sheet date.

 

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*Deferredportion of income tax*

 

Deferred income taxes areprovided using the balance sheet method on temporary differences at the balancesheet date between the tax and book bases of assets and liabilities.

 

All deductible temporarydifferences and loss carryforwards generate the recognition of deferred taxassets to the extent that it is probable that they can be used in calculatingtaxable income in future years. Deferred income tax is recognized for alldeductible temporary differences and tax loss carryforwards, to the extent thatis more likely than not that taxable profit will be available against which thedeductible temporary differences and unused tax losses can be utilized. Thecarrying amount of the deferred income tax assets is reviewed at each balancesheet date and reduced to the extent that it is no longer probable thatsufficient taxable profit will be available to allow all or part of thedeferred asset to be utilized. Unrecognized deferred assets are reassessed ateach balance sheet date.

 

Deferred income tax assetsand deferred income tax liabilities are offset if a legally enforceable rightexists to set off current tax assets against current income tax liabilities andthe deferred income taxes relate to the same taxable entity and the sametaxation authority.

 

ASC 740-20 “Income Taxes”(formerly FIN 48 “Accounting for Uncertainty of Income Taxes”) requires thatany liability created for unrecognized tax benefits is disclosed. Theapplication of ASC 740-20 may also affect the tax bases of assets andliabilities and therefore may change or create deferred tax liabilities orassets. The Company would recognize interest and penalties related tounrecognized tax benefits in provision for income taxes. At December 31,2009 and 2008, the Company did not record any liabilities for uncertain taxpositions.

 

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

 

Property, plant andequipment, net are stated at cost less accumulated depreciation.  The costof significant renewals and betterments is capitalized and depreciated, whileexpenditures for normal maintenance and repairs are expensed as incurred.

 

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

 

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| Installations                                                    |   | 33  years |   |
|------------------------------------------------------------------|--------|-----------|--------|
| Machinery  and equipment                                         |   | 10  years |   |
| Transport  units                                                 |   | 5  years  |   |
| Improvements  to locomotive and rolling stock assets under lease |   | 26  years |   |
| Owned  locomotives and rolling stock                             |   | 26  years |   |
| Furniture  and fixtures                                          |   | 10  years |   |
| Computer  equipment                                              |   | 4  years  |   |
| Operating  assets                                                |   | 10  years |   |

 

*(j)            Intangibles, net*

 

Software costs are recordedunder assets and classified as intangibles if such costs are not part of therelated hardware. Software is amortized using the straight-line method.

 

Amortization expense iscomputed using the straight-line method over the following estimated usefullives:

 
| Logo and trademarks   |   | 30  years |   |
|-----------------------|--------|-----------|--------|
| Software and licenses |   | 4  years  |   |

 

*(k)          Impairment of long-lived assets*

 

In accordance with ASC360-10-35 “Impairment or Disposal of Long-Lived Assets-Subsequent Measurement”(formerly SFAS 144 “Accounting for the Impairment or Disposal of Long-LivedAssets”), the Company’s management reviews long-lived assets whenever events orchanges in circumstances indicate that the carrying amount of the assets maynot be recoverable.  In the event that an impairment occurs, the Companyrecords a charge to income calculated as the excess of the asset’s carryingvalue over the estimated fair value.

 

*(l)           Financial leasing*

 

For financial leasingtransactions, the method used consists of showing under fixed assets the totalcost of the contract and its corresponding liability. Financial expenses arecharged to operations in the period in which they become due, and depreciationof assets is charged to operations based on their useful life.

 

*(m)          Employees’ length of service compensation*

 

The provision for employees’length of service compensation included under taxes and other accounts payableis charged to operations as the compensation becomes due.

 

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*(n)          Revenue recognition*

 

Passenger transport revenueincludes ticket revenue that is recognized when the related services areprovided.  Tickets are mainly issued nomore than 11 days prior to the date of travel and refunds on tickets not usedare immaterial.  Rail freight and cargorevenues are recognized when the freight and cargo reaches its destination.Ground cargo transport services revenues are recognized on a fixed fee basisper month, plus variable fees per ton transported when the services areprovided.  Revenues are presented net oftaxes collected from customers and remitted to governmental authorities.

 

Revenues in providing theseservices are recognized, as appropriate, when:

 

1.          The amount of revenues can be reliablyquantified;

 

2.          The transaction-related economicbenefits are likely to flow to the Company;

 

3.          The degree of completion of thetransaction, on the date of the balance, can be reliably quantified; and

 

4.          The costs incurred in providing theservices, as well as those still to be incurred until completed, can bereliably quantified.

 

*(o)          Interest expense, net*

 

The Company capitalizesinterest during the construction of assets. There was no capitalized interestin 2009, 2008 and 2007.

 

*(p)          Deferred financing costs*

 

Debt issuance costs incurredin connection with the placement of long-term debt are capitalized andamortized to interest expense over the term of the related debt.

 

*(q)          Risk and uncertainties*

 

The Company’s activitiesexpose it to a variety of financial risks: market risks (including interestrate risk and exchange risk), credit risk, and liquidity risk. The Company’srisk management program tries to minimize the potential adverse effects on itsfinancial performance. Management is aware of the market conditions and, basedon its knowledge and experience, controls the exchange, interest rate, creditand liquidity risks, following the policies approved by the Board of Directors.The most important aspects of these risks are:

 

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*Liquidity risk*

 

Liquidity risk is the riskthat cash may not be available to pay obligations at their maturity at a fairvalue. The Company controls the required liquidity through a proper managementof asset and liability maturity dates, so that the flow of cash matches futurepayments.

 

*Credit risk*

 

The Company’s financialassets that are potentially exposed to concentration of credit risk are mainlytrade accounts receivable, accounts receivable from related parties and fromshareholders, and various accounts receivable.

 

*Interest rate risk*

 

The Company ́s exposure tothis risk arises from changes in the interest rates in its financial assets andliabilities. The Company keeps mainly long-term debt subject to a floatinginterest rate.  Management does notexpect to incur significant losses due to interest rate risk.

 

*Exchange risk*

 

The Company carries out itstransactions mostly in foreign currency, but management estimates that anyfluctuation will not adversely affect the results of the Company’s operations.

 

*(r)           Deferred employee profit sharing*

 

In accordance with Peruvianlaw, employee profit sharing is limited to 18 times an employee’s monthlyaverage salary. The excess of calculated statutory employee profit sharing ispaid to the Peruvian government and is treated as an additional tax. TheCompany’s practice is to recognize the employee profit sharing as part of operatingcost and any excess profit sharing is recognized as part of current income tax.The Company has a 5% rate for calculating employee profit sharing.  To date, no excess profit sharing has beenrecognized.

 

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*(s)           Recent accounting pronouncements*

 

*ASU2009-13*

 

In October 2009, theFASB issued ASU 2009-13 “Revenue Recognition” on multiple-deliverable revenuearrangements. ASU 2009-13 codifies the consensus in EITF Issue 08-1, whichsupersedes Issue 00-21 (codified in ASC 605-25). The ASU was issued in responseto concerns related to the accounting for revenue arrangements with multipledeliverables under Issue 00-21 and applies to all deliverables in contractualarrangements in all industries in which a vendor will perform multiplerevenue-generating activities, except when some or all deliverables in amultiple-deliverable arrangement are within the scope of other, more specificsections of the ASC (e.g., ASCs 840, 952, 360-20 (pre-ASC guidance from SFAS13, 45, and 66) and other sections of ASC 605 on revenue recognition (e.g.,pre-ASC guidance from SOPs 81-1 and 97-2)).

 

ASU 2009-13 is effective forfiscal years beginning on or after June 15, 2010. The Company does notexpect any material impact from the adoption of the ASU.

 

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

 

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

 
| ** **                                                       | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                                                       | ** ** | ** **            | ** ** | **(unaudited)** | ** ** |
|                                                             |       |                  |       |   |   |
| Land                                                             |       | $                     | 437        |   | $ | 56 |   |
| Installations                                                    |       | 465                   |       | 465 |   |
| Machinery  and equipment                                         |       | 925                   |       | 1,353 |   |
| Transport  units                                                 |       | 2,500                 |       | 2,500 |   |
| Improvements  to locomotive and rolling stock assets under lease |       | 22,289                |       | 17,273 |   |
| Owned  locomotives and rolling stock                             |       | 3,221                 |       | 3,148 |   |
| Furniture  and fixtures                                          |       | 2,864                 |       | 2,726 |   |
| Works  in progress                                               |       | 2,595                 |       | 1,224 |   |
| Less:  accumulated depreciation                                  |       | (6,273                | )          | (4,615 | ) |
|                                                             |       | $                     | 29,023     |   | $ | 24,130 |   |

 

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The major classes of assetsunder capital leases included above are as follows (dollars in thousands):

 
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                      | ** ** | ** **            | ** ** | **(unaudited)** | ** ** |
| ** **                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| Locomotives  and rolling stock  |       | $                     | 2,340      |   | — |   |
| Less:  accumulated depreciation |       | (82                   | )          | — |   |
|                            |       | $                     | 2,258      |   | — |   |

 

**3.         Intangibles, net**

 

Intangibles consist of thefollowing as of December 31, 2009 and 2008 (dollars in thousands):

 
| ** **                       | ** ** | **Year  ended December 31, 2009** | ** ** |
|----------------------------------|------------|-----------------------------------|------------|
| ** **                       | ** ** | **Logo  and  trademarks**         | ** ** | **Software  and  licenses** | ** ** | **Total** | ** ** |
| Carrying  amount:                |       |                              |       |   |   |   |   |
| Balance  as of January 1, 2009   |       | $                                 | 122        |   | $ | 159 |   | $ | 281 |   |
| Additions                        |       | —                            |       | 63 |   | 63 |   |
| Transfers                        |       | —                            |       | 44 |   | 44 |   |
| Balance  as at December 31, 2009 |       | $                                 | 122        |   | $ | 266 |   | $ | 388 |   |
|                             |       |                              |       |   |   |   |   |
| Accumulated  amortization:       |       |                              |       |   |   |   |   |
| Balance  as of January 1, 2009   |       | $                                 | 34         |   | $ | 97 |   | $ | 131 |   |
| Charge  for the period           |       | 4                                 |       | 38 |   | 42 |   |
| Balance  as at December 31, 2009 |       | $                                 | 38         |   | $ | 135 |   | $ | 173 |   |
|                             |       |                              |       |   |   |   |   |
| Net  book value:                 |       |                              |       |   |   |   |   |
| As  at December 31, 2008         |       | $                                 | 88         |   | $ | 62 |   | $ | 150 |   |
|                             |       |                              |       |   |   |   |   |
| As  at December 31, 2009         |       | $                                 | 84         |   | $ | 131 |   | $ | 215 |   |

 

