**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

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**(MarkOne)**

**x****                             ****ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

**For the fiscal year ended December 31, 2006**

**OR**

** ̈****                                ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

**For the transition period from                        to                        **

**Commission File Number 1-16017**

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**ORIENT–EXPRESS HOTELS LTD.**

(Exact name ofregistrant as specified in its charter)

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

 

**22 Victoria Street,Hamilton HM 12, Bermuda**(Address of principal executive offices)

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

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THEACT:
| 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                       |

 

SECURITIESREGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: **None.**

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

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

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x  No o

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. (Not applicable. See third paragraph underItem 1—Business on page 4.)

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated file,or a non-accelerated file.  Seedefinition of “accelerated filer and large accelerated file” in Rule 12b-2 ofthe Exchange Act).

Large AcceleratedFile x   Accelerated Filer o   Non-Accelerated Filer o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act.Yes o  No x

The aggregatemarket value of the Class A common shares held by non-affiliates of theregistrant computed by reference to the closing price on June 30, 2006 (thelast business day of the registrant’s second fiscal quarter in 2006) wasapproximately $1,637,000,000.

As ofFebruary 20, 2007, 42,251,600 Class A common shares and 18,044,478Class B common shares of the registrant were outstanding.  All of the Class B shares are owned by asubsidiary of the registrant (see Note 13(d) to the Financial Statements(Item 8).

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DOCUMENTS INCORPORATED BY REFERENCE:  **None**

 

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**TABLE OF CONTENTS**
|     |   |      |                                                                                                                | **Page** |
|----------|--------|-----------|---------------------------------------------------------------------------------------------------------------------|----------|
| PART I   |   | Item  1.  | Business                                                                                                            | 4        |
|     |   | Item  1A. | Risk  Factors                                                                                                       | 21       |
|     |   | Item 1B.  | Unresolved  Staff Comments                                                                                          | 35       |
|     |   | Item  2.  | Properties                                                                                                          | 35       |
|     |   | Item 3.   | Legal Proceedings                                                                                                   | 36       |
|     |   | Item 4.   | Submission  of Matters to a Vote of Security Holders                                                                | 36       |
|     |   |      |                                                                                                                |     |
| PART II  |   | Item 5.   | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 37       |
|     |   | Item 6.   | Selected Financial  Data                                                                                            | 38       |
|     |   | Item 7.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 39       |
|     |   | Item 7A.  | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 58       |
|     |   | Item 8.   | Financial  Statements and Supplementary Data                                                                        | 60       |
|     |   | Item 9.   | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               | 113      |
|     |   | Item 9A.  | Controls and  Procedures                                                                                            | 113      |
|     |   | Item 9B.  | Other Information                                                                                                   | 114      |
|     |   |      |                                                                                                                |     |
| PART III |   | Item 10.  | Directors  and Executive Officers of the Registrant                                                                 | 115      |
|     |   | Item 11.  | Executive  Compensation                                                                                             | 120      |
|     |   | Item 12.  | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 123      |
|     |   | Item 13.  | Certain  Relationships and Related Transactions, and Director Independence                                          | 126      |
|     |   | Item 14.  | Principal  Accountant Fees and Services                                                                             | 128      |
|     |   |      |                                                                                                                |     |
| PART IV  |   | Item 15.  | Exhibits and  Financial Statement Schedules                                                                         | 130      |
|     |   |      | Signatures                                                                                                          | 132      |
|     |   |      | Exhibit Index                                                                                                       | 134      |

 

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**Preliminary Note:**Forward-looking statements concerning the operations, performance,financial condition, plans and prospects of Orient-ExpressHotels Ltd. and its subsidiaries are based on management’s currentexpectations and assumptions, are not historical facts, and are subject tovarious risks and uncertainties.  Actualresults could differ materially from those anticipated in the statements due toa number of factors, including those described in Item 1—Business, Item 1A-RiskFactors, Item 7—Management’s Discussion and Analysis, Item 7A—Quantitative andQualitative Disclosures about Market Risk, and Item 12—Security Ownership ofCertain Beneficial Owners and Management below. Investors are cautioned not to place undue reliance on theseforward-looking statements which are not guarantees of future performance.  Orient-Express Hotels Ltd. undertakes noobligation to update or revise publicly any forward-looking statement, whetheras a result of new information, future events or otherwise.

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**PART I**

**ITEM 1.****     Business**

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

These reports andamendments to them are available free of charge on the internet website of theCompany as soon as reasonably practicable after they are filed electronicallywith the SEC.  The internet website addressis http://www.orient-express.com.  Unlessspecifically noted, information on the OEH website is not incorporated byreference into this Form 10-K annual report.

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

**Restatementof prior year financial statements**

OEH hasrestated its consolidated financial statements, as more fully discussed in Note2 to the Financial Statements (Item 8 below). OEH restated its consolidated balance sheets, its statements ofconsolidated operations, its statements of consolidated shareholders’ equityand its statements of consolidated cash flows as of December 31, 2005 and forthe years ended December 31, 2005 and 2004. In addition, OEH restated Selected FinancialData as of December 31, 2005, 2004, 2003 and 2002 and for the years endedDecember 31, 2005, 2004, 2003 and 2002 in Item 6—Selected Financial Data belowand beginning shareholders’ equity for the impact of the restatement for periodsprior to 2004. The impact of the restated financial results for the first,second and third quarterly periods of 2006 and the quarterly periods of 2005are also presented in Summary of Quarterly Earnings (unaudited) in Item 8below.  The restatement corrects forerrors made in the application of U.S. generally accepted accountingprinciples, including deferred tax and foreign currency accounting. 

**Introduction**

OEH is a hotel andleisure group focused on the luxury end of the leisure market.  Organized in 1995, it currently owns and/orinvests in 49 properties (48 of which it manages) consisting of 39 highlyindividual deluxe hotels, two restaurants, six tourist trains and two rivercruise businesses.  These are located in25 countries worldwide.  OEH acquires ormanages only very distinctive properties in areas of outstanding cultural,historic or recreational interest in order to provide luxury lifestyleexperiences for the elite traveller.

The locations ofOEH’s various properties are shown in the map on the preceding page, where theynumber 45 because the Hotel Cipriani and Palazzo Vendramin are contiguous in 

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Venice, the HotelSplendido and Splendido Mare are both in Portofino, and three separate safarilodges operate as a unit in Botswana. These seven properties bring the total to 49.

Hotels andrestaurants represent the largest segment of OEH’s business, contributing 84%of revenue in 2006, 85% in 2005 and 84% in 2004.  Tourist trains and cruises accounted for 13%of revenue in 2006, 14% in 2005 and 15% in 2004.  Property development activities accounted forthe remaining revenue in each year.  OEH’sworldwide portfolio of hotels currently consists of 3,693 individual guestrooms and multiple-room suites, each known as a “key”.  Hotels owned by OEH in 2006 achieved anaverage daily room rate (“ADR”) of $382 (2005—$375) and a revenue per availableroom (“RevPAR”) of $242 (2005—$228). Approximately two-thirds of OEH’s customers are leisure travellers, withapproximately 50% of customers in 2006 originating from North America, 33% fromEurope and the remaining 17% from elsewhere in the world.

Revenue, earningsand identifiable assets of OEH in 2004, 2005 and 2006 for its business segmentsand geographic areas are presented in Note 18 to the Financial Statements (Item8 below).

**OwnedHotels—Europe**

*Italy*

The **Hotel Cipriani** and **Palazzo Vendramin**—104keys—in Venice were built for the most part in the 1950s and are located onthree acres on Giudecca Island across from the Piazza San Marco which isaccessed by a free private boat service. Most of the rooms have views over the Venetian lagoon.  Features include fine cuisine in three indoorand outdoor restaurants, gardens and terraces encompassing an Olympic-sizedswimming pool, a tennis court, and a large banquet and meeting facilitysituated in an historic refurbished warehouse.

The **Hotel Splendido** and **Splendido Mare**—81keys—overlook picturesque Portofino harbor on the Italian Riviera.  Set on four acres, the main hotel was builtin 1901 and is surrounded by gardens and terraces which include a swimming pooland tennis court.  There are two open-airand enclosed restaurants as well as banquet/meeting rooms, and a shuttle buslinking the main hotel with Splendido Mare on the harbor below.

The **Villa San Michele**—46 keys—is located in Fiesole, a shortdistance from Florence.  Originally builtas a monastery in the 15th century with a façade attributed to Michelangelo, ithas stunning views over historic Florence and the Arno 

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River Valley.  OEH has remodelled and expanded the guestaccommodation to luxury standards, including the addition of a swimming pool. Ashuttle bus service is provided into Florence. The property occupies ten acres. The Villa San Michele also operates for hotel guests the five-bedroommain house of the Capannelle vineyard in the Chianti region owned by James andSimon Sherwood.  See Item 13—CertainRelationships and Related Transactions, and Director Independence below.

OEH rebuilt and inJune 2005 reopened the **Hotel Caruso Belvedere**—50keys—in Ravello.  The hotel is located onthree hill-top acres overlooking the Amalfi coast near Naples.  Once a nobleman’s palace, parts, of thebuildings date back to the 11th century. Amenities include two restaurants, an outdoor swimming pool and extensivegardens.

All of theseItalian properties operate seasonally, closing for varying periods during thewinter.

*Portugal*

**Reid’sPalace**—163 keys—is the most famous hotel on the island ofMadeira, situated on ten acres of semitropical gardens on a cliff top above thesea and the bay of Funchal, the main port city. Opened in 1891, the hotel has four restaurants and banquet/meetingfacilities.  Leisure and sports amenitiesinclude two fresh water swimming pools, a third tide-filled pool, tenniscourts, ocean water sports, access to two championship golf courses, and a spaadded in 2006.  It has year-round appealto European leisure travellers, serving both winter escapes to the sun andregular summer holidays.

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

*Elsewhere in Europe*

**Hôtel dela Cité**—61 keys—is located in the central square of thebeautiful walled medieval town of Carcassonne, France near Toulouse.  Opened in 1909, the hotel incorporates one ofthe 50 watch towers in Carcassonne’s ancient fortifications 

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and features tworestaurants, gardens, a swimming pool and a nearby conference center,altogether occupying two acres.  One ofthe restaurants has been awarded one star for fine dining by the MichelinGuide.  The hotel also operates a canalbarge on the Canal du Midi providing day excursions for guests.

OEH owns **La Residencia**—59 keys—located in the charming village ofDeià on the rugged northwest coast of the island of Mallorca, Spain in theMediterranean.  Mallorca is a popularEuropean tourist destination throughout the year.  The core of La Residencia was originallycreated from two adjoining 16th and 17th century country houses set on ahillside site of 30 acres.  The hotelfeatures three restaurants including the gourmet El Olivio, one of the foremoston the island, as well as two large outdoor swimming pools, tennis courts and aspa with an indoor pool.  OEH iscurrently adding keys to the hotel.

**Le Manoiraux Quat’ Saisons**—32 keys—is located in Oxfordshire, Englandabout an hour’s drive west of London. The main part of the hotel is a 16th century manor house set in 27 acresof gardens.  The property was developedby Raymond Blanc, one of Britain’s most famous chefs, and the hotel’s restauranthas two stars in the Michelin Guide.  Mr.Blanc has given a long-term commitment to remain the chef at the hotel.

In February 2005,OEH acquired a 93.5% interest in, and full management and operational controlof, the **Grand Hotel Europe**—301 keys—in St.Petersburg, Russia.  Originally built in1875, the hotel occupies one side of an entire city block on the fashionableNevsky Prospect in the heart of the city near the Russian Museum, ShostakovichPhilharmonia and other tourist and cultural attractions as well as the businesscenter.  There are six restaurants on thepremises, popular with locals and visitors alike, as well as a grand ballroom,meeting facilities, a health club and several retail shops.  OEH has begun a phased refurbishment of thehotel and plans to acquire the 6.5% minority interest owned by the City of St.Petersburg.

**OwnedHotels—North America**

*UnitedStates*

The **Windsor Court**—322 keys—opened in 1984 and is located in thecentral business district of New Orleans near the French Quarter and theMississippi riverfront.  Harrah’soperates the only land-based casino in Louisiana across the street.  Each room has panoramic views over the riveror the city.  Facilities include threerestaurants and lounges, a roof-top ballroom, several other banquet and meetingrooms, an 

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outdoor swimming pool anda health club.  The hotel’s interiordécor features a collection of historic European art and antiquefurniture.  Sixty guest rooms wererefurbished and upgraded in 2006, and the hotel has planning permission tobuild a conference center on a nearby owned lot.  The hotel was closed for three months in 2005due to hurricane damage, and occupancy and ADR have slowly recovered with theNew Orleans market.

**KeswickHall**—48 keys—is located in the rolling countryside of centralVirginia, near Charlottesville. Originally a private home dating from 1912, it is popular for weekendbreaks and business meetings and, with the adjacent Keswick Club, features aspa and fitness center, tennis courts, two swimming pools and an ArnoldPalmer-designed championship golf course. The total site occupies 600 acres including vacant land around the golfcourse being sold by OEH in parcels for private residential development.  See “Property Development” below.

The **Inn at Perry Cabin**—81 keys—was first built in 1812 as acountry inn and is located in St. Michaels, Maryland on the eastern shore ofChesapeake Bay.  Set on 25 waterfrontacres that include an outdoor swimming pool as well as boating and fishing onthe Bay, it is an attractive conference and vacation destination, particularlyfor guests from the Washington, D.C. area. OEH has completed a major renovation and expansion of the hotel,including a new conference facility, and is building a spa. Vacant availableland may be developed as residences in the future.

OEH owns **El Encanto Hotel and Garden Villas**—77 keys—in Santa Barbara,California.  The hotel is located in thehills above the restored Santa Barbara Mission, with views out to the PacificOcean.  Built in 1913 on a seven-acresite, the guest rooms are in cottages and low rise buildings spread throughoutmature gardens with a swimming pool and tennis court.  OEH closed this hotel in September 2006 forsignificant renovation and the addition of 14 keys, with an expected reopeningin early 2008.

*Caribbean*

**LaSamanna**—81 keys—is located on the island of St. Martin in theFrench West Indies.  Built in 1973, thehotel consists of several buildings on ten acres of land along a 4,000-footbeach.  Amenities include two restaurants,two swimming pools, a spa, tennis courts, fitness and conference centers,boating and ocean water sports and extensive gardens.  The hotel is open most of the year,seasonally closing during the autumn months.

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OEH owns about 48acres of additional land adjoining La Samanna on both the French and Dutchsides of St. Martin, which it is developing as residential villas andapartments.  See “Property Development”below.

*Mexico*

OEH owns the **Maroma Resort and Spa**—65 keys—on Mexico’s Riviera Maya onthe Caribbean coast of the Yucatan Peninsula, about 30 miles south ofCancun.  OEH originally purchased a 75%interest in the hotel and, in February 2006, purchased the minorityinterest.  The resort opened in 1995 andhas 25 acres of land along a 750-foot beach with the Cozumel barrier reefoffshore where guests may fish, snorkel and scuba-dive. Important Mayanarchaeological sites are also nearby. Rooms are arranged in low-rise villas and there are extensive spafacilities.  The hotel suffered hurricanedamage in October 2005 and reopened in February 2006.

In addition, OEHhas contracted to purchase a 28.5 acre tract adjacent to Maroma.  OEH intends to construct and sell privatevillas on the land.  See “PropertyDevelopment” below.

In February 2006,OEH acquired a 75% interest (increased to 80% in January 2007) in **Casa de Sierra Nevada**—33 keys—a luxury resort in thecolonial town of San Miguel de Allende. Opened in 1952, the hotel consists of nine Spanish colonial buildingsbuilt in the 16th and 18th centuries. OEH manages the hotel and plans to renovate the existing buildings andtwo restaurants, as well as to develop 20 new suites, a full service spa, and anew pool and garden area.  In addition tothe nine owned buildings, the hotel leases two buildings for administrativeoffices, a total site of approximately two acres.  In June 2006, OEH purchased a nearby cookingschool and retail shop operated in conjunction with the hotel.

**OwnedHotels—Rest of the World**

*South America*

Built in the 1920son a three-acre site facing Copacabana Beach near the central business districtof Rio de Janeiro, Brazil, the **Copacabana Palace**—222keys—is one of the most famous in South America and features two gourmetrestaurants, spacious function and meeting rooms, a large swimming pool andfitness center, and a roof-top tennis court and pool.  The old casino rooms and 500-seat theaterwere refurbished in 2006 as additional function and meeting space, and OEH iscurrently installing a spa.

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The **Miraflores Park Hotel**—82 keys—is located in an exclusiveresidential district of Lima, Peru surrounded by parkland and looking out atthe Pacific Ocean, yet near the commercial and cultural center of thecity.  Opened in 1997, the hotel has alarge ballroom, rooftop outdoor pool, health and beauty facilities and abusiness center for guests, and occupies about one acre of land.

*Southern Africa*

The **Mount Nelson Hotel**—226 keys—in Cape Town, South Africa is afamous historic property opened in 1899 with beautiful gardens and pools.  It stands just below Table Mountain and iswithin walking distance of the main business, civic and cultural center of thecity.  The hotel has a ballroom, twoswimming pools, tennis courts, and a fitness center, all situated on ten acresof grounds and gardens.  Expansion andthe addition of a spa are planned through incorporation into the hotel ofadjoining owned residential properties.

The **Westcliff Hotel**—117 keys—is the only garden hotel inJohannesburg, South Africa, situated on six hillside acres with views over thecity’s zoo and parkland.  Its resortamenities include two swimming pools, a tennis court, and a health club, andthe hotel attracts business guests because of its proximity to the city center.  OEH opened this hotel in 1998.  A banquet and conference center occupies partof the adjacent expansion land.

**Orient-ExpressSafaris**—39 keys total—consist of three separate game-viewinglodges in Botswana called **Khwai River Lodge, EagleIsland Camp** and **Savute Elephant Camp**.  Established in 1971, OEH leases the lodgesites in the Okavango River delta and nearby game reserves, where some of thebest wildlife in Africa can be observed from open safari vehicles orboats.  Each camp has 12 or 15twin-bedded deluxe tents, and guests travel between the camps by lightaircraft. Boating, fishing, hiking and swimming are offered at the varioussites.

*Australia*

The **Observatory Hotel**—96 keys—is in Sydney within walkingdistance of the central business district of the city.  This hotel opened in 1993 and has tworestaurant and lounge areas, extensive meeting and banquet rooms, a spa andhealth club with indoor swimming pool, and a large parking garage on a site ofabout one acre.  There is also access toa nearby tennis court.

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The **Lilianfels Blue Mountains**—85 keys—is in the Blue MountainsNational Park west of Sydney.  It isnamed after the original estate house, dating from 1890, where the hotel’sgourmet restaurant is located.  The mainhotel, built in 1992 and recently refurbished, has a second restaurant andconference facilities.  The resort’s fouracres of grounds encompass indoor and outdoor swimming pools, health club andspa, tennis court and extensive gardens with views over the BlueMountains.  There is expansion land toadd keys in the future.

*French Polynesia*

**Bora BoraLagoon Resort and Spa**—77 keys—opened in 1993 and hasbungalows situated over the lagoon water plus additional beach and gardenbungalows, all built in traditional Tahitian style on a 12-acre site.  Guests dine in two restaurants and enjoyextensive water sports and tennis.  Arecent renovation program included a new swimming pool, spa and conferencefacility.  On some of the resort’savailable vacant land, OEH is currently planning to develop private villas forsale.

*Asia*

In July 2006, OEH acquired the Pansea group of sixdeluxe hotels in Southeast Asia described below, each built anddecorated in traditional local style.  In 2004 and 2005, OEH made$8,000,000 of loans to the Pansea hotels group which were included as part ofthe purchase price.  During this period OEH did not manage the hotels butmarketed them with other OEH properties, especially its Eastern &Oriental Express tourist train and its Road to Mandalay river cruiseship.  Also, in May 2006, OEH acquired the 50% interest in the Napasaihotel not owned by the Pansea group for $10,500,000.  The total purchaseprice for these six properties including Napasai was $45,400,000.

**Napasai**—55 keys—is located onits own beach on the north side of Koh Samui island of Thailand in the Gulf ofSiam.  It originally opened in 2004 and features two restaurants, tenniscourts, swimming pool, spa and water sports such as diving and snorkeling inthe nearby coral reef.  The guest rooms are arranged in seaview cottageson a total site of about 40 acres on which 14 private for-sale villas have beenbuilt with vacant land available to develop and sell additional villas.  See “Property Development” below.  Most purchasers of these villas havecontracted with Napasai to make the villas available to hotel guests on arevenue-sharing basis with the purchasers.

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On Bali in Indonesia are two long-term leaseholdproperties, **Jimbaran Puri Bali**—41keys—and **Ubud Hanging Gardens**—38keys.  Jimbaran Puri Bali occupies four beachfront acres on the southcoast of the island and was substantially renovated in 2005.  Guest roomsare situated in cottages and, in addition to ocean water sports, the hotelfeatures two restaurants and a swimming pool.  Ubud Hanging Gardens islocated on terraces on about seven steep hillside acres above the AyungRiver gorge in the interior of Bali.  The hotel opened in 2005 with tworestaurants, a swimming pool and spa, and offers a free shuttle bus tothe nearby town of Ubud, a cultural and arts center.

**La Résidence d’Angkor**—55keys—opened in 2002 and is situated in walled gardens in Siem Reap,Cambodia.  The hotel occupies a site of about two acres under long-termlease.  The ancient Temples of Angkor, the principal tourist attraction ofSiem Reap, are near the hotel which has an indoor/outdoor restaurant andswimming pool.

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

In Luang Prabang, the ancient capital of Laos, OEHowns a 51% interest in **La Résidence Phou Vao**—34keys.  OEH has reached agreement in principle with other shareholders inthe property to increase its interest to 69%. The hotel opened in 2001 and occupies about eighthillside acres under long-term lease.  Guest rooms are in fourtwo-storey buildings surrounded by gardens that include a restaurant, spa andswimming pool.

**HotelManagement Interests**

Through a 50%/50%joint venture with a Spanish investment company, OEH owns and manages thefamous **Hotel Ritz**—167 keys—in central Madridnear the financial district, Spanish parliament and many of the city’s wellknown tourist attractions.  Opened in1910, the hotel has four spacious conference and banqueting suites, an indoorrestaurant and the famous Ritz Terrace restaurant outdoors in the gardens.  OEH and its 50% partner have embarked on anextensive capital improvement program, beginning with the public areas of thehotel.

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**CharlestonPlace**—441 keys—is located in the heart of historicCharleston, South Carolina, a popular destination for tourists and businessmeetings.  Opened in 1986, the hotel hastwo restaurants, extensive banqueting and conference space including a grandballroom, a health club with spa and swimming pool, and a shopping arcade of 25retail outlets leased to unaffiliated parties. The hotel also owns the adjacent historic Riviera Theater remodelled asadditional conference space and retail shops. OEH has a 19.9% ownership interest in this hotel, manages the propertyunder an exclusive long-term contract, and receives interest on partnershiploans which it assumed at the time of its original investment and on other loansmade since then.

OEH has a 50%/50%joint venture with local investors in Peru which, under exclusive management ofOEH, operates the following two hotels under long-term renewable leases whichcommenced in 1995.

The **Hotel Monasterio**—126 keys—is located in the ancient Incacapital of Cusco, an important tourist destination in Peru.  The hotel was originally built as a Spanishmonastery in the 16th century, converted to hotel use in 1995, and upgraded byOEH since then.  The deluxe guest roomsand two restaurants are arranged around open-air cloisters.  Because of Cusco’s high altitude, speciallyoxygenated ventilation has been added to some of the refurbished rooms. Thethree acre site includes a vacant convent adjoining the hotel which is beingredeveloped in 2007 as 55 additional keys. Also in 2007, the Monasterio Hotel is building a small 20 key satellitehotel in Parador del Colca near Arequipa and the scenic Colca Canyon.

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

**Restaurants**

OEH owns **‘21’ Club**, the famous landmark restaurant at 21 West 52ndStreet in mid-town Manhattan in New York City. Originally a speakeasy during Prohibition in the 1920s, this restaurantis open to the public, occupies three brownstone buildings and features gourmetAmerican cuisine.  It serves à la cartemeals in the original bar restaurant and a separate dining room upstairs, andalso has a number of banqueting 

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rooms used for functions,including the famous secret wine cellar.

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

Until the sale toits majority partner in June 2006, OEH owned a 49% interest in **Harry’s Bar**, a private dining club in the Mayfair area ofLondon.

**TouristTrains and Cruises**

OEH’s principalEuropean tourist trains, called the **Venice Simplon-Orient-Express**,operate in two parts in a regularly scheduled overnight service between Londonand Venice and on short excursions in southern England.  OEH owns 30 railway cars originally used onhistoric “Orient-Express” and other famous European trains.  All have been refurbished in original1920s/1930s décor and meet modern safety standards.  The services are marketed as a continuationof the Orient-Express trains of pre-World War II years.  One train is based in Great Britain composedentirely of Pullman cars with a capacity for up to 250 passengers.  The other is based on the Continent made upof Compagnie Internationale des Wagons-Lits et du Tourisme sleeping cars andday coaches with capacity for up to 180 passengers.  They operate once or twice weekly principallybetween London and Venice from March to November each year via Paris, Zurichand Innsbruck on a scenic route through the Alps.  Passengers travel under the English Channelby coach on the Eurotunnel shuttle train. Occasional trips are also made from time to time to Rome, Prague,Budapest and Istanbul and other European destinations.

The **British Pullman** cars of Venice Simplon-Orient-Expressoperate all year, originating out of London on short excursions to places ofhistoric or scenic interest in southern England, including some overnight tripswhen passengers stay at local hotels. Both the British and Continental trains are available for privatecharter.

The **Northern Belle** tourist train offers day trips and charterservice principally in the north of England. It builds on the success of OEH’s British Pullman business, whichfocuses on the south of England around London. This train consists of six dining cars elegantly decorated to bereminiscent of old British “Belle” trains of the 1930s, plus 

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related service cars, andcan carry up to 250 passengers.  Fullcourse gourmet meals are served on board and passengers stay in local hotels onovernight itineraries.

OEH owns a 50% interestin the **Royal Scotsman** luxury tourist trainwith rights to acquire the other 50% at the end of 2007.  Founded in 1985, the Royal Scotsman iscomposed of nine Edwardian-style cars accommodating up to 36 passengers.  Each compartment in the six sleeping cars hasa private bathroom.  Operating from Aprilto November each year, the train travels on itineraries of up to seven nightsthrough the Scottish countryside affording passengers the opportunity to visitclan castles, historic battlegrounds, famous Scotch whiskey distilleries andother points of interest.  The other 50%owner manages the Royal Scotsman, but the train has been fully integrated intoOEH’s sales and marketing network.

**PeruRail**is a 50%/50% joint venture between OEH and Peruvian partners formed to operatepart of the state-owned railways in Peru under a 30-year franchiseacquired in 1999 and extendable every five years, upon the joint venture’sapplication, up to 30 additional years. The joint venture pays the government a fee related to traffic levelswhich can be partially offset until 2009 against investment in trackimprovements. The 70-mile Cusco-Machu Picchu line carries mainly touristsvisiting the famous Inca ruins, the principal means of access because there isno convenient road.  A second rail lineruns from Cusco to Matarani on the Pacific Ocean via Puno on Lake Titicaca andArequipa and principally serves freight traffic.  The Cusco-Machu Picchu line connectstwo of OEH’s Peruvian hotels allowing inclusive tours served by OEH’s **Hiram Bingham** luxury tourist train.  OEH also operates a deluxe daytime touristtrain on the Cusco-Puno route through the High Andes mountains.

The **Eastern & Oriental Express** in Southeast Asiatravels up to one round trip each week between Singapore, Kuala Lumpur andBangkok.  The journey lasts between 48and 72 hours each way and includes two or three nights on board and side tripsto Penang in Malaysia and the River Kwai in Thailand.  Some overnight trips are also made fromBangkok to Chiang Mai and elsewhere in Thailand.  Originally built in 1970, the 24 cars weresubstantially rebuilt to an elegant oriental style of décor and fitted withmodern facilities such as air-conditioning and private bathrooms.  The train is made up of sleeping cars, threerestaurant cars, a bar car and an open air observation car and can carry up to125 passengers.  The Eastern &Oriental Express is available for charter by private groups.  OEH manages the train exclusively and has a25% shareholding in the owning company.

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OEH owns and operates a deluxe river cruiseship on theIrrawaddy River in central Burma, or Myanmar, called the **Road toMandalay**.  The ship was aRhine River cruiser built in 1964 which OEH bought and refurbished.  It has 66 air-conditioned cabins with privatebathrooms, spacious restaurant and lounge areas and a canopied sun deck withswimming pool.  The ship travels betweenMandalay and Pagan up to eight times each month and carries 126 passengers whoenjoy sightseeing along the river and guided shore excursions to places ofhistoric interest.  Five to eight nightitineraries are offered, including airfare to and from the ship and hotelaccommodation in Rangoon.  OEH alsooperates occasional cruises to different destinations, such as to Bhamo in thenorth of the country close to the China border. The ship does not operate in the hot summer season and occasionally whenthe water level of the Irrawaddy River falls too low due to lack of rainfall.