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| ** **                       | ** ** | **Year  ended December 31, 2008 (unaudited)** | ** ** |
|----------------------------------|------------|-----------------------------------------------|------------|
| ** **                       | ** ** | **Logo  and  trademarks**                     | ** ** | **Software  and  licenses** | ** ** | **Total** | ** ** |
| Carrying  amount:                |       |                                          |       |   |   |   |   |
| Balance  as of January 1, 2008   |       | $                                             | 122        |   | $ | 119 |   | $ | 241 |   |
| Additions                        |       | —                                        |       | 38 |   | 38 |   |
| Transfers                        |       | —                                        |       | 2 |   | 2 |   |
| Balance  as at December 31, 2008 |       | $                                             | 122        |   | $ | 159 |   | $ | 281 |   |
|                             |       |                                          |       |   |   |   |   |
| Accumulated  amortization:       |       |                                          |       |   |   |   |   |
| Balance  as of January 1, 2008   |       | $                                             | 30         |   | $ | 75 |   | $ | 105 |   |
| Charge  for the period           |       | 4                                             |       | 22 |   | 26 |   |
| Balance  as at December 31, 2008 |       | $                                             | 34         |   | $ | 97 |   | $ | 131 |   |
|                             |       |                                          |       |   |   |   |   |
| Net  book value:                 |       |                                          |       |   |   |   |   |
| As  at December 31, 2007         |       | $                                             | 92         |   | $ | 44 |   | $ | 136 |   |
|                             |       |                                          |       |   |   |   |   |
| As  at December 31, 2008         |       | $                                             | 88         |   | $ | 62 |   | $ | 150 |   |

 

Amortization expense for theyear ended December 31, 2009 was $42,000 (2008-$26,000 (unaudited);2007-$24,000 (unaudited)).

 

Estimated amortizationexpense for each of the years 2010 to 2014 is $42,000.

 

**4.         Working capital facilities**

 

Working capital facilitiesare composed of the following, all repayable within one year (dollars inthousands):

 
| ** **                 | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                 | ** ** | ** **            | ** ** | **(unaudited)** | ** ** |
| ** **                 | ** ** | ** **            | ** ** | ** ** | ** ** |
| Working capital facilities |       | $                     | 4,855      |   | $ | 868 |   |
|                            |            |                       |            |  |  |  |  |

 

Bank loans accrue an annualaverage interest rate of 3.7% (2008—6.8% (unaudited)).

 

The Company hadapproximately $5,215,000 of working capital lines of credit atDecember 31, 2009 (2008-$2,000,000 (unaudited)) issued by variousfinancial institutions and having various expiration dates, of which $360,000was undrawn (2008-$1,132,000 (unaudited)).

 

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**5.****                           ****Accrued liabilities and deferred revenue**

 

A breakdownof accrued liabilities and deferred revenue is as follows (dollars inthousands):

 
| ** **                                      | ** ** | **December  31,** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|
| ** **                                      | ** ** | **2009**          | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | ** **        | ** ** | **(unaudited)** | ** ** |
| ** **                                      | ** ** | ** **        | ** ** | ** ** | ** ** |
| Income  tax                                     |       | $                 | —     |   | $ | 1,899 |   |
| Other  taxes                                    |       | 176               |       | 33 |   |
| Employees’  length of service compensation |       | 67                |       | 75 |   |
| Vacation  payable                               |       | 348               |       | 362 |   |
| Remuneration  and profit sharing payable        |       | 1,093             |       | 1,375 |   |
| Advance  payments received from passengers      |       | 427               |       | 568 |   |
| Provision  for purchases and services           |       | 198               |       | 444 |   |
| Other  accounts payable                         |       | —            |       | 15 |   |
|                                            |       | $                 | 2,309      |   | $ | 4,771 |   |

 

**6.****                           ****Long-termdebt, obligations under capital lease and fair value disclosures**

 

*(a)          Long-term debt*

 

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

 
| ** **                                                                                                                                                                            | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                                                                                                                                                                            | ** ** | ** **            | ** ** | **(unaudited)** | ** ** |
| Loans  from banks collateralized by property, plant and equipment payable over  periods of 1 to 5 years, with a weighted average interest rate of 4.07% and  6.29%**,** respectively. |       | $                     | 5,362      |   | $ | 6,623 |   |
| Obligations  under capital lease (see Note 6(b))                                                                                                                                      |       | 1,984                 |       | 2,267 |   |
|                                                                                                                                                                                  |       | 7,346                 |       | 8,890 |   |
| Less:  current portion                                                                                                                                                                |       | 2,013                 |       | 1,261 |   |
|                                                                                                                                                                                  |       | $                     | 5,333      |   | $ | 7,629 |   |

 

Deferred financing costsrelated to the above outstanding long-term debt were $161,400 atDecember 31, 2009 (2008-$202,764 (unaudited)) and are amortized tointerest expense over the term of the corresponding long-term debt.

 

The following is a summaryof the aggregate maturities of long-term debt excluding obligations undercapital leases at December 31, 2009 (dollars in thousands):

 

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| **Year  ending December 31,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
| ** **                         | ** ** | ** ** | ** ** |
| 2010                               |       | $          | 1,262      |   |
| 2011                               |       | 1,262      |       |
| 2012                               |       | 1,262      |       |
| 2013                               |       | 1,262      |       |
| 2014                               |       | 314        |       |
|                               |       | $          | 5,362      |   |

 

*(b)          Obligations under capital leases*

 

The following is a summaryof future minimum lease payments under capital leases together with the presentvalue of the minimum lease payments at December 31, 2009 (dollars inthousands):

 
| **Year  ending December 31,**                    | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|------------|------------|
| ** **                                            | ** ** | ** ** | ** ** |
| 2010                                                  |       | $          | 870        |   |
| 2011                                                  |       | 870        |       |
| 2012                                                  |       | 435        |       |
| Minimum  lease payments                               |       | 2,175      |       |
| Less:  amount of interest contained in above payments |       | 191        |       |
| Present  value of minimum lease payments              |       | 1,984      |       |
| Less:  current portion                                |       | 751        |       |
|                                                  |       | $          | 1,233      |   |

 

The amount of interestdeducted from minimum lease payments to arrive at the present value is theinterest contained in each of the leases.

 

*(c)           Fair value of financial instruments*

 

Certain methods andassumptions were used to estimate the fair value of each class of financialinstruments for which it is practicable to estimate fair value. The carryingamount of cash and cash equivalents and working capital facilities approximatesfair value because of the short maturity of those instruments. The fair valueof debt is calculated by discounting back future interest and principalpayments using a discount factor which reflects the Company’s current credit metrics.This factor is derived from credit analysis using inputs such as profit, cashgeneration, and level of debt.

 

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The estimated fair values ofthe Company’s financial instruments as of December 31, 2009 are as follows(dollars in thousands):

 
| ** **                                 | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **Carrying amount**   | ** ** | **Fair value** | ** ** |
| Cash  and cash equivalents                 |       | $                     | 3,377      |   | $ | 3,377 |   |
| Working  capital facilities                |       | $                     | 4,855      |   | $ | 4,855 |   |
| Long-term  debt, including current portion |       | $                     | 7,346      |   | $ | 7,055 |   |

 

The carrying values ofnon-financial assets that are measured on a non-recurring basis approximatetheir fair values.

 

**7****.         Income taxes**

 

The provision for incometaxes consists of the following (dollars in thousands):

 
| ** **           | ** ** | **Year ended December 31,** | ** ** |
|----------------------|------------|----------------------------------|------------|
| ** **           | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **           | ** ** | ** **                       | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **           | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pre-tax  income      |       | $                                | 15,496     |   | $ | 15,572 |   | $ | 11,962 |   |
|                 |       |                             |       |   |   |   |   |
| Current  tax         |       | $                                | (2,702     | ) | $ | (5,145 | ) | $ | (3,471 | ) |
|                 |       |                             |       |   |   |   |   |
| Deferred  tax charge |       | $                                | (1,400     | ) | $ | (672 | ) | $ | (480 | ) |

 

The reconciliations of thePeru income tax rate to the Company’s effective tax rate for the three yearsended December 31, 2009 are as follows:

 
| ** **             | ** ** | **Year ended December 31,** | ** ** |
|------------------------|------------|----------------------------------|------------|
| ** **             | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **             | ** ** | ** **                       | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **             | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Peru  income tax rate  |       | 30                               | %          | 30 | % | 30 | % |
| Permanent  differences |       | (4                               | )%         | 7 | % | 3 | % |
| Effective  tax rate    |       | 26                               | %          | 37 | % | 33 | % |

 

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamount of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes.  The following represents theCompany’s net deferred tax liabilities (dollars in thousands):

 

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| ** **                                                | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                                                | ** ** | ** **            | ** ** | **(unaudited)** | ** ** |
| ** **                                                | ** ** | ** **            | ** ** | ** ** | ** ** |
| Provisions  included in books                             |       | $                     | —     |   | $ | — |   |
| Other  deferred tax assets                                |       | —                |       | 104 |   |
| Net  deferred tax assets                                  |       | —                |       | 104 |   |
| Fixed  assets and intangibles                             |       | (4,382                | )          | (3,079 | ) |
| Structure  fee loans and deferred cost                    |       | (48                   | )          | (64 | ) |
| Other  deferred tax liabilities                           |       | (9                    | )          | — |   |
| Deferred  tax liabilities (depreciation and amortization) |       | (4,439                | )          | (3,143 | ) |
| Net  deferred tax liabilities                             |       | $                     | (4,439     | ) | $ | (3,039 | ) |

 

**8.         Shareholders’ equity**

 

*(a)          Share capital and additional-paid incapital*

 

At December 31, 2009,the Company’s share capital consisted of 20,000,000 fully subscribed and paidshares with a par value of S/1.00 each, all carrying the same rights.

 

In May 2009, the Companyrecorded a capitalization of earnings from exposure to inflation in 1999 to2004 amounting to 21,188 shares, equivalent to S/21,188. As of thecapitalization date, earnings from exposure to inflation was included as partof common shares. As a consequence, no additional movement was required in thestatements of shareholders’ equity.

 

Also in May 2009, theCompany recorded a capitalization of retained earnings amounting to 19,776,812shares, equivalent to S/19,776,812 ($6,625,398), increasing common shares atpar value.

 

The shareholders of theCompany are as follows:

 
| ** **                           | ** ** | **Number of********shares** | ** ** | **Percent of********Ownership** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
|                                 |       |                        |       |                            |       |
| Orient-Express  Hotels Ltd.          |       | 10,000,000                  |       | 50.00                           |       |
| Peruvian  Trains & Railways S.A. |       | 10,000,000                  |       | 50.00                           |       |
|                                 |       | 20,000,000                  |       | 100.00                          |       |

 

*(b)**                  **Legalreserve*

 

In accordance with Peruvianlaw, a minimum 10% of the annual profits that can be distributed have to betransferred to a legal reserve until it equals 20% of the paid-in capital. Thelegal reserve can be used only to offset losses, but must be replenished andcannot be distributed as dividends, except in case of liquidation. The Companymay capitalize the legal reserve but must replenish it in the year immediatelyafter profits are obtained.

 

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*(c)           Retained earnings*

 

Retained earnings may becapitalized or distributed as dividends, by resolution of the shareholders. TheCompany ́s distributable profits are limited to the amount of retained earningsavailable under local statutory provisions. As from 2003, dividends and anyother form of distributed profit are subject to a withholding tax at a 4.1%rate on the distributed amount to be borne by the shareholders who areindividuals, whether or not domiciled in Peru, or who are juridical persons notdomiciled in Peru. Any dividends distribution must be proportionate to theshareholders’ contribution.

 

**9.         Deferred employees’ profit sharing**

 

According to Peruvian law,employees have a share of 5% of the Company profits before income tax.Employees’ profit sharing is computed on the taxable net income balance of theyear subject to tax, as assessed for local purposes. Employee profit sharing isimpacted by both current and deferred tax balances.  Therefore, the balance in employee profitsharing can result in either an asset or liability, depending on the underlyingdeferred tax balance.

 

**10.       Information by segments**

 

Accounting standards requirethat the Company present financial information by segments. Segments aredetermined by the form in which the management organizes the Company to makedecisions and assess the business performance. In this regard, management considers that the Company operates one singlereportable segment.

 

**11.       Commitments and contingencies**

 

The Peruvian Association ofRailway Operators began in January 2009, through the National Institute ofAntitrust and Intellectual Property Protection (“INDECOPI”), an administrativesanctioning proceeding against the Company, Ferrocarril Transandino S.A.,Peruval Corp S.A., and Peruvian Trains & Railways S.A., for alleged abuseof dominant position in the form of abuse of legal proceedings.  In May 2010, INDECOPI notified the Companyand the other parties of its ruling in the first instance and imposed a penaltyof 657.5 UIT equivalent to S/2,400,000 ($822,000) against the Company andissued a warning to the other parties. TheCompany filed an appeal to the tribunal of INDECOPI (in the second instance)and believes, based upon current facts and circumstances, that a materialpayment upon final resolution of this proceeding, including all future judicialremedies, is unlikely.

 

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In addition, INDECOPI hasbegun sanctioning proceedings against the Company because of separate accidentsthat occurred in January and December 2008 on the Cuzco-Machu Picchuroute.  The maximum penalty in eachproceeding is approximately $50,000. While the Company believes penalties are likely to be imposed, they arenot expected to be a material amount.

 

**12.       Supplemental cash flow information**

 
| ** **      | ** ** | **Year ended December 31,** | ** ** |
|-----------------|------------|----------------------------------|------------|
| ** **      | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **      | ** ** | ** **                       | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **      | ** ** | **(Dollars in thousands)**       | ** ** |
| Cash  paid for: |       |                             |       |   |   |   |   |
| Interest        |       | $                                | 1,034      |   | $ | 953 |   | $ | 931 |   |
| Income  taxes   |       | $                                | 3,356      |   | $ | 5,126 |   | $ | 3,460 |   |

 

**13.       Other comprehensive income**

 

The components ofcomprehensive income were as follows (dollars in thousands):

 
| ** **            | ** ** | **Year ended December 31,** | ** ** |
|-----------------------|------------|----------------------------------|------------|
| ** **            | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **            | ** ** | ** **                       | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| Net  earnings         |       | $                                | 11,394     |   | $ | 9,755 |   | $ | 8,011 |   |
| Comprehensive  income |       | $                                | 11,394     |   | $ | 9,755 |   | $ | 8,011 |   |

 

**14.       Related party transactions**

 

Accounts receivable includenon-interest bearing loans extended to the Company’s shareholders. The amountdue from shareholders to the Company at December 31, 2009 was $173,215(2008—$1,499,632 (unaudited)). In 2008, it was resolved to distribute dividendsof $6,360,000 (unaudited), of which $1,150,000 (unaudited) were applied to theaccounts receivable from shareholders.

 

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Accounts receivable fromFerrocarril Transandino S.A. for working capital, according to estimates, willstart to be paid in 2010. The amount due from Ferrocarril Transandino S.A. atDecember 31, 2009 was $6,599,619 (2008—$3,552,398 (unaudited)).

 

The amount due toFerrocarril Transandino S.A. at December 31, 2009 was $38,476 (2008-$39,957(unaudited)) and relates to the invoicing for the access and use of the railway,locomotives and rolling stock, stations and yards, and loans.  These accounts accrue no interest and will bepaid in 2010. In 2009, the Company received services from FerrocarrilTransandino S.A. in the amount of $20,218,000 (2008-$22,467,000 (unaudited);2007—$21,267,000 (unaudited)), including the value added tax (19%).

 

The amount due toOrient-Express Peru S.A. at December 31, 2009 was $3,975,535 (2008-$2,343,369(unaudited)) relating to the invoicing of management fees and expensereimbursements established in the current management agreement.

 

**15.       Subsequent events**

 

During the last week ofJanuary 2010, heavy rains caused floods that destroyed various sections of therailway on the Cusco - Machu Picchu route. As a result, trains could not operate on this route for approximatelythree months while repairs were carried out. Management is claiming under theCompany’s insurance for the disruption on the Company’s business.

 

For purposes of the Company’sDecember 31, 2009 financial statements, management has evaluated subsequentevents through June 4, 2010.

 

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BDO — Pazos, López de Romaña, Rodriguez S.C.

 

Report ofIndependent Registered Public Accounting Firm

 

Board of Directors and Shareholders

Peru OEH S.A. and Peru OEH Machu Picchu S.A.

Lima, Peru

 

We haveaudited the accompanying combined balance sheets of Peru OEH S.A. and Peru OEHMachu Picchu S.A. (together the “Group”) as of December 31, 2009, and therelated combined statements of operations, cash flows and shareholders’ equityfor the year ended December 31, 2009. These financial statements are theresponsibility of the Group ́s management. Our responsability is to express anopinion on these financial statements based on our audits.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of the Group at December 31, 2009,and the results of its operations and its cash flows for the year endedDecember 31, 2009, in conformity with accounting principles generally acceptedin the United States of America.

 

Pazos, López deRomaña, Rodriguez S.C.

Lima, Peru

June 4,2010

 
| Countersigned by:                      |   |   |
|----------------------------------------|--------|--------|
|                                   |   |   |
|                                   |   |   |
| /s/  MANUEL PAZOS VÉLEZ           |   |   |
| Manuel  Pazos Vélez               |   |   |
| Certified  Chartered Public Accountant |   |   |
| Register No. 01-05095                  |   |   |

 

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**PERUOEH S.A. AND PERU OEH MACHU PICCHU S.A.**

**COMBINED BALANCE SHEETS**

 
| ** **                                                                                          | ** ** | **December  31,**           | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                          | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| ** **                                                                                          | ** ** | ** **                  | ** ** | **(unaudited)** | ** ** |
| ** **                                                                                          | ** ** | **(Dollars  in thousands)** | ** ** |
| **Assets**                                                                                          |       |                        |       |   |   |
| Cash  and cash equivalents                                                                          |       | $                           | 11,505     |   | $ | 1,464 |   |
| Restricted  cash                                                                                    |       | 5,841                       |       | 1,939 |   |
| Accounts  receivables                                                                               |       | 10,138                      |       | 4,876 |   |
| Due  from related parties                                                                           |       | 438                         |       | 5,447 |   |
| Inventories                                                                                         |       | 1,646                       |       | 1,427 |   |
| Prepaid  expenses                                                                                   |       | 778                         |       | 1,105 |   |
| Total  current assets                                                                               |       | 30,346                      |       | 16,258 |   |
|                                                                                                |       |                        |       |   |   |
| Various  long-term accounts receivable                                                              |       | —                      |       | 4,895 |   |
| Investments                                                                                         |       | 39                          |       | 39 |   |
| Property,  installations and equipment,  net of  accumulated depreciation of $5,099 and $4,046 |       | 25,481                      |       | 17,605 |   |
| Goodwill                                                                                            |       | 1,159                       |       | 1,159 |   |
| Intangibles,  net                                                                                   |       | 24,135                      |       | 24,711 |   |
|                                                                                                |       | $                           | 81,160     |   | $ | 64,667 |   |
|                                                                                                |       |                        |       |   |   |
| **Liabilities  and Shareholders’ Equity**                                                      |       |                        |       |   |   |
| Working  capital facilities                                                                         |       | $                           | —     |   | $ | 117 |   |
| Accounts  payable                                                                                   |       | 1,049                       |       | 781 |   |
| Accrued  liabilities                                                                                |       | 6,682                       |       | 2,453 |   |
| Deferred  revenue                                                                                   |       | 777                         |       | 808 |   |
| Due  to related parties                                                                             |       | 1,817                       |       | 4,523 |   |
| Current  portion of long-term debt                                                                  |       | 30,149                      |       | 1,236 |   |
| Total  current liabilities                                                                          |       | 40,474                      |       | 9,918 |   |
|                                                                                                |       |                        |       |   |   |
| Long-term  debt                                                                                     |       | 2,245                       |       | 14,442 |   |
| Deferred  tax liability, net                                                                        |       | 4,356                       |       | 5,032 |   |
| Deferred  employees’ profit sharing                                                            |       | 353                         |       | 266 |   |
|                                                                                                |       | 47,428                      |       | 29,658 |   |
| Commitments  and contingencies                                                                      |       |                        |       |   |   |
|                                                                                                |       |                        |       |   |   |
| Shareholders’  equity:                                                                         |       |                        |       |   |   |
| Common  shares S/1,000 par value (67,400 shares authorized) Issued - 67,400 (2008 -  67,400)        |       | 20,003                      |       | 20,003 |   |
| Retained  earnings                                                                                  |       | 13,729                      |       | 15,006 |   |
| Total  shareholders’ equity                                                                    |       | 33,732                      |       | 35,009 |   |
|                                                                                                |       | $                           | 81,160     |   | $ | 64,667 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**PERUOEH S.A. AND PERU OEH MACHU PICCHU S.A.**