OEH owns a 50%interest in the business of **Afloat in France**operating luxury river and canal boats in Burgundy, Provence and other ruralregions of France.  OEH also owns thefive boats of Afloat in France, and has the right to purchase the balance ofthe operating business in 2009.  Theboats accommodate between six and 12 passengers each in double berthcompartments with private bathrooms, and some have small plunge pools ondeck.  They operate seasonally betweenApril and October on three to six night itineraries with guests dining on boardor in nearby restaurants.  Side trips areorganized each day.

**Property Development**

OEHis pursuing opportunities to develop the real estate it owns at itshotels.  In addition to expansion throughconstruction of guest rooms and other facilities at the hotels, certain of OEH’sproperties have adjacent vacant land available for construction and sale ofdeluxe residential villas and apartments.

OEHis currently building at La Samanna in St. Martin the Cupecoy Yacht Club on 12acres on the Dutch side of the island consisting of approximately 180condominium apartments and 30,000 square feet of shop, restaurant and marinaspace.  The apartments range from 750 to3,000 square feet in size.  OEH plans tobuild and sell the units in phases, with completion currently scheduled by2009, and to retain management of most of the units sold.  At December 31, 2006, 60 condominiums atCupecoy had been pre-sold.  OEH also hasplanning permission to build a further 60 units at Cupecoy.

Onthe French side of St. Martin, OEH is also developing the Villas at LaSamanna.  Up to 37 private homes areplanned 

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tobe built on 36 acres in phases through 2009. A first phase of eight large homes, each about 4,000 to 4,500 squarefeet with a private swimming pool, is currently under construction.  One was sold in 2006.

AtKeswick Hall in the rolling countryside of central Virginia, OEH will continuethrough 2009 to sell residential parcels of land surrounding and adjacent toits Keswick Club championship golf course. Fourteen plots were sold in 2006 in a minimum size of two acres.  OEH is building the roads and otherinfrastructure for the development, while the purchasers build their owncustom-designed homes subject to development guidelines.  Each sale entitles the purchaser to join thehotel’s Keswick Club.

WhenOEH acquired the Pansea hotels group in July 2006, a 14-private villadevelopment was already underway on the 40 acre site of Napasai on Koh Samui inThailand.  Four of these units were soldin the fourth quarter of 2006 and four remain for sale.  Development of a second phase of up to 40more residential villas is planned starting in 2009.

In2007, OEH plans to complete the purchase of about 28 acres of vacant landbeside its Maroma Resort and Spa on the Riviera Maya in Mexico.  OEH management currently intends to build onmost of this land up to about 20 locally-designed private residential villas,all with access to the hotel’s expanded beach. A sample unit is planned to be constructed in 2007 with the full projectbeginning in 2008.

Otherhotels owned by OEH with available vacant land include Bora Bora Lagoon Resortin French Polynesia, Lapa Palace in Lisbon, and Inn at Perry Cabin on theeastern shore of Maryland.  Developmentwill include sale of completed residences and, in many cases, ongoing managementas integral parts of the adjacent hotels or, at Keswick Hall, membership in thehotel’s golf club.  The villas andapartments are being marketed and sold by local on-site sales personnel of OEHand through third-party real estate agents with listings locally and abroad.

**ManagementStrategies**

As the foregoingindicates, OEH has a mix of hotel and other deluxe travel products that aregeographically diverse and appeal to the high-end leisure market, reflecting animportant management strategy.  As aresult, about two-thirds of annual revenue derives from leisure customers whilecorporate/business travel accounts for the rest.  OEH’s properties are distinctive as well asluxurious and tend to 

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attract guests preparedto pay higher rates for the travel experience OEH offers.

OEH benefits fromtrends and developments favorably impacting the global hotel, travel andleisure markets, including strong demand growth trends in the luxury hotelmarket in many parts of the world, increased travel and leisure spending byconsumers, favorable demographic trends in relevant age and income brackets ofU.S. and European populations, and increased online travel bookings.  These trends suffered a setback beginning in2001 due to slowing national economies, the shock of terrorist attacks, thebuild-up and aftermath of the wars in Afghanistan and Iraq and the SARSepidemic.  Management currently believesthat the public’s confidence in international travel and demand for luxuryhotel and tourist products are returning.

OEH managementplans to grow the business by increasing RevPAR and earnings at its establishedproperties and newer acquisitions, by expanding existing hotel and restaurantproperties where land or space is already available, by developing vacant landas residences for sale, by increasing the utilization of its tourist trains andcruises to add trips, and by acquiring additional distinctive luxury propertiesthroughout the world.  Factors in OEH’sevaluation of a potential acquisition include the uniqueness of the property,attractions for guests in the vicinity, acceptability of initial investmentreturns, upside potential through pricing, expansion or improved marketing,limitations on nearby competition, and convenient access.  Expansion at existing properties by addingrooms and facilities such as spas and conference space can provide attractiveinvestment returns because incremental operating costs are low.

OEH managementplans to continue owning or part owning and managing most OEH properties.  Ownership encourages OEH to develop thedistinctive character of its properties and allows it to benefit from all ofthe current cash flow and future capital gains should it sell a property.  Self-management has enabled OEH to capturethe economic benefits otherwise shared with a third-party manager, tocontrol the operations, quality and expansion of the hotels, and to use itsexperience with price changes, expansions and renovations to improve cash flowand enhance asset values.

Many of OEH’sindividual properties, such as the Hotel Cipriani and ‘21’ Club, havedistinctive local character and brand identity. Management believes that discerning travellers will choose a famousproperty in preference to a chain brand. OEH links its properties together under the umbrella “Orient-ExpressHotels, Trains & Cruises” name which 

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originated with thelegendary luxury European train in the late 19th and early 20th centuries andwhich is recognizable worldwide and synonymous with sophisticated travel andrefined elegance.

As indicated aboveunder “Property Development”, OEH is expanding its property developmentactivities.  Management anticipatesfuture profits both from sales of land and completed units and from ongoingmanagement of the units for the purchasers as integral parts of the adjacenthotels.

**Marketing,Sales and Public Relations**

OEH’s sales andmarketing function is primarily based upon direct sales (including to customersand through the internet), cross-selling to existing customers and travelagents, and public relations.  OEH has aglobal sales force of about 250 persons in 50 locations.  These include regional sales and reservationsoffices in New York, Paris, Cologne, Milan, London, Moscow, Sao Paulo, Tokyoand Sydney, and additional reservations offices in Singapore, Cusco,Charleston, and Providence (Rhode Island). OEH also has local sales representatives with responsibility for thehotels where they are based.  Theresponsibilities of OEH’s sales staff include working with the travel industryand preferred partners, contacting group and corporate account representatives,and planning marketing such as direct mailings and e-commerce.  OEH participates in a number of internationalprograms, such as “American Express Centurian”, and organizations, such as “TheLeading Hotels of the World”, to promote its properties.

Internet usage isan important direct sales and sales development tool.  Through OEH’s website(www.orient-express.com), OEH offers direct reservations services to customersin English and other languages.  OEH alsoprovides an internet website (www.oeh.com) for preferred travel industrypartners.  On-line sales have lowertransaction costs by saving travel agent commissions and tour operatordiscounts.  The internet also enhancesmarketing exposure and increases distribution.

Because repeatcustomers appreciate the consistent quality of OEH’s hotels, trains, cruisesand restaurants, an important part of management’s strategy is to promote otherOEH properties through various cross-selling efforts.  These include preferred travel agentprograms, direct mail to existing customers, in-house brochures and promotions,discounted special offers, and OEH’s in-house “Orient-ExpressMagazine”.  OEH sells luxury souvenirgoods branded with the names of its travel products.

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OEH’s marketingstrategy also focuses on public relations, which management believes is ahighly cost-effective marketing tool for luxury properties.  Because of the unique nature of the OEHproperties, guests are more likely to hear about OEH’s hotels and tours throughword-of-mouth or published articles rather than through directadvertising.  OEH has an in-house publicrelations office in London and representatives in ten countries worldwide,including contracts with third-party public relations firms, to promote itsproperties through travel magazines, newspapers, television features and othermedia.  During 2006, OEH hosted about1,600 journalists at its various properties. As a result, over 12,000 articles and stories were published or broadcastabout OEH’s properties, many in publications with large local, regional orinternational circulations.

**IndustryAwards**

OEH has gained aworldwide reputation for quality and service in the luxury segment of theleisure and business travel market.  Overthe years, OEH’s properties have won numerous national and international awardsgiven by trade or consumer publications such as Conde Nast Traveller, Gourmet,Travel & Leisure and Tatler, or industry bodies such as the AmericanAutomobile Association. The awards are based on opinion polls of their readersor the professional opinion of journalists or panels of experts.  The awards are believed to influence consumerchoice and are therefore highly prized.

**Competition**

Some of OEH’sproperties are located in areas where there are numerous competitors.  Competition for guests in the hospitalityindustry is based generally on the convenience of location, the quality of theproperty, room rates and menu prices, the range and quality of food servicesand amenities offered, types of cuisine, and name recognition.

OEH’s strategy isto acquire only hotels which have special locations and distinctivecharacter.  Many are in areas with uniquelocal history or high entry barriers because of zoning restrictions. OEH buildsits competitive advantage further by offering high quality service and cuisine,often with a local flavor.  Typically,therefore, OEH competes by providing a special combination of location,character, cuisine, service and experiential activities rather than relying onprice competition.

OEH’s luxurytourist trains have no direct competitors. Other trains exist on similarroutes, but management believes 

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OEH’s trains and onboardservice are so unique and of such superior quality that guests consider an OEHtrain journey more as a luxury experience and an end in itself rather than as ameans of transport.

**Employees**

OEH currentlyemploys about 7,100 persons, about 2,400 of whom are represented by laborunions.  Approximately 6,300 persons areemployed in the hotels and restaurants, 700 are employed in the trains andcruises business, and the rest are engaged in central administration andsales.  Management believes that OEH’songoing labor relations are satisfactory.

**Government Regulation**

OEH and its propertiesare subject worldwide to numerous laws and government regulations such as thoserelating to the preparation and sale of food and beverages, liquor service,health and safety of premises, employee relationships, environmental matters,and planning and zoning rules. Management believes that OEH is in compliance inall material respects with relevant laws and regulations with respect to itsbusiness.

**OEH’sRelationship with Sea Containers Ltd.**

Until its initialpublic offering in August 2000, OEH was a wholly-owned subsidiary of SeaContainers Ltd. (“SCL”), a leasing and transport company.  Since then, SCL has sold its shares in theCompany in public secondary offerings registered in the United States, sellingits last shares in November 2005.  Of theCompany’s current directors and officers, one is a non-executive director ofSCL.  See Item 10—Directors and ExecutiveOfficers of the Registrant.

At the time of theinitial public offering in 2000, OEH and SCL entered into agreements providingfor the separation of their businesses. An agreement regarding services and offices provided by SCL to OEHterminated at the end of 2006, while an agreement between the companiesregarding tax matters continues in effect. See Item 13—Certain Relationships and Related Transactions, and DirectorIndependence below.

**ITEM 1A.****                                            RiskFactors**

OEH investors should carefullyconsider the risks described below and the other information contained in orincorporated by reference in this report. These risks are separated into three general groups:

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·                                          risks of OEH’s business;

·                                          risks that relate to OEH’sfinancial condition and results of operations; and

·                                          risks of owning andselling Class A common shares.

Described below are only therisks OEH management considers to be the most significant.  There may be additional risks that are deemedless material or not presently known to management.

If any of these risks occurs,OEH’s business, prospects, financial condition, results of operations or cashflows could be materially adversely affected. A risk that might have a material adverse effect means that the risk mayhave one or more of these effects.  Inthat case, the market price of the Class A common shares could decline.

## **Risks ofOEH’s Business**

***OEH’soperations are subject to adverse factors generally encountered in thehospitality industry.***

Besides the specific conditionsdiscussed in the risk factors below, these adverse factors include

·                                          cyclical downturnsarising from changes in general and local economic conditions,

·                                          political instability ofthe governments of some countries where properties are located,

·                                          falling disposableincome of consumers and the travelling public,

·                                          dependence on varyinglevels of tourism, business travel and corporate entertainment,

·                                          changes in popular travelpatterns,

·                                          competition from otherhotels and leisure time activities,

·                                          periodic localoversupply of guest accommodation, which may adversely affect occupancy andactual room rates achieved,

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·                                          increases in operatingcosts due to inflation and other factors which may not be offset by increasedrevenues, and changes in costs of materials,

·                                          regional and localeconomic and political conditions affecting market demand, includingrecessions, civil disorder, and acts or threats of terrorism,

·                                          foreign exchange ratemovements,

·                                          adverse weatherconditions or destructive forces like fire or flooding, and

·                                          seasonality, in thatmany of OEH’s hotels and tourist trains are located in the northern hemispherewhere they operate at low revenue or close during the winter months.

The effect of these factorsvaries among the hotels and other properties because of their geographicdiversity.  For example, the outbreak ofSARS in Asia in 2003 caused a reduction in passenger bookings on the touristtrain of OEH operating between Bangkok and Singapore and had a negative impacton travel to Australia and Tahiti.  Whilethe disease was contained, the occurrence of this or a similar event may have anegative impact on OEH’s operations.

In particular, as a result ofthe terrorist attacks in the United States on September 11, 2001 and thesubsequent military actions in Afghanistan and Iraq, international, regionaland even domestic travel was disrupted. Demand for most of OEH’s properties declined substantially in the latterpart of 2001.  Although, the effects ofthe disruption have reduced in the intervening years, further acts of terrorismor a military action, or the threat of either, could again reduce leisure andbusiness travel.

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

OEH competes for hotel andrestaurant acquisition opportunities with others who may have substantiallygreater financial resources.  Thesecompetitors may be prepared to accept a higher level of financial risk than OEHcan prudently manage.  This competitionmay have the effect of reducing the number of suitable investment opportunitiesoffered to OEH and increasing OEH’s acquisition costs by enhancing the bargainingpower of property owners seeking to sell or to enter into managementagreements.

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Some of OEH’s properties arelocated in areas where there are numerous competitors, particularly in citycenters.  Competitive factors in thehospitality industry include

·                                          convenience of location,

·                                          the quality of theproperty,

·                                          room rates and menuprices,

·                                          the range and quality offood services and amenities offered,

·                                          types of cuisine, and

·                                          name recognition.

Demographic, geographic or other changes in one ormore of OEH’s markets could impact the convenience or desirability of itshotels and restaurants, and so could adversely affect their operations.  Also, new or existing competitors couldsignificantly lower rates or offer greater conveniences, services or amenities,or significantly expand, improve or introduce new facilities in the markets inwhich OEH’s hotels and restaurants compete.

***The hospitalityindustry is heavily regulated, including with respect to food and beveragesales, employee relations, construction and environmental concerns, andcompliance with these laws could reduce revenues and profits of propertiesowned or managed by OEH.***

OEH and its various propertiesare subject worldwide to numerous laws and government regulations, includingthose relating to the preparation and sale of food and beverages, liquorservice, and health and safety of premises. The properties are also subject to laws governing OEH’s relationshipwith employees in such areas as minimum wage and maximum working hours,overtime, working conditions, hiring and firing employees and workpermits.  Also, the success of expandingexisting properties depends upon obtaining necessary building permits or zoningvariances from local authorities. Failure to obtain or delay in obtaining these permits could adverselyaffect OEH’s strategy of increasing revenues and net income through expansionof existing properties.

OEH also is subject to foreignand U.S. laws and regulations relating to the environment and the handling ofhazardous substances that may impose or create significant 

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potential environmental liabilities, even insituations where the environmental problem or violation occurred on a propertybefore OEH acquired it.

***OEH’sacquisition, expansion and development strategy may be less successful thanexpected and, therefore, its growth may be limited.***

Management intends to increasethe revenues and net income of OEH through acquisition of new properties andexpansion of existing properties.  Theability to pursue new growth opportunities successfully will depend on OEHmanagement’s ability to

·                                          identify propertiessuitable for acquisition and expansion,

·                                          negotiate purchases orconstruction on satisfactory terms,

·                                          obtain the necessaryfinancing and permits,

·                                          build on schedule andwith minimum disruption to guests, and

·                                          integrate new propertiesinto OEH’s operations.

Also, the acquisition of properties in newlocations may present operating and marketing challenges that are differentfrom those encountered in OEH’s existing locations.  There can be no assurance that management willsucceed in OEH’s growth strategy.

OEH management plans to developnew properties in the future.  Newproject development is subject to such adverse factors as

·                                          site deterioration afteracquisition,

·                                          inclement weather,

·                                          labor or materialshortages,

·                                          work stoppages,

·                                          continued availabilityof construction and permanent financing,

·                                          untimely opening,

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·                                          high start-up costs, and

·                                          weak initial marketacceptance of a new property.

For example, the opening of the Westcliff Hotel inJohannesburg occurred about six months later than originally planned, asconstruction took longer than expected. This delay had a significant adverse impact on the revenues andprofitability of OEH’s southern Africa operations.

***OEH may be unable toobtain the necessary additional capital to finance the growth of its business.***

The acquisition and expansionof leisure properties, as well as the ongoing renovations, refurbishments andimprovements required to maintain or upgrade OEH’s existing properties, arecapital intensive.  Although actualamounts of capital expenditures could exceed estimates, current expansion planscall for the expenditure of up to an aggregate of $80,000,000 over the next fewyears to add new rooms or facilities at existing properties, and currentacquisition plans contemplate expenditure of about $75,000,000 per year for newproperties which would be financed mainly by a suitable level of mortgagedebt.  The availability of futureborrowings and access to the capital markets for equity financing to fund theseacquisitions and expansions depends on prevailing market conditions and theacceptability of financing terms offered to OEH.  There can be no assurance that future borrowingsor equity financing will be available to OEH, or available on acceptable terms,in an amount sufficient to fund its needs. Future equity financings may be dilutive to the existing holders ofcommon shares.  Future debt financingscould involve restrictive covenants that would limit OEH’s flexibility inoperating its business.

***Currencyfluctuations may have a material adverse effect on OEH’s financial statementsand/or its operating margins.***

Substantial portions of OEH’srevenues and expenses are denominated in non-U.S. currencies such as Europeaneuros, British pounds sterling, Russian rubles, South African rand, Australiandollars, Peruvian nuevos soles, Botswana pula, Brazilian reais, Mexican pesos,French Pacific francs and various Southeast Asian currencies.  In addition, OEH buys assets and incursliabilities in these foreign currencies. Foreign exchange rate fluctuations may have a material adverse effect onOEH’s financial statements and/or operating margins.

OEH’s financial statements arepresented in U.S. dollars and can be impacted by foreign exchange fluctuationsthrough both

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·                                          translation risk, whichis the risk that the financial statements for a particular period or as of acertain date depend on the prevailing exchange rates of the various currenciesagainst the U.S.  dollar, and

·                                          transaction risk, whichis the risk that the currency of costs and liabilities fluctuates in relationto the currency of revenue and assets, which fluctuations may adversely affectOEH’s operating margins.

***OEH’soperations may be adversely affected by extreme weather conditions and theimpact of natural disasters.***

OEH operates properties in avariety of locales, each of which is subject to local weather patternsaffecting the properties and customer travel. As OEH’s revenues are dependent on the revenues of individualproperties, extreme weather conditions can from time to time have a majoradverse impact upon individual properties or particular regions.  For example, La Samanna in St. Martinsuffered substantial wind and flood damage from a hurricane inNovember 1999.  Although the hotelwas fully insured for the repair costs, it remained closed untilFebruary 2000, so that OEH missed much of the high season that year.   Similarly, hurricanes in August and October2005 caused damage to the Windsor Court Hotel in New Orleans and Maroma Resortand Spa on Mexico’s Yucatan Peninsula, resulting in temporary closure of thehotels for repairs.  OEH carries propertyand loss of earnings insurance in amounts management deems reasonably adequate,but damages may exceed the insurance limits or be outside the scope ofcoverage.

***If therelationships between OEH and its employees were to deteriorate, OEH may befaced with labor shortages or stoppages, which would adversely affect itsability to operate its facilities.***

OEH’s relations with itsemployees in various countries could deteriorate due to disputes related to,among other things, wage or benefit levels, working conditions or management’sresponse to changes in government regulation of workers and the workplace.  Operations rely heavily on employees’providing high-quality personal service, and any labor shortage or stoppagecaused by poor relations with employees, including labor unions, couldadversely affect the ability to provide those services, which could reduceoccupancy and room revenue and even tarnish OEH’s reputation.

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***OEH’splans to expand existing properties, develop new ones and build residentialunits for sale at its properties are subject to project cost, completion andresale risks.***

Successful newproject development depends on timely completion within budget and satisfactorymarket conditions.  Risks that couldaffect a project include

·                                          constructiondelays or cost overruns that may increase project costs,

·                                          receiptof zoning, occupancy and other required governmental permits andauthorizations,

·                                          developmentcosts incurred for projects that are not pursued to completion,

·                                          naturaldisasters such as earthquakes, hurricanes, floods or fires that could adverselyimpact a project,

·                                          defectsin design or construction that may result in additional costs to remedy orrequire all or a portion of a property to be closed during the period requiredto rectify the situation,

·                                          abilityto raise capital to fund a project,

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

·                                          changesin market conditions such as mortgage rates for residences or oversupply thatmay affect OEH’s ability to sell residential units at a profit or at pricelevels originally anticipated.

***OEH’s ownedhotels and restaurants are subject to risks generally incident to the ownershipof commercial real estate and often beyond its control.***

These include

·                                          fluctuating demand forreal estate investment,

·                                          changes in national,regional and local economic and political conditions,

·                                          changes in interestrates and in the availability, cost and terms of financing,

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·                                          the impact of present orfuture governmental legislation and regulations (including environmental laws),

·                                          the ongoing need forcapital improvements to maintain or upgrade properties,

·                                          changes in propertytaxes and operating expenses, and

·                                          the potential foruninsured or underinsured losses.

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

In the competitivehotel and leisure service industry in which OEH operates, trade names,trademarks, service marks and logos are important in the sales and marketing ofthose services.  OEH has a large numberof trade names, trademarks, service marks and logos, and expends resources eachyear on surveillance, registration and protection of these brandidentities.  The loss or infringement ofany of OEH’s trade names, trademarks, service marks or logos could have an adverseeffect on its business, results of operations and financial condition.

## **Risks Relating to OEH’s Financial Condition andResults of Operations**

***Covenants in OEH’sfinancing agreements could limit its discretion in operating its businesses,causing it to make less advantageous business decisions; OEH’s indebtedness iscollateralized by substantially all of its properties.***

OEH’s financing agreements with about 20 commercial banklenders contain covenants that include limits on additional debt collateralizedby mortgaged properties, limits on liens on property and limits on mergers andasset sales, and financial covenants requiring maintenance of a minimum networth amount or a minimum interest expense coverage, or establishing a maximumdebt to equity ratio or a maximum loan to collateral value ratio.  Indebtedness is also collateralized bysubstantially all of OEH’s properties. Future financing agreements may contain similar, or even morerestrictive, provisions and covenants. If OEH fails to comply with the restrictions in its present or futurefinancing agreements, a default may occur. A default could allow the creditors to accelerate the related debt aswell as any other debt to which a cross-acceleration or cross-defaultprovision applies.  A 

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default could also allow the creditors toforeclose on the properties collateralizing the debt.

***Increases inprevailing interest rates may increase OEH’s interest payment obligations.***

Approximately 77% of OEH’sconsolidated long-term debt at December 31, 2006 accrued interest at rates thatfluctuate with prevailing interest rates, so that any increases in prevailinginterest rates may increase OEH’s interest payment obligations.  From time to time, OEH enters into hedgingtransactions in order to manage its floating interest rate exposure, but therecan be no assurance those transactions will be successful.  At December 31, 2006, approximately$126,000,000 of long-term debt was subject to fixed interest rate swaps.

***The Company’s abilityto pay dividends on the Class A common shares is limited.***

Beginning in January 2004, the Company hasbeen paying quarterly dividends on its Class A and B common shares in theamount of $0.025 per share.  There can beno assurance the Company will be able to make dividend payments in the futurebecause of debt repayment requirements, a downturn to OEH’s business or otherreasons.

Under Bermuda law, the Companymay pay dividends on, or make other distributions with respect to theClass A and B common shares (1) unless there are reasonable groundsfor believing that OEH is, or after the payment or distribution would be,unable to pay its liabilities as they become due, or (2) unless therealizable value of OEH’s assets is less than the aggregate of its liabilities,issued share capital and “share premium accounts” (share premium is defined asthe amount of shareholders’ equity over and above the aggregate par value ofissued shares).  There can be noassurance the Company will not be restricted by Bermuda law from payingdividends.

***OEH’ssubstantial indebtedness could adversely affect its financial health.***

OEH has a significant amount ofdebt and may incur additional debt from time to time.  As of December 31, 2006, its consolidatedlong-term indebtedness was $669,697,000 (including the current portion).  This substantial indebtedness could

·                                          require OEH to dedicatemuch of its cash flow from operations to payments on its indebtedness, and soreduce the availability of cash flow to fund working capital, capitalexpenditures, product and service 

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development and other general corporate purposes; forexample, in 2006 OEH generated $56,631,000 in cash from operating activitiesafter paying interest of $40,979,000 and before net loan principal borrowingsof $39,602,000.

·                                          limit OEH’s ability toobtain additional financing to fund future working capital, capitalexpenditures, product and service development and other general corporatepurposes,

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

·                                          limit its flexibility inplanning for, or reacting to, changes in its business and industry as well asthe economy generally.

OEH must also repay orrefinance a significant amount of indebtedness in future years.  Although OEH may seek to refinance itsindebtedness, it may be unable to obtain refinancing.  Any failure of OEH to repay any indebtednesswhen due may result in a default under such indebtedness and cause cross-defaultsunder other indebtedness.

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

Implementation ofexisting and future legislation, rulings, standards and interpretations fromthe U.S. Financial Accounting Standards Board (“FASB”) or other regulatorybodies could affect the presentation of OEH’s financial statements and relateddisclosures.  Future regulatoryrequirements could significantly change OEH’s current accounting practices anddisclosures.  These changes in thepresentation of OEH’s financial statements and related disclosures could changean investor’s interpretation or perception of OEH’s financial position andresults of operations.  For example, FASBaccounting interpretation no. 48, “Accounting for Uncertainty in Income Taxes”(“FIN 48”), is effective for OEH in the first quarter of 2007.  OEH will recognize an initial FIN 48provision at that time as an adjustment to retained earnings, which will havean adverse effect on OEH’s first quarter 2007 results. See Note 11 to theFinancial Statements. OEH’s future income tax cost may include a tax benefit asthe initial FIN 48 provision is released or a tax cost as new FIN 48liabilities are recognized, in addition to the tax costs or benefits thatrelate to OEH’s trading activities and results.

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OEH uses manymethods, estimates and judgements in applying its accounting policies (see “CriticalAccounting Policies” in Item 7—Management’s Discussion and Analysis of thisreport).  These methods, estimates andjudgements are, by their nature, subject to substantial risks, uncertaintiesand assumptions, and factors may arise over time that lead OEH to change itsmethods, estimates and judgments. Changes in those methods, estimates and judgements could significantlyaffect OEH’s results of operations.

## **Risks of Owning and Selling Class A Common Shares**

***The Company will notbe restricted from issuing additional Class A common shares, and any salescould negatively affect the trading price of the Class A common sharesoutstanding.***

The Company may in its discretion sell newly issuedClass A common shares.  There can beno assurance that the Company will not make significant sales of Class Acommon shares.  Any sales could materiallyand adversely affect the trading price of the Class A common sharesoutstanding.  

***The price of theClass A common shares may fluctuate significantly, which may make itdifficult for shareholders to sell the Class A common shares when theywant or at prices they find attractive.***

The price of the Class A common shares on theNew York Stock Exchange constantly changes. OEH management expects that the market price of the Class A commonshares will continue to fluctuate. Holders of Class A common shares will be subject to the risk ofvolatility and depressed prices.  

The Company’s share price canfluctuate as a result of a variety of factors, many of which are beyond OEH’scontrol.  These factors include 

·                                          quarterly variations inoperating results, 

·                                          operating results thatvary from the expectations of management, securities analysts and investors, 

·                                          changes in expectationsas to future financial performance, including financial estimates by securitiesanalysts and investors, 

·                                          developments generallyaffecting OEH’s businesses, 

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·                                          announcements by OEH orits competitors of significant contracts, acquisitions, joint ventures orcapital commitments, 

·                                          announcements by thirdparties of significant claims or proceedings against OEH, 

·                                          the dividend policy forthe Class A and B common shares, 

·                                          future sales of equityor equity-linked securities, and 

·                                          general domestic andinternational economic conditions.  

In addition, the stock marketin general has experienced volatility that has often been unrelated to theoperating performance of a particular company. These broad market fluctuations may adversely affect the market price ofthe Class A common shares.  