**COMBINED STATEMENTS OF OPERATIONS**

 
| ** **                           | ** ** | **Year  ended December 31,** | ** ** |
|--------------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | **2009**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                           | ** ** | ** **                   | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **                           | ** ** | **(Dollars  in thousands)**  | ** ** |
|                                 |       |                         |       |   |   |   |   |
| Revenue                              |       | $                            | 23,248     |   | $ | 27,768 |   | $ | 24,094 |   |
|                                 |       |                         |       |   |   |   |   |
| Expenses:                            |       |                         |       |   |   |   |   |
| Depreciation  and amortization       |       | (1,581                       | )          | (1,446 | ) | (1,190 | ) |
| Impairment  of inventories           |       | —                       |       | (207 | ) | — |   |
| Operating                            |       | (6,014                       | )          | (6,753 | ) | (6,074 | ) |
| Selling,  general and administrative |       | (13,946                      | )          | (11,653 | ) | (9,063 | ) |
| Total  expenses                      |       | (21,541                      | )          | (20,059 | ) | (16,327 | ) |
|                                 |       |                         |       |   |   |   |   |
| Earnings  from operations            |       | 1,707                        |       | 7,709 |   | 7,767 |   |
|                                 |       |                         |       |   |   |   |   |
| Interest  expense, net               |       | (1,561                       | )          | (2,426 | ) | (1,941 | ) |
| Foreign  currency, net               |       | 425                          |       | (461 | ) | 157 |   |
| Net  finance costs                   |       | (1,136                       | )          | (2,887 | ) | (1,784 | ) |
|                                 |       |                         |       |   |   |   |   |
| Earnings  before income tax          |       | 571                          |       | 4,822 |   | 5,983 |   |
|                                 |       |                         |       |   |   |   |   |
| Provision  for income tax            |       | (28                          | )          | (3,252 | ) | 77 |   |
|                                 |       |                         |       |   |   |   |   |
| Net  earnings                        |       | $                            | 543        |   | $ | 1,570 |   | $ | 6,060 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**PERUOEH S.A. AND PERU OEH MACHU PICCHU S.A.**

**COMBINED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                           | ** ** | **Year  ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                           | ** ** | **2009**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                           | ** ** | ** **                   | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **                                                                           | ** ** | **(Dollars  in thousands)**  | ** ** |
|                                                                                 |       |                         |       |   |   |   |   |
| Cash  flows from operating activities:                                               |       |                         |       |   |   |   |   |
| Net  earnings                                                                        |       | $                            | 543        |   | $ | 1,570 |   | $ | 6,060 |   |
| Adjustments  to reconcile net earnings to net cash provided by operating activities: |       |                         |       |   |   |   |   |
| Depreciation                                                                         |       | 1,005                        |       | 971 |   | 775 |   |
| Amortization                                                                         |       | 576                          |       | 475 |   | 415 |   |
| Provision  for doubtful accounts on related party loans                              |       | 4,020                        |       | — |   | — |   |
| Deferred  employees’ profit sharing                                             |       | 87                           |       | 266 |   | — |   |
| Deferred  income tax                                                                 |       | (676                         | )          | 1,868 |   | (561 | ) |
| Impairment  of inventories                                                           |       | —                       |       | 207 |   | — |   |
| Loss  on disposal of investments, fixed assets and intangibles                       |       | 23                           |       | 37 |   | 23 |   |
| Change  in assets and liabilities, net of effects from acquisition of subsidiary:    |       |                         |       |   |   |   |   |
| Increase  in accounts receivable                                                     |       | (4,084                       | )          | (456 | ) | (5,270 | ) |
| Increase  in inventories                                                             |       | (219                         | )          | (179 | ) | (543 | ) |
| Decrease/(increase)  in prepaid expenses                                             |       | 327                          |       | (66 | ) | (481 | ) |
| Increase/(decrease)  in accounts payable                                             |       | 144                          |       | (290 | ) | 650 |   |
| Decrease/(increase)  in due from related parties                                     |       | 1,203                        |       | (2,952 | ) | 6,362 |   |
| (Decrease)/increase  in accrued liabilities                                          |       | (168                         | )          | 1,577 |   | (3,500 | ) |
| Total  adjustments                                                                   |       | 2,238                        |       | 1,458 |   | (2,130 | ) |
| Net  cash provided by operating activities                                           |       | 2,781                        |       | 3,028 |   | 3,930 |   |
|                                                                                      |            |                              |            |  |  |  |  |  |  |  |

 

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**PERUOEH S.A. AND PERU OEH MACHU PICCHU S.A.**

**COMBINEDSTATEMENTS OF CASH FLOWS (continued)**

 
| ** **                                            | ** ** | **Year  ended December 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|
| ** **                                            | ** ** | **2009**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                            | ** ** | **(Dollars  in thousands)**  | ** ** |
| ** **                                            | ** ** | ** **                   | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| Cash  flows from investing activities:                |       |                         |       |   |   |   |   |
| Capital  expenditures                                 |       | (2,090                       | )          | (4,019 | ) | (4,034 | ) |
| Acquisitions,  net of cash acquired                   |       | (106                         | )          | — |   | — |   |
| Decrease/(increase)  in restricted cash               |       | (3,902                       | )          | 514 |   | 16 |   |
| Net  cash used in investing activities                |       | (6,098                       | )          | (3,505 | ) | (4,018 | ) |
|                                                  |       |                         |       |   |   |   |   |
| Cash  flows from financing activities:                |       |                         |       |   |   |   |   |
| Net  proceeds from working capital facilities         |       | (117                         | )          | — |   | — |   |
| Proceeds  from long-term debt                         |       | 15,537                       |       | 4,477 |   | 10,561 |   |
| Repayment  of long-term debt                          |       | (1,342                       | )          | (6,294 | ) | (6,616 | ) |
| Payment  of common share dividends                    |       | (720                         | )          | (720 | ) | — |   |
| Net  cash provided by/(used in) financing activities  |       | 13,358                       |       | (2,537 | ) | 3,945 |   |
|                                                  |       |                         |       |   |   |   |   |
| Net  increase/(decrease) in cash and cash equivalents |       | 10,041                       |       | (3,014 | ) | 3,857 |   |
|                                                  |       |                         |       |   |   |   |   |
| Cash  and cash equivalents at beginning of year       |       | 1,464                        |       | 4,478 |   | 622 |   |
| Cash  and cash equivalents at end of year             |       | $                            | 11,505     |   | $ | 1,464 |   | $ | 4,479 |   |
|                                                       |            |                              |            |  |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**PERUOEH S.A. AND PERU OEH MACHU PICCHU S.A.**

**COMBINED STATEMENTS OF SHAREHOLDERS ́ EQUITY**

 
| **(Dollars  in thousands)**                | ** ** | **Common    shares at  par  value** | ** ** | **Retained  earnings** | ** ** | **Total  comprehensive  income** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|------------------------|------------|----------------------------------|------------|
| Balance,  January 1, 2007 (unaudited) |       | $                                   | 20,003     |                   | $          | 8,096                            |       |   |   |
|                                       |       |                                |       |                   |       |                             |       |
| Net  earnings                              |       | —                              |       | 6,060                  |       | $                                | 6,060      |   |
|                                       |       |                                |       |                   |       | $                                | 6,060      |   |
| Balance,  December 31, 2007 (unaudited)    |       | 20,003                              |       | 14,156                 |       |                             |       |
|                                       |       |                                |       |                   |       |                             |       |
| Dividends                                  |       | —                              |       | (720                   | )          |                             |       |
| Net  earnings                              |       | —                              |       | 1,570                  |       | $                                | 1,570      |   |
|                                       |       |                                |       |                   |       | $                                | 1,570      |   |
| Balance,  December 31, 2008 (unaudited)    |       | 20,003                              |       | 15,006                 |       |                             |       |
|                                       |       |                                |       |                   |       |                             |       |
| Dividends                                  |       | —                              |       | (1,820                 | )          |                             |       |
| Net  earnings                              |       | —                              |       | 543                    |       | $                                | 543        |   |
|                                       |       |                                |       |                   |       | $                                | 543        |   |
| Balance,  December 31, 2009                |       | $                                   | 20,003     |                   | $          | 13,729                           |       |   |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**PERUOEH S.A. AND PERU OEH MACHU PICCHU S.A.**

**Notes to the Combined Financial Statements**

 

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

 

*(a)**                              **Business*

 

The combined financialstatements of Peru OEH S.A. and Peru OEH Machu Picchu S.A. (together, the “Group”)correspond to a group of companies under a common management control, whichoperate hotels in Cuzco, Arequipa and Urubamba, Peru. The Group is made up of:

 

*Peru OEH S.A.*

 

Peru OEH S.A. is 50% ownedby OEH Peru Ltd. incorporated in Bermuda, and 50% owned by Peru Hotel MachuPicchu S.A. incorporated in Peru.

 

Its headquarters andregistered address is located at la Calle Alcanfores No 775, District ofMiraflores, Province of Lima. Hotel Monasterio del Cuzco is located at CallePalacio No 140, Department de Cuzco.  LasCasitas del Colca is located at Curiña s/n, Valle del Colca Anansaya, Districtof Yanque, Province of Caylloma, Department of Arequipa.

 

The purpose of Peru OEH S.A.is providing accommodation, food, beverages and other services through HotelMonasterio del Cuzco and Las Casitas del Colca. On January 1, 2007, MachuPicchu Sanctuary Lodge was transferred to Peru OEH Machu Picchu S.A. It alsoprovides food and beverage service on board the Hiram Bingham train serviceoperated by its related company Perurail S.A.

 

Peru OEH S.A. also owns asubsidiary acquired in December 2009 which owns Hotel Rio Sagrado (see Note 4).

 

*PeruOEH Machu Picchu S.A.*

 

Peru OEH Machu Picchu S.A.is 50% owned by OEH Peru Ltd. incorporated in Bermuda, and 50% owned by PeruHotel Machu Picchu S.A. incorporated in Peru.

 

Its headquarters andregistered address is located at la Calle Alcanfores No 775, District ofMiraflores, Province of Lima. Hotel Machu Picchu Sanctuary Lodge is located atCarretera Hiram Bingham, Province of Urubamba, Department of Cuzco.

 

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The purpose of Peru OEHMachu Picchu S.A. is providing accommodation, food, beverages and otherservices through Machu Picchu Sanctuary Lodge.

 

*(b)          Basis of presentation*

 

The accompanying financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America and reflect the combinedresults of operations, financial position and cash flows of the Group.

 

As noted in Note 9 below, atDecember 31, 2009, the Group was out of compliance with a leverage ratioand indebtedness ratio in its loans, that have been contingently guaranteed byOrient-Express Hotels Ltd. if it ceases to be a direct or indirect 50%shareholder in the Group. At that date $29,979,000 was owed under this loanfacility. The Group continues to service fully the interest and principalrepayments as these fall due, including a principal repayment of $1,394,926 inJanuary 2010, and is continuing to negotiate with the lender to determine howto bring the Group back into compliance.

 

*(c)*           *Estimates*

 

The preparation of financialstatements in conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reportingperiod.  Significant estimates include, but are not limited to, thevaluation of fixed assets and intangibles, depreciation and amortization, andtaxes.  Actual results could differ materially from management’s estimate.

 

*(d)*          *Foreigncurrency*

 

The functional currency ofthe Group is the US Dollar, which is also the reporting currency of the Group.The local currency is Nuevos Soles. Foreign currency transaction gains andlosses are recognized in earnings as they occur.

 

*(e)*           *Cash andcash equivalents*

 

Cash and cash equivalentsinclude all cash balances and highly-liquid investments having originalmaturities of three months or less.

 

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*(f)*            *Restricted cash*

 

In the combined statement ofcash flows for the years ended December 31, 2009, 2008 and 2007, changesin restricted cash balances have been reported in investing activities.

 

*(g)          Inventories*

 

Inventories are valued atthe lower of their cost or market value under the average cost method.

 

*(h)          Income taxes*

 

*Currentportion of income tax*

 

Income tax for the currentperiod is measured at the amount expected to be paid to the taxationauthorities. The rates and laws used to compute the amount are those in forceas of the balance sheet date.

 

*Deferredportion of income tax*

 

Deferred income taxes areprovided using the balance sheet method on temporary differences at the balancesheet date between the tax and book bases of assets and liabilities.

 

All deductible temporarydifferences and loss carryforwards generate the recognition of deferred taxassets to the extent that it is probable that they can be used in calculatingtaxable income in future years. Deferred income tax is recognized for alldeductible temporary differences and tax loss carryforwards, to the extent thatis more likely than not that taxable profit will be available against which thedeductible temporary differences and unused tax losses can be utilized. Thecarrying amount of the deferred income tax and employee profit sharing assetsis reviewed at each balance sheet date and reduced to the extent that it is nolonger probable that sufficient taxable profit will be available to allow allor part of the deferred asset to be utilized. Unrecognized deferred assets arereassessed at each balance sheet date.

 

Deferred income tax assetsand deferred income tax liabilities are offset if a legally enforceable rightexists to set off current tax assets against current income tax liabilities andthe deferred income taxes relate to the same taxable entity and the sametaxation authority.

 

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ASC 740-20 “Income Taxes”(formerly FIN 48 “Accounting for Uncertainty of Income Taxes”) requires thatany liability created for unrecognized tax benefits is disclosed. Theapplication of ASC 740-20 may also affect the tax bases of assets andliabilities and therefore may change or create deferred tax liabilities orassets. The Group would recognize interest and penalties related tounrecognized tax benefits in the provision for income taxes. At December 31,2009 and 2008, the Group did not record any liabilities for uncertain taxpositions.

 

*(i)**           Property, installations andequipment, net*

 

Property, installations andequipment, net are stated at cost less accumulated depreciation.  The costof significant renewals and betterments is capitalized and depreciated, whileexpenditures for normal maintenance and repairs are expensed as incurred.

 

Depreciation expense iscomputed using the straight-line method over the following estimated usefullives:

 
| **Description**        | ** ** | **Useful  lives** |
|------------------------|------------|-------------------|
| Installations          |       | 60 years          |
| Transport units        |       | 5 years           |
| Various equipment      |       | 5 and 25 years    |
| Furniture and fixtures |       | 15 years          |

 

*(j)**            Intangibles and accumulatedamortization*

 

Intangibles are recorded attheir initial cost less the corresponding accumulated amortization. After theinitial recognition, intangibles are measured at cost less accumulatedamortization and any accumulated loss for devaluation.

 

Intangibles are amortized asfollows:

 
| **Description**                          | ** ** | **Useful  lives** |
|------------------------------------------|------------|-------------------|
| Concession  Hotel Monasterio del Cuzco   |       | 60 years          |
| Concession  Machu Picchu Sanctuary Lodge |       | 60 years          |
| Software                                 |       | 10 years          |

 

*(k)          Impairment of long-lived assets*

 

Inaccordance with ASC 360-10-35 “Impairment or Disposal of Long-LivedAssets-Subsequent Measurement” (formerly SFAS 144 “Accounting for theImpairment or Disposal of Long-Lived Assets”), the Group’s management reviewslong-lived assets whenever events or changes in circumstances indicate that thecarrying amount of the assets may not be recoverable.  In the event thatan impairment occurs, the Group records a charge to income calculated as theexcess of the asset’s carrying value over the estimated fair value.

 

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*(l)           Goodwill*

 

In accordance with ASC 350 “Intangibles-Goodwilland Other”(formerly SFAS No 142, “Goodwill and Other Intangible Assets”),goodwill must be evaluated at least annually to determine impairment. Goodwill is not amortized.  The goodwill impairment testing under ASC 350is performed in two steps: first, the determination of impairment based uponthe fair value of a reporting unit as compared with its carrying value and,second, if there is an implied impairment, the measurement of the amount ofimpairment loss is determined by comparing the implied fair value of goodwillwith the carrying amount of that goodwill.  Impairment testing isperformed annually at year end.  There was no impairment loss in 2009, 2008or 2007.

 

*(m)**          Employees’ length of servicecompensation*

 

The provision for employees’length of service compensation included under accrued liabilities is charged tooperations as the compensation becomes due.

 

*(n)**                              **Revenuerecognition*

 

Hotel and restaurant revenueis recognized when the rooms are occupied and the services are performed. Deferred revenue consisting of deposits paid in advance is recognized asrevenue when the services are performed.

 

*(o)      Interest expense, net*

 

The Group capitalizesinterest during the construction of assets. Interest expense, net excludesinterest which has been capitalized in the amount of $571,830 in 2009 and$254,569 (unaudited) in 2008. No interest was capitalized in 2007.

 

*(p)          Deferred financing costs*

 

Debt issuance costs incurredin connection with the placement of long-term debt are capitalized andamortized to interest expense over the term of the related debt.

 

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*(q)          Risk and uncertainties*

 

The Group’s activitiesexpose it to a variety of financial risks: market risks (including interestrate risk and exchange risk), credit risk, and liquidity risk. The Group’s riskmanagement program tries to minimize the potential adverse effects on itsfinancial performance. Management is aware of the market conditions and, basedon its knowledge and experience, controls the exchange, interest rate, creditand liquidity risks, following the policies approved by the Boards ofDirectors. The most important aspects for the management of these risks are:

 

*Liquidity risk*

 

Liquidity risk is the riskthat cash may not be available to pay obligations at their maturity at a fairvalue. The Group controls the required liquidity through a proper management ofasset and liability maturity dates, so that the flow of cash matches futurepayments.

 

*Credit risk*

 

The Group’s financial assetsthat are potentially exposed to concentration of credit risk are mainly trade accountsreceivable, accounts receivable from related parties and from shareholders, andvarious accounts receivable.

 

*Interest rate risk*

 

The Group’s exposure to thisrisk arises from changes in the interest rates in its financial assets andliabilities. The Group keeps mainly long-term debt subject to a floatinginterest rates. The Group does not expect to incur in significant losses due tointerest rate risk.

 

*Exchange risk*

 

The Group carries out itstransactions mostly in foreign currency, but management estimates that anyfluctuation will not adversely affect the results of the Group’s ́ operations.

 

*(r)           Deferred employee profit sharing*

 

In accordance with Peruvianlaw, employee profit sharing is limited to 18 times an employee’s monthlyaverage salary. The excess of calculated statutory employee profit sharing ispaid to the Peruvian government and is treated as an additional tax. The Group’spractice is to recognize the employees’ profit sharing as part of operatingcost and any excess profit sharing is recognized as part of current income tax.The Group has a 5% rate for calculating employee profit sharing. To date, noexcess profit sharing has been recognized.

 

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*(s)           Derivative financial instruments*

 

If a derivative instrumentis not designated as a hedge for accounting purposes, the fluctuations in thefair value of the derivative are recorded in earnings.

 

The Group is exposed tointerest rate risk on its floating rate debt and management uses derivatives tomanage the impact of interest rate changes on earnings and cash flows. TheGroup’s policy is to enter into an interest rate swap agreement to hedge thevariability in interest rate cash flows on floating rate debt. The swapeffectively converts the floating rate interest payments on a portion of theoutstanding debt into fixed payments.

 

*(t)           Recent accounting pronouncements*

 

*ASU2009-13*

 

In October 2009, the FASBissued ASU 2009-13 “Revenue Recognition” on multiple-deliverable revenuearrangements. ASU 2009-13 codifies the consensus in EITF Issue 08-1, whichsupersedes Issue 00-21 (codified in ASC 605-25). The ASU was issued in responseto concerns related to the accounting for revenue arrangements with multipledeliverables under Issue 00-21 and applies to all deliverables in contractualarrangements in all industries in which a vendor will perform multiplerevenue-generating activities, except when some or all deliverables in amultiple-deliverable arrangement are within the scope of other, more specificsections of the ASC (e.g., ASCs 840, 952, 360-20 (pre-ASC guidance from SFAS13, 45, and 66) and other sections of ASC 605 on revenue recognition (e.g., pre-ASCguidance from SOPs 81-1 and 97-2)).

 

ASU 2009-13 is effective forfiscal years beginning on or after June 15, 2010. The Group does notexpect any material impact from the adoption of the ASU.

 

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**2**.         **Concessions**

 

In March 1999, Peru OEH S.A.acquired the concession of the Monastery San Antonio de Abad del Cuzco whereHotel Monasterio del Cuzco operates. The original term of the concessioncontract was ten obligatory years, renewable for ten additional years, countedas from April 1996. In September 2007, the concession contract was terminatedand a usufruct contract was entered into (see Note 3).

 

Alsoin March 1999, Peru OEH S.A. acquired the concession of the Hotel de Turistaslocated in Machu Picchu (renamed Machu Picchu Sanctuary Lodge). The term of theconcession contract is 20 obligatory years, renewable for ten additional years,counted as from May 1995. The contract provides that during the concessionterm, the Cuzco Region will receive a monthly fixed consideration of $7,159 andan additional amount equivalent to 6% of the total monthly gross revenuesgenerated by Machu Picchu Sanctuary Lodge. In October 2006, a contract ofassignment was entered into under which Peru OEH S.A. assigned the concessionof Machu Picchu Sanctuary Lodge to Peru OEH Machu Picchu S.A. Throughsupplementary agreement entered January 1, 2007, it was agreed that theassignment took place on that date and the consideration amounted to$11,513,399.

 

During the term of theconcession contracts, any improvements to real and personal properties includedin the concessions and any other assets that may be acquired to be used in thehotel business will be owned by the Archbishopry of Cuzco in the case of theHotel Monasterio del Cuzco and by the Cuzco Region in the case of Machu PicchuSanctuary Lodge at the expiration of the contracts, with no reimbursementwhatsoever. Likewise, the contracts terminate without any court resolutionrequirement under the circumstances stated therein.