***The Company’sdirectors and officers may control the outcome of most matters submitted to avote of shareholders.***

A wholly-owned subsidiaryof the Company, Orient-Express Holdings 1 Ltd. (“Holdings”),currently holds all 18,044,478 outstanding Class B common shares in theCompany representing about 81% of the combined voting power of Class A and Bcommon shares for most matters submitted to a vote of shareholders, and thedirectors and officers of the Company hold Class A common shares representingan additional 0.4%.  In general, holdersof Class A common shares and holders of Class B common shares votetogether as a single class, with holders of Class A common shares havingone-tenth of one vote per share and holders of Class B common shareshaving one vote per share.  Therefore, aslong as the number of outstanding Class B shares exceeds one-tenth thenumber of outstanding Class A common shares, the holders of Class Bcommon shares could control the outcome of most matters submitted to a vote ofthe shareholders.  

Under Bermuda law, commonshares of the Company owned by Holdings are outstanding and may be voted byHoldings.  The manner in which Holdingsvotes its common shares will be determined by the four directors of Holdings,two of whom, John D. Campbell and James B. Sherwood, are also directors of theCompany, consistently with the exercise by those directors of their fiduciaryduties to Holdings.  Those directors,should they choose to act together, will be able to 

33

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control substantially all matters affecting theCompany, and to block a number of matters relating to any potential change ofcontrol of the Company.  See Item 12—SecurityOwnership of Certain Beneficial Owners and Management and Related StockholdersMatters.

***Provisions in theCompany’s charter documents, and the preferred share purchase rights currentlyattached to the Class A and B common shares, may discourage potentialacquisitions of OEH, even those that the holders of a majority of itsClass A common shares might favor.***

The Company’s memorandum ofassociation and bye-laws contain provisions that could make it harder for athird party to acquire it without the consent of its Board of Directors.  These provisions include 

·                                          supermajorityshareholder voting provisions for the removal of directors from office with orwithout cause, and for “business combination” transactions with beneficialowners of shares carrying 15% or more of the votes which may be cast at anygeneral meeting of the Company, and 

·                                          limitations on thevoting rights of such 15% beneficial owners. 

Also, the Company’s Board ofDirectors has the right under Bermuda law to issue preferred shares withoutshareholder approval, which could be done to dilute the stock ownership of apotential hostile acquirer.  Although OEHmanagement believes these provisions provide the shareholders an opportunity toreceive a higher price by requiring potential acquirers to negotiate with theCompany’s Board of Directors, these provisions apply even if the offer isfavored by shareholders holding a majority of the Company’s equity.  

The Company has in place ashareholder rights agreement providing for rights to purchase series Ajunior participating preferred shares of the Company.  The rights are not currently exercisable andthey are attached to and trade together with the Class A and B commonshares on a one-to-one basis.  Theserights may have anti-takeover effects.  

These anti-takeover provisions are in addition tothe ability of Holdings and directors and officers to vote shares representinga significant majority of the total voting power of the Company’s commonshares.  See the Risk Factor immediatelyabove. 

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

The Company is incorporated inBermuda, a majority of its directors and officers are residents of Bermuda, theUnited Kingdom and elsewhere outside the United States, and most of its assetsand the assets of its directors and officers are located outside the UnitedStates.  As a result, it may be difficultfor shareholders to 

·                                          effect service ofprocess within the United States upon the Company or its directors andofficers, or 

·                                          enforce judgmentsobtained in United States courts against the Company or its directors andofficers based upon the civil liability provisions of the United States federalsecurities laws.  

OEH has been advised by Bermudacounsel, Appleby Hunter Bailhache, that there is doubt as to 

·                                          whether a judgment of aUnited States court based solely upon the civil liability provisions of theUnited States federal securities laws would be enforceable in Bermuda againstthe Company or its directors and officers, and 

·                                          whether an originalaction could be brought in Bermuda against the Company or its directors andofficers to enforce liabilities based solely upon the United States federalsecurities laws.

**ITEM 1B.****                                            UnresolvedStaff Comments**

None.

**ITEM 2.****                                                     Properties**

OEH owns 35 hotels(including eight under long-term lease), three European tourist trains, acruiseship and five small French canalboats and two restaurants, and ownsinterests of 50% or less in four hotels, its Scottish and Southeast Asiantourist trains and PeruRail, all as described in Item 1—Business above.  The small regional sales, marketing andoperating offices of the hotels, tourist trains and cruise business areoccupied under operating leases. 

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**ITEM 3.****                                                     LegalProceedings**

There are no materiallegal proceedings, other than ordinary routine litigation incidental to OEH’sbusiness, to which the Company or any of its subsidiaries is a party or towhich any of their property is subject. 

**ITEM 4.****                                                     Submissionof Matters to a Vote of Security Holders**

The Company submitted nomatter to a vote of its security holders during the fourth quarter of 2006. 

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**PART II**

**ITEM 5.****                                                     Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities**

The Class Acommon shares of the Company are traded on the New York Stock Exchange underthe symbol OEH.  All of the Class Bcommon shares of the Company are owned by a subsidiary of the Company and notlisted.  See Item 12—Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.  The following table presents the quarterlyhigh and low sales prices of a Class A common share in 2006 and 2005 asreported for New York Stock Exchange composite transactions: 
|                | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
|           |       |     |       |     |       |   |   |   |   |
| First quarter  |       | $        | 40.35      |     | $          | 30.71 |   | $ | 26.36 |   | $ | 19.60 |   |
| Second quarter |       | 43.43    |       | 35.05    |       | 32.50 |   | 25.16 |   |
| Third quarter  |       | 40.97    |       | 31.30    |       | 33.40 |   | 27.28 |   |
| Fourth quarter |       | 48.05    |       | 36.71    |       | 32.71 |   | 26.15 |   |
|                |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

The Company paidquarterly cash dividends at the rate of $0.025 per Class A and B common sharein 2006 and 2005.

The Islands ofBermuda where the Company is incorporated have no applicable governmental laws,decrees or regulations which restrict the export or import of capital or affectthe payment of dividends or other distributions to non-resident holders of theClass A and B common shares of the Company or which subject United Statesholders to taxes. 

At February 20,2007, the number of record holders of the Class A common shares of theCompany was approximately 30.

During 2006, theCompany issued and sold 2,500,000 Class A common shares in a public offeringregistered in the United States in July. Also, during the fourth quarter of 2006, no purchases of the Company’scommon shares were made by or on behalf of the Company or any affiliatedperson.

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

**Orient-ExpressHotels Ltd. and Subsidiaries**

                As discussed inNote 2 to the Financial Statements (Item 8), the results for the years endedDecember 31, 2005, 2004, 2003 and 2002 have been restated.

 
| ** **                                                | ** ** | **Year ended December 31,**                           | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                | ** ** | ** **                                                           | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| ** **                                                | ** ** | **(In thousands except per share amounts)** | ** ** |
| Revenue                                                   |       | $                                                                    | 492,804    |   | $ | 433,147 |   | $ | 357,284 |   | $ | 315,863 |   | $ | 279,268 |   |
|                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Gain on sale of  investment/hotel asset                   |       | $                                                                    | 6,619      | ** | $ | — |   | $ | — |   | $ | 4,250 | * | $ | — |   |
|                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Earnings from  unconsolidated companies — net of tax |       | $                                                                    | 11,970     |   | $ | 11,175 |   | $ | 9,084 |   | $ | 7,320 |   | $ | 8,471 |   |
|                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Net earnings                                              |       | $                                                                    | 39,767     |   | $ | 41,539 |   | $ | 31,218 |   | $ | 24,963 |   | $ | 28,762 |   |
|                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Net earnings per  share                                   |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Basic                                                     |       | $                                                                    | 0.98       |   | $ | 1.09 |   | $ | 0.91 |   | $ | 0.76 |   | $ | 0.93 |   |
| Diluted                                                   |       | $                                                                    | 0.97       |   | $ | 1.08 |   | $ | 0.91 |   | $ | 0.76 |   | $ | 0.93 |   |
|                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Total assets                                              |       | $                                                                    | 1,751,663  |   | $ | 1,452,166 |   | $ | 1,316,058 |   | $ | 1,208,383 |   | $ | 1,037,689 |   |
|                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Long-term  obligations                                    |       | $                                                                    | 669,697    |   | $ | 568,307 |   | $ | 583,706 |   | $ | 554,188 |   | $ | 459,016 |   |
|                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Shareholders’  equity                                |       | $                                                                    | 806,996    |   | $ | 650,496 |   | $ | 521,280 |   | $ | 488,530 |   | $ | 404,049 |   |
|                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Dividends per share                                       |       | $                                                                    | 0.10       |   | $ | 0.10 |   | $ | 0.10 |   | $ | — |   | $ | — |   |

 

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*                           The gain in 2003 related to the sale of theHotel Quinta do Lago in Portugal.

**                    The gain in 2006 related to the sale of theinvestment in Harry’s Bar.

See notes to consolidated financial statements (Item 8). 

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**ITEM 7.****                                                     Management’sDiscussion and Analysis of Financial****Condition and Results ofOperations**

All comparisons inthis Item 7 reflect restatements of OEH’s financial results for 2005 and 2004that are more fully described in Note 2 to the consolidated financialstatements in Item 8—Financial Statements below.

**Overview**

OEH has threebusiness segments: (1) hotels and restaurants, (2) tourist trains andcruises, and (3) real estate and property development.  Hotels currently consist of 39 deluxe hotels.  Thirty-five of these hotels are wholly or majorityowned, and are referred to in this discussion as “owned hotels”.  The other four hotels, in which OEH has anequity interest and operates under management contracts, are referred to inthis discussion as “hotel management interests”.  Of the owned hotels, 12 are located inEurope, seven in North America and 16 in the rest of the world.  

In addition to the purchase in February 2006 of a 75%interest in Casa de Sierra Nevada in San Miguel de Allende, Mexico, OEHacquired in July 2006 the Pansea group of six deluxe hotels in SoutheastAsia.  In 2004 and 2005, OEH made $8,000,000 of loans to the Pansea hotelsgroup which were applied to the purchase price.  Prior to July 2006, OEHdid not manage the hotels but marketed them with other OEH properties especiallyits Eastern & Oriental Express tourist train and its Road to Mandalay rivercruise ship.  Previously, in May 2006, OEH acquired the 50% interest inthe Napasai hotel in Thailand not owned by the Pansea group for $10,500,000. The total purchase price for these seven properties including Casa de SierraNevada and Napasai was $54,700,000.

Also, OEH currently owns and operates the restaurants ‘21’Club in New York and La Cabaña in Buenos Aires. In June 2006, OEH sold its minority interest in a third restaurant. 

OEH’s touristtrains and cruises segment operates six tourist trains — three of which areowned and operated by OEH, two in which OEH has an equity interest andexclusive management contracts, and one in which OEH has an equity investment –and a river cruiseship and five canalboats. 

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

39

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Following theterrorist attacks in the United States on September 11, 2001, as well asweakening national economies in 2001, OEH experienced a significant adverseimpact on its business in common with other companies in the travel andhospitality sector.  During 2002, thebusiness showed some improving trends quarter on quarter.  In 2003, however, with the commencement ofthe Iraq War and the outbreak of the SARS epidemic, travel was further reducedwith a consequential reduction in occupancy and OEH’s profitability.  The results for 2004 were much improved over2003 with net earnings increasing from $20.7 million (excluding the gain onsale of a hotel) to $31.2 million, an increase of 51%.  This was principally driven by a same storeRevPAR increase of 16% at OEH’s owned hotels and a much improved performance inthe tourist trains and cruises segment. This improvement continued into 2005, with same store RevPAR increasesof 16%, coupled with the acquisition of the Grand Hotel Europe, driving revenueincreases of 21% and net earnings growth of 33% to $41.5 million.  In 2006, OEH saw further growth of 10% inRevPAR as performance approached 2000 levels. In 2006 average occupancy was 63% with ADR $382.

OEH has a strategyto grow its business through:

·                  RevPARgrowth:  the unique nature of OEH’sindividual properties and the avoidance of a chain brand have historicallyenabled OEH to charge premium rates for rooms;

·                  Expansionof hotels:  the returns on investment byadding new rooms to a hotel are high as the incremental operating costs arelow; 

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

·                  Realestate:  OEH owns about 325 acres of landwhich it intends to develop over time for residential real estate sales. 

In March 2005, byselling 5,050,000 newly-issued class A common shares at $26 each, OEH raised$121.9 million net of underwriters fees and expenses.  The proceeds of this sale were used primarilyto fund the acquisition of the Grand Hotel Europe.  In July 2006, OEH raised an additional $99.2million by selling 2,500,000 newly-issued class A common shares at $40each.  The proceeds of the sale were usedprimarily to fund the acquisition of the former Pansea hotels group.                            

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In 2006, 84% ofOEH’s revenue was derived from the hotels and restaurants segment and 13% fromthe tourist trains and cruises segment, with the remainder from real estate andproperty development.  In the hotels andrestaurants segment, 92% of revenue was from owned hotels, 6% from restaurantsand 2% was from hotel management interests.

OEH derivesrevenue from owned hotel operations primarily from the sale of rooms and theprovision of food and beverages.  Themain factors for analyzing rooms revenue are the number of room nights sold andthe ADR, and RevPAR referred to above which is a measure of both these factors.

Revenue fromrestaurants is derived from food and beverages sold to customers.  Revenue from hotel management interestsincludes fees received under management contracts, which are based upon acombination of a percentage of the revenue from operations and operatingearnings calculated before specified fixed charges.  

The revenue fromthe tourist trains and cruises segment primarily comprises tickets sold fortravel and food and beverage sales. 

The revenue fromreal estate and property development is primarily derived from the sale of landand buildings.

Operating costsinclude labor, repairs and maintenance, energy and the costs of food andbeverages sold to customers in respect of owned hotel operations, restaurants,tourist trains and cruises.

Selling, generaland administrative expenses include travel agents’ commissions, the salariesand related costs of the sales teams, advertising and public relations costs,and the salaries and related costs of management.  

Depreciation andamortization includes depreciation of owned hotels, restaurants, tourist trainsand cruise boats. 

When OEH discussesresults for a period on a “comparable” or “same store” basis, OEH isconsidering only the results of hotels owned and operating throughout theperiods mentioned and excluding the effect of any acquisitions, dispositions ormajor refurbishments.

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**Results of Operations**

OEH’s operatingresults for years 2006, 2005 and 2004, expressed as a percentage of revenue,are as follows: 
| ** **                               | ** ** | **Year ended December 31** | ** ** |
|------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                               | ** ** | ** **                                | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Revenue:                                 |       |                                      |       |   |   |   |   |
| Hotels and restaurants                   |       | 84                                        | %          | 85 | % | 84 | % |
| Tourist trains and cruises               |       | 13                                        |       | 14 |   | 15 |   |
| Real estate and property development     |       | 3                                         |       | 1 |   | 1 |   |
|                                     |       | 100                                       |       | 100 |   | 100 |   |
| Expenses:                                |       |                                      |       |   |   |   |   |
| Depreciation and amortization            |       | 7                                         |       | 8 |   | 8 |   |
| Operating                                |       | 47                                        |       | 47 |   | 49 |   |
| Selling, general and administrative      |       | 30                                        |       | 31 |   | 32 |   |
| Gain on sale of  investment              |       | (1                                        | )          | — |   | — |   |
| Net finance  costs                       |       | 10                                        |       | 6 |   | 4 |   |
| Earnings before  income taxes            |       | 7                                         |       | 8 |   | 7 |   |
| Provision for  income taxes              |       | (2                                        | )          | (1 | ) | (1 | ) |
| Earnings from  unconsolidated companies  |       | 3                                         |       | 3 |   | 3 |   |
| Net earnings as a  percentage of revenue |       | 8                                         | %          | 10 | % | 9 | % |

 

Segment netearnings before interest expense (but after interest income from unconsolidatedcompanies), foreign currency, tax (including tax on earnings from unconsolidatedcompanies), depreciation, amortization and gain on investment sale (“segmentEBITDA”) for the years ended 2006, 2005 and 2004 are analyzed as follows(dollars in millions): 
| ** **                                    | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Segment EBITDA:                               |       |                                       |       |   |   |   |   |
| Owned Hotels:                                 |       |                                       |       |   |   |   |   |
| Europe                                        |       | $                                          | 52.7       |   | $ | 46.6 |   | $ | 29.9 |   |
| North America                                 |       | 19.7                                       |       | 18.8 |   | 15.0 |   |
| Rest of the world                             |       | 33.0                                       |       | 23.4 |   | 18.0 |   |
| Hotel management and part-ownership interests |       | 19.9                                       |       | 17.5 |   | 14.9 |   |
| Restaurants                                   |       | 6.5                                        |       | 5.6 |   | 3.9 |   |
| Tourist trains and cruises                    |       | 18.3                                       |       | 15.4 |   | 13.0 |   |
| Real estate and property development          |       | 3.5                                        |       | — |   | — |   |
| Central overheads                             |       | (22.1                                      | )          | (19.0 | ) | (15.7 | ) |
| Total                                         |       | $                                          | 131.5      |   | $ | 108.3 |   | $ | 79.0 |   |

 

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The foregoing segment EBITDA reconciles to netearnings as follows (dollars in millions):
| ** **                                                       | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                       | ** ** | ** **                                 | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Net earnings                                                     |       | $                                          | 39.8       |   | $ | 41.5 |   | $ | 31.2 |   |
| Add:                                                             |       |                                       |       |   |   |   |   |
| Depreciation and  amortization                                   |       | 35.6                                       |       | 34.1 |   | 28.4 |   |
| Interest  expense, net                                           |       | 44.5                                       |       | 30.2 |   | 19.9 |   |
| Foreign  currency, net                                           |       | 4.6                                        |       | (5.1 | ) | (5.5 | ) |
| Provision for  income taxes                                      |       | 7.8                                        |       | 4.2 |   | 2.4 |   |
| Share of  provision for income taxes of unconsolidated companies |       | 5.8                                        |       | 3.4 |   | 2.6 |   |
| Less:                                                            |       |                                       |       |   |   |   |   |
| Gain on sale of  investment                                      |       | (6.6                                       | )          | — |   | — |   |
| Total                                                            |       | $                                          | 131.5      |   | $ | 108.3 |   | $ | 79.0 |   |

 

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

Operating information for OEH’s owned hotels for the years endedDecember 31, 2006 and 2005 is as follows:

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|                                 | ** ** | **Year ended**   | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **December 31,** | ** ** |
| ** **                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                            |       |                  |       |   |   |
| Average Daily Rate (in dollars) |       |                  |       |   |   |
| Europe                          |       | 584                   |       | 526 |   |
| North America                   |       | 325                   |       | 323 |   |
| Rest of World                   |       | 271                   |       | 277 |   |
| Worldwide                       |       | 382                   |       | 375 |   |
|                            |       |                  |       |   |   |
| Rooms Available (in thousands)  |       |                  |       |   |   |
| Europe                          |       | 298                   |       | 301 |   |
| North America                   |       | 212                   |       | 207 |   |
| Rest of World                   |       | 382                   |       | 336 |   |
| Worldwide                       |       | 892                   |       | 844 |   |
|                            |       |                  |       |   |   |
| Room Nights Sold (in thousands) |       |                  |       |   |   |
| Europe                          |       | 175                   |       | 176 |   |
| North America                   |       | 148                   |       | 140 |   |
| Rest of World                   |       | 242                   |       | 196 |   |
| Worldwide                       |       | 565                   |       | 512 |   |
|                            |       |                  |       |   |   |
| RevPAR (in dollars)             |       |                  |       |   |   |
| Europe                          |       | 342                   |       | 307 |   |
| North America                   |       | 227                   |       | 219 |   |
| Rest of World                   |       | 172                   |       | 162 |   |
| Worldwide                       |       | 242                   |       | 228 |   |

 
|                                            | ** ** | ** ** | ** ** | ** ** | ** ** | **Change %** | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   | ** ** | **Local** | ** ** |
| ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollars**  | ** ** | **Currency** | ** ** |
| Comparable/Same Store RevPAR  (in dollars) |       |       |       |       |       |         |       |   |   |
| Europe                                     |       | 357        |       | 327        |       | 9            | %          | 9 | % |
| North America                              |       | 317        |       | 291        |       | 9            | %          | 9 | % |
| Rest of World                              |       | 182        |       | 162        |       | 12           | %          | 15 | % |
| Worldwide                                  |       | 262        |       | 238        |       | 10           | %          | 11 | % |

 

Average daily rateis the average amount achieved for the rooms sold.  RevPAR is revenue per available room, this isthe rooms’ revenue divided by the number of available rooms for each night ofoperation.  Same store RevPAR is acomparison based on the operations of the same units in each period, byexcluding the effect of any acquisitions, dispositions or majorrefurbishments.  The same store dataexcludes the following operations: Hotel Caruso, El Encanto Hotel and GardenVillas, Grand Hotel Europe, Casa de Sierra Nevada and the six Asianhotels.  It also excludes La Residencia,Maroma Resort and Spa and Windsor Court Hotel for the periods in which theywere closed.

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**Year Ended December 31, 2006****compared to Year Ended December 31, 2005**

*Revenue*

Total revenueincreased by $59.7 million, or 13.8%, from $433.1 million in 2005 to$492.8 million in 2006.  Hotels andrestaurants revenue increased by $45.8 million, or 12.5%, from $367.2 millionin 2005 to $413.0 million in 2006, and the revenue from tourist trains andcruises increased by $2.4 million, or 3.9%, from $61.2 million in 2005 to $63.6million in 2006.  Real estate and propertydevelopment contributed $16.1 million of revenue in 2006, up significantly from$4.7 million in 2005, with revenues from Keswick Hall representing $8.4million.

The increase inhotels and restaurants revenue consisted of the following:

·                  $44.9 millionattributable to owned hotels, or 13%, from $336.4 million in 2005 to $381.3million in 2006,

·                  an increase inrevenue from hotel management interests of $0.5 million, or 5.7%, from$8.7 million in 2005 to $9.2 million in 2006, mainly due to improvedresults of Charleston Place and the Peruvian hotel investments,

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

The increase inowned hotels revenue of $44.9 million is analyzed by region as follows:

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

On a same storebasis in euros, RevPAR increased by 9% in 2006 over 2005 and when translated toU.S. dollars also increased by 9%. Overall, revenue in Italy was $12.5 million ahead of revenue in 2005, anincrease of 20%.

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*NorthAmerica.*  Revenueincreased by $5.8 million, or 7%, from $79.7 million in 2005 to $85.5 millionin 2006.  The increase was underpinned by$6.1 million of revenue at Maroma Resort and Spa, along with revenue growth atLa Samanna, Keswick Hall and The Inn at Perry Cabin.  

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

*Rest ofthe World.*  Revenueincreased by $19.9 million, or 21%, from $95.5 million in 2005 to $115.4million in 2006.  Revenue at allproperties showed good growth in 2006. Southern African revenue increased by 11% to $35.0 million, SouthAmerican revenue increased by 21% to $40.1 million, and Australasian revenueincreased by 8% to $33.4 million. Revenue from the former Pansea group, acquired in July 2006, contributeda further $6.9 million.

RevPARincreased by 15% in local currencies but increased by 12% in U.S. dollars.

*Depreciationand Amortization*

Depreciationand amortization increased by $1.6 million, or 5%, from $34.1 millionin 2005 to $35.7 million in 2006.  Theincrease was due primarily to the impact of the new acquisitions in Mexico andAsia, plus the impact of the opening of the Hotel Caruso. 

*OperatingExpenses*

Operatingexpenses increased by $27.5 million, or 13%, from $205.3 million in2005 to $232.8 million in 2006. This was primarily due to the improved revenues and volumes in OEH’sbusinesses in the year.  As a percentageof revenue, operating expenses remained flat at 47% in 2006.

*Selling,General and Administrative Expenses*

Selling,general and administrative expenses increased by $12.1 million, or 9%,from $134.1 million in 2005 to $146.2 million in 2006.  

*Margins*

SegmentEBITDA margins (calculated as segment EBITDA as a percentage of revenue) for2006 were 27%, up from 25% for 2005.  Theincrease was due to increased margins in the Rest of the World.  Margins in the Rest of the World 

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increased from 25%in 2005 to 29% in 2006, helped by the impact of the Asian hotels acquisition.  

*Earningsfrom Operations before Net Finance Costs*

Earningsfrom operations increased by $18.4 million, or 31%, from$59.7 million in 2005 to $78.1 million in 2006, due to the factorsreferred to in the proceeding paragraphs. 

*NetFinance Costs*

Netfinance costs increased by $24.0 million, or 96%, from $25.1 million in 2005 to$49.1 million in 2006.  This includesforeign currency transaction losses of $4.6 million in 2006 (2005-$5.1 milliongain) linked primarily to South African debt on financing transactions.  The increase is attributable to the impact ofthe financing of the Grand Hotel Europe, the Hotel Caruso and funding ofcapital expenditure in 2006.  There werealso increases in both U.S. and U.K. interest rates in 2006, along with $5.6 millionof deferred finance write-offs in connection with refinancing costs.

*Provisionfor Income Taxes*

Theprovision for income taxes increased by $3.6 million, or 86%, from $4.2 millionin 2005 to $7.8 million in 2006. The Company is incorporated in Bermuda, which does not impose an incometax.  Accordingly, the entire income taxprovision was attributable to income tax charges incurred by subsidiariesoperating in jurisdictions that impose an income tax.  The increase was due to increased profitabilityof these subsidiaries and the tax associated with the gain arising on the saleof Harry’s Bar. 

*Earningsfrom Unconsolidated Companies*

Earningsfrom unconsolidated companies, which include OEH’s share of the net earnings ofits equity investments as well as interest income related to loans and advancesto the equity investees, increased by $0.8 million, or 7%, from $11.2 millionto $12.0 million, mainly due to increased earnings from Peruvian jointventures.  

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**YearEnded December 31, 2005 compared to Year Ended December 31, 2004**

*Revenue*

Totalrevenue increased by $75.8 million, or 21.2%, from $357.3 million in 2004to $433.1 million in 2005.  Hotels andrestaurants revenue increased by $72.7 million, or 24.7%, from $294.5 millionin 2004 to $367.2 million in 2005, and the revenue from tourist trains andcruises increased by $2.6 million, or 4.5%, from $58.6 million in 2004 to $61.2million in 2005.  

Theincrease in hotels and restaurants revenue consisted of the following:

·                  $70.1million attributable to owned hotels, or 26%, from $271.0 million in 2004 to$341.1 million in 2005,

·                  anincrease in revenue from hotel management interests of $1.3 million, or18%, from $7.3 million in 2004 to $8.6 million in 2005, mainly due toimproved results of Charleston Place and the Peruvian hotel investments, 

·                  anincrease in restaurants revenue of $1.8 million, or 9%, from $20.3 millionin 2004 to $22.2 million in 2005, mainly due to improved revenue at the ‘21’Club of $1.1 million and La Cabana of $0.4m.

Theincrease in owned hotels revenue of $70.1 million is analyzed by region asfollows: 

*Europe.*  Revenue increased by $45.1 million from$116.1 million in 2004 to $161.2 million in 2005.  $32 million of this growth was attributableto the Grand Hotel Europe with all other properties showing revenue growth. 

On asame store basis in euros, RevPAR increased by 6% in 2005 over 2004 and whentranslated to U.S. dollars also increased by 6%.  The European portfolio revenue increases in2005 were stronger within the Italian portfolio which showed significantincreases from $54.4 million to $59.5 million in 2005, an increase of 9%.  

*NorthAmerica.*  Revenueincreased by $9.0 million, or 13%, from $75.4 million in 2004 to $84.4 millionin 2005.  Included in 2005 revenues are$4.7 million relating to real estate sales at Keswick Hall Hotel (2004-$4.2million).  The increase was underpinnedby $6 million of revenue at El 

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Encanto Hotel& Garden Villas, but offset by drops in revenue at the Windsor Court Hoteland Maroma Resort and Spa ($4.4 million) due to hurricane related closures.

On asame store basis, RevPAR in 2005 increased by 9% over 2004.  

*Rest ofthe World.*  Revenueincreased by $15.9 million, or 20%, from $79.6 million in 2004 to $95.5 millionin 2005.  Revenues at all propertiesshowed good growth in 2005.  SouthernAfrica revenues increased by 19% to $31.6 million, South American revenuesincreased by 20% to $33.1 million, and Australia and Asia increased by 21% to$30.8 million.    

RevPARincreased by 10% in local currencies but increased by 11% in U.S. dollars.  

*Depreciationand Amortization*

Depreciationand amortization increased by $5.8 million, or 20%, from$28.3 million in 2004 to $34.1 million in 2005.  The increase was due primarily to the impactof the Grand Hotel Europe, St. Petersburg. 

*OperatingExpenses*

Operatingexpenses increased by $29.7 million, or 17%, from $175.6 million in2004 to $205.3 million in 2005. This was primarily due to the improved revenues and volumes in OEH’s businessesin the year and the impact of the Grand Hotel Europe acquisition and the HotelCaruso opening.  As a percentage ofrevenue, operating expenses reduced from 49% in 2004 to 47% in 2005.

*Selling,General and Administrative Expenses*

Selling,general and administrative expenses increased by $19.6 million, or 17%,from $114.5 million in 2004 to $134.1 million in 2005.  This was primarily due to the acquisition ofthe Grand Hotel Europe.

*Earningsfrom Operations before Net Finance Costs*

Earningsfrom operations increased by $20.8 million, or 53%, from$38.9 million in 2004 to $59.7 million in 2005.  