 

**3**.                            **Usufructcontracts**

 

In March 1999, Peru OEH S.A.entered a usufruct contract (similar to a lease arrangement) of the formerConvento de las Nazarenas located next to Hotel Monasterio del Cuzco. Thecontract had a term of 21 years and five months as from March 1999, and themonthly rent amounted to $7,500 adjustable annually based on the consumer priceindex. In March 2005, an amendment to the contract was entered for a term of 20years and providing for (i) a monthly rent of $9,000 for the term of two yearsand eight months considered as the “pre-operating stage” and (ii) a monthlyrent of $20,000 plus 4.5% of the gross operating revenues of the hotel createdfrom the former convent, for a term of 17 years and four months to be computedas from completion of the “pre-operating stage”. Should the “pre-operatingstage” be extended, a monthly rent of $16,000 was to be paid until itscompletion. Peru OEH S.A. had the right to extend the term of the contract forten additional years.

 

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In January 2010, the March2005 amendment was further amended to extend the “pre-operating stage” to sevenyears and to establish the term after the “pre-operating stage” at 23 years. Peru OEH S.A. has the right to extend theterm for seven years and eight months.

 

InSeptember 2007, Peru OEH S.A. entered a contract for the usufruct of HotelMonasterio del Cuzco and of certain furniture and fixtures owned by theArchbishopry of Cuzco, for a term of 30 years as from the signature of thecontract. This contract replaced the concession contract of Hotel Monasteriodel Cuzco referred to in Note 2, and provides that the Archbishopry of Cuzcowill receive monthly rent of $13,492 adjustable annually based on the consumerprice index plus the equivalent to 4.5% of the total monthly gross revenuesgenerated by Hotel Monasterio del Cuzco. Peru OEH S.A. has the option, everyfive years, to extend the term of the usufruct for five additional years up to30 years.

 

**4**.         **Acquisition**

 

On December 23, 2009, PeruOEH S.A. acquired 100% of the share capital of Inversiones TuristicasVagamundos S.A.C., which owns the Hotel Rio Sagrado located in the SacredValley, Urubamba, Peru, at an agreed purchase price of $7,000,000 less debtassumed. Peru OEH S.A. purchased the hotel to enhance its presence in thePeruvian hotel market.  No intangible assets were identified.

 

Peru OEH S.A. performed apreliminary fair value exercise to allocate the purchase price to the acquiredassets and liabilities as at December 23, 2009, which is complete with theexception of the vendor providing support on certain asset balances.  PeruOEH S.A. expects to finalize the purchase price allocation no later than thefourth quarter of 2010.

 

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The following tablesummarizes the consideration paid for the hotel and the preliminary fair valuesof the assets acquired and liabilities assumed (dollars in thousands):

 
| ** **                                | ** ** | **Fair  value on  December 23, 2009** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|
| Consideration:                            |       |                                       |       |
| Total agreed consideration                |       | $                                          | 7,000      |   |
| Less:  existing debt assumed              |       | (2,415                                     | )          |
| Purchase  price                           |       | $                                          | 4,585      |   |
|                                      |       |                                       |       |
| Assets  acquired and liabilities assumed: |       |                                       |       |
| Cash  and cash equivalents                |       | $                                          | 15         |   |
| Accounts  receivables                     |       | 303                                        |       |
| Property,  plant and equipment            |       | 6,814                                      |       |
| Accrued  liabilities                      |       | (132                                       | )          |
| Long-term  debt                           |       | (2,415                                     | )          |
| Net  assets acquired                      |       | $                                          | 4,585      |   |

 

The acquisition of the hotelhas been accounted for using the purchase method of accounting for business combinations. The results of operations of the hotel have been included in the combinedstatement of operations since the date of acquisition.

 

As of December 31,2009, Peru OEH S.A. had paid only a deposit of $121,000 towards theacquisition.  The remaining outstandingbalance of $4,464,000 was held in accrued liabilities (see Note 8).

 

The pro forma effects of theacquisition of this hotel on the Group’s combined statement of operations hadthe acquisition date been January 1, 2009 were an increase in revenues of$149,000 and a net loss of $490,000.  Thehotel opened in April 2009 and was not operating in 2008.

 

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**5.         Property, installations and equipment, net**

 

The major classes ofproperty, installations and equipment are as follows (dollars in thousands):

 
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                      | ** ** | ** **            | ** ** | **(unaudited)** | ** ** |
|                            |       |                  |       |   |   |
| Land                            |       | $                     | 4,553      |   | $ | 1,365 |   |
| Installations                   |       | 13,888                |       | 6,410 |   |
| Transport  units                |       | 465                   |       | 461 |   |
| Various  equipment              |       | 4,500                 |       | 3,413 |   |
| Furniture  and fixtures         |       | 4,551                 |       | 3,229 |   |
| Works  in progress              |       | 2,623                 |       | 6,773 |   |
|                            |       | 30,580                |       | 21,651 |   |
| Less:  accumulated depreciation |       | (5,099                | )          | (4,046 | ) |
| Net  cost                       |       | $                     | 25,481     |   | $ | 17,605 |   |

 

**6.         Goodwill**

 

Therehas been no change in the carrying amount of goodwill for the years ended December 31,2009 and 2008.  The carrying value ofgoodwill that arose on the acquisition of hotel contracts was $1,159,000.  There has been no impairment of this goodwillsince it was acquired.

 

The Group’s goodwillimpairment testing is performed in two steps, first, the determination ofimpairment based upon the fair value of the reporting unit as compared with itscarrying value and, second, if there is an implied impairment, the measurementof the amount of the impairment loss is determined by comparing the impliedfair value of goodwill with the carrying value of the goodwill.  If the carrying value of the reporting unit’sgoodwill exceeds its implied fair value, the goodwill is deemed to be impairedand is written down to the extent of the difference.

 

The determination ofimpairment incorporates various assumptions and uncertainties that managementbelieves are reasonable and supportable considering all available evidence,such as the future cash flows of the business, future growth rates and therelated discount rate. However, these assumptions and uncertainties are, bytheir very nature, highly judgmental.  Ifthe assumptions are not met, the Group may be required to recognize goodwillimpairment losses.

 

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**7.         Intangibles, net**

 

Intangibles consist of thefollowing as of December 31, 2009 and 2008 (dollars in thousands):

 
| **Year ended  December 31, 2009** | ** ** | **Concession  Hotel  Monasterio  del Cuzco** | ** ** | **Concession  Machu  Picchu  Sanctuary  Lodge** | ** ** | **Concession  Convento de  las  Nazarenas** | ** ** | **Software** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|--------------|------------|-----------|------------|
|                                             |       |                                              |       |                                            |       |                                             |       |         |       |      |       |
| Carrying  amount:                                |       |                                              |       |                                            |       |                                             |       |         |       |      |       |
| Balance  as of January 1, 2009              |       | $                                                 | 14,500     |                                            | $          | 11,360                                           |       | $            | 2,586      |      | $          | 324 |   | $ | 28,770 |   |
| Balance  as of December 31, 2009            |       | $                                                 | 14,500     |                                            | $          | 11,360                                           |       | $            | 2,586      |      | $          | 324 |   | $ | 28,770 |   |
|                                             |       |                                              |       |                                            |       |                                             |       |         |       |      |       |
| Amortization:                                    |       |                                              |       |                                            |       |                                             |       |         |       |      |       |
| Balance  as of January 1, 2009              |       | $                                                 | 2,509      |                                            | $          | 1,451                                            |       | $            | —     |      | $          | 99 |   | $ | 4,059 |   |
| Charge  for the period                           |       | 522                                               |       | —                                          |       | —                                           |       | 54           |       | 576       |       |
| Balance  as of December 31, 2009            |       | $                                                 | 3,031      |                                            | $          | 1,451                                            |       | $            | —     |      | $          | 153 |   | $ | 4,635 |   |
|                                             |       |                                              |       |                                            |       |                                             |       |         |       |      |       |
| Net  book value:                                 |       |                                              |       |                                            |       |                                             |       |         |       |      |       |
| As  of December 31, 2008                    |       | $                                                 | 11,991     |                                            | $          | 9,909                                            |       | $            | 2,586      |      | $          | 224 |   | $ | 24,711 |   |
| As  of December 31, 2009                    |       | $                                                 | 11,469     |                                            | $          | 9,909                                            |       | $            | 2,586      |      | $          | 171 |   | $ | 24,135 |   |

 

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| **Year ended  December 31, 2008  (unaudited)** | ** ** | **Concession  Hotel  Monasterio  del Cuzco** | ** ** | **Concession  Machu  Picchu  Sanctuary  Lodge** | ** ** | **Concession  Convento de  las  Nazarenas** | ** ** | **Software** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|--------------|------------|-----------|------------|
|                                                          |       |                                              |       |                                            |       |                                             |       |         |       |      |       |
| Carrying  amount:                                             |       |                                              |       |                                            |       |                                             |       |         |       |      |       |
| Balance  as of January 1, 2008                           |       | $                                                 | 14,500     |                                            | $          | 10,000                                           |       | $            | 2,505      |      | $          | 197 |   | $ | 27,202 |   |
| Additions                                                     |       | —                                            |       | —                                          |       | 81                                               |       | 127          |       | 208       |       |
| Reclassification  of fixed assts                              |       | —                                            |       | 1,360                                           |       | —                                           |       | —       |       | 1,360     |       |
| Balance  as of December 31, 2008                         |       | $                                                 | 14,500     |                                            | $          | 11,360                                           |       | $            | 2,586      |      | $          | 324 |   | $ | 28,770 |   |
|                                                          |       |                                              |       |                                            |       |                                             |       |         |       |      |       |
| Amortization:                                                 |       |                                              |       |                                            |       |                                             |       |         |       |      |       |
| Balance  as of January 1, 2008                           |       | $                                                 | 2,048      |                                            | $          | 1,451                                            |       | $            | —     |      | $          | 85 |   | $ | 3,584 |   |
| Charge  for the period                                        |       | 461                                               |       | —                                          |       | —                                           |       | 14           |       | 475       |       |
| Balance  as of December 31, 2008                         |       | $                                                 | 2,509      |                                            | $          | 1,451                                            |       | $            | —     |      | $          | 99 |   | $ | 4,059 |   |
|                                                          |       |                                              |       |                                            |       |                                             |       |         |       |      |       |   |   |   |   |   |
| Net  book value:                                              |       |                                              |       |                                            |       |                                             |       |         |       |      |       |
| As  of December 31, 2007                                 |       | $                                                 | 12,452     |                                            | $          | 8,549                                            |       | $            | 2,505      |      | $          | 112 |   | $ | 23,619 |   |
| As  of December 31, 2008                                 |       | $                                                 | 11,991     |                                            | $          | 9,909                                            |       | $            | 2,586      |      | $          | 225 |   | $ | 24,711 |   |

 

Amortization expense for theyear ended December 31, 2009 was $576,000 (2008-$475,000 (unaudited);2007-$415,000 (unaudited)).

 

Estimated amortizationexpense for each of the years 2010 to 2014 is $576,000.

 

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**8.****                           ****Accruedliabilities**

 

Abreakdown of accrued liabilities is as follows (dollars in thousands):

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | ** **            | ** ** | **(unaudited)** | ** ** |
| Remuneration  payable                           |       | $                     | 129        |   | $ | 192 |   |
| Employees’  profit sharing payable         |       | 183                   |       | 235 |   |
| Interest  payable on long-term debt             |       | 412                   |       | 559 |   |
| Usufruct  of concessions                        |       | —                |       | 96 |   |
| Purchase  of investments (a)                    |       | 4,464                 |       | — |   |
| Tax  payable                                    |       | 50                    |       | 96 |   |
| Employees’  length of service compensation |       | 18                    |       | 21 |   |
| Derivative                                      |       | 95                    |       | — |   |
| Other                                           |       | 1,331                 |       | 1,254 |   |
|                                            |       | $                     | 6,682      |   | $ | 2,453 |   |

 

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(a)           Purchase of investments representsthe account payable for the acquisition of shares of Inversiones TurísticasVagamundos S.A.C. due in May 2010, all of which has been paid to thevendor except $700,000 held in escrow. This account payable has no specific security and bears no interest.

 

**9.****                           ****Long-termdebt**

 

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

 
| ** **                                                                                                                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                        | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                                                                                                                                        | ** ** | ** **            | ** ** | **(unaudited)** | ** ** |
| Loans  from banks payable over periods of 1 year to 8 years and 6 months, with a  weighted average interest rate of 3.67% and 5.59%, respectively |       | $                     | 32,394     |   | $ | 15,678 |   |
| Less:  current portion                                                                                                                            |       | 30,149                |       | 1,236 |   |
|                                                                                                                                              |       | $                     | 2,245      |   | $ | 14,442 |   |

 

Loans from banks arecollateralized by land at Las Casitas del Colca, personal property of HotelMonasterio del Cuzco, Convento de las Nazarenas and Las Casitas del Colca, theconcession contracts, the revenues of the Group, and assignments of the hotelmanagement agreements of the Group and Orient-Express Peru S.A.

 

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At December 31, 2009,the Group was out of compliance with a leverage ratio and indebtedness ratio inits loans, that have been contingently guaranteed by Orient-Express Hotels Ltd.if it ceases to be a direct or indirect 50% shareholder of the Group. A totalof $29,979,000 had been borrowed under this loan facility at December 31,2009. The Group continues to service fully the interest and principalrepayments as these fall due, including a principal repayment of $1,394,926 in January 2010,and is continuing to negotiate with the lenders to determine how to bring theGroup back into compliance.

 

In addition, $2,415,000 ofindebtedness associated with the acquisition of Inversiones TuristicasVagamundos S.A.C. was incurred in December 2009.  That debt had an initial maturity date of April 2010and was subsequently refinanced to mature over a seven-year period.

 

The following is a summaryof the aggregate maturities of long-term debt at December 31, 2009(dollars in thousands):

 
| **Year  ending December 31,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
|                               |       |       |       |
| 2010                               |       | $          | 30,149     |   |
| 2011                               |       | 306        |       |
| 2012                               |       | 324        |       |
| 2013                               |       | 344        |       |
| 2014  and thereafter               |       | 1,271      |       |
|                               |       | $          | 2,394      |   |

 

Deferred financing costsrelated to the above outstanding long-term debt were $702,724 atDecember 31, 2009 (2008-$765,200 (unaudited)) and are amortized tointerest expense over the term of the corresponding long-term debt.

 

**10.****                    ****Derivativeand fair value disclosures**

 

*Risk management objective ofusing derivatives*

 

Peru OEH S.A. entered into aderivative financial instrument to manage exposures that arise from financingactivities that result in the payment of future known and uncertain cashamounts, the value of which is determined by interest rates.

 

*Non-designated hedge of interestrate risk*

 

The derivative held by PeruOEH S.A. is not designated as a hedge, as it does not meet the strict hedgeaccounting requirements of ASC 815 “Derivatives and Hedging”.  Peru OEH S.A. uses the derivative to manageits exposure to interest rate movements. As of December 31, 2009, Peru OEH S.A. had a forward startinginterest rate swap with a $6,277,000 notional amount that had a start date ofJanuary 15, 2010 and was used to manage its exposure to interest raterisk.

 

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The table below presents thefair value of the Group’s derivative financial instrument as well as itsclassification as of December 31, 2009 (dollars in thousands).

 
| ** **                                                       | ** ** | **Liability  Derivative**        | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                       | ** ** | **Balance Sheet  Location** | ** ** | **Fair Value as of  December 31, 2009** | ** ** | **Fair Value as of  December 31, 2008  (unaudited)** | ** ** |
|                                                             |       |                             |       |   |   |   |   |
| Derivative  not designated as hedging instruments under ASC 815: |       |                             |       |   |   |   |   |
| Interest  rate swap                                              |       | Accrued liabilities              |       | $ | (95 | ) | $ | — |   |
| Total                                                            |       |                             |       | $ | (95 | ) | $ | — |   |

 

*ASC 820-10 disclosures*

 

There were no movements inLevel 3 derivatives in 2009 and no derivatives classified as Level 3derivatives as at December 31, 2009.

 

The amount of total lossesincluded in earnings that are attributable to the change in unrealized gains orlosses relating to those liabilities still held at December 31, 2009 was$95,000 for the year ended December 31, 2009.

 

The Group reviews its fairvalue hierarchy classifications annually.  Changes in significantobservable valuation inputs identified during these reviews may trigger areclassification of the fair value hierarchy levels of financial assets andliabilities.  These reclassifications are reported as transfers in Level 3at their fair values at the beginning of the period in which the change occursand the transfers out at their fair values at the end of the period.

 

The fair value of the Group’sderivative financial instrument is computed based on an income approach usingappropriate valuation techniques including discounting future cash flows andother methods that are consistent with accepted economic methodologies forpricing financial instruments.  Where credit value adjustments exceeded20% of the fair value of the derivatives, Level 3 inputs are assumed to have asignificant impact on the fair value of the derivatives in their entirety andthe valuation has been classified in the Level 3 category.

 

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*Fair value of financialinstruments*

 

Certain methods andassumptions were used to estimate the fair value of each class of financialinstruments for which it is practicable to estimate fair value. The carryingamount of cash and cash equivalents approximates fair value because of theshort maturity of those instruments. The fair value of the Group’s long-termdebt is estimated based on the credit spreads for the Group derived from athird-party credit risk model.

 

The estimated fair values ofthe Group’s financial instruments as of December 31, 2009 are as follows(dollars in thousands):

 
| ** **                                 | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **Carrying  amount**        | ** ** | **Fair  value** | ** ** |
| Cash  and cash equivalents                 |       | $                           | 11,505     |   | $ | 11,505 |   |
| Long-term  debt, including current portion |       | $                           | 32,394     |   | $ | 29,853 |   |

 

The carrying values ofnon-financial assets that are measured on a non-recurring basis approximatetheir fair values.

 

**11****.       Income tax**

 

The provision for incometaxes consists of the following (dollars in thousands):

 
| ** **                    | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                    | ** ** | ** **                       | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
|                          |       |                             |       |   |   |   |   |
| Pre-tax  income               |       | $                                | 571        |   | $ | 4,822 |   | $ | 5,983 |   |
|                          |       |                             |       |   |   |   |   |
| Current  tax                  |       | $                                | 704        |   | $ | 1,384 |   | $ | 484 |   |
|                          |       |                             |       |   |   |   |   |
| Deferred  tax (charge)/credit |       | $                                | (676       | ) | $ | 1,868 |   | $ | (561 | ) |

 

No income taxes were paidduring 2009, 2008 and 2007 by Peru OEH Machu Picchu S.A. because there were taxlosses carried forward to these years.

 

The reconciliations of thePeru income tax rate to the Group’s effective tax rate for the three yearsended December 31, 2009 are as follows:

 

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| ** **             | ** ** | **Year ended December 31,** | ** ** |
|------------------------|------------|----------------------------------|------------|
| ** **             | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **             | ** ** | ** **                       | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **             | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Peru  income tax rate  |       | 30                               | %          | 30 | % | 30 | % |
| Permanent  differences |       | (25                              | )%         | 38 | % | (31 | )% |
| Effective  tax rate    |       | 5                                | %          | 68 | % | (1 | )% |

 

Permanent differences aboverelate to the non-deductibility of amortization and foreign exchange gains andlosses, the impact of allowances for doubtful accounts associated withshareholder loans (see note 18) and other items.

 

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamount of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes.  The following represents the Group’snet deferred tax liabilities (dollars in thousands):

 
| ** **                                                | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                                                | ** ** | ** **            | ** ** | **(unaudited)** | ** ** |
| Gross  deferred tax assets:                               |       |                  |       |   |   |
| Operating  loss carryforwards                             |       | $                     | 230        |   | $ | 1,713 |   |
| Less:  valuation allowance                                |       | —                |       | — |   |
| Net  deferred tax assets                                  |       | 230                   |       | 1,713 |   |
| Deferred  tax liabilities (depreciation and amortization) |       | 4,586                 |       | 6,745 |   |
| Net  deferred tax liabilities                             |       | $                     | 4,356      |   | $ | 5,032 |   |

 

The gross amount of tax losscarryforwards was $863,751 at December 31, 2009 (2008-$1,540,188(unaudited)).  After weighing allpositive and negative evidence, a valuation allowance has not been providedagainst gross deferred tax assets as it is thought more likely than not thatthe benefits associated with these assets will be realized.

 

**12.****                    ****Shareholders ́equity**

 

*a)            Share capital of Peru OEH S.A.*

 

At December 31, 2009,Peru OEH S.A. share capital consisted of 55,970 fully subscribed and paidshares with a par value of S/1,000 each, all carrying the same rights. Theissue of 9,728 shares corresponding to the capitalization of the restatement ofNuevos Soles to constant currency of years 1999 to 2004 is pending.

 

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The shareholders of Peru OEHS.A. are as follows:

 
|                          | ** ** | **Number of********shares** | ** ** | **Percent of********ownership** | ** ** |
|-------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| OEH  Peru Ltd.                |       | 27,985                      |       | 50.00                           |       |
| Peru  Hotel Machu Picchu S.A. |       | 27,985                      |       | 50.00                           |       |
|                          |       | 55,970                      |       | 100.00                          |       |

 

*b)            Share capital of Peru OEH Machu Picchu S.A.*

 

At December 31, 2009,Peru OEH Machu Picchu S.A. share capital consisted of 11,430 fully subscribedand paid shares with a par value of S/1,000 each, all carrying the same rights.