*NetFinance Costs*

Netfinance costs increased by $10.7 million, or 74%, from $14.4 million in 2004 to$25.1 million in 2005.  The increase wasprimarily due to increased interest rates.

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*Provisionfor Income Taxes*

Theprovision for income taxes increased by $1.8 million, or 75%, from $2.4 millionin 2004 to $4.2 million in 2005. The Company is incorporated in Bermuda, which does not impose an incometax.  Accordingly, the entire income taxprovision was attributable to income tax charges incurred by subsidiariesoperating in jurisdictions that impose an income tax.  The increase of $1.8 million was due toincreased profitability of these subsidiaries and the impact of the Grand HotelEurope. 

*Earningsfrom Unconsolidated Companies*

Earningsfrom unconsolidated companies, which include OEH’s share of the net earnings ofits equity investments as well as interest income related to loans and advancesto the equity investees, increased by $2.0 million, or 22%, from $9.1 millionto $11.2 million, mainly due to increased earnings from Peruvian jointventures.  

**Liquidityand Capital Resources**

*WorkingCapital*

OEHhad cash and cash equivalents of $79.3 million at December 31, 2006,$40.9 million more than the $38.4 million at December 31,2005.  At December 31, 2006, therewere undrawn amounts available to OEH under committed short-term lines ofcredit of $22.2 million ($7.1 million at December 31, 2005) and undrawnamounts available to OEH under secured revolving credit facilities of $94.1million, bringing total cash availability at December 31, 2006 to $195.6 million.

Currentassets less current liabilities, including the current portion of long-termdebt, resulted in a working capital balance of $16.0 million, a working capitalincrease of $58.3 million from a deficit balance of $42.3 million atDecember 31, 2005.  Changes in thefollowing balances made the most contribution to the increase in the workingcapital:

·                  Cashand cash equivalents have increased by $40.9 million due to various activitiesdescribed under “Cash Flow”  below.

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·                  Realestate assets have increased by $23.7 million due to continuing constructionactivities in St. Martin, acquisition of properties for sale within the Asianhotels group, and land development activities in Keswick Hall.

·                  Accountsreceivable, net of allowances, have increased by $15.2 million due to thegrowth in operating activities with creditworthy tour operators and othercustomers.  This also includes insurancereceivables.

·                  Currentportion of long-term debt has increased by $11.2 million in connection with therefinancing transactions completed during the year.

·                  Accruedliabilities increased by $12.4 million due to increase in the operatingactivities and liabilities acquired with new properties.

OEH’sbusiness does not require the maintenance of significant inventories orreceivables and, therefore, management believes working capital is not the mostappropriate measure of liquidity.  

*Cash Flow*

*OperatingActivities.*  Net cashprovided by operating activities increased by $12.6 million to$49.4 million for the year ended December 31, 2006, from cashprovided by operating activities of $36.8 million for the year endedDecember 31, 2005.  The increase wasmainly attributable to the favorable movements in the working capitalbalances.  The net increase in workingcapital balances during 2006 was lower than the increase in working capitalduring 2005 by $13.9 million. 

*InvestingActivities.*  Cash usedin investing activities was $146.1 million for the year endedDecember 31, 2006, compared to $218.4 million for the year endedDecember 31, 2005, a decrease of $72.3 million.  Capital expenditure of $111.8 millionincluded $21.8 million for refurbishment of the Italian hotels, $9.4 millionspent on Reids Palace Hotel, $24.0 million for post-hurricane construction atMaroma and Windsor Court Hotel, $8.3 million spent on acquisition of wheelsetsfor Venice Simplon-Orient-Express, and $6.5 million spent on refurbishment ofEl Encanto.

Currentyear acquisitions of $47.4 million included the acquisition of the formerPansea group of six hotels, Casa de Sierra Nevada, and the remaining 25%interest in Maroma.  The 

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2005 amount wasmainly due to the acquisition of the Grand Hotel Europe.

Thecash used in capital expenditures and acquisitions was offset by $13.0 millionfrom disposals, including $9.5 million proceeds from the sale of the Harry’sBar investment in June 2006. 

*FinancingActivities.*  Cashprovided from financing activities for the year ended December 31, 2006was $135.7 million as compared to cash provided from financing activities of$135.6 million for the year ended December 31, 2005, an increase of$0.1 million.  

In theyear ended December 31, 2006, OEH had proceeds from borrowings under long-termdebt of $423.0 million, compared to proceeds of $143.0 million for the yearended December 31, 2005.  The borrowingsmade for the year to December 31, 2006 included the new European hotelsfacility of $240.7 million, new ‘21’ Club facility of $20.5 million, new trainsfacility of $36.6 million, new La Residencia facility of $23.0 million and thenew La Samanna facility of $20.0 million. The borrowings made for the year ended December 31, 2005 included $58.5million of finance on the Grand Hotel Europe acquisition.

In theyear ended December 31, 2006, OEH had net proceeds from the issuance of commonshares of $99.2 million, which were primarily used to acquire the former Panseagroup of hotels, and to pay down short-term debt.  In the year ended December 31, 2005, OEH hadnet proceeds from the issuance of common shares of $121.9 million.  In 2006, OEH used most of the balance oflong-term debt proceeds for general corporate purposes including acquisitionsand investments.

*CapitalCommitments*  

Therewere $21.8 million of capital commitments outstanding as of December 31,2006 mainly on investments in owned hotels. 

*Indebtedness*

AtDecember 31, 2006, OEH had $669.7 million of consolidated long-termdebt, including the current portion, collateralized by OEH assets with a numberof commercial bank lenders which is payable over periods of one to11 years with a weighted average interest rate of 5.80%.  These financing agreements contain covenantsthat include limits on the property owning company’s ability to raiseadditional debt collateralized by these properties, limits on liens on theproperties and limits on mergers and asset sales and, in some 

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cases, financialcovenants such as a minimum interest coverage ratio and debt service coverageratio and a maximum debt to equity ratio. Some of the Company guarantees of these facilities contain financialcovenants on OEH covering a minimum consolidated tangible net worth and aminimum consolidated interest coverage ratio. OEH is in full compliance with these covenants, and management believesthey will not substantially limit OEH’s ability to finance future acquisitionsor capital expenditure plans.  SeeNote 7 to the Financial Statements regarding the maturity of long-termdebt. 

Approximately49% of the outstanding principal was drawn in euros at December 31, 2006,and the balance primarily drawn in U.S. dollars.  At December 31, 2006, 77% of borrowingsof OEH were in floating interest rates. 

*Liquidity*

Managementplans to invest over the next few years in the expansion of existing hotelproperties consistent with its growth strategy, subject to marketconditions.  In addition, OEH aims toacquire more properties which it expects to finance with an appropriate levelof debt collateralized on the properties, and the balance through availablecash resources.  

Managementexpects to have available cash from operations and appropriate debt and othersources of financing sufficient to fund its working capital requirements,capital expenditures, acquisitions and debt service for 2007 and later years. 

*ContractualObligations Summary*

Thefollowing table summarizes OEH’s material known contractual obligations,excluding accounts payable and accrued liabilities, in 2007 and later years asof December 31, 2006 (dollars in thousands). 
| ** **                  | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                   | ** ** | **2008-  2009** | ** ** | **2010-  2011** | ** ** | **There-  After** | ** ** | **Total** | ** ** |
| Working capital  facilities |       | $                                          | 46,590     |   | $ | — |   | $ | — |   | $ | — |   | $ | 46,590 |   |
| Debt                        |       | 81,519                                     |       | 100,058 |   | 430,084 |   | 41,352 |   | 653,013 |   |
| Capital leases              |       | 1,878                                      |       | 3,592 |   | 5,247 |   | 5,969 |   | 16,686 |   |
| Operating leases            |       | 908                                        |       | 2,217 |   | 741 |   | 1,644 |   | 5,510 |   |
| Capital commitments         |       | 21,839                                     |       | — |   | — |   | — |   | 21,839 |   |
|                        |       | $                                          | 152,734    |   | $ | 105,867 |   | $ | 436,072 |   | $ | 48,965 |   | $ | 743,688 |   |

 

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*Off-BalanceSheet Arrangements*

OEHhad no material off-balance sheet arrangements at December 31, 2006 other thanthose involving its equity investees reported in Notes 1(g), 3(b), 8(a) and 18 tothe Financial Statements, and commitments and contingencies and derivativefinancial instruments reported in Notes 1(t), 15 and 16.

Alldeposits received for residential purchases at La Samanna are held in escrow,and as at December 31, 2006, this amounted to $4.1 million.

## **Critical Accounting Policies and Estimates**

Thepreceding discussion and analysis of OEH’s financial condition and results ofoperations is based on its consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America.  Thepreparation of these financial statements requires OEH management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses.  Onan ongoing basis, OEH management evaluates these estimates.  Management bases its estimates on historicalexperience and on various other assumptions that it believes are reasonableunder the circumstances, the result of which form the basis for judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources.  Actual results maydiffer from these estimates under different assumptions or conditions.

Criticalaccounting policies are those that reflect significant judgments oruncertainties, and potentially result in materially different results underdifferent assumptions and conditions. OEH management believes the following are OEH’s most critical accountingpolicies and estimates.

*Carryingvalues of long-lived assets and goodwill*

OEHmanagement periodically evaluates the recoverability of long-lived assetswhenever events or changes in circumstances indicate that the carrying amountmay not be recoverable.  These evaluationsinclude analyses based on the cash flows generated by the underlying assets,profitability information including estimated future operating results, trendsor other determinants of fair value.  Ifthe value of the asset determined by these evaluations is less than itscarrying amount, a loss, if any, is recognized for the difference between thefair value and the carrying value of the asset. Future adverse changes in market conditions or poor operating results ofthe related business may indicate an 

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inabilityto recover the carrying value of the asset, thereby possibly requiring animpairment charge in the future.

Inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwilland Other Intangible Assets”, goodwill must be evaluated annually forimpairment.  The impairment testing under SFAS No. 142 is performed in two steps,first, the determination of impairment based upon the fair value of a reportingunit as compared with its carrying value and, second, if there is an impairment,the measurement of the amount of impairment loss by comparing the implied fairvalue of goodwill with the carrying amount of that goodwill.  As of December 31, 2006 and 2005, OEHdetermined the carrying values of all its reporting units were less than theirestimated fair values, indicating that there was no impairment of the recordedgoodwill.  To determine fair value, OEHrelied on common industry valuation models, including multiples of earnings.

Otherintangible assets with indefinite useful lives are also reviewed for impairmentin accordance with SFAS No. 142.

*Depreciation*

Realestate and other fixed assets are recorded at cost and are depreciated overtheir estimated useful lives by the straight-line method.  The depreciation rates on freehold buildingsare 60 years with a 10% residual value, and on machinery and other remainingassets range from 5 to 25 years. Leasehold improvements are depreciated over the shorter of the estimateduseful life or the respective lease terms including lease extensions that arereasonably assured.

*Pensions*

OEH’s primary definedbenefit pension plan is accounted for using actuarial valuations required bySFAS No. 87, “Employers’ Accounting for Pensions” and SFAS No. 158 “Employers’Accounting for Defined Benefit Pension and Other Post-retirement Plans — AnAmendment of FASB Statements No. 87, 88, 106 and 132(R)”.  Management considers accounting for pensionscritical to all of OEH’s operating segments because management is required tomake significant subjective judgments about a number of actuarial assumptions,which include discount rates, long-term return on plan assets and mortalityrates.  On May 31, 2006, the plan wasclosed to future benefit accrual.

Managementbelieves that a 7.5% long-term return on plan assets in 2006 is reasonabledespite the recent market volatility.  Indetermining the expected long-term rate of 

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return on assets,management has evaluated input from OEH’s actuaries and financial advisers,including their review of anticipated future long-term performance ofindividual asset classes and the consideration of the appropriate assetallocation strategy given the anticipated requirements of the plan to determinethe average rate of earnings expected on the funds invested.  The projected returns are based on broadequity and bond indices, including fixed interest rate gilts (U.K. Governmentissued long-term securities) of long-term duration since the plan is in theU.K.

Managementregularly reviews OEH’s actual asset allocation and periodically rebalancesinvestments to targeted allocations when considered appropriate.  While the analysis considers recent fundperformance and historical returns, the assumption is primarily a long-term,prospective rate.  Management willcontinue to evaluate the expected rate of return at least annually, and willadjust as necessary.

Dependingon the assumptions and estimates used, pension expense could vary within arange of outcomes and have a material effect on OEH’s consolidated financialstatements.  Management is currentlymonitoring and evaluating the level of pension contributions based on variousfactors that include investment performance, actuarial valuation and taxdeductibility.  Management will evaluatethe need for additional contributions in 2007 based on these factors.  Management believes that the cash flows fromOEH’s operations will be sufficient to fund additional contributions, if any,to the plan.

##### *Foreign currency*

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

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

##### *Tax assets*

OEHmaintains a valuation allowance to reduce its gross deferred tax assets toreflect the amount, based upon OEH’s estimates of income that would likely berealized.  If OEH’s future operationsdiffered from those in the estimates, OEH may need to increase or decrease thevaluation allowance, which could affect its reported operations.

**RecentAccounting Pronouncements**

*FIN 48*

InJuly 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 48, “Accounting for Uncertainty in Income Taxes”, aninterpretation of SFAS No. 109 (“FIN 48”), which clarifies the accountingfor uncertainty in tax positions.  Theevaluation of a tax position under FIN 48 is a two-step process.  The first step is recognition, under whichtax positions taken or expected to be taken in a tax return 

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should berecognized only if those positions are more likely than not of being sustainedupon examination, based on the technical merits of the position.  In evaluating whether a tax position has metthe more likely than not recognition threshold, it should be presumed that theposition will be examined by the relevant taxing authority that would have fullknowledge of all relevant information. The second step is measurement, under which tax positions that meet therecognition criteria are measured at the largest amount of benefit that isgreater than 50% likely of being recognized upon ultimate settlement.

FIN 48also provides guidance on de-recognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective for fiscal yearsbeginning after December 15, 2006 and is effective for the Company in the firstquarter of the year beginning January 1, 2007.   See Note 11 to the Financial Statements.

*SAB 108*

InSeptember 2006, the SEC issued Staff Accounting Bulletin No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements” (“SAB 108”). This provides interpretive guidance on how the effects of the carryoveror reversal of prior year misstatements should be considered in quantifying acurrent year misstatement.  The SEC staffbelieves that registrants should quantify errors using both a balance sheet andan income statement approach and evaluate whether either approach results inquantifying a misstatement that, when all relevant quantitative and qualitativefactors are considered, is material.  SAB108 is effective for the Company’s fiscal year ending December 31, 2006, withearly application encouraged. SAB 108 was adopted with effect fromDecember 31, 2006.

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

InSeptember 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS157”).  SFAS 157 addresses the need forincreased consistency in fair value measurements, defining fair value as theprice that would be received to sell an asset or paid to transfer a liability inan orderly transaction between market participants at the measurementdate.  It also establishes a frameworkfor measuring fair value and expands disclosure requirements.  SFAS 157 is effective for the Company’sfiscal year ending December 31, 2008. The Company is in the process of evaluating SFAS 157.

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

InSeptember 2006, the FASB issued SFAS No. 158, “Employers’ Accounting forDefined Benefit Pension and Other Post-retirement Plans — an amendment of FASBStatements No. 87, 88, 106, and 132(R)” (“SFAS 158”).  This statement requires an employer torecognize the over-funded or under-funded status of defined benefit pensionplans and post-retirement plans (other than a multi-employer plan) as an assetor liability in its statement of financial position and to recognize changes inthat funded status in the year in which the changes occur through comprehensiveincome.  SFAS 158 also requires anemployer to measure the funded status of a plan as of the date of its year-endstatement of financial position and requires disclosure in the notes tofinancial statements of certain additional information related to net periodicbenefit cost for the next fiscal year. SFAS 158 defines the funded status of a defined benefit plan as itsassets less its projected benefit obligation and defines the funded status of apost-retirement plan as its assets less its accumulated post-retirement benefitobligation.  Calendar year-end companiessuch as OEH, are required to adopt the recognition and disclosure provisions ofSFAS 158 as of December 31, 2006.  Themeasurement date provisions are not required to be adopted until 2008.  The Company adopted the recognition anddisclosure provisions of SFAS No. 158 with effect from December 31, 2006.  See Note 10 to the Financial Statements.

*SFAS 159*

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities – Including an Amendment of FASBStatement No. 115” (“SFAS 159”).  Thisstandard permits an entity to choose to measure many financial instruments andcertain other items at fair value.  Mostof the provisions in SFAS 159 are elective; however, the amendment to SFAS No.115, “Accounting for Certain Investments in Debt and Equity Securities”,applies to all entities with available-for-sale and trading securities. Thefair value option established by SFAS 159 permits all entities to choose tomeasure eligible items at fair value at specified election dates.  A business entity will report unrealizedgains and losses on items for which the fair value option has been elected inearnings (or another performance indicator if the business entity does notreport earnings) at each subsequent reporting date.  The fair value option (a) may be appliedinstrument by instrument, with a few exceptions, such as investments otherwiseaccounted for by the equity method, (b) is irrevocable (unless a new electiondate occurs) and (c) is applied only to entire instruments and not to portionsof instruments. SFAS 159 is effective as of the beginning of an entity’s firstfiscal year that begins after November 15, 2007.  The adoption of SFAS 159 is not expected tohave any impact on OEH’s consolidated financial statements.

**ITEM 7A.****                                            Quantitativeand Qualitative Disclosures About Market Risk**

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

Themarket risk relating to interest rates arises mainly from the financingactivities of OEH.  Earnings are affectedby changes in interest rates on floating rate borrowings, principally based onU.S. dollar LIBOR and EURIBOR, and on short-term cash investments.  OEH management assesses market risk based onchanges in interest rates using a sensitivity analysis.  If interest rates increased by 10% with allother variables held constant, annual net finance costs of OEH would haveincreased by approximately $3,600,000 based on borrowings outstanding atDecember 31, 2006.

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

Nineof OEH’s owned hotels in 2006 operated with currencies linked to the euro, twooperated in South African rand, two in Australian dollars, one in Britishpounds sterling, one in Botswanan pula, one in Peruvian nuevo soles, one inThai bahts, one in Lao kips, and two in Indonesian rupees.  The Venice Simplon-Orient-Express,British Pullman and Northern Belle tourist trains operate primarily in Britishpounds sterling and currencies linked to the euro.  OEH faces exposure arising from the impact oftranslating its global foreign currency earnings into U.S. dollars, andanticipates this foreign exchange rate risk will remain a market exposure forthe foreseeable future.

OEH’sproperties match foreign currency earnings and costs to provide a natural hedgeagainst currency movements.  In addition,a significant proportion of the guests at OEH hotels located outside of theUnited States originate from the United States. When a foreign currency in which OEH operates devalues against the U.S.dollar, OEH has considerable flexibility to increase prices in local currency,or vice versa.  Management believes thatwhen these factors are combined, OEH does not face a material exposure to itsnet earnings from currency movements, although the reporting of OEH’s revenuesand costs translated into U.S. dollars can, from period to period, bematerially affected.

OEH managementuses a sensitivity analysis to assess the potential impact on net earnings ofchanges in foreign currency financial instruments from hypothetical changes inthe foreign currency exchange rates.  Theprimary assumption used in this model is a hypothetical 10% weakening orstrengthening of the foreign currencies against the U.S. dollar.  At December 31, 2006, as a result of thisanalysis, OEH management determined that the impact on foreign currencyfinancial instruments of a 10% change in foreign currency exchange rates inrelation to the U.S. dollar would be approximately $3,000,000 on OEH’s netearnings.

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**ITEM 8.                  FinancialStatements and Supplementary Data**

*Report ofIndependent Registered Public Accounting Firm*

Board ofDirectors and ShareholdersOrient-Express Hotels Ltd.Hamilton, Bermuda

Wehave audited the accompanying consolidated balance sheets of Orient-ExpressHotels Ltd. and subsidiaries (the “Company”) as of December 31, 2006 and 2005,and the related consolidated statements of operations, shareholders’ equity,and cash flows for each of the three years in the period ended December 31,2006.  Our audits also included thefinancial statement schedule listed in Item 15. These consolidated financial statements and the financial statement scheduleare the responsibility of the Company’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements and the financial statement schedule based on our audits.

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement.  Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our audits provide a reasonable basis forour opinion.

In ouropinion, such consolidated financial statements present fairly, in all materialrespects, the financial position of Orient-Express Hotels Ltd. and subsidiariesas of December 31, 2006 and 2005, and the results of their operations and theircash flows for each of the three years in the period ended December 31, 2006,in conformity with accounting principles generally accepted in the UnitedStates of America.  Also in our opinion,such financial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

Asdiscussed in Note 2, the accompanying 2004 and 2005 financial statements havebeen restated.

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Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2006, based on thecriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our reportdated March 1, 2007 expressed an unqualified opinion on management’s assessmentof the effectiveness of the Company’s internal control over financial reportingand an unqualified opinion on the effectiveness of the Company’s internalcontrol over financial reporting.
| /s/ Deloitte & Touche  LLP |   |
|--------------------------------|--------|
|                           |
| London, England.               |
| March 1, 2007                  |

 

61

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*Report ofIndependent Registered Public Accounting Firm*

Board of Directorsand ShareholdersOrient-Express Hotels Ltd.Hamilton, Bermuda

We have auditedmanagement’s assessment, in the accompanying Report on Internal Control overFinancial Reporting included in Item 9A—Controls and Procedures of this Form10-K Annual Report, that Orient-Express Hotels Ltd. and subsidiaries (the“Company”) maintained effective internal control over financial reporting as ofDecember 31, 2006, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  As described in Item 9A, management excluded from itsassessment the internal control over financial reporting at Pansea Hotels group,which was acquired on July 21, 2006 and whose financial statements constitute 4.6%of net and total assets, respectively, 1.3% of revenues, and 4.7% of net incomeof the consolidated financial statement amounts as of and for the year ended December31, 2006.  Accordingly, our audit did notinclude the internal control over financial reporting at the Pansea Hotelsgroup.  The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting.  Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects.  Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances.  We believe that our audit provides a reasonable basis forour opinions.

A company’sinternal control over financial reporting is a process designed by, or underthe supervision of, the company’s principal executive and principal financialofficers, or persons performing similar functions, and effected by thecompany’s board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and thepreparation of 

62

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financial statements forexternal purposes in accordance with generally accepted accountingprinciples.  A company’s internal control over financial reportingincludes those policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of theinherent limitations of internal control over financial reporting, includingthe possibility of collusion or improper management override of controls,material misstatements due to error or fraud may not be prevented or detectedon a timely basis.  Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to futureperiods are subject to the risk that the controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate. 

In our opinion,management’s assessment that the Company maintained effective internal controlover financial reporting as of December 31, 2006, is fairly stated, in allmaterial respects, based on the criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission.  Also in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2006, based on the criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission.

We have alsoaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated financial statements andfinancial statement schedule as of and for the year ended December 31, 2006 ofthe Company and our report dated March 1, 2007 expressed an unqualified opinionon those consolidated financial statements and financial statement schedule andincluded an explanatory paragraph relating to the restatement discussed in Note2.
| /s/ Deloitte & Touche  LLP |   |
|--------------------------------|--------|
| London, England                |
| March 1, 2007                  |

 

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**Orient-Express Hotels Ltd. and SubsidiariesConsolidated Balance Sheets**
| ** **                                                                               | ** ** | **December 31,**                | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                               | ** ** | **2006**                             | ** ** | **2005  (restated)** | ** ** |
| ** **                                                                               | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                     |       |                                 |       |   |   |
| **Assets**                                                                               |       |                                 |       |   |   |
| Cash and cash  equivalents                                                               |       | $                                    | 79,318     |   | $ | 38,397 |   |
| Accounts  receivable, net of allowances of $1,299 and $980                               |       | 74,327                               |       | 59,061 |   |
| Due from related  parties                                                                |       | 19,939                               |       | 17,549 |   |
| Prepaid expenses  and other                                                              |       | 9,485                                |       | 13,061 |   |
| Inventories                                                                              |       | 35,789                               |       | 29,636 |   |
| Real estate  assets                                                                      |       | 35,821                               |       | 12,149 |   |
| Total current  assets                                                                    |       | 254,679                              |       | 169,853 |   |
|                                                                                     |       |                                 |       |   |   |
| Property, plant  and equipment, net of accumulated depreciation of $211,136 and $184,479 |       | 1,183,400                            |       | 1,017,175 |   |
| Investments                                                                              |       | 130,124                              |       | 129,681 |   |
| Goodwill                                                                                 |       | 121,651                              |       | 94,390 |   |
| Other intangible  assets                                                                 |       | 20,149                               |       | 7,100 |   |
| Other assets                                                                             |       | 41,660                               |       | 33,967 |   |
|                                                                                     |       | $                                    | 1,751,663  |   | $ | 1,452,166 |   |
| **Liabilities  and Shareholders’ Equity**                                           |       |                                 |       |   |   |
| Working capital  facilities                                                              |       | $                                    | 46,590     |   | $ | 47,108 |   |
| Accounts payable                                                                         |       | 26,227                               |       | 22,680 |   |
| Due to related  parties                                                                  |       | 1,249                                |       | 7,374 |   |
| Accrued  liabilities                                                                     |       | 55,916                               |       | 43,545 |   |
| Deferred revenue                                                                         |       | 25,501                               |       | 19,339 |   |
| Current portion  of long-term debt and capital leases                                    |       | 83,397                               |       | 72,151 |   |
| Total current  liabilities                                                               |       | 238,880                              |       | 212,197 |   |
|                                                                                     |       |                                 |       |   |   |
| Long-term  debt and obligations under capital leases                                     |       | 586,300                              |       | 496,156 |   |
| Liability for  pension benefit                                                           |       | 8,677                                |       | — |   |
| Other  liabilities                                                                       |       | 2,330                                |       | — |   |
| Deferred income  taxes                                                                   |       | 106,598                              |       | 89,164 |   |
|                                                                                     |       | 942,785                              |       | 797,517 |   |
| Minority  interest                                                                       |       | 1,882                                |       | 4,153 |   |
|                                                                                     |       |                                 |       |   |   |
| Shareholders’  equity:                                                              |       |                                 |       |   |   |
| Preferred shares $0.01 par value (30,000,000 shares  authorized, issued nil)             |       | —                               |       | — |   |
| Class A common shares $0.01 par value (120,000,000  shares authorized):                  |       |                                 |       |   |   |
| Issued – 42,196,350 (2005 - 39,399,750)                                             |       | 422                                  |       | 393 |   |
| Class B common shares $0.01 par value (120,000,000  shares authorized):                  |       |                                 |       |   |   |
| Issued – 18,044,478 (2005 – 18,044,478)                                        |       | 181                                  |       | 181 |   |
| Additional  paid-in capital                                                              |       | 509,762                              |       | 404,923 |   |
| Retained  earnings                                                                       |       | 301,785                              |       | 266,093 |   |
| Accumulated  other comprehensive loss                                                    |       | (4,973                               | )          | (20,913 | ) |
| Less: reduction  due to class B common shares owned by a subsidiary — 18,044,478    |       | (181                                 | )          | (181 | ) |
| Total  shareholders’ equity                                                         |       | 806,996                              |       | 650,496 |   |
| Commitments and  contingencies                                                           |       | —                               |       | — |   |
|                                                                                     |       | $                                    | 1,751,663  |   | $ | 1,452,166 |   |

 

See notes toconsolidated financial statements.