 

The shareholders of Peru OEHMachu Picchu S.A. are as follows:

 
| ** **                    | ** ** | **Number of********shares** | ** ** | **Percent of********ownership** | ** ** |
|-------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| OEH  Peru Ltd.                |       | 5,715                       |       | 50.00                           |       |
| Peru  Hotel Machu Picchu S.A. |       | 5,715                       |       | 50.00                           |       |
|                          |       | 11,430                      |       | 100.00                          |       |

 

Norestriction exists for the remittance of investments and profits abroad.

 

*c)            Retained earnings*

 

Retained earnings may becapitalized or distributed as dividends, by resolution of the shareholders. TheGroup’s distributable profits are limited to the amount of retained earningsavailable under local statutory provisions. As from 2003, dividends and anyother form of distributed profit are subject to withholding tax at a 4.1% rateon the distributed amount to be borne by the shareholders who are individuals,whether or not domiciled in Peru, or who are juridical persons not domiciled inPeru. Any distribution must be proportionate to the shareholders ́ contribution.

 

**13.****                    ****Deferredemployees’ profit sharing**

 

According to Peruvian law,employees are entitled to a share of 5% of the Group’s profits before incometax. Employees’ profit sharing is computed on the taxable net income balance ofthe year subject to tax, as assessed for local purposes. Employee profitsharing is impacted by both current and deferred tax balances.  Therefore, the balance in employee profitsharing can result in either an asset or liability, depending on the underlyingdeferred tax balance.

 

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**14.       Information by segments**

 

Accounting standards requirethat the Group present financial information by segments. Segments aredetermined by the form in which management organizes the Group to makedecisions and assess the business performance. Management considers that theGroup operates as one single reportable segment, which are its hoteloperations.

 

**15.****                    ****Commitmentsand contingencies**

 

In April 2002, BusinessFocus Leisure Sdn Bhd commenced proceedings in the Sixth Civil Court of Limaagainst Peru OEH S.A and certain related persons and companies and ScotiabankPeru S.A.A. and International Finance Corporation, seeking to nullify thetransfer of assets and assignment of contracts relating to Hotel Monasterio delCuzco and Machu Picchu Sanctuary Lodge. The respondents answered the proceedings and moved to dismiss the casebased on various arguments including that the case was time-barred and forfailure to prosecute.  In April 2009, thecourt dismissed the proceedings, and the petitioner appealed in May 2009although that appeal has not yet been perfected.  Management believes the proceedings willeventually be decided in favor of Peru OEH S.A.

 

**16.       Supplemental cash flow information andrestricted cash**

 
| ** **      | ** ** | **Year ended December 31,** | ** ** |
|-----------------|------------|----------------------------------|------------|
| ** **      | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **      | ** ** | ** **                       | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **      | ** ** | **(Dollars  in thousands)**      | ** ** |
| Cash  paid for: |       |                             |       |   |   |   |   |
| Interest        |       | $                                | 840        |   | $ | 1,471 |   | $ | 1,382 |   |
| Income  taxes   |       | $                                | 193        |   | $ | 648 |   | $ | 297 |   |

 

In 2009, the Groupauthorized dividends of $1,820,000.  Ofthis amount, $720,000 was paid in cash and $1,100,000 was used to reduceoutstanding shareholder loan balances owed to the Group.

 

*Restricted cash*

 

At December 31, 2009,$5,840,553 (2008-$1,939,439 (unaudited)) was held in a separate account for thepayment of obligations to certain lenders.

 

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**17.       Comprehensive income**

 

The components ofcomprehensive income were as follows (dollars in thousands):

 
| ** **            | ** ** | **Year ended December 31,** | ** ** |
|-----------------------|------------|----------------------------------|------------|
| ** **            | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **            | ** ** | ** **                       | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| Net  earnings         |       | $                                | 543        |   | $ | 1,570 |   | $ | 6,060 |   |
| Comprehensive  income |       | $                                | 543        |   | $ | 1,570 |   | $ | 6,060 |   |

 

**18.****                    ****Relatedparty transactions**

 

Accounts payable to PerurailS.A. arise mainly from the train tickets bought by the Group to transportguests to Machu Picchu. The amount due to Perurail S.A. at December 31, 2009was $46,840 (2008-$42,411 (unaudited)).

 

Accounts payable toOrient-Express Peru S.A. represent mainly the management fees and expenserecovery generated by the management contracts with the Group. The amount dueto Orient-Express Peru S.A. at December 31, 2009 was $667,416 (2008-$2,695,292(unaudited)).

 

Accounts receivable fromOrient-Express Peru S.A. arise mainly from management services rendered.  The amount due from Orient-Express Peru S.A.at December 31, 2009 was $nil (2008-$235,074 (unaudited)).

 

Accounts payable toOrient-Express Hotels Ltd. mainly represent interest due on loans received,guarantee fees and other central services. The amount due to Orient-ExpressHotels Ltd. at December 31, 2009 was $1,102,366 (2008-$1,781,886 (unaudited)).

 

Accounts payable to PeruHotel S.A. mainly represent services rendered. The amount due to Peru Hotel S.A. at December 31, 2009 was $nil(2008-$3,748 (unaudited)).

 

From 2004 to 2007, the Groupprovided its shareholders with loans.  In2009, the Group determined that due to the passage of time, it was appropriateto write off most of the outstanding balance of shareholder loans.  Accordingly in 2009, a provision of$4,020,000 was recorded within selling, general and administrativeexpenses.  Shareholder loans outstandingas of December 31, 2009 amounted to $438,802 (2008-$5,212,306 (unaudited)).

 

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**19.       Subsequent event**

 

During the last week of January 2010, heavy rainfallcaused floods that destroyed various sections of the railway on the Cusco -Machu Picchu route. As a result, the Machu Picchu Sanctuary Lodge was closedfor approximately three months, which was the time required to repair therailway that provides access to the hotel. The hotel has since re-opened. The flooding also impacted the revenues of Hotel Monasterio del Cuzco,as it also receives guests who journey to Machu Picchu.  Management is claiming under the Group’sinsurance for the disruption of its business.

 

For purposes of the Group’sDecember 31, 2009 financial statements, management has evaluated subsequentevents through June 4, 2010.

 

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** **

**SIGNATURES**

 

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

 
| Dated: June 18, 2010 |   |
|----------------------|--------|
|                 |   |
| ** **           |   | ORIENT-EXPRESS HOTELS LTD. |
| ** **           |   |   |
| ** **           | By:    | /s/  Martin O’Grady |
|                 |   | Martin  O’Grady |
|                 |   | Vice  President—Finance and  Chief Financial Officer |

 

**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)                                                                                                                  |
|                   |       |                                                                                                                         |       |                                                                                                                                                                                                                             |
| 3.5                    |       | Exhibit 4.3  to May 27, 2010 Form 8-K Current Report (File No. 1-16017)                                       |       | Amendment  No. 2 dated May 27, 2010 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 |

 

The registrant 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 theregistrant on a consolidated basis.  The registrant agrees to furnish tothe SEC upon request a copy of each instrument with respect to long-term debtnot filed as an exhibit to this report.

 

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| **Exhibit********No.** | ** ** | **Incorporated by********Reference to**                                  | ** ** | **Description**                                                                                                                                                                                                                           |
|------------------------|------------|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **             | ** ** | ** **                                                                         | ** ** | ** **                                                                                                                                                                                                                                |
| 10.1                   |       | Exhibit  10.1 to 2008 Form 10-K Annual Report (File No. 1-16017)                   |       | Orient-Express  Hotels Ltd. 2000 Stock Option Plan                                                                                                                                                                                        |
|                   |       |                                                                               |       |                                                                                                                                                                                                                                      |
| 10.2                   |       | Exhibit  10.2 to 2008 Form 10-K Annual Report (File No. 1-16017)                   |       | Orient-Express  Hotels Ltd. 2004 Stock Option Plan                                                                                                                                                                                        |
|                   |       |                                                                               |       |                                                                                                                                                                                                                                      |
| 10.3                   |       | Exhibit  10.3 to 2008 Form 10-K Annual 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  10.1 to June 4, 2010 Form 8-K Current Report (File No. 1-16017)           |       | Orient-Express  Hotels Ltd. 2009 Share Award and Incentive Plan                                                                                                                                                                           |
|                   |       |                                                                               |       |                                                                                                                                                                                                                                      |
| 10.6                   |       | 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.                                                          |
|                   |       |                                                                               |       |                                                                                                                                                                                                                                      |
| 10.7                   |       | 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.                               |
|                   |       |                                                                               |       |                                                                                                                                                                                                                                      |
| 10.8                   |       | 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                                                                                                                          |
|                   |       |                                                                               |       |                                                                                                                                                                                                                                      |
| 10.9                   |       | 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.                                                                                                   |
|                   |       |                                                                               |       |                                                                                                                                                                                                                                      |
| 10.10                  |       | 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                                                                                          |
|                   |       |                                                                               |       |                                                                                                                                                                                                                                      |
| 10.11                  |       | 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, and Martin O’Grady  (dated November 15, 2007 for Mr. O’Grady) |
|                   |       |                                                                               |       |                                                                                                                                                                                                                                      |
| 10.12                  |       | 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, David Williams and Phillip A. Gesue  (dated February 9, 2009 for Mr. Gesue)                             |
|                   |       |                                                                               |       |                                                                                                                                                                                                                                      |
| 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                                                                                                                                                   |

 

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| **Exhibit********No.** | ** ** | **Incorporated by********Reference to**                             | ** ** | **Description**                                                                                                                                                                                                                                           |
|------------------------|------------|-------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                   |       |                                                                          |       |                                                                                                                                                                                                                                                      |
| 21                     |       |                                                                          |       | Subsidiaries  of Orient-Express Hotels Ltd.*                                                                                                                                                                                                              |
|                   |       |                                                                          |       |                                                                                                                                                                                                                                                      |
| 23.1                   |       |                                                                          |       | Consent  of Deloitte LLP relating to Form S-8 Registration Statements  No. 333-58298, No. 333-129152, No. 333-147448 and No. 333-161459.*                                                                                                  |
|                   |       |                                                                          |       |                                                                                                                                                                                                                                                      |
| 23.2                   |       |                                                                          |       | Consent  of PricewaterhouseCoopers relating to Form S-3 Registration Statement  No. 333-165092 and Form S-8 Registration Statements  No. 333-58298, No. 333-129152, No. 333-147448 and No. 333-161459.                           |
|                   |       |                                                                          |       |                                                                                                                                                                                                                                                      |
| 23.3                   |       |                                                                          |       | Consent  of BDO Pazos, Lopez de Romaña, Rodriguez S.C. relating to Form S-3  Registration Statement No. 333-165092 and Form S-8 Registration  Statements No. 333-58298, No. 333-129152, No. 333-147448 and No.  333-161459. |
|                   |       |                                                                          |       |                                                                                                                                                                                                                                                      |
| 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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