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**Orient-Express Hotels Ltd. and SubsidiariesStatements of Consolidated Operations**
| **Year ended December 31,**                                        | ** ** | **2006**                                                                           | ** ** | **2005  (restated)** | ** ** | **2004  (restated)** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                        | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
|                                                                              |       |                                                                               |       |                 |       |                 |       |
| Revenue                                                                           |       | $                                                                                  | 492,804    |                 | $          | 433,147              |       | $ | 357,284 |   |
|                                                                              |       |                                                                               |       |                 |       |                 |       |
| Expenses:                                                                         |       |                                                                               |       |                 |       |                 |       |
| Depreciation and amortization                                                     |       | 35,676                                                                             |       | 34,087               |       | 28,349               |       |
| Operating                                                                         |       | 232,841                                                                            |       | 205,291              |       | 175,547              |       |
| Selling, general and administrative                                               |       | 146,198                                                                            |       | 134,108              |       | 114,474              |       |
| Total expenses                                                                    |       | 414,715                                                                            |       | 373,486              |       | 318,370              |       |
|                                                                              |       |                                                                               |       |                 |       |                 |       |
| Earnings from  operations before net finance costs and gain on sale of investment |       | 78,089                                                                             |       | 59,661               |       | 38,914               |       |
|                                                                              |       |                                                                               |       |                 |       |                 |       |
| Gain on sale of  investment                                                       |       | 6,619                                                                              |       | —               |       | —               |       |
|                                                                              |       |                                                                               |       |                 |       |                 |       |
| Interest  expense, net                                                            |       | (44,510                                                                            | )          | (30,153              | )          | (19,948              | )          |
| Foreign  currency, net                                                            |       | (4,610                                                                             | )          | 5,065                |       | 5,515                |       |
| Net finance  costs                                                                |       | (49,120                                                                            | )          | (25,088              | )          | (14,433              | )          |
|                                                                              |       |                                                                               |       |                 |       |                 |       |
| Earnings before  income taxes and earnings from unconsolidated subsidiaries       |       | 35,588                                                                             |       | 34,573               |       | 24,481               |       |
|                                                                              |       |                                                                               |       |                 |       |                 |       |
| Provision for  income taxes                                                       |       | 7,791                                                                              |       | 4,209                |       | 2,347                |       |
|                                                                              |       |                                                                               |       |                 |       |                 |       |
| Earnings before  earnings from unconsolidated companies                           |       | 27,797                                                                             |       | 30,364               |       | 22,134               |       |
|                                                                              |       |                                                                               |       |                 |       |                 |       |
| Earnings from  unconsolidated companies net of tax                                |       | 11,970                                                                             |       | 11,175               |       | 9,084                |       |
|                                                                              |       |                                                                               |       |                 |       |                 |       |
| Net earnings                                                                      |       | $                                                                                  | 39,767     |                 | $          | 41,539               |       | $ | 31,218 |   |
|                                                                              |       |                                                                               |       |                 |       |                 |       |
| Earnings per share:                                                               |       |                                                                               |       |                 |       |                 |       |
| Basic                                                                             |       | $                                                                                  | 0.98       |                 | $          | 1.09                 |       | $ | 0.91 |   |
| Diluted                                                                           |       | $                                                                                  | 0.97       |                 | $          | 1.08                 |       | $ | 0.91 |   |
|                                                                              |       |                                                                               |       |                 |       |                 |       |
| Dividends per share                                                               |       | $                                                                                  | 0.10       |                 | $          | 0.10                 |       | $ | 0.10 |   |

op

See notes to consolidatedfinancial statements

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**Orient-Express Hotels Ltd. and SubsidiariesStatements of Consolidated Cash Flows**
| ** **                                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                                   | ** ** | **2005  (restated)** | ** ** | **2004  (restated)** | ** ** |
| ** **                                                                                 | ** ** | **(Dollars in thousands)**       | ** ** |
|                                                                                       |       |                                       |       |   |   |   |   |
| Cash flows from  operating activities:                                                     |       |                                       |       |   |   |   |   |
| Net earnings                                                                               |       | $                                          | 39,767     |   | $ | 41,539 |   | $ | 31,218 |   |
|                                                                                       |       |                                       |       |   |   |   |   |
| Adjustment to reconcile net earnings to net cash  provided by operating activities:        |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                              |       | 35,676                                     |       | 31,085 |   | 26,073 |   |
| Amortization and write-off of finance costs                                                |       | 5,579                                      |       | 3,002 |   | 2,276 |   |
| Undistributed earnings of unconsolidated companies                                         |       | (7,011                                     | )          | (2,830 | ) | (3,588 | ) |
| (Gain)/loss from sale of investments and fixed  assets                                     |       | (7,920                                     | )          | 268 |   | (1,286 | ) |
| Stock-based compensation                                                                   |       | 1,179                                      |       | 1,249 |   | 1,391 |   |
| Other non-cash items                                                                       |       | 1,875                                      |       | (1,146 | ) | (1,515 | ) |
| Change in deferred tax                                                                     |       | (2,187                                     | )          | (5,584 | ) | (1,249 | ) |
| Change in assets and liabilities, net of effects  from acquisition of subsidiaries:        |       |                                       |       |   |   |   |   |
| Increase in accounts receivable, prepaid expenses  and other                               |       | (10,835                                    | )          | (29,039 | ) | (9,220 | ) |
| Increase in inventories                                                                    |       | (4,075                                     | )          | (2,605 | ) | (1,208 | ) |
| Increase in real estate assets held for sale                                               |       | (12,821                                    | )          | (7,330 | ) | — |   |
| Increase in accounts payable, accrued liabilities,  deferred revenue and other liabilities |       | 10,211                                     |       | 7,562 |   | 9,673 |   |
| Dividends received from unconsolidated companies                                           |       | —                                     |       | 624 |   | — |   |
| Total adjustments                                                                          |       | 9,671                                      |       | (4,744 | ) | 21,347 |   |
| Net cash  provided by operating activities                                                 |       | 49,438                                     |       | 36,795 |   | 52,565 |   |
|                                                                                       |       |                                       |       |   |   |   |   |
| Cash flows from  investing activities:                                                     |       |                                       |       |   |   |   |   |
| Capital expenditures                                                                       |       | (111,794                                   | )          | (114,898 | ) | (65,104 | ) |
| Acquisitions and investments, net of cash acquired                                         |       | (47,350                                    | )          | (103,453 | ) | (38,479 | ) |
| Proceeds from sale of investments and fixed assets                                         |       | 12,999                                     |       | — |   | 3,003 |   |
|                                                                                       |       |                                       |       |   |   |   |   |
| Net cash used in  investing activities                                                     |       | (146,145                                   | )          | (218,351 | ) | (100,580 | ) |
|                                                                                       |       |                                       |       |   |   |   |   |
| Cash flows from  financing activities:                                                     |       |                                       |       |   |   |   |   |
| Net proceeds from/(repayments of) working capital  facilities and redrawable loans         |       | (3,558                                     | )          | (87,596 | ) | 21,336 |   |
| Issuance of common shares (net)                                                            |       | 99,220                                     |       | 121,889 |   | — |   |
| Stock options exercised                                                                    |       | 4,469                                      |       | 1,623 |   | — |   |
| Proceeds from long-term debt                                                               |       | 423,003                                    |       | 143,040 |   | 88,226 |   |
| Principal payments under long-term debt                                                    |       | (383,401                                   | )          | (39,552 | ) | (55,053 | ) |
| Payment of common share dividends                                                          |       | (4,075                                     | )          | (3,807 | ) | (3,425 | ) |
| Net cash  provided by financing activities                                                 |       | 135,658                                    |       | 135,597 |   | 51,084 |   |
|                                                                                       |       |                                       |       |   |   |   |   |
| Effect of  exchange rate changes on cash                                                   |       | 1,970                                      |       | (1,254 | ) | 1,194 |   |
| Net  increase/(decrease) in cash and cash equivalents                                      |       | 40,921                                     |       | (47,213 | ) | 4,263 |   |
| Cash and cash  equivalents at beginning of year                                            |       | 38,397                                     |       | 85,610 |   | 81,347 |   |
| Cash and cash  equivalents at end of year                                                  |       | $                                          | 79,318     |   | $ | 38,397 |   | $ | 85,610 |   |

 

See notes toconsolidated financial statements.

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**Orient-Express Hotels Ltd. andSubsidiariesStatements of Consolidated Shareholders’ Equity**
| **(Dollars in thousands)**                                         | ** ** | **Preferred  Shares  At Par  Value**                                                                                                                                                                           | ** ** | **Class A  Common  Shares  At Par  Value**                                                                                                                                              | ** ** | **Class B  Common  Shares  At Par  Value**                                                                                                                                              | ** ** | **Additional  Paid-In  Capital**                                                                                                                                                                                                            | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Common  Shares  Held By A  Subsidiary**                                                                                                                                                                                         | ** ** | **Total  Comprehensive  Income** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| Balance, January  1, 2004 (as reported)                                      |       | $                                                                                                                                                                                                                   | —     |                                                                                                                                                                                              | $          | 318                                                                                                                                                                                               |       | $                                                                                                                                                                                                                                           | 205        |                   | $          | 278,821                                     |       | $                                                                                                                                                                                                                                           | 252,484    |                             | $          | (19,203 | ) | $ | (181 | ) |   |   |
| Impact of  restatement                                                       |       |                                    — |       |                                 — |       |                                 — |       |                                        — |       | (51,916                | )          | 28,002                                      |       |                                        — |       |                             |       |
| Balance, January  1, 2004 (restated)                                         |       |                                    — |       | 318                                                                                                                                                                                               |       | 205                                                                                                                                                                                               |       | 278,821                                                                                                                                                                                                                                     |       | 200,568                |       | 8,799                                       |       | (181                                                                                                                                                                                                                                        | )          |                             |       |
| Stock based  compensation                                                    |       | —                                                                                                                                                                                                              |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                            |       | 1,391                                                                                                                                                                                                                                       |       | —                 |       | —                                      |       | —                                                                                                                                                                                                                                      |       |                             |       |
| Dividends on  common shares                                                  |       | —                                                                                                                                                                                                              |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                                                                      |       | (3,425                 | )          | —                                      |       | —                                                                                                                                                                                                                                      |       |                             |       |
| Comprehensive  income:                                                       |       |                                                                                                                                                                                                                |       |                                                                                                                                                                                              |       |                                                                                                                                                                                              |       |                                                                                                                                                                                                                                        |       |                   |       |                                        |       |                                                                                                                                                                                                                                        |       |                             |       |
| Net earnings on common shares for the year                                   |       | —                                                                                                                                                                                                              |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                                                                      |       | 31,218                 |       | —                                      |       | —                                                                                                                                                                                                                                      |       | $                                | 31,218     |   |
| Other comprehensive income                                                   |       | —                                                                                                                                                                                                              |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                                                                      |       | —                 |       | 3,566                                       |       | —                                                                                                                                                                                                                                      |       | 3,566                            |       |
|                                                                         |       |                                                                                                                                                                                                                |       |                                                                                                                                                                                              |       |                                                                                                                                                                                              |       |                                                                                                                                                                                                                                        |       |                   |       |                                        |       |                                                                                                                                                                                                                                        |       | $                                | 34,784     |   |
| Balance, December  31, 2004 (restated)                                       |       | —                                                                                                                                                                                                              |       | 318                                                                                                                                                                                               |       | 205                                                                                                                                                                                               |       | 280,212                                                                                                                                                                                                                                     |       | 228,361                |       | 12,365                                      |       | (181                                                                                                                                                                                                                                        | )          |                             |       |
|                                                                         |       |                                                                                                                                                                                                                |       |                                                                                                                                                                                              |       |                                                                                                                                                                                              |       |                                                                                                                                                                                                                                        |       |                   |       |                                        |       |                                                                                                                                                                                                                                        |       |                             |       |
| Issuance of class  A common shares in public offering, net of issuance costs |       | —                                                                                                                                                                                                              |       | 50                                                                                                                                                                                                |       | —                                                                                                                                                                                            |       | 121,839                                                                                                                                                                                                                                     |       | —                 |       | —                                      |       | —                                                                                                                                                                                                                                      |       |                             |       |
| Stock based  compensation                                                    |       | —                                                                                                                                                                                                              |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                            |       | 1,249                                                                                                                                                                                                                                       |       | —                 |       | —                                      |       | —                                                                                                                                                                                                                                      |       |                             |       |
| Stock options  exercised                                                     |       | —                                                                                                                                                                                                              |       | 1                                                                                                                                                                                                 |       | —                                                                                                                                                                                            |       | 1,623                                                                                                                                                                                                                                       |       | —                 |       | —                                      |       | —                                                                                                                                                                                                                                      |       |                             |       |
| Conversion of  class B to class A shares                                     |       | —                                                                                                                                                                                                              |       | 24                                                                                                                                                                                                |       | (24                                                                                                                                                                                               | )          | —                                                                                                                                                                                                                                      |       | —                 |       | —                                      |       | —                                                                                                                                                                                                                                      |       |                             |       |
| Dividends on  common shares                                                  |       | —                                                                                                                                                                                                              |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                                                                      |       | (3,807                 | )          | —                                      |       | —                                                                                                                                                                                                                                      |       |                             |       |
| Comprehensive  income:                                                       |       |                                                                                                                                                                                                                |       |                                                                                                                                                                                              |       |                                                                                                                                                                                              |       |                                                                                                                                                                                                                                        |       |                   |       |                                        |       |                                                                                                                                                                                                                                        |       |                             |       |
| Net earnings on common shares for the year                                   |       | —                                                                                                                                                                                                              |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                                                                      |       | 41,539                 |       | —                                      |       | —                                                                                                                                                                                                                                      |       | $                                | 41,539     |   |
| Other comprehensive loss                                                     |       | —                                                                                                                                                                                                              |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                                                                      |       | —                 |       | (33,278                                     | )          | —                                                                                                                                                                                                                                      |       | (33,278                          | )          |
|                                                                         |       |                                                                                                                                                                                                                |       |                                                                                                                                                                                              |       |                                                                                                                                                                                              |       |                                                                                                                                                                                                                                        |       |                   |       |                                        |       |                                                                                                                                                                                                                                        |       | $                                | 8,261      |   |
| Balance, December  31, 2005 (restated)                                       |       | —                                                                                                                                                                                                              |       | 393                                                                                                                                                                                               |       | 181                                                                                                                                                                                               |       | 404,923                                                                                                                                                                                                                                     |       | 266,093                |       | (20,913                                     | )          | (181                                                                                                                                                                                                                                        | )          |                             |       |
|                                                                         |       |                                                                                                                                                                                                                |       |                                                                                                                                                                                              |       |                                                                                                                                                                                              |       |                                                                                                                                                                                                                                        |       |                   |       |                                        |       |                                                                                                                                                                                                                                        |       |                             |       |
| Issuance of class  A common shares in public offering, net of issuance costs |       | —                                                                                                                                                                                                              |       | 25                                                                                                                                                                                                |       | —                                                                                                                                                                                            |       | 99,195                                                                                                                                                                                                                                      |       | —                 |       | —                                      |       | —                                                                                                                                                                                                                                      |       |                             |       |
| Stock based  compensation                                                    |       | —                                                                                                                                                                                                              |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                            |       | 1,179                                                                                                                                                                                                                                       |       | —                 |       | —                                      |       | —                                                                                                                                                                                                                                      |       |                             |       |
| Stock options  exercised                                                     |       | —                                                                                                                                                                                                              |       | 3                                                                                                                                                                                                 |       | —                                                                                                                                                                                            |       | 4,466                                                                                                                                                                                                                                       |       | —                 |       | —                                      |       | —                                                                                                                                                                                                                                      |       |                             |       |
| Dividends on  common shares                                                  |       | —                                                                                                                                                                                                              |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                                                                      |       | (4,075                 | )          | —                                      |       | —                                                                                                                                                                                                                                      |       |                             |       |
| Comprehensive  income:                                                       |       |                                                                                                                                                                                                                |       |                                                                                                                                                                                              |       |                                                                                                                                                                                              |       |                                                                                                                                                                                                                                        |       |                   |       |                                        |       |                                                                                                                                                                                                                                        |       |                             |       |
| Net earnings on common shares for the year                                   |       | —                                                                                                                                                                                                              |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                                                                      |       | 39,767                 |       | —                                      |       | —                                                                                                                                                                                                                                      |       | $                                | 39,767     |   |
| Other comprehensive income                                                   |       | —                                                                                                                                                                                                              |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                            |       | —                                                                                                                                                                                                                                      |       | —                 |       | 15,940                                      |       | —                                                                                                                                                                                                                                      |       | 15,940                           |       |
|                                                                         |       |                                                                                                                                                                                                                |       |                                                                                                                                                                                              |       |                                                                                                                                                                                              |       |                                                                                                                                                                                                                                        |       |                   |       |                                        |       |                                                                                                                                                                                                                                        |       | $                                | 55,707     |   |
| Balance, December 31,  2006                                                  |       | $                                                                                                                                                                                                                   | —     |                                                                                                                                                                                              | $          | 422                                                                                                                                                                                               |       | $                                                                                                                                                                                                                                           | 181        |                   | $          | 509,762                                     |       | $                                                                                                                                                                                                                                           | 301,785    |                             | $          | (4,973 | ) | $ | (181 | ) |   |   |

 

Seenotes to consolidated financial statements.

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**Orient-Express Hotels Ltd. and SubsidiariesNotes to Consolidated Financial Statements**

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

*(a)**                               Business*

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

AtDecember 31, 2006, OEH owned or invested in 39 deluxe hotels and resortslocated in the United States, Mexico, Caribbean, Europe, southern Africa, SouthAmerica, Southeast Asia, Australia and South Pacific, two restaurants in NewYork and Buenos Aires, six tourist trains in Europe, Southeast Asia and Peru,and a river cruiseship in Burma and five canalboats in France.  

*(b)**                               Basisof presentation*

The accompanyingconsolidated financial statements reflect the results of operations, financialposition and cash flows of the Company and all its majority-ownedsubsidiaries.  The consolidated financialstatements have been prepared using the historical basis in the assets andliabilities and the historical results of operations directly attributable toOEH, and all intercompany accounts and transactions between the Company and itssubsidiaries have been eliminated. Unconsolidated companies that are 20% to 50% owned are accounted for onan equity basis. 

Cash and cashequivalents include all cash balances and highly-liquid investments havingoriginal maturities of three months or less.

Certain items in2005 and 2004 have been reclassified to conform to the current year’spresentation.

“FASB” meansFinancial Accounting Standards Board and “APB” means Accounting PrinciplesBoard, the FASB’s predecessor.  “SFAS”means Statement of Financial Accounting Standards of the FASB, and “FIN” or“EITF” means an accounting interpretation of the FASB.  “SAB” means Staff Accounting Bulletin of theSecurities and Exchange Commission.

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*(c)**                                Foreigncurrency*

The functionalcurrency for each of the Company’s foreign subsidiaries is the applicable localcurrency, except for Russia, French West Indies, Mexico, Brazil and Peru wherethe functional currency is U.S. dollars.

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

*(d)**                               Estimates*

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period.  Estimates include,among others, the allowance for doubtful accounts, depreciation andamortization, carrying value of assets including intangible assets, employeebenefits, taxes and contingencies. Actual results may differ from those estimates. 

*(e)**                                Stock-basedcompensation*

OEH had previouslyaccounted for stock-based compensation under the guidelines of APB Opinion No.25, “Accounting for Stock Issued to Employees”, and followed thedisclosure-only provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation” as amended by SFAS No. 148, “Accounting for Stock-BasedCompensation — Transition and Disclosure”.  

With effect fromJanuary 1, 2005, the Company adopted SFAS No. 123R, “Share-Based Payment”, andchose the modified prospective application as its transition method.  Prior to January 1, 2005, the Company disclosedthe pro-forma impact to net income had all previously issued 

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stock-based compensationbeen expensed under the provisions of SFAS No. 123.  Upon adoption of SFAS No. 123R, allpreviously issued stock-based compensation vesting during the 12 months endedDecember 31, 2005 and those issued during the current year have been reflectedin OEH’s net earnings.  This resulted inan expense in the 12 months ended December 31, 2006 of $1,179,000(2005—$1,249,000).  See Note 14. 

OEH had previouslyaccounted for its stock-based compensation plans under APB Opinion No.25.  Had compensation cost for theCompany’s stock option plans been determined based on fair values as of thedates of grant, OEH’s net earnings and earnings per share would have beenreported as follows (dollars in thousands, except per share amounts): 
|                                                                                                                       | ** ** | **December   31, 2004  (restated)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
|                                                                                                                  |       |                                          |       |
| Net earnings:                                                                                                         |       |                                          |       |
| As reported on common shares                                                                                          |       | $                                             | 31,218     |   |
| Add: Stock-based compensation expense included  in reported net income, net of related tax effects               |       | 1,514                                         |       |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method, net of related tax |       | (897                                          | )          |
| Pro forma                                                                                                             |       | $                                             | 31,835     |   |
| Basic and  diluted earnings per share:                                                                                |       |                                          |       |
| As reported                                                                                                           |       | $                                             | 0.91       |   |
| Pro forma                                                                                                             |       | $                                             | 0.93       |   |

 

*(f)**                                   Revenuerecognition*

Hotel andrestaurant revenues are recognized when the rooms are occupied and the servicesare performed.  Tourist train and cruiserevenues are recognized upon commencement of the journey.  Deferred revenue consisting of deposits paidin advance is recognized as revenue when the services are performed for hotelsand restaurants and upon commencement of tourist train and cruisejourneys.  Revenues under managementcontracts are recognized based upon the attainment of certain financialresults, primarily revenue and operating earnings, in each contract asdefined.  

Revenue from realestate activities represents the proceeds from sales of undeveloped lands anddeveloped properties that OEH is holding for sale.  Profit from sales of land and developedproperties is recognized upon closing using the full accrual method ofaccounting, provided that all the requirements prescribed by SFAS No. 66,“Accounting for Sales of Real Estate”, have been met.  No revenue has been recognized for other realestate properties under development 

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because the criteria forrevenue recognition set by SFAS No. 66 have not been met.

*(g)**                               Earningsfrom unconsolidated companies*

Earnings fromunconsolidated companies include OEH’s share of the net earnings of its equityinvestments as well as interest income related to loans and advances to theequity investees amounting to $10,700,000 in 2006 (2005—$9,752,000,2004—$8,165,000). 

*(h)**                               Marketingcosts*

Marketing costsare expensed as incurred (except in the case of real estate projects, see Note1(o)) and are reported in selling, general and administrative expenses.  Marketing costs include costs of advertisingand other marketing activities.  Thesecosts were $34,662,000 in 2006 (2005—$32,405,000; 2004—$26,780,000). 

*(i)**                                  Interestexpense, net*

OEH capitalizesinterest during the construction of assets. Interest expense, net excludesinterest which has been capitalized in the amount of $1,735,000 in 2006(2005—$448,000, 2004—$1,708,000). 

*(j)**                                   Foreigncurrency, net*

Foreign currency,net consists entirely of foreign currency exchange transaction losses of$4,610,000 in 2006 (2005 — a gain of $5,065,000; 2004 – a gain of $5,515,000). 

*(k)**                               Incometaxes*

Deferred income taxesresult from temporary differences between the financial reporting and tax basesof assets and liabilities.  Deferredtaxes are recorded at enacted statutory rates and are adjusted as enacted rateschange.  Classification of deferred taxassets and liabilities corresponds with the classification of the underlyingassets and liabilities giving rise to the temporary differences or the periodof expected reversal, as applicable.  Avaluation allowance is established, when necessary, to reduce deferred tax assetsto the amount that is more likely than not to be realized based on availableevidence. 

*(l)**                                  Earningsper share*

Basic earnings pershare exclude dilution and are computed by dividing net earnings available tocommon 

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shareholders by theweighted average number of class A and B common shares outstanding for theperiod.  The number of shares used incomputing basic earnings per share was 40,692,000 for the year endedDecember 31, 2006 (2005—38,214,000; 2004—34,250,000).  The number of shares used in computingdiluted earnings per share was 40,960,000 for the year ended December 31,2006 (2005—38,534,000; 2004—34,367,000). There were no anti-dilutive securitiesfor any of the years. 

The followingtable is a reconciliation of the net earnings and per share amounts used in thecalculation of basic earnings per share and diluted earnings per share (inthousands, except per share amounts):
| ** **                       | ** ** | **Net  Earnings  (restated)** | ** ** | **Number of  Shares** | ** ** | **Per Share  Amount  (restated)** | ** ** |
|----------------------------------|------------|-------------------------------|------------|----------------------------|------------|----------------------------------------|------------|
| Year ended  December 31, 2006:   |       |                          |       |                       |       |                                   |       |
| Basic earnings per share         |       | $                             | 39,767     |                       | 40,692     |                                   | $          | 0.98 |   |
| Effect of dilutive stock options |       | —                        |       | 268                        |       | (0.01                                  | )          |
| Diluted earnings per share       |       | $                             | 39,767     |                       | 40,960     |                                   | $          | 0.97 |   |
|                             |       |                          |       |                       |       |                                   |       |
| Year ended  December 31, 2005:   |       |                          |       |                       |       |                                   |       |
| Basic earnings per share         |       | $                             | 41,539     |                       | 38,214     |                                   | $          | 1.09 |   |
| Effect of dilutive stock options |       | —                        |       | 320                        |       | $                                      | (0.01      | ) |
| Diluted earnings per share       |       | $                             | 41,539     |                       | 38,534     |                                   | $          | 1.08 |   |
|                             |       |                          |       |                       |       |                                   |       |
| Year ended  December 31, 2004:   |       |                          |       |                       |       |                                   |       |
| Basic earnings per share         |       | $                             | 31,218     |                       | 34,250     |                                   | $          | 0.91 |   |
| Effect of dilutive stock options |       | —                        |       | 117                        |       | —                                 |       |
| Diluted earnings  per share      |       | $                             | 31,218     |                       | 34,367     |                                   | $          | 0.91 |   |

 

*(m)**                             Inventories*

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

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

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

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

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| **Description**                                           | ** ** | **Useful lives**                              |
|-----------------------------------------------------------|------------|-----------------------------------------------|
|                                                      |       |                                          |
| Buildings                                                 |       | Up to 60 years and 10% residual value         |
| Tourist trains                                            |       | Up to 50 years                                |
| River cruiseship  and canalboats                          |       | 25 years                                      |
| Furniture,  fixtures and equipment                        |       | 5-25 years                                    |
| Equipment under  capital lease and leasehold improvements |       | Lesser of initial lease term or economic life |

 

*(o)**                               Realestate assets*

Real estate assetsconsist primarily of inventory costs of real estate property developments.  Expenditures directly related to non-hotelreal estate developments, such as real estate taxes and capital improvements,are capitalized.  Inventory costs of realestate development include construction costs and ancillary costs, which areexpensed as real estate is sold.  OEHalso capitalizes direct costs attributable to the sales and marketing of theproperties until revenue recognition commences. If a sales contract is cancelled, unrecoverable direct selling costs areexpensed upon cancellation.  Landproperty development costs are accumulated by project and are allocated toindividual residential units, principally using the relative sales valuemethod.

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

In accordance withSFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”,OEH management reviews long-lived assets whenever events or changes incircumstances indicate that the carrying amount of the assets may not berecoverable.  In the event that animpairment occurs, OEH records a charge to income calculated as the excess ofthe asset’s carrying value over the estimated fair value.  

*(q)**                               Investments*

Investmentsinclude equity interests in and advances to unconsolidated companies. 

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*(r)**                                 Goodwilland other intangible assets*

In accordance withSFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill must beevaluated annually to determine impairment. Goodwill is not amortized.  The goodwill impairment testing under SFASNo. 142 is performed in two steps, first, the determination of impairment basedupon the fair value of a reporting unit as compared with its carrying valueand, second, if there is an implied impairment, the measurement of the amountof impairment loss is determined by comparing the implied fair value ofgoodwill with the carrying amount of that goodwill.  Impairment testing is performed annually atyear end.  At December 31, 2006, there wasno impairment.  Other intangible assetswith indefinite useful lives are also reviewed for impairment in accordancewith SFAS No. 142.

*(s)**                                 Concentrationof credit risk*

Due to the natureof the leisure industry, concentration of credit risk with respect to tradereceivables is limited.  OEH’s customerbase is comprised of numerous customers across different geographic areas. 

*(t)**                                  Derivativefinancial instruments*

If the derivativeis designated as a fair value hedge, the changes in the fair value of thederivative and of the hedged item attributable to the hedged risk arerecognized in earnings.  If thederivative is designated as a cash flow hedge, the effective portions ofchanges in the fair value of the derivative are recorded as a component ofaccumulated other comprehensive income/(loss) in shareholders’ equity and arerecognized in the statement of consolidated operations when the hedged itemaffects earnings.  The ineffectiveportion of a hedging derivative’s change in the fair value will be immediatelyrecognized in earnings.  If thederivative is not designated as a hedge for accounting purposes, the change inits fair value is recorded in earnings**.**

OEH managementformally documents all relationships between hedging instruments and hedgeditems, as well as its risk management objectives and strategies for undertakingvarious hedge transactions.  OEH linksall hedges that are designated as fair value hedges to specific assets orliabilities on the balance sheet or to specific firm commitments.  OEH links all hedges that are designated ascash flow hedges to forecasted transactions or to floating rate liabilities onthe balance sheet.  OEH management alsoassesses, both at the inception of the hedge and on an ongoing basis, whetherthe derivatives that are used in hedging transactions are highly effective inoffsetting changes in fair values or cash flows of hedged items.  Should it be 

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determined that aderivative is not highly effective as a hedge, OEH will discontinue hedgeaccounting prospectively.

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

*(u)**                               Variableinterest entities*

Management’sevaluation of OEH’s joint venture agreements and management contracts hasidentified one joint venture investment, a cruise business called Afloat inFrance (see Note 3(b)), in which OEH has variable interests due to the terms ofthe investment in the entity’s activities and the structure of the financialsupport provided to the entity.  Theterms of the joint venture agreement do not expose OEH to the majority ofexpected cash flow variability and, therefore, this entity is not consolidated.  OEH’s maximum exposure to loss is aninvestment balance in Afloat in France which was $610,000 at December 31, 2006.

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*(v)**                                Recentaccounting pronouncements*

*FIN 48*

See Note 11regarding FIN 48 of the FASB, “Accounting for Uncertainty in Income Taxes”.

*SAB 108*

InSeptember 2006, the SEC issued Staff Accounting Bulletin No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements” (“SAB 108”). This provides interpretive guidance on how the effects of the carryoveror reversal of prior year misstatements should be considered in quantifying acurrent year misstatement.  The SEC staffbelieves that registrants should quantify errors using both a balance sheet andan income statement approach and evaluate whether either approach results inquantifying a misstatement that, when all relevant quantitative and qualitativefactors are considered, is material.  SAB108 is effective for the Company’s fiscal year ending December 31, 2006, withearly application encouraged. The adoption of SAB 108 did not have a material impact on OEH’s results of operations orfinancial position.

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

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”).  SFAS 157 addresses the need for increasedconsistency in fair value measurements, defining fair value as the price thatwould be received to sell an asset or paid to transfer a liability in anorderly 

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transaction betweenmarket participants at the measurement date. It also establishes a framework for measuring fair value and expandsdisclosure requirements.  SFAS 157 iseffective for the Company’s fiscal year ending December 31, 2008.  The Company is in the process of evaluatingthe effects of the adoption of SFAS 157.

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

In September 2006,the FASB issued SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Post-retirement Plans – an amendment of FASB Statements No.87, 88, 106, and 132(R)” (“SFAS 158”). This statement requires an employer to recognize the over-funded orunder-funded status of defined benefit pension plans and post-retirement plans(other than a multi-employer plan) as an asset or liability in its statement offinancial position and to recognize changes in that funded status in the yearin which the changes occur through comprehensive income.  SFAS 158 also requires an employer to measurethe funded status of a plan as of the date of its year-end statement offinancial position and requires disclosure in the notes to financial statementsof certain additional information related to net periodic benefit cost for thenext fiscal year.  SFAS 158 defines thefunded status of a defined benefit plan as its assets less its projectedbenefit obligation and defines the funded status of a post-retirement plan asits assets less its accumulated post-retirement benefit obligation.  Calendar year-end companies such as OEH, arerequired to adopt the recognition and disclosure provisions of SFAS 158 as ofDecember 31, 2006.  The measurement dateprovisions are not required to be adopted until 2008.  The Company adopted the recognition anddisclosure provisions of SFAS No. 158 with effect from December 31, 2006. SeeNote 10.

*SFAS 159*

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities – Including an Amendment of FASB Statement No. 115”(“SFAS 159”).  This standard permits anentity to choose to measure many financial instruments and certain other itemsat fair value.  Most of the provisions inSFAS 159 are elective; however, the amendment to SFAS No. 115, “Accounting forCertain Investments in Debt and Equity Securities”, applies to all entitieswith available-for-sale and trading securities. The fair value optionestablished by SFAS 159 permits all entities to choose to measure eligibleitems at fair value at specified election dates.  A business entity will report unrealizedgains and losses on items for which the fair value option has been elected inearnings (or another performance 

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indicator if the businessentity does not report earnings) at each subsequent reporting date.  The fair value option (a) may be appliedinstrument by instrument, with a few exceptions, such as investments otherwiseaccounted for by the equity method, (b) is irrevocable (unless a new electiondate occurs) and (c) is applied only to entire instruments and not to portionsof instruments. SFAS 159 is effective as of the beginning of an entity’s firstfiscal year that begins after November 15, 2007.  The adoption of SFAS 159 is not expected tohave any impact on OEH’s consolidated financial statements.

*****(w)**********                            **********Other significant events*****

****Due to hurricanes Katrina and Rita, the Windsor Court Hotelin New Orleans suffered damage and remained closed throughout the period fromAugust 29 to October 31, 2005.  TheMaroma Resort and Spa in Mexico also suffered damage as a result of hurricanesEmily and Wilma and remained closed throughout the period from July 18, 2005(when the hotel closed for refurbishment) through to February 20, 2006.  OEH’s insurance covers property damage andloss of earnings under business interruption for up to 12 months after theevent.  Earnings from operations includewithin revenue an insurance recovery of $2,319,000 (2005-$4,900,000) forbusiness interruption for the Windsor Court Hotel.  Earnings from operations include withinrevenue an insurance recovery of $4,906,000 (2005-$2,500,000) for businessinterruption for the Maroma Resort and Spa. The property damage claims submitted as at December 31, 2006 amounted toapproximately $8,000,000 for the Windsor Court Hotel and approximately$6,000,000 for the Maroma Resort and Spa. The excess of the property damage claims submitted over the lossesrecorded represents a contingent gain and will only be recognized in thefinancial statements when realized.****

**2.             Restatement**

In adopting SAB108 effective for the Company’s fiscal year ended December 31, 2006, OEHmanagement undertook to re-evaluate certain misstatements identified in prioryears’ financial statements and as part of the financial closing processmanagement identified additional errors in the historical financial statementsas described below. Consequently management has restated the consolidatedfinancial statements presented as of December 31, 2005 and for the years endedDecember 31, 2005 and 2004.  Seebeginning shareholders’ equity for the impact of the restatement for periodsprior to 2004. The impact of the restated financial results for the first,second and third quarterly periods of 2006 and the quarterly periods of 2005are also presented in the summary of quarterly earnings (unaudited) below*.*

The nature andimpact of these adjustments are described below. The impact of theseadjustments is shown in the following tables.

*Deferred tax on fair valueadjustments on prior acquisitions and other temporary differences*

OEH did not recordcertain deferred tax liabilities, arising principally on the fair value adjustmentsmade on the acquisition of subsidiaries between 1976 and 2002 as well as onother temporary differences in respect of land and buildings. As a result ofthis error, retained earnings were overstated by $23,914,000 (cumulatively) atDecember 31, 2003 (in respect of amortization of the related goodwillarising on the restatement of the deferred taxes in the period up to theintroduction of SFAS No 142 “Goodwill and Other Intangible Assets” in 2001,offset by the release from the deferred tax provision as the properties weredepreciated), and net income was understated by $204,000 in 2004 andunderstated by $806,000 in 2005. As a result of the correction of these errors,OEH recorded a $38,623,000 increase in goodwill not previously recognized as ofDecember 31, 2005 with a corresponding increase of $61,527,000 in the deferredtax liability and a decrease of $22,904,000 in retained earnings to correctthese misstatements.

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*Foreign currency transactionsaccounting*

OEH did notproperly apply the provisions of SFAS No. 52, “Foreign Currency Translation”,regarding accounting for foreign exchange transaction prior to January 1, 2005.The effect of certain foreign currency transactions was recorded in othercomprehensive income instead of in the statement of consoldiated earnings. OEHrecorded a $25,210,000 increase in the accumulated other comprehensive incomebalance as of January 1, 2005 with a corresponding decrease in retainedearnings to correct this misstatement. The impact of the misstatement on netearnings for the year ended December 31, 2004 was an understatement of incomeby $2,792,000.

The followingtables present the impact of the restatement adjustments on OEH’s statements ofconsolidated operations for the years ended December 31, 2005 and 2004 (dollarsin thousands):

79

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* *
| ** **                                                               | ** ** | **For the year ended December 31, 2005** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                               | ** ** | **As   previously   reported**                               | ** ** | **Deferred  tax   matters** | ** ** | **Foreign   currency   matters** | ** ** | **Restated** | ** ** |
| Revenue                                                                  |       | $                                                                      | 433,147    |   | $ | — |   | $ | — |   | $ | 433,147 |   |
|                                                                     |       |                                                                   |       |   |   |   |   |   |   |
| Expenses:                                                                |       |                                                                   |       |   |   |   |   |   |   |
| Depreciation and amortization                                            |       | 34,087                                                                 |       | — |   | — |   | 34,087 |   |
| Operating                                                                |       | 205,291                                                                |       | — |   | — |   | 205,291 |   |
| Selling, general and administrative                                      |       | 134,108                                                                |       | — |   | — |   | 134,108 |   |
| Total expenses                                                           |       | 373,486                                                                |       | — |   | — |   | 373,486 |   |
|                                                                     |       |                                                                   |       |   |   |   |   |   |   |
| Earnings from  operations before net finance costs                       |       | 59,661                                                                 |       | — |   | — |   | 59,661 |   |
|                                                                     |       |                                                                   |       |   |   |   |   |   |   |
| Interest  expense, net                                                   |       | (30,153                                                                | )          | — |   | — |   | (30,153 | ) |
| Foreign  currency, net                                                   |       | 5,065                                                                  |       | — |   | — |   | 5,065 |   |
| Net finance  costs                                                       |       | (25,088                                                                | )          | — |   | — |   | (25,088 | ) |
|                                                                     |       |                                                                   |       |   |   | — |   |   |   |
| Earnings before  income taxes and earnings from unconsolidated companies |       | 34,573                                                                 |       | — |   | — |   | 34,573 |   |
|                                                                     |       |                                                                   |       |   |   |   |   |   |   |
| Provision for  income taxes                                              |       | 5,015                                                                  |       | (806 | ) | — |   | 4,209 |   |
|                                                                     |       |                                                                   |       |   |   |   |   |   |   |
| Earnings before  earnings from unconsolidated companies                  |       | 29,558                                                                 |       | 806 |   | — |   | 30,364 |   |
|                                                                     |       |                                                                   |       |   |   |   |   |   |   |
| Earnings from  unconsolidated companies, net of tax                      |       | 11,175                                                                 |       | — |   | — |   | 11,175 |   |
|                                                                     |       |                                                                   |       |   |   |   |   |   |   |
| Net earnings                                                             |       | $                                                                      | 40,733     |   | $ | 806 |   | $ | — |   | $ | 41,539 |   |
|                                                                     |       |                                                                   |       |   |   |   |   |   |   |
| Earnings per  share:                                                     |       |                                                                   |       |   |   |   |   |   |   |
| Basic                                                                    |       | $                                                                      | 1.07       |   | $ | 0.02 |   | $ | — |   | $ | 1.09 |   |
| Diluted                                                                  |       | $                                                                      | 1.06       |   | $ | 0.02 |   | $ | — |   | $ | 1.08 |   |

 

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* *
| ** **                                                               | ** ** | **For the year ended December 31, 2004** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                               | ** ** | **As   previously   reported**                               | ** ** | **Deferred  tax  matters** | ** ** | **Foreign   currency   matters** | ** ** | **Restated** | ** ** |
| Revenue                                                                  |       | $                                                                      | 357,284    |   | $ | — |   | $ | — |   | $ | 357,284 |   |
|                                                                     |       |                                                                   |       |   |   |   |   |   |   |
| Expenses:                                                                |       |                                                                   |       |   |   |   |   |   |   |
| Depreciation and amortization                                            |       | 28,349                                                                 |       | — |   | — |   | 28,349 |   |
| Operating                                                                |       | 175,547                                                                |       | — |   | — |   | 175,547 |   |
| Selling, general and administrative                                      |       | 114,474                                                                |       | — |   | — |   | 114,474 |   |
| Total expenses                                                           |       | 318,370                                                                |       | — |   |   |   | 318,370 |   |
|                                                                     |       |                                                                   |       |   |   |   |   |   |   |
| Earnings from  operations before net finance costs                       |       | 38,914                                                                 |       | — |   | — |   | 38,914 |   |
|                                                                     |       |                                                                   |       |   |   | — |   |   |   |
| Interest  expense, net                                                   |       | (19,948                                                                | )          | — |   | — |   | (19,948 | ) |
| Foreign  currency, net                                                   |       | 2,723                                                                  |       | — |   | 2,792 |   | 5,515 |   |
| Net finance  costs                                                       |       | (17,225                                                                | )          | — |   | 2,792 |   | (14,433 | ) |
|                                                                     |       |                                                                   |       |   |   |   |   |   |   |
| Earnings before  income taxes and earnings from unconsolidated companies |       | 21,689                                                                 |       | — |   | 2,792 |   | 24,481 |   |
|                                                                     |       |                                                                   |       |   |   |   |   |   |   |
| Provision for  income taxes                                              |       | 2,551                                                                  |       | (204 | ) | — |   | 2,347 |   |
|                                                                     |       |                                                                   |       |   |   |   |   |   |   |
| Earnings before  earnings from unconsolidated companies                  |       | 19,138                                                                 |       | 204 |   | 2,792 |   | 22,134 |   |
|                                                                     |       |                                                                   |       |   |   |   |   |   |   |
| Earnings from  unconsolidated companies, net of tax                      |       | 9,084                                                                  |       | — |   | — |   | 9,084 |   |
|                                                                     |       |                                                                   |       |   |   |   |   |   |   |
| Net earnings                                                             |       | $                                                                      | 28,222     |   | $ | 204 |   | $ | 2,792 |   | $ | 31,218 |   |
|                                                                     |       |                                                                   |       |   |   |   |   |   |   |
| Earnings per  share:                                                     |       |                                                                   |       |   |   |   |   |   |   |
| Basic                                                                    |       | $                                                                      | 0.82       |   | $ | 0.01 |   | $ | 0.08 |   | $ | 0.91 |   |
| Diluted                                                                  |       | $                                                                      | 0.82       |   | $ | 0.01 |   | $ | 0.08 |   | $ | 0.91 |   |

 

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Adjustments identifiedrelating to fiscal years prior to 2004 are reflected in the beginning balanceof retained earnings in the accompanying statements of consolidatedshareholders’ equity. The cumulative impact of these adjustments reduced thisbalance by $51,916,000 and primarily represents adjustments relating to thedeferred tax on prior year acquisitions and foreign currency accountingmatters.

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The followingtable represents the impact of the restatement adjustments on OEH’sconsolidated balance sheet as of December 31, 2005 (dollars in thousands):
| ** **                                                                  | ** ** | **December 31, 2005**  | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                  | ** ** | **As previously  reported** | ** ** | **Effect of   Restatement** | ** ** | **Restated** | ** ** |
| Assets                                                                      |       |                             |       |   |   |   |   |
| Cash and cash  equivalents                                                  |       | $                                | 38,397     |   | $ | — |   | $ | 38,397 |   |
| Accounts  receivable, net of allowance of $980                              |       | 59,061                           |       | — |   | 59,061 |   |
| Due from related  parties                                                   |       | 17,549                           |       | — |   | 17,549 |   |
| Prepaid expenses  and other                                                 |       | 13,061                           |       | — |   | 13,061 |   |
| Inventories                                                                 |       | 29,636                           |       | — |   | 29,636 |   |
| Real estate  assets                                                         |       | 12,149                           |       | — |   | 12,149 |   |
| Total current  assets                                                       |       | 169,853                          |       | — |   | 169,853 |   |
|                                                                        |       |                             |       |   |   |   |   |
| Property, plant  and equipment, net of accumulated depreciation of $184,479 |       | 1,017,175                        |       | — |   | 1,017,175 |   |
| Investments                                                                 |       | 129,681                          |       | — |   | 129,681 |   |
| Goodwill                                                                    |       | 55,767                           |       | 38,623 |   | 94,390 |   |
| Other intangible  assets                                                    |       | 7,100                            |       | — |   | 7,100 |   |
| Other assets                                                                |       | 35,986                           |       | (2,019 | ) | 33,967 |   |
|                                                                        |       | $                                | 1,415,562  |   | $ | 36,604 |   | $ | 1,452,166 |   |
| Liabilities and  Shareholders’ Equity                                  |       |                             |       |   |   |   |   |
| Working capital  facilities                                                 |       | $                                | 47,108     |   | $ | — |   | $ | 47,108 |   |
| Accounts payable                                                            |       | 22,680                           |       | — |   | 22,680 |   |
| Due to related  parties                                                     |       | 7,374                            |       | — |   | 7,374 |   |
| Accrued  liabilities                                                        |       | 43,545                           |       | — |   | 43,545 |   |
| Deferred revenue                                                            |       | 19,339                           |       | — |   | 19,339 |   |
| Current portion  of long-term debt and capital leases                       |       | 72,151                           |       | — |   | 72,151 |   |
| Total current  liabilities                                                  |       | 212,197                          |       | — |   | 212,197 |   |
|                                                                        |       |                             |       |   |   |   |   |
| Long-term debt  and obligations under capital leases                        |       | 496,156                          |       | — |   | 496,156 |   |
| Deferred income  taxes                                                      |       | 29,656                           |       | 59,508 |   | 89,164 |   |
|                                                                        |       | 738,009                          |       | 59,508 |   | 797,517 |   |
| Minority  interest                                                          |       | 4,153                            |       | — |   | 4,153 |   |
|                                                                        |       |                             |       |   |   |   |   |
| Shareholders’  equity:                                                 |       |                             |       |   |   |   |   |
| Class A common  shares                                                      |       | 393                              |       | — |   | 393 |   |
| Class B common  shares                                                      |       | 181                              |       | — |   | 181 |   |
| Additional  paid-in capital                                                 |       | 404,923                          |       | — |   | 404,923 |   |
| Retained  earnings                                                          |       | 314,207                          |       | (48,114 | ) | 266,093 |   |
| Accumulated  other comprehensive loss                                       |       | (46,123                          | )          | 25,210 |   | (20,913 | ) |
| Less: shares  owned by subsidiary                                           |       | (181                             | )          | — |   | (181 | ) |
| Total  shareholders’ equity                                            |       | 673,400                          |       | (22,904 | ) | 650,496 |   |
| Commitments and  contingencies                                              |       | —                           |       | — |   | — |   |
|                                                                        |       | $                                | 1,415,562  |   | $ | 36,604 |   | $ | 1,452,166 |   |

 

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The restatement adjustments discussed above for theyears ended December 31, 2005 and 2004 did not impact the major subtotals ofOEH’s statements of consolidated cash flows.

The following table presents the impact of therestatement adjustments discussed above on OEH’s consolidated comprehensiveincome for the years ended December 31, 2005 and 2004 (dollars in thousands):
| ** **                                        | ** ** | **2005**                               | ** ** | **2004**     | ** ** |
|---------------------------------------------------|------------|----------------------------------------|------------|--------------|------------|
| ** **                                        | ** ** | **As previously   reported** | ** ** | **Restated** | ** ** | **As previously   reported** | ** ** | **Restated** | ** ** |
| Net income                                        |       | $                                      | 40,733     |         | $          | 41,539 |   | $ | 28,222 |   | $ | 31,218 |   |
| Currency  translation adjustments                 |       | (33,419                                | )          | (33,419      | )          | 5,046 |   | 2,254 |   |
| Change in fair  value of derivatives              |       | 141                                    |       | 141          |       | (301 | ) | (301 | ) |
| Additional  minimum pension liability, net of tax |       | —                                 |       | —       |       | 1,613 |   | 1,613 |   |
| Total comprehensive  income                       |       | $                                      | 7,455      |         | $          | 8,261 |   | $ | 34,580 |   | $ | 34,784 |   |

 

The notes to the financial statements also reflect theimpact of the restatement adjustments discussed above.

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**3.****                                      Significantacquisitions, dispositions and investments**

*(a)**                               Acquisitions*

*2006 Acquisitions:*

*Pansea Hotels Group*

In February 2004, OEHentered into an agreement with the Pansea Hotels group, the owner of interestsin six deluxe hotels in Southeast Asia, including 50% of the Napasai Hotel inKoh Samui, Thailand.  Under thisagreement, OEH was to provide a maximum of $8,000,000 in loans to the hotelholding company which would be convertible after three years into 

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approximately 25% of the holding company’sshares.  OEH was not managing the hotelsbut was marketing them along with its other properties.

OEH decided to accelerate the acquisition of thePansea Hotels group in June 2006 by acquiring the 50% of the Napasai hotel—owningcompany shares not owned by Pansea for $10,500,000 cash consideration.  The rest of the Pansea Hotels group wasacquired in July 2006 for a total cash consideration of $33,562,000 (includingthe original $8,000,000 loan, accrued interest, other prior payments andacquisition costs) and assumption of sundry debts owed by the Pansea Hotelsgroup to third parties of $15,524,000.

This strategic acquisition enabled OEH to expand itsposition in the Southeast Asian market, which contributed to the purchase priceand resulted in goodwill.

The acquisition of the Pansea Hotels group has beenaccounted for as a purchase in accordance with SFAS No. 141, “BusinessCombinations”.  OEH allocated thepurchase price for the acquisition based on fair value of assets acquired andliabilities assumed, which is defined as the amount at which an asset orliability could be exchanged in a current transaction  between knowledgeable, unrelated willingparties when neither party is acting under compulsion.  The following table summarizes the fairvalues of the assets acquired and liabilities assumed at the date ofacquisition (dollars in thousands):
| ** **                                      | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|
|                                            |       |                        |       |
| Current assets                                  |       | $                           | 10,447     |   |
| Property, plant  and equipment                  |       | 33,665                      |       |
| Goodwill and  other intangible assets           |       | 27,105                      |       |
| Total assets acquired                           |       | 71,217                      |       |
|                                            |       |                        |       |
| Current liabilities                             |       | (7,230                      | )          |
| Liabilities to  minority shareholders           |       | (7,818                      | )          |
| Third party debt                                |       | (6,115                      | )          |
| Deferred income taxes                           |       | (5,992                      | )          |
| Total  liabilities assumed                      |       | (27,155                     | )          |
| Net assets acquired                             |       | $                           | 44,062     |   |
|                                            |       |                        |       |
| Loan advanced in  2004 and other prior payments |       | $                           | 9,950      |   |
| Paid in June  2006 for 50% of Napasai           |       | 10,500                      |       |
| Paid in July  2006 for the rest of Pansea       |       | 23,612                      |       |
| Total cash consideration                        |       | $                           | 44,062     |   |

 

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The net assets of PanseaHotels group have been fair valued based on the estimated market values of thefreehold and leasehold properties.  Afterfair valuing all other assets and liabilities, goodwill of $13,815,000 has beenrecorded of which $nil will be deductible as operating expenses for taxpurposes.  Included in the goodwill is adebit balance of $2,316,000 for minority interest relating to losses carriedforward as at the date of acquisition. In the future periods, minority interest share of profits will becredited against goodwill to the extent of the previously recorded minorityinterest losses.

The results of theoperation of Pansea Hotels group have been included in the consolidatedfinancial statements of OEH from July 21, 2006.

The proforma results ofoperations data presented below assume that the Pansea Hotels group acquisitionhad been made at the beginning of 2005. The proforma data are presented for informational purposes only and arenot necessarily indicative of the results of future operations, nor of theactual results that would have been achieved had the acquisition taken place atthe beginning of 2005 (dollars in thousands):
| Year ended December 31, | ** ** | **2006**       | ** ** | **2005** | ** ** |
|----------------------------------------|------------|----------------|------------|----------|------------|
| ** **                             | ** ** | **(Proforma)** | ** ** |
|                                   |       |           |       |     |       |
| Revenue                                |       | $              | 498,808    |     | $          | 441,958 |   |
| Net earnings                           |       | $              | 37,564     |     | $          | 41,943 |   |
| Earnings per share:                    |       |           |       |     |       |
| Basic                                  |       | $              | 0.93       |     | $          | 1.10 |   |
| Diluted                                |       | $              | 0.92       |     | $          | 1.09 |   |

 

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

*Casa de Sierra Nevada*

In February 2006,OEH acquired a 75% interest in Casa de Sierra Nevada, a 33-room deluxe hotel inSan Miguel de Allende, Mexico.   Thetotal purchase price, including acquisition costs, was $8,800,000 paid incash.  The acquisition included adjacentbuildings and land.

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The followingtable summarizes the fair values of the assets acquired and liabilities assumedat the date of acquisition (dollars in thousands):
| ** **                                            | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|
|                                                  |       |                        |       |
| Property, plant and  equipment                        |       | $                           | 8,600      |   |
| Goodwill and other  intangible assets                 |       | 3,770                       |       |
| Total assets acquired                                 |       | 12,370                      |       |
|                                                  |       |                        |       |
| Current liabilities                                   |       | (200                        | )          |
| Other long-term  liabilities (deferred consideration) |       | (2,850                      | )          |
| Deferred income taxes                                 |       | (520                        | )          |
| Total liabilities  assumed                            |       | (3,570                      | )          |
| Net assets acquired                                   |       | $                           | 8,800      |   |

 

The net assets ofCasa de Sierra Nevada have been fair valued based on the estimated market valueof the buildings.  After fair valuing allother assets and liabilities, goodwill of $3,510,000 has been recorded of which$nil will be deductible as operating expenses for tax purposes.

The acquisition ofCasa de Sierra Nevada has been accounted for as a purchase in accordance withSFAS No. 141, “Business Combinations”. The results of the operation have been included in the consolidatedfinancial statements of OEH from February 8, 2006.

In December 2006,OEH acquired a further 5% interest in the hotel for a cash consideration of$520,000.  In accordance with theshareholders’ agreement, OEH will purchase a further 5% in January 2009 for acash consideration equal to a proportion of ten times the previous 12 monthsnet operating income of the hotel, less its outstanding debt, and the remaining15% in January 2010 for a cash consideration calculated on the same basis.  Guidance in SFAS No. 150, “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity”, and EITF 00-4, “Majority owner’s accounting for a transaction in theshares of a consolidated subsidiary and a derivative indexed to the minorityinterest in that subsidiary”, has been applied to account for the forwardcontracts for acquisition of the remaining 20%. The liability has been recorded at the fair value of the deferredconsideration and the minority interest has been reduced accordingly.

The proformaresults of operations data presented below assume that the Casa de SierraNevada acquisition had been made at the beginning of 2005.  The proforma data are

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presented forinformational purposes only and are not necessarily indicative of the resultsof future operations, nor of the actual results that would have been achievedhad the acquisition taken place at the beginning of 2005 (dollars inthousands):
| **Year ended December 31,** | ** ** | **2006**       | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|----------------|------------|----------|------------|
| ** **                                 | ** ** | **(Proforma)** | ** ** |
|                                       |       |           |       |     |       |
| Revenue                                    |       | $              | 493,027    |     | $          | 435,521 |   |
| Net earnings                               |       | $              | 39,867     |     | $          | 41,553 |   |
| Earnings per share:                        |       |           |       |     |       |
| Basic                                      |       | $              | 0.98       |     | $          | 1.09 |   |
| Diluted                                    |       | $              | 0.98       |     | $          | 1.08 |   |

 

*MaromaResort and Spa*

Effective January1, 2006, OEH purchased the remaining 25% interest in Maroma Resort and Spa fora cash consideration of $5,400,000 bringing its interest to 100%.  A deferred tax liability of $1,853,000 hasbeen recorded on the acquisition.  Goodwillof $4,728,000 has been recognized on this acquisition.

*2005 Acquisition:*

In February 2005,OEH purchased 100% of the issued equity of LLC Europe Hotel which owns a 93.5%interest in the property operating as the Grand Hotel Europe, St Petersburg,Russia.  The remaining interest in theproperty is owned by the City of St. Petersburg.  In addition, OEH acquired full management andoperational control of the hotel and acquired 100% of a Cyprus company whichhas agreements with the hotel to provide various management services.

This strategicacquisition enabled OEH to start expansion of its position in the Russianmarket, which contributed to the purchase price and resulted in goodwill.  The total purchase price, includingacquisition costs, was $95,150,000 paid in cash of which $57,500,000 wasfinanced by a syndicate of banks led by the International Finance Corporation.

The acquisition ofthe Grand Hotel Europe has been accounted for as a purchase in accordance withSFAS No. 141, “Business Combinations”. OEH allocated the purchase price for the acquisition based on fair valueof assets acquired and liabilities assumed, which is defined as the amount atwhich an asset or liability could be exchanged in a current transaction betweenknowledgeable, unrelated willing parties when neither party is acting undercompulsion.  The following tablesummarizes the fair values of the assets acquired and

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liabilities assumed atthe date of acquisition (dollars in thousands):
| ** **                                 | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **(restated)**              | ** ** |
| Current assets                             |       | $                           | 2,740      |   |
| Property, plant and  fixtures and fittings |       | 80,500                      |       |
| Trade name                                 |       | 7,100                       |       |
| Goodwill                                   |       | 27,928                      |       |
| Total assets acquired                      |       | 118,268                     |       |
|                                       |       |                        |       |
| Current liabilities and  lease obligations |       | 7,842                       |       |
| Deferred income taxes                      |       | 15,276                      |       |
| Total liabilities  assumed                 |       | 23,118                      |       |
| Net assets acquired                        |       | $                           | 95,150     |   |

 

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

The acquiredintangible assets included the trade name which was fair valued at $7,100,000,and has been assigned an indefinite useful life.

The results of theoperation have been included in the consolidated financial statements of OEHfrom February 8, 2005.

*2004 Acquisition:*

Effective November1, 2004, OEH acquired El Encanto Hotel and Garden Villas in Santa Barbara,California for $26,000,000 paid in cash. Part of the purchase price was financed with a bank loan.  The entire purchase price was allocated totangible fixed assets, primarily land, based on their fair value.

*(b)  Investments*

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

In April 2005, OEHacquired 50% of the equity in the Great Scottish and Western Railway Co. Ltd.,which currently operates the Royal Scotsman luxury tourist train on a seasonalservice largely within Scotland.  Theinitial investment was $2,700,000 of which $1,300,000 was paid in cash and thebalance represents 50% of the long-term debt within the company in which OEHhas invested.  OEH has an option to

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acquire the remaining 50%of the equity in December 2007 at an enterprise valuation based upon a multipleof the average EBITDA for the previous 36 months, as defined in the purchaseagreement.  This investment has beenaccounted for under the equity method of accounting.

In May 2004, OEHacquired a 50% interest in a luxury French canal and river cruise businesscalled Afloat in France.  The investmentin Afloat in France is accounted for under the equity method ofaccounting.  Also as part of thistransaction OEH acquired the five canalboats operated in the business.  The total investment in these transactionswas $3,000,000 paid in cash.

Investments represent equity interests of 50% or lessand in which OEH exerts significant influence. OEH does not have effective control of these unconsolidated companiesand, therefore, accounts for these investments using the equity method.

OEH’s investmentsin and loans and advances to unconsolidated companies amounted to $130,124,000at December 31, 2006 (2005—$129,681,000). OEH’s earnings from unconsolidated companies were $11,970,000 in 2006(2005—$11,175,000; 2004-$9,084,000).  SeeNote 19.

Summarizedfinancial data for unconsolidated companies are as follows (dollars inthousands):
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Current assets                                  |       | $                     | 50,782     |   | $ | 46,529 |   |
| Property, plant and  equipment, net             |       | 347,772               |       | 325,769 |   |
| Other assets                                    |       | 46,022                |       | 41,362 |   |
| Total assets                                    |       | $                     | 444,576    |   | $ | 413,660 |   |
|                                            |       |                  |       |   |   |
| Current liabilities                             |       | $                     | 59,621     |   | $ | 53,102 |   |
| Long-term debt                                  |       | 227,477               |       | 204,405 |   |
| Other liabilities                               |       | 86,637                |       | 88,965 |   |
| Total shareholders’  equity                |       | 70,841                |       | 67,188 |   |
| Total liabilities and shareholders’ equity |       | $                     | 444,576    |   | $ | 413,660 |   |

 

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| ** **                                         | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue                                            |       | $                                          | 173,858    |   | $ | 159,705 |   | $ | 135,250 |   |
| Earnings from  operations before net finance costs |       | $                                          | 34,509     |   | $ | 25,630 |   | $ | 19,874 |   |
| Net Earnings/(loss)                                |       | $                                          | 2,127      |   | $ | (2,382 | ) | $ | (1,778 | ) |

 

Included inunconsolidated companies is the Charleston Place Hotel to which OEH has made loansin addition to its equity investment. Some of these loans have a conversion feature exercisable by OEH nosooner than 2020 and in limited circumstances before then, under which OEH mayconvert its loans into additional capital, thereby giving OEH a majority equityinterest in the hotel.

Also included inunconsolidated companies are the Peru hotel and PeruRail joint ventures, underwhich OEH and the other 50% participant must contribute equally additionalequity capital needed for the businesses. If the other participant does not meet this obligation, OEH has theright to dilute the other participant and obtain a majority equity interest inthe affected joint venture company.  OEHalso has rights to purchase the other participant’s interests, exercisable inlimited circumstances such as its bankruptcy.

**4.****             Property, plant andequipment, net**

The major classesof property, plant and equipment are as follows (dollars in thousands):
|                                          | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Land and buildings                       |       | $                     | 998,227    |   | $ | 860,711 |   |
| Machinery and equipment                  |       | 191,050               |       | 170,676 |   |
| Fixtures, fittings and  office equipment |       | 186,075               |       | 151,754 |   |
| River cruiseship and  canalboats         |       | 19,184                |       | 18,513 |   |
|                                     |       | 1,394,536             |       | 1,201,654 |   |
| Less: accumulated  depreciation          |       | (211,136              | )          | (184,479 | ) |
|                                     |       | $                     | 1,183,400  |   | $ | 1,017,175 |   |

 

The major classes of assets under capital leases included above are asfollows (dollars in thousands):

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|                                          | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Freehold and  leased land and buildings  |       | $                     | 16,006     |   | $ | 14,803 |   |
| Machinery and  equipment                 |       | 2,205                 |       | 2,067 |   |
| Fixtures,  fittings and office equipment |       | 1,678                 |       | 1,817 |   |
|                                     |       | 19,889                |       | 18,687 |   |
| Less:  accumulated depreciation          |       | (2,241                | )          | (1,892 | ) |
|                                     |       | $                     | 17,648     |   | $ | 16,795 |   |

 

**5.****             Goodwill**

OEH’s goodwill consists of $1,383,000 related to the trains and cruisesbusiness segment and $120,268,000 related to the hotels and restaurantsbusiness segment, of which $27,928,000 relates to the acquisition of the GrandHotel Europe, $3,510,000 relates to the estimated purchase price allocation ofCasa de Sierra Nevada, $6,318,000 relates to goodwill arising on theacquisition of Maroma, and $14,973,000 relates to the estimated purchase priceallocation of the Pansea hotels group.

**6.****             Other intangibleassets**

Other intangible assets consist of the value of the Grand Hotel Europetradename of $7,100,000, the estimated purchase price allocation of $260,000for the Casa de Sierra Nevada tradename, and favorable lease intangible assetsacquired as part of the acquisition of the Pansea hotels group of $12,789,000.Amortization expense relating to Pansea favorable lease was $160,000 for 2006(2005-$nil).

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

Working capitalfacilities are composed of the following, all repayable within one year (dollarsin thousands):
| ** **                                                                                                     | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                     | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Unsecured working  capital facilities, with a weighted average interest rate of 5.55% and 5.92%,  respectively |       | $                     | 46,590     |   | $ | 47,108 |   |
|                                                                                                                |            |                       |            |  |  |  |  |

 

OEH hadapproximately $64,000,000 of working capital lines of credit at December 31,2006 (2005-$54,000,000) issued by various financial institutions and havingvarious expiration dates, of which $22,208,000 was undrawn (2005-$7,100,000).

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**8.****             Long-term debt andobligations under capital leases**

*(a)**          Long-term debt*

Long-term debtconsists of the following (dollars in thousands):
| ** **                                                                                                                                                                                                  | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                  | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Loans from banks  collateralized by property, plant and equipment payable over periods of 1 to  11 years, with a weighted average interest rate of 5.80% and 5.51%,  respectively, primarily based on LIBOR |       | $                     | 649,513    |   | $ | 546,593 |   |
| Loan secured by river  cruiseship payable over 3 years, with a weighted interest rate of 6.54% and  5.65%, respectively, based on LIBOR                                                                     |       | 3,500                 |       | 4,500 |   |
| Obligations under  capital lease (see Note 8(b))                                                                                                                                                            |       | 16,684                |       | 17,214 |   |
|                                                                                                                                                                                                        |       | 669,697               |       | 568,307 |   |
| Less: current portion                                                                                                                                                                                       |       | 83,397                |       | 72,151 |   |
|                                                                                                                                                                                                        |       | $                     | 586,300    |   | $ | 496,156 |   |

 

The carrying valueof the debt is equal to its fair value.

Certain creditagreements of OEH have restrictive covenants. At December 31, 2006, OEH was in compliance with these covenants,including a minimum consolidated net worth test and a minimum consolidatedinterest coverage test as defined under a bank-syndicated $241,000,000 loanfacility referred to below.  OEH does notcurrently have any covenants in its loan agreements which limit the payment ofdividends.

In July 2006, OEHborrowed $241,000,000 (€190,000,000) under a bank-syndicated loan facilitytotalling $317,000,000 (€250,000,000) secured by four of OEH’s Italian hotels,its two Portuguese hotels, and its properties in the U.K. and France.  The initial drawdown was used to refinance anexisting $254,000,000 (€201,000,000) loan facility.  On repayment of this existing loan facility,outstanding deferred finance costs amounting to $1,400,000 were written off anda repayment fee of $1,100,000 was incurred.

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The following is asummary of the aggregate maturities of consolidated long-term debt excludingobligations under capital leases at December 31, 2006 (dollars inthousands):

 
| Year ending December 31, | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|
|                                    |       |       |       |
| 2007                                    |       | $          | 81,519     |   |
| 2008                                    |       | 74,677     |       |
| 2009                                    |       | 25,381     |       |
| 2010                                    |       | 44,730     |       |
| 2011                                    |       | 385,354    |       |
| 2012 and  thereafter                    |       | 41,352     |       |
|                                    |       | $          | 653,013    |   |

 

The Company hasguaranteed $552,000,000 of the long-term debt of its subsidiary companies as atDecember 31, 2006.

The Company hasguaranteed, through 2011, $9,893,000 of the debt obligations of the PeruRail operations,an unconsolidated joint venture in which OEH has a 50% investment and, through2007, $4,413,000 of PeruRail contingent obligations relating to the performanceof its governmental rail concessions. OEH has guaranteed, through 2007, $3,000,000 of the debt obligations ofCharleston Center LLC, owner of the Charleston Place Hotel in which OEH has a19.9% equity investment.  The Company hasguaranteed, through 2007, a $3,000,000 bank loan to Eastern and OrientalExpress Ltd. in which OEH has a 25% equity investment.  All of these guarantees were in place beforeDecember 31, 2003.

*(b)**          Obligations undercapital leases*

The following is asummary of future minimum lease payments under capital leases together with thepresent value of the minimum lease payments at December 31, 2006 (dollarsin thousands):
| **Year ending December 31,**           | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|------------|------------|
|                                                  |       |       |       |
| 2007                                                  |       | $          | 2,402      |   |
| 2008                                                  |       | 2,663      |       |
| 2009                                                  |       | 2,375      |       |
| 2010                                                  |       | 2,379      |       |
| 2011                                                  |       | 3,796      |       |
| 2012 and thereafter                                   |       | 15,737     |       |
| Minimum lease payments                                |       | 29,352     |       |
| Less: amount of  interest contained in above payments |       | 12,668     |       |
| Present value of  minimum lease payments              |       | 16,684     |       |
| Less: current portion                                 |       | 1,878      |       |
|                                                  |       | $          | 14,806     |   |

 

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

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**9.****             Other liabilities**

Other liabilitiesconsist of $2,330,000 of deferred consideration arising on the Casa de SierraNevada acquisition (see note 3(a)).

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

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

The significantweighted-average assumptions used to determine net periodic costs of theplan during the year are as follows:
| ** **                                       | ** ** | **Year ended  December 31,** | ** ** |
|--------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                       | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                             |       |                                   |       |   |   |   |   |
| Discount rate                                    |       | 5.10                                   | %          | 5.00 | % | 5.40 | % |
| Assumed rates of  compensation increases         |       | —                                 |       | 3.25 | % | 3.00 | % |
| Expected long-term rate of return on plan assets |       | 7.50                                   | %          | 7.50 | % | 7.00 | % |

 

The significantweighted-average assumptions used to determine benefit obligations of the planat year end are as follows:
| ** **                             | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Discount rate                          |       | 5.10                  | %          | 4.75 | % |
| Assumed rate of compensation increases |       | —                |       | 3.25 | % |

 

The discount rateessentially represents the rate of return on high quality corporate bonds atthe end of the year in the country in which the assets are held.

In determining theexpected long-term rate of return on plan assets, management has evaluatedinformation from OEH’s actuaries and financial advisors, including their reviewof anticipated future long-term performance of individual asset classes and theasset allocation strategy given the anticipated requirements of the plan todetermine the average rate of earnings expected on the funds invested.

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Theweighted-average asset allocation of OEH’s defined benefit pension plan as ofDecember 31, 2006 and 2005 by asset category as a percentage of plan assets isas follows:
| ** **                | ** ** | **Year ended  December 31,** | ** ** |
|---------------------------|------------|----------------------------------------|------------|
| **Asset Category**   | ** ** | **2006**                               | ** ** | **2005** | ** ** |
|                      |       |                                   |       |   |   |
| Equity securities         |       | 99                                     | %          | 80 | % |
| Fixed income  investments |       | —                                 |       | 20 | % |
| Other                     |       | 1                                      | %          | — |   |
| Total                     |       | 100                                    | %          | 100 | % |

 

The changes in thebenefit obligation, the plan assets and the funded status for the plan were asfollows (dollars in thousands):
| ** **                               | ** ** | **Year ended  December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Change in benefit  obligation:           |       |                                   |       |   |   |
| Benefit obligation at  beginning of year |       | $                                      | 17,597     |   | $ | 13,953 |   |
| Service cost                             |       | 459                                    |       | 885 |   |
| Interest cost                            |       | 877                                    |       | 699 |   |
| Plan participants’  contributions   |       | 128                                    |       | 297 |   |
| Net transfer in                          |       | 851                                    |       | 1,001 |   |
| Actuarial loss                           |       | 1,435                                  |       | 2,817 |   |
| Benefits paid                            |       | (270                                   | )          | (258 | ) |
| Curtailment  gain                        |       | (1,139                                 | )          | — |   |
| Foreign currency  translation            |       | 2,439                                  |       | (1,797 | ) |
| Benefit obligation at end of year        |       | 22,377                                 |       | 17,597 |   |
|                                          |            |                                        |            |  |  |  |  |

 
| Change in plan assets:                          |   |   |   |   |   |
|-------------------------------------------------|--------|--------|--------|--------|--------|
| Fair value of plan  assets at beginning of year |   | 9,806  |   | 7,540  |   |
| Actual return on plan  assets                   |   | 1,334  |   | 1,673  |   |
| Employer contributions                          |   | 813    |   | 1,063  |   |
| Plan participants’  contributions          |   | 128    |   | 297    |   |
| Net transfer in                                 |   | 378    |   | 480    |   |
| Benefits paid                                   |   | (270   | )      | (258   | )      |
| Foreign currency  translation                   |   | 1,511  |   | (989   | )      |
| Fair value of plan  assets at end of year       |   | 13,700 |   | 9,806  |   |
|                                            |   |   |   |   |   |
| Funded status                                   |   | (8,677 | )      | (7,791 | )      |
| Unrecognized net  actuarial loss                |   | 12,101 |   | 10,832 |   |
| Net amount recognized in retained earnings      |   | $      | 3,424  |   | $      | 3,041 |   |
|                                                 |        |        |        |        |        |  |  |

 

At December 31,2006, OEH adopted SFAS No. 158 “Employer’s Accounting for Defined BenefitPensions and Other Post-retirement Plans – An Amendment of FASB Statements No.87, 88, 106 and 132(R)”.  Theimplementation of SFAS No. 158 did not have a material impact onOEH’s financial statements.

97

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The followingtable details certain information with respect to OEH’s defined benefit pensionplan (dollars in thousands):
|                                 | ** ** | **Year ended  December 31,** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Projected  benefit obligation   |       | $                                      | 22,377     |   | $ | 17,597 |   |
| Accumulated  benefit obligation |       | $                                      | 22,377     |   | $ | 9,589 |   |
| Fair value of plan  assets      |       | $                                      | 13,700     |   | $ | 9,806 |   |

 

The components ofnet periodic benefit cost for the OEH employees covered under the planconsisted of the following (dollars in thousands):
| ** **                                     | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                           |       |                                       |       |   |   |   |   |
| Service cost                                   |       | $                                          | 459        |   | $ | 885 |   | $ | 780 |   |
| Interest cost on  projected benefit obligation |       | 877                                        |       | 699 |   | 448 |   |
| Expected return on  assets                     |       | (824                                       | )          | (546 | ) | (362 | ) |
| Net amortization and  deferrals                |       | 484                                        |       | 417 |   | 5 |   |
| Net periodic benefit cost                      |       | $                                          | 996        |   | $ | 1,455 |   | $ | 871 |   |

 

Additional information about OEH’s pension plan is asfollows (dollars in thousands):
| ** **                                                                       | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
|                                                                             |       |                                       |       |   |   |
| Increase in minimum  pension liability (net of tax in other comprehensive income |       | $                                          | 8,518      |   | — |   |
|                                                                                  |            |                                            |            |  |  |  |

 

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OEH expects tocontribute $940,000 to its defined benefit pension plan in 2007.  The following benefit payments, which reflectassumed future service, are expected to be paid (dollars in thousands):

 
| Year ending December 31, | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|
|                                    |       |       |       |
| 2007                                    |       | 76         |       |
| 2008                                    |       | 78         |       |
| 2009                                    |       | 92         |       |
| 2010                                    |       | 110        |       |
| 2011                                    |       | 174        |       |
| Next five years                         |       | $          | 2,030      |   |
|                                         |            |            |            |  |

 

OEH has anotherdefined benefit pension plan in South Africa for certain employees of the MountNelson Hotel.  Total number of activemembers is five, and the remaining members are retired pensioners.  The latest actuarial valuation performed asat January 1, 2003 showed a net pension plan surplus of approximately $459,000based on fair value of plan assets of $1,457,000 and projected benefitobligation of $998,000.  Management doesnot expect significant movements in the balances since the last valuation dueto the small size of the plan.  Thesurplus has not been recognized in the financial statements as it is deemed notrecoverable.

Certain employeesof OEH are members of the British Rail pension plan, which is a governmentalmulti-employer defined benefit pension plan. Total OEH contributions into the plan for 2006 and 2005 were $92,000 and$184,000, respectively.

Certain employeesof OEH were members of defined contribution pension plans.  Total contributions into the plans were asfollows (dollars in thousands):
| ** **                     | ** ** | **Year ended December 31** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
|                           |       |                                      |       |   |   |
| Employer’s  contributions |       | $                                         | 1,460      |   | $ | 1,100 |   |
|                                |            |                                           |            |  |  |  |  |

 

**11.****          Income taxes**

The Company is incorporated in Bermuda which does not impose an incometax.  OEH’s effective tax rate isentirely due to the income taxes imposed by jurisdictions in which OEH conductsbusiness other than Bermuda.

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Theprovision for income taxes consists of the following (dollars in thousands): 

 
| ** **        | ** ** | **Year ended December 31, 2006** | ** ** |
|-------------------|------------|------------------------------------------------------|------------|
| ** **        | ** ** | **Current**                                          | ** ** | **Deferred** | ** ** | **Total** | ** ** |
| Bermuda           |       | $                                                    | —     |   | $ | — |   | $ | — |   |
| United States     |       | 4,016                                                |       | 2,608 |   | 6,624 |   |
| Rest of the world |       | 7,662                                                |       | (6,495 | ) | 1,167 |   |
|              |       | $                                                    | 11,678     |   | $ | (3,887 | ) | $ | 7,791 |   |

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

 
| ** **        | ** ** | **Year ended December 31, 2004  (restated)** | ** ** |
|-------------------|------------|------------------------------------------------------------------|------------|
| ** **        | ** ** | **Current**                                                      | ** ** | **Deferred** | ** ** | **Total** | ** ** |
| Bermuda           |       | $                                                                | —     |   | $ | — |   | $ | — |   |
| United States     |       | 310                                                              |       | 502 |   | 812 |   |
| Rest of the world |       | 4,278                                                            |       | (2,743 | ) | 1,535 |   |
|              |       | $                                                                | 4,588      |   | $ | (2,241 | ) | $ | 2,347 |   |

 

The 2006 cost included a current tax cost of $2,213,000 arising on thesale of Harry’s Bar, with no equivalent cost in either 2005 or 2004.

Earnings from unconsolidated companies are reported net of tax.  The tax provision applicable to theseunconsolidated companies in the year ended December 31, 2006 was $5,741,000(2005-$3,333,000; 2004-$2,669,000).

Deferred income taxes reflect the net tax effects of temporarydifferences between the carrying amount of assets and liabilities for financialreporting purposes and the amounts used for income tax purposes.  The following represents OEH’s net deferredtax liabilities (dollars in thousands):
|                                                                     | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ** **                                                          | ** ** | ** **            | ** ** | **(restated)** | ** ** |
| Gross deferred  tax assets (primarily operating loss carryforwards) |       | $                     | 69,299     |   | $ | 60,469 |   |
| Less: valuation  allowance                                          |       | (13,065               | )          | (22,487 | ) |
| Net deferred tax  assets                                            |       | 56,234                |       | 37,982 |   |
| Deferred tax  liabilities                                           |       | (139,592              | )          | (114,826 | ) |
| Net deferred tax  liabilities                                       |       | $                     | (83,358    | ) | $ | (76,844 | ) |

 

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The deferred tax assets consist primarily of tax losscarryforwards.  The gross amount of taxloss carryforwards is $199,856,000.  Ofthis amount, $69,865,000 will expire in the five years ending December 31, 2011and a further $11,496,000 will expire in the five years ending December 31,2016.  The remaining losses of$118,495,000 will expire after December 31, 2016 or have no expiry date.  A valuation allowance has been providedagainst gross deferred tax assets where it is thought more likely than not thatthe benefits associated with these assets will not be realized.  The 2006 income taxes provision includesdeferred tax benefits totalling $8,829,000 that arose on the reduction ofvaluation allowances established in respect of tax losses in Bora Bora,Portugal and Australia, after OEH concluded that it was more likely than notthat these tax losses would be utilized in the future.

The deferred taxliabilities consist primarily of differences between the tax basis ofdepreciable assets and the adjusted basis as reflected in the financialstatements.  

Deferred incometaxes have not been provided in respect of the tax costs that would arise onthe distribution of the retained earnings of OEH’s foreign subsidiaries.  These earnings have been indefinitelyreinvested and there are no plans to distribute these retained earnings in thefuture.

In July 2006, theFASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes”, aninterpretation of SFAS No. 109 (“FIN 48”), which clarifies the accountingfor uncertainty in tax positions.  FIN 48is effective for fiscal years beginning after December 15, 2006 and is effectivefor the Company in the first quarter of the year beginning January 1,2007.  OEH is continuing to evaluate theimpact that the adoption of this interpretation will have on it’s financialposition and results of operations, although it estimates the initial FIN 48provision that will be recognized at January 1, 2007 as an adjustment toretained earnings brought forward will be in the range of $27,000,000 to$30,000,000.

**12.****          Supplemental cash flowinformation**
|                | ** ** | **Year ended December 31,** | ** ** |
|----------------|------------|--------------------------------------------|------------|
| ** **     | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **     | ** ** | **(Dollars in thousands)**       | ** ** |
| Cash paid for: |       |                                       |       |   |   |   |   |
| Interest       |       | $                                          | 40,979     |   | $ | 29,461 |   | $ | 21,436 |   |
| Income taxes   |       | $                                          | 14,719     |   | $ | 10,124 |   | $ | 4,071 |   |

 

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Non-cash investingand financing activities:

In conjunctionwith certain acquisitions in 2006, 2005 and 2004 (see Note 2(a)),liabilities were assumed as follows (dollars in thousands):
| ** **                                     | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                   | ** ** | **2005  (restated)** | ** ** | **2004** | ** ** |
| ** **                                     | ** ** | ** **                                 | ** ** |
|                                           |       |                                       |       |   |   |   |   |
| Fair value of assets acquired                  |       | $                                          | 89,551     |   | $ | 118,618 |   | $ | 30,146 |   |
| Cash paid                                      |       | (50,122                                    | )          | (95,150 | ) | (29,670 | ) |
| Loan advanced in 2004 and other prior payments |       | (9,950                                     | )          | — |   | — |   |
| Liabilities assumed                            |       | $                                          | 29,479     |   | $ | 23,468 |   | $ | 476 |   |

 

**13.****     Shareholders’ equity**

*(a)**     Public offering*

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

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

*(b)**     Dual common sharecapitalization*

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

*(c)**      Shareholder rights agreement*

The Company has inplace a shareholder rights agreement which will be implemented not earlier thanthe tenth day following the first to occur of (i) the public announcementof the acquisition by a person (other than a subsidiary of the Company) of sharescarrying 20% or more of the total voting rights which may be cast at anygeneral meeting of the Company

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and (ii) thecommencement or announcement of a tender offer or exchange offer by a personfor shares carrying 30% or more of the total voting rights that may be cast atany general meeting of the Company.  Atthat time, the rights will detach from the class A and class B commonshares, and the holders of the rights will be entitled to purchase, for eachright held, one one-hundredth of a series A junior participating preferredshare of the Company at an exercise price of $142 (the “Purchase Price”) foreach one one-hundredth of such junior preferred share, subject to adjustment incertain events.  From and after the dateon which any person acquires beneficial ownership of shares carrying 20% ormore of the total voting rights which may be cast at any general meeting of theCompany, each holder of a right (other than the acquiring person) will beentitled upon exercise to receive, at the then current Purchase Price and inlieu of the junior preferred shares, that number of class A orclass B common shares (depending on whether the right was previouslyattached to a class A or B share) having a market value of twice thePurchase Price.  If the Company is acquiredor 50% or more of its consolidated assets or earning power is sold, each holderof a right will be entitled to receive, upon exercise at the then currentPurchase Price, that amount of common equity of the acquiring company which atthe time of such transaction would have a market value of two times thePurchase Price.  Also, the Company’sboard of directors may exchange all or some of the rights for class A andclass B common shares (depending on whether the right was previouslyattached to a class A or B share) if any person acquires 20% beneficialownership as described above, but less than 50% beneficial ownership.  The rights will expire on June 1, 2010but may be redeemed at a price of $0.05 per right at any time prior to thetenth day following the date on which a person acquires beneficial ownership ofshares carrying 20% or more of the total voting rights which may be cast at anygeneral meeting of the Company.

*(d)**     Acquired shares*

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

*(e)**      Preferred shares*

The Company has30,000,000 authorized preferred shares, par value $0.01 each, 500,000 of whichhave been reserved for issuance as series A junior participating preferredshares

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upon exercise ofpreferred share purchase rights held by class A and B common shareholdersin connection with the shareholder rights agreement.  See Note 13(c).

**14.****     Employee stock option plans**

Under the Company’s2000 and 2004 stock option plans, options to purchase up to 750,000 and500,000, respectively, class A and B common shares may be awarded toemployees of OEH at fair market value at the date of grant.  Options are exercisable three years afteraward and must be exercised ten years from the date of grant.  At December 31, 2006, 357,150class A common shares were reserved under the 2000 plan for issuancepursuant to options awarded to 36 persons, and 274,450 class A common shareswere reserved under the 2004 plan for issuance pursuant to options awarded to83 persons.  The total compensation cost relatedto unexercised options at December 31, 2006 to be recognized over the periodJanuary 1, 2007 to December 31, 2009, is $2,395,000.  The fair value of grants issued in the yearto December 31, 2006 were $2,211,000 (2005 - $899,000; 2004 - $1,005,000).  Transactions under the plans have been asfollows:
| ** **                          | ** ** | **Year ended  December 31, 2006** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | **Shares**                                       | ** ** | **Option Price** | ** ** |
|                                |       |                                             |       |   |   |
| Outstanding at  beginning of period |       | 787,750                                          |       | $13.00-$28.50 |   |
| Granted                             |       | 142,750                                          |       | $34.88-$42.87 |   |
| Forfeited                           |       | (2,300                                           | )          | $14.70-$36.50 |   |
| Exercised                           |       | (296,600                                         | )          | $13.06-$28.50 |   |
| Outstanding at end of  period       |       | 631,600                                          |       | $13.00-$36.50 |   |
| Exercisable at end of  period       |       | 275,650                                          |       | $13.00-$19.00 |   |

 
| ** **                          | ** ** | **Year ended  December 31, 2005** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | **Shares**                                       | ** ** | **Option Price** | ** ** |
|                                |       |                                             |       |   |   |
| Outstanding at  beginning of period |       | 824,000                                          |       | $13.00-$19.00 |   |
| Granted                             |       | 82,000                                           |       | $21.40-$28.50 |   |
| Forfeited                           |       | (18,500                                          | )          | $13.06-$28.50 |   |
| Exercised                           |       | (99,750                                          | )          | $13.06-$19.00 |   |
| Outstanding at end of  period       |       | 787,750                                          |       | $13.00-$28.50 |   |
| Exercisable at end of  period       |       | 472,250                                          |       | $13.00-$19.00 |   |

 

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|                                     | ** ** | **Year ended  December 31, 2004** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | **Shares**                                       | ** ** | **Option Price** | ** ** |
|                                |       |                                             |       |   |   |
| Outstanding at  beginning of period |       | 676,000                                          |       | $13.00-$19.00 |   |
| Granted                             |       | 150,000                                          |       | $14.70 |   |
| Forfeited                           |       | (2,000                                           | )          | $13.40 |   |
| Exercised                           |       | —                                           |       |   |   |
| Outstanding at end of  period       |       | 824,000                                          |       | $13.00-$19.00 |   |
| Exercisable at end of  period       |       | 271,500                                          |       | $19.00 |   |

 

The optionsoutstanding at December 31, 2006, were as follows:
|                      | ** ** | **Number of Shares**  | ** ** | **Weighted Average of** | ** ** |
|----------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| **Exercise  Prices** | ** ** | **Outstanding  at  12/31/2006** | ** ** | **Exercisable  at  12/31/2006**   | ** ** | **Remaining  Contractual  Lives** | ** ** | **Exercise  Prices for  Outstanding  Options** | ** ** | **Exercise  Prices for  Exercisable  Options** | ** ** |
|                 |       |                            |       |                              |       |   |   |   |   |   |   |
| $                    | 13.00      |                            | 10,000     |                              | 10,000     |   | 5.8 |   | $ | 13.00 |   | $ | 13.00 |   |
| $                    | 13.06      |                            | 74,250     |                              | 74,250     |   | 5.8 |   | $ | 13.06 |   | $ | 13.06 |   |
| $                    | 13.40      |                            | 60,400     |                              | 60,400     |   | 6.4 |   | $ | 13.40 |   | $ | 13.40 |   |
| $                    | 14.70      |                            | 139,000    |                              | —     |   | 7.6 |   | $ | 14.70 |   | — |   |
| $                    | 17.09      |                            | 3,000      |                              | 3,000      |   | 6.8 |   | $ | 17.09 |   | $ | 17.09 |   |
| $                    | 19.00      |                            | 116,500    |                              | 116,500    |   | 4.2 |   | $ | 19.00 |   | $ | 19.00 |   |
| $                    | 19.00      |                            | 11,500     |                              | 11,500     |   | 3.6 |   | $ | 19.00 |   | $ | 19.00 |   |
| $                    | 21.40      |                            | 2,000      |                              | —     |   | 8.1 |   | $ | 21.40 |   | — |   |
| $                    | 28.40      |                            | 33,000     |                              | —     |   | 8.7 |   | $ | 28.40 |   | — |   |
| $                    | 28.50      |                            | 40,000     |                              | —     |   | 8.5 |   | $ | 28.50 |   | — |   |
| $                    | 34.88      |                            | 20,700     |                              | —     |   | 9.2 |   | $ | 34.88 |   | — |   |
| $                    | 34.90      |                            | 26,500     |                              | —     |   | 9.6 |   | $ | 34.90 |   | — |   |
| $                    | 36.45      |                            | 11,000     |                              | —     |   | 9.7 |   | $ | 36.45 |   | — |   |
| $                    | 36.50      |                            | 54,950     |                              | —     |   | 9.5 |   | $ | 36.50 |   | — |   |
| $                    | 39.25      |                            | 3,000      |                              | —     |   | 9.8 |   | $ | 39.25 |   | — |   |
| $                    | 42.87      |                            | 25,800     |                              | —     |   | 9.9 |   | $ | 42.87 |   | — |   |
|                      |       | 631,600                         |       | 275,650                           |       |   |   |   |   |   |   |

 
| ** **                   | ** ** | **As of and for  year ended December 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted average fair  value |       | $                                                                        | 15.36      |   | $ | 11.98 |   | $ | 6.70 |   |
|                              |            |                                                                          |            |  |  |  |  |  |  |  |

 

Estimates of fairvalues of stock options on the grant dates using the Black-Scholes optionpricing model are based on the following assumptions:
| ** **                           | ** ** | **As of and for  year ended December 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                 |       |                                                                     |       |   |   |   |   |
| Expected share price  volatility     |       | 40.45                                                                    | %          | 41.71 | % | 46.33 | % |
| Risk-free  interest rate             |       | 4.95                                                                     | %          | 4.24 | % | 4.01 | % |
| Expected annual  dividends per share |       | $                                                                        | 0.10       |   | $ | 0.10 |   | $ | 0.10 |   |
| Expected life of stock  options      |       | 5 years                                                                  |       | 5 years |   | 5 years |   |
|                                      |            |                                                                          |            |  |  |  |  |  |  |  |

 

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**15.****          Commitments andcontingencies**

Outstandingcontracts to purchase fixed assets were approximately $21,839,000 atDecember 31, 2006 (2005-$24,341,000).

Future rentalpayments under operating leases in respect of equipment rentals and leasedpremises are payable as follows (dollars in thousands):
|                     | ** ** | **Year ended  December 31,** | ** ** |
|---------------------|------------|----------------------------------------|------------|
|                |       |                                   |       |
| 2007                |       | $                                      | 908        |   |
| 2008                |       | 660                                    |       |
| 2009                |       | 557                                    |       |
| 2010                |       | 543                                    |       |
| 2011                |       | 198                                    |       |
| 2012 and thereafter |       | 144                                    |       |
|                |       | $                                      | 3,010      |   |

 

Rental expense forthe year ended December 31, 2006 amounted to $2,077,000 (2005-$1,911,000;2004-$1,716,000).

Under theagreement to acquire the Royal Scotsman (see Note 3(b)), OEH has an optionexercisable in December 2007 to acquire the remaining 50% of the outstandingshares at a multiple of EBITDA less existing debt (as defined in theagreement).  In the event that OEH doesnot exercise this option, the existing shareholders have the option to sell therelated shares to OEH for £1,400,000 ($2,400,000) and £2,100,000 ($3,600,000),respectively.  At December 31, 2006, thefair value of this contract was approximately zero.

Pursuant to theterms of its investment in the Afloat in France business (see Note 3(b)), OEHpurchased an option to acquire the remaining shares in the business, which isexercisable effective on May 9, 2009. Prior to that date, the other shareholders have the right to sell theirshares in the business to OEH.  Bothoptions have the same exercise prices, which are determined at a multiple ofEBITDA less existing debt (as defined in the agreement) during the exerciseperiods.  The exercise price of eachoption approximates the fair value of the shares at December 31, 2006.

**16.****          Derivative financialinstruments**

OEH is exposed tointerest rate risk on its floating rate debt, and in September 2006 it enteredinto interest rate swap agreements for the notional amounts of €75,000,000 

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($95,000,000) and€24,700,000 ($31,000,000) that limit the exposure to a fixed rate level.  Although these interest rate swapseconomically hedge the interest rate risk, these instruments have not beendesignated as hedging instruments in 2006.

At December 31,2006 and 2005, the fair values of the outstanding interest rate swaps wereaccounted for as other non-current assets at $687,000 and $nil, respectively.

**17.****          Other comprehensiveincome/(loss)**

The accumulatedbalances for each component of other comprehensive loss are as follows (dollarsin thousands):
|                                                   | ** ** | **Year ended  December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                        | ** ** | **2006**                               | ** ** | **2005  (restated)** | ** ** |
| ** **                                        | ** ** | ** **                             | ** ** |
| Foreign currency translation  adjustments         |       | $                                      | 3,545      |   | $ | (20,845 | ) |
| Derivative financial  instruments                 |       | —                                 |       | (68 | ) |
| Additional minimum  pension liability, net of tax |       | (8,518                                 | )          | — |   |
|                                              |       | $                                      | (4,973     | ) | $ | (20,913 | ) |

 

The components ofcomprehensive income/(loss) are as follows (dollars in thousands):
| ** **                                        | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                   | ** ** | **2005  (restated)** | ** ** | **2004  (restated)** | ** ** |
| ** **                                        | ** ** | ** **                                 | ** ** |
| Net earnings on common  shares                    |       | $                                          | 39,767     |   | $ | 41,539 |   | $ | 31,218 |   |
| Foreign currency  translation adjustments         |       | 24,390                                     |       | (33,419 | ) | 2,254 |   |
| Change in fair value of  derivatives              |       | 68                                         |       | 141 |   | (301 | ) |
| Additional minimum  pension liability, net of tax |       | (8,518                                     | )          | — |   | 1,613 |   |
| Comprehensive income                              |       | $                                          | 55,707     |   | $ | 8,261 |   | $ | 34,784 |   |

 

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

OEH’s segmentinformation has been prepared in accordance with SFAS No. 131, ****“****Disclosures about Segments of an Enterpriseand Related Information****”****.  OEH’s operations are as three segments,(i) hotels and restaurants, (ii) tourist trains and cruises, and(iii) real estate and property

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development, and aregrouped into various geographical regions. Real estate and property development has been disclosed as a new segmentin 2006 and disclosures for the comparative prior periods have been changed toconform to the new segment presentation. Hotels at December 31, 2006 are located in the United States, Caribbean,Mexico, Europe, southern Africa, South America, Southeast Asia, Australia andSouth Pacific, restaurants are located in New York and Buenos Aires, touristtrains operate in Europe, Southeast Asia and Peru, a river cruiseship operatesin Burma and five canalboats in France, and real estate developments arelocated in the U.S., Caribbean, Mexico, Europe, Southeast Asia and SouthPacific.  Segment performance isevaluated based upon segment net earnings before interest expense, foreigncurrency, tax (including tax on earnings from unconsolidated companies),depreciation, amortization and gain on asset sales (****“****segment EBITDA****”****).  Segment information is presented inaccordance with the accounting policies described in Note 1.

Financialinformation regarding these business segments is as follows (dollars inthousands):
|                                                            | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue:                                                   |       |                                       |       |   |   |   |   |
| Hotels and restaurants                                     |       |                                       |       |   |   |   |   |
| Owned hotels –  Europe                                |       | $                                          | 180,365    |   | $ | 161,188 |   | $ | 116,074 |   |
|         – North America |       | 85,492                                     |       | 79,706 |   | 71,205 |   |
|        – Rest of World  |       | 115,419                                    |       | 95,516 |   | 79,576 |   |
| Hotel  management/part ownership interests                 |       | 9,212                                      |       | 8,663 |   | 7,344 |   |
| Restaurants                                                |       | 22,544                                     |       | 22,162 |   | 20,339 |   |
|                                                       |       | 413,032                                    |       | 367,235 |   | 294,538 |   |
| Tourist trains  and cruises                                |       | 63,628                                     |       | 61,207 |   | 58,575 |   |
| Real estate                                                |       | 16,144                                     |       | 4,705 |   | 4,171 |   |
|                                                       |       | $                                          | 492,804    |   | $ | 433,147 |   | $ | 357,284 |   |
|                                                       |       |                                       |       |   |   |   |   |
| Depreciation and  amortization:                            |       |                                       |       |   |   |   |   |
| Hotels and  restaurants                                    |       |                                       |       |   |   |   |   |
| Owned hotels –  Europe                                |       | $                                          | 14,243     |   | $ | 13,471 |   | $ | 9,954 |   |
|        – North America  |       | 7,503                                      |       | 7,248 |   | 6,536 |   |
|        – Rest of World  |       | 9,406                                      |       | 8,675 |   | 7,755 |   |
| Restaurants                                                |       | 936                                        |       | 851 |   | 757 |   |
|                                                       |       | 32,088                                     |       | 30,245 |   | 25,002 |   |
| Tourist trains  and cruises                                |       | 3,588                                      |       | 3,842 |   | 3,347 |   |
|                                                       |       | $                                          | 35,676     |   | $ | 34,087 |   | $ | 28,349 |   |
|                                                       |       |                                       |       |   |   |   |   |
| Segment EBITDA:                                            |       |                                       |       |   |   |   |   |
| Owned hotels –  Europe                                |       | $                                          | 52,708     |   | $ | 46,560 |   | $ | 29,868 |   |
|    –  North America                         |       | 19,652                                     |       | 15,686 |   | 14,315 |   |
|    –  Rest of World                         |       | 33,033                                     |       | 23,381 |   | 18,051 |   |
| Hotel  management/part ownership interests                 |       | 19,932                                     |       | 17,485 |   | 14,885 |   |
| Restaurants                                                |       | 6,530                                      |       | 5,625 |   | 3,911 |   |
| Tourist trains  and cruises                                |       | 18,316                                     |       | 15,396 |   | 13,057 |   |
| Real estate                                                |       | 3,514                                      |       | 3,078 |   | 636 |   |
| Central  overheads                                         |       | (22,209                                    | )          | (18,955 | ) | (15,707 | ) |
|                                                       |       | $                                          | 131,476    |   | $ | 108,256 |   | $ | 79,016 |   |

 

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| ** **                                                       | ** **           | **Year ended  December 31,** | ** ** |
|------------------------------------------------------------------|----------------------|-----------------------------------|------------|
| ** **                                                       | ** **           | **2006**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Segment EBITDA/net  earnings reconciliation:                     |                 |                              |       | (restated) |   | (restated) |   |
| Segment EBITDA                                                   |                 | $                                 | 131,476    |   | $ | 108,256 |   | $ | 79,016 |   |
| Gain on sale of  investment                                      |                 | 6,619                             |       | — |   | — |   |
| Less                                                             |                 |                              |       |   |   |   |   |
| Depreciation and  amortization                                   |                 | 35,676                            |       | 34,087 |   | 28,349 |   |
| Interest  expense, net                                           |                 | 44,510                            |       | 30,153 |   | 19,948 |   |
| Foreign  currency, net                                           |                 | 4,610                             |       | (5,065 | ) | (5,515 | ) |
| Provision for  income taxes                                      |                 | 7,791                             |       | 4,209 |   | 2,347 |   |
| Share of  provision for income taxes of unconsolidated companies |                 | 5,741                             |       | 3,333 |   | 2,669 |   |
| Net earnings                                                     |                 | $                                 | 39,767     |   | $ | 41,539 |   | $ | 31,218 |   |
|                                                             |                 |                              |       |   |   |   |   |
| Earnings from  unconsolidated companies:                         |                 |                              |       |   |   |   |   |
| Hotels and  restaurants                                          |                 |                              |       |   |   |   |   |
| Hotel  management/part ownership interests                       |                 | $                                 | 7,875      |   | $ | 7,169 |   | $ | 6,437 |   |
| Restaurants                                                      |                 | 277                               |       | 360 |   | 223 |   |
|                                                             |                 | 8,152                             |       | 7,529 |   | 6,660 |   |
| Tourist trains  and cruises                                      |                 | 3,818                             |       | 3,646 |   | 2,424 |   |
|                                                             |                 | $                                 | 11,970     |   | $ | 11,175 |   | $ | 9,084 |   |
|                                                             |                 |                              |       |   |   |   |   |
| Capital expenditure:                                             |                 |                              |       |   |   |   |   |
| Hotels and  restaurants                                          |                 |                              |       |   |   |   |   |
| Owned hotels                                                     | – Europe        |                              | $          | 48,308 |   | $ | 60,359 |   | $ | 32,643 |   |
|                                                             | – North America |                              | 36,345     |   | 16,324 |   | 14,177 |   |
|                                                             | – Rest of World |                              | 15,431     |   | 23,368 |   | 15,214 |   |
| Restaurants                                                      |                 | 1,460                             |       | 1,091 |   | 694 |   |
|                                                             |                 | 101,544                           |       | 101,142 |   | 62,728 |   |
| Tourist trains  and cruises                                      |                 | 9,711                             |       | 6,170 |   | 2,376 |   |
| Real estate                                                      |                 | 539                               |       | 7,586 |   | — |   |
|                                                             |                 | $                                 | 111,794    |   | $ | 114,898 |   | $ | 65,104 |   |

 
| ** **                                 | ** **           | **December 31,** | ** ** |
|--------------------------------------------|----------------------|-----------------------|------------|
| ** **                                 | ** **           | **2006**              | ** ** | **2005** | ** ** |
| Identifiable assets:                       |                 |                  |       |   |   |
| Hotels and  restaurants                    |                 |                  |       |   |   |
| Owned hotels                               | – Europe        |                  | $          | 660,083 |   | $ | 561,902 |   |
|                                       | – North America |                  | 317,577    |   | 241,458 |   |
|                                       | – Rest of World |                  | 429,969    |   | 365,126 |   |
| Hotel  management/part ownership interests |                 | 114,378               |       | 103,549 |   |
| Restaurants                                |                 | 39,416                |       | 42,794 |   |
|                                       |                 | 1,561,423             |       | 1,314,829 |   |
| Tourist trains  and cruises                |                 | 140,803               |       | 121,644 |   |
| Real estate                                |                 | 49,437                |       | 15,693 |   |
|                                       |                 | $                     | 1,751,663  |   | $ | 1,452,166 |   |

 

Financialinformation regarding geographic areas based on the location of properties isas follows (dollars in thousands):
| ** **    | ** ** | **Year ended December 31,** | ** ** |
|---------------|------------|--------------------------------------------|------------|
| ** **    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue:      |       |                                       |       |   |   |   |   |
| Europe        |       | $                                          | 237,336    |   | $ | 217,275 |   | $ | 169,788 |   |
| North America |       | 123,725                                    |       | 109,019 |   | 98,244 |   |
| Rest of World |       | 131,743                                    |       | 106,853 |   | 89,252 |   |
|          |       | $                                          | 492,804    |   | $ | 433,147 |   | $ | 357,284 |   |

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2006**              | ** ** | **2005  (restated)** | ** ** |
| ** **                        | ** ** | ** **            | ** ** | ** ** | ** ** |
| Long-lived assets  at book value: |       |                  |       |   |   |
| Europe                            |       | $                     | 662,099    |   | $ | 567,406 |   |
| North America                     |       | 364,696               |       | 301,978 |   |
| Rest of World                     |       | 428,529               |       | 378,962 |   |
|                              |       | $                     | 1,455,324  |   | $ | 1,248,346 |   |

 

Assets at bookvalue constitute the following (dollars in thousands):

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| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ** **                     | ** ** | ** **            | ** ** | **(restated)** | ** ** |
| Property, plant and  equipment |       | $                     | 1,183,400  |   | $ | 1,017,175 |   |
| Investments                    |       | 130,124               |       | 129,681 |   |
| Goodwill                       |       | 121,651               |       | 94,390 |   |
| Other intangible assets        |       | 20,149                |       | 7,100 |   |
|                           |       | $                     | 1,455,324  |   | $ | 1,248,346 |   |

 

**19.****          Related partytransactions**

For the year ended December 31, 2006, OEH paid subsidiaries of SeaContainers Ltd. (“SCL”) $2,172,000 (2005-$5,757,000) for the provision ofvarious services provided under a services agreement between OEH and SCL whichterminated at December 31, 2006.  Theseamounts have been settled in accordance with the services agreement and areincluded in selling, general and administrative expenses.  As of December 31, 2006, SCL is no longer arelated party of OEH.

OEH manages under a long-term contract the Charleston Place Hotel(accounted for under the equity method) and has made loans to the hotel-owningcompany.  For the year ended December 31,2006, OEH earned $4,939,000 (2005-$4,587,000; 2004-$3,943,000) in managementfees which are recorded in revenue, and $10,700,000 (2005-$9,752,000; 2004-$8,165,000)in interest income on partnership and other loans, which is recorded inearnings from unconsolidated companies. These loans have an indefinite maturity period.  See Note 2(b).

OEHmanages under long-term contracts the Hotel Monasterio and the Machu PicchuSanctuary Lodge owned by its 50/50 joint venture with local Peruvian interests,as well as the 50/50 owned PeruRail operation, and provides loans, guaranteesand other credit accommodation to these joint ventures.  In the year ended December 31, 2006, OEHearned management and guarantee fees of $5,314,000 (2005-$4,785,000; 2004–$4,337,000) and loan interest of $87,000(2005-$116,000; 2004–$104,000)which are recorded in revenue.  AtDecember 31, 2006, OEH had a $750,000 subordinated loan to the PeruRailoperation with an indefinite maturity date and interest at a spread overLIBOR.  All of the guarantees relating tothe Company’s investments in Peru were in place prior to December 31, 2003.

OEHmanages under a long-term contract the Hotel Ritz in Madrid, Spain, in whichOEH holds a 50% interest accounted for under the equity method.  For the year ended December 31, 2006, OEHearned $1,057,000 (2005-$1,139,000; 2004-$969,000) in management fees, whichare included in revenue.  See note 2(b).

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

InAugust 2006, Simon Sherwood, President and Chief Executive Officer of the Company,purchased a villa at the Napasai resort in Koh Samui, Thailand for a marketvalue of $775,000.  The villa will be putinto the rental pool of the resort, with revenues split 40/60 as with othervillas at the resort in favor of Mr. Sherwood.

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Summary ofquarterly earnings (unaudited)

As described in Note 2, the Company restated itsconsolidated financial statements for the years 2005 and 2004 and its quarterlyconsolidated financial statements for the first, second and third quarters of 2006.The following table of unuadited quarterly financial information during thepast two years reflects the impact of restatement.
| ** **                                                                        | ** ** | **Quarter ended**                                                             | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **December 31**                                                               | ** ** | **September 30** | ** ** | **June 30** | ** ** | **March 31** | ** ** |
| ** **                                                                        | ** ** | ** **                                                                         | ** ** | **as  reported** | ** ** | **as  restated** | ** ** | **as  reported** | ** ** | **as  restated** | ** ** | **as  reported** | ** ** | **as  restated** | ** ** |
| ** **                                                                        | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| **2006**                                                                          |       |                                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                                                           |       | $                                                                                  | 134,084    |   | $ | 144,764 |   | $ | 144,764 |   | $ | 134,705 |   | $ | 134,705 |   | $ | 79,251 |   | $ | 79,251 |   |
| Earnings/(losses)  before net finance costs and gain on sale of investment        |       | $                                                                                  | 18,475     |   | $ | 34,780 |   | $ | 34,780 |   | $ | 26,553 |   | $ | 27,147 |   | $ | (3,091 | ) | $ | (2,313 | ) |
| Gain on sale of  investment                                                       |       | —                                                                             |       | — |   | — |   | 6,619 |   | 6,619 |   | — |   | — |   |
| Net finance  costs                                                                |       | (11,110                                                                            | )          | (14,869 | ) | (14,869 | ) | (13,459 | ) | (14,053 | ) | (8,310 | ) | (9,088 | ) |
| Earnings/(losses)  before income taxes and earnings from unconsolidated companies |       | 7,365                                                                              |       | 19,911 |   | 19,911 |   | 19,713 |   | 19,713 |   | (11,401 | ) | (11,401 | ) |
| (Provision  for)/benefit from income taxes                                        |       | (3,601                                                                             | )          | (3,615 | ) | (3,406 | ) | (3,167 | ) | (2,958 | ) | 1,964 |   | 2,174 |   |
| Earnings from  unconsolidated companies net of tax                                |       | 2,893                                                                              |       | 3,925 |   | 3,925 |   | 3,326 |   | 3,326 |   | 1,826 |   | 1,826 |   |
| Net  earnings/(losses)                                                            |       | $                                                                                  | 6,657      |   | $ | 20,221 |   | 20,430 |   | $ | 19,872 |   | $ | 20,081 |   | $ | (7,611 | ) | $ | (7,401 | ) |
|                                                                              |       |                                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  earnings/(losses) per share:                                                 |       |                                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                             |       | $                                                                                  | 0.16       |   | $ | 0.49 |   | $ | 0.49 |   | $ | 0.50 |   | $ | 0.51 |   | $ | (0.19 | ) | $ | (0.19 | ) |
| Diluted                                                                           |       | $                                                                                  | 0.16       |   | $ | 0.48 |   | $ | 0.49 |   | $ | 0.50 |   | $ | 0.50 |   | $ | (0.19 | ) | $ | (0.19 | ) |
| Dividends per share                                                               |       | $                                                                                  | 0.025      |   | $ | 0.025 |   | $ | 0.025 |   | $ | 0.025 |   | $ | 0.025 |   | $ | 0.025 |   | $ | 0.025 |   |

 

 
| ** **                                                                        | ** ** | **Quarter ended**                                                             | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **December 31**                                                                    | ** ** | **September 30** | ** ** | **June 30** | ** ** | **March 31** | ** ** |
| ** **                                                                        | ** ** | **as reported**                                                               | ** ** | **as restated** | ** ** | **as reported** | ** ** | **as restated** | ** ** | **as reported** | ** ** | **as restated** | ** ** | **as reported** | ** ** | **as restated** | ** ** |
| ** **                                                                        | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| **2005**                                                                          |       |                                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                                                                        |       |                                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                                                           |       | $                                                                                  | 98,753     |   | $ | 98,753 |   | $ | 127,733 |   | $ | 127,733 |   | $ | 126,252 |   | $ | 126,252 |   | $ | 80,409 |   | $ | 80,409 |   |
| Earnings/(losses) before  net finance costs                                       |       | $                                                                                  | 9,220      |   | $ | 9,220 |   | $ | 26,228 |   | $ | 26,228 |   | $ | 24,294 |   | $ | 24,294 |   | $ | (81 | ) | $ | (81 | ) |
| Net finance costs                                                                 |       | (7,539                                                                             | )          | (7,539 | ) | (7,819 | ) | (7,819 | ) | (6,231 | ) | (6,231 | ) | (3,499 | ) | (3,499 | ) |
| Earnings/(losses) before  income taxes and earnings from unconsolidated companies |       | 1,681                                                                              |       | 1,681 |   | 18,409 |   | 18,409 |   | 18,063 |   | 18,063 |   | (3,580 | ) | (3,580 | ) |
| (Provision for)/benefit  from income taxes                                        |       | 1,132                                                                              |       | 1,322 |   | (3,025 | ) | (2,820 | ) | (3,420 | ) | (3,215 | ) | 298 |   | 504 |   |
| Earnings from  unconsolidated companies net of tax                                |       | 1,537                                                                              |       | 1,537 |   | 4,099 |   | 4,099 |   | 3,814 |   | 3,814 |   | 1,725 |   | 1,725 |   |
| Net earnings/(losses)                                                             |       | $                                                                                  | 4,350      |   | $ | 4,540 |   | $ | 19,483 |   | $ | 19,688 |   | $ | 18,457 |   | $ | 18,662 |   | $ | (1,557 | ) | $ | (1,351 | ) |
|                                                                              |       |                                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings/(losses)  per share:                                                 |       |                                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                             |       | $                                                                                  | 0.11       |   | $ | 0.12 |   | $ | 0.50 |   | $ | 0.51 |   | $ | 0.47 |   | $ | 0.48 |   | $ | (0.04 | ) | $ | (0.02) |   |
| Diluted                                                                           |       | $                                                                                  | 0.11       |   | $ | 0.12 |   | $ | 0.49 |   | $ | 0.50 |   | $ | 0.47 |   | $ | 0.48 |   | $ | (0.04 | ) | $ | (0.02) |   |
| Dividends per share                                                               |       | $                                                                                  | 0.025      |   | $ | 0.025 |   | $ | 0.025 |   | $ | 0.025 |   | $ | 0.025 |   | $ | 0.025 |   | $ | 0.025 |   | $ | 0.025 |   |

 

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**ITEM 9.****        Changes in and Disagreementswith Accountants on Accounting and Financial Disclosure**

None.

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

*Disclosure Controls and Procedures*

The Company’s chief executive and financial officers have evaluated theeffectiveness of OEH’s disclosure controls and procedures (as defined in SECRule 13a-15(e)) as of December 31, 2006 and, based on that evaluation, believethose disclosure controls and procedures are effective as of that date.

*Management’s Annual**Report on**InternalControl over Financial Reporting*

OEH management is responsible for establishing and maintainingadequate internal control over financial reporting (as defined in SEC Rule13a-15(f)).  OEH’s internal control overfinancial reporting is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with U.S. generally accepted accountingprinciples.  Management assessed theeffectiveness of OEH’s internal control over financial reporting as of December31, 2006, but excluded from the scope of this assessment, the Pansea hotelsgroup acquired on July 21, 2006.  Inmaking this assessment, management used the criteria set forth by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO) in InternalControl—Integrated Framework.  Based onthis assessment and those criteria, management believes that OEH’s internalcontrol over financial reporting was effective as of December 31, 2006.

Deloitte &Touche LLP, OEH’s independent registered public accounting firm, issued anattestation report on management’s assessment of OEH’s internal control overfinancial reporting, which appears in Item 8—Financial Statements above.

*Changes in Internal Control over Financial Reporting*

As a result of the restatement of OEH’s consolidated financialstatements for the year ended December 31, 2005 discussed in Note 2 to theconsolidated financial statements in this Form 10-K annual report for the yearended December 31, 2006  (the “2005Restatement”), OEH under the supervision and with the participation of itsmanagement, including the Company’s chief executive and chief financialofficers, has considered the adequacy of its assertions concerning theeffectiveness of OEH’s disclosure controls and procedures and its internalcontrol over financial reporting in the Company’s Form 10-K annual report forthe year ended December 31, 2005 and in its Form 10-Q quarterly reports for thequarterly periods ended March 31, June 30 and September 30, 2006.  As a result, OEH management has concludedthat there was a material weakness in OEH’s disclosure controls and proceduresand in its internal control over financial reporting as of December 31, 2005and March 31, June 30 and September 30, 2006 with respect to the application ofU.S. generally accepted accounting principles regarding the accounting fordeferred tax on purchase accounting fair value adjustments as required underStatement of Financial Accounting Standards No. 109, "Accounting forIncome Taxes", and Statement of Financial Accounting Standards No. 141, “BusinessCombinations”.

In late 2005, as part of OEH’s ongoing improvements of its internalcontrol over financial reporting, OEH recruited additional staff withappropriate expertise to focus on the application of U.S. generally acceptedaccounting principles and related financial reporting matters. The errors thatresulted in the 2005 Restatement were identified and remediated as a result ofOEH’s improved controls and review during the 2006 financial closing andreporting process.  Therefore, as ofDecember 31, 2006, OEH management, including the Company’s chief executive andchief financial officers, has determined that this material weakness in itsinternal control over financial reporting had been remedied.

Except with respect to remediation in connection with the 2005Restatement, there have been no changes in OEH’s internal control overfinancial reporting during the fourth quarter of 2006 that have materiallyaffected, or are reasonably likely to materially affect, OEH’s internal controlover financial reporting.

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

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notabsolute, assurance that the objectives of the system are met, such asprevention and detection of misstatements. In addition, the design of any control system is based in part uponcertain assumptions about the likelihood of future events.  Controls may become inadequate because ofchanges in conditions, or the degree of compliance with the policies orprocedures may deteriorate, for example. Because of these and other inherent limitations of control systems,there can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions.

**ITEM 9B.****     Other Information**

None.

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**PART III**

**ITEM 10.****                                              Directorsand Executive Officers of the Registrant**

**Directors**

The directors ofthe Company are as follows.  As explainedbelow regarding Mr. Simon Sherwood, he is resigning as President and ChiefExecutive Officer of the Company and will not stand for re-election as adirector in 2007.  The Board has begunthe search to recruit a new chief executive.
| **Name, Age**            | ** ** | **Principal Occupation  and Other Major  Affiliations**                                                              | ** ** | **Year  First  Became  Director** |
|--------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|
| John D.  Campbell, 64    |       | Senior Counsel  (retired) of Appleby Hunter Bailhache (attorneys)                                                    |       | 1994                              |
| James B.  Hurlock, 73    |       | Partner  (retired) of White & Case LLP (attorneys)                                                               |       | 2000                              |
| Prudence M. Leith,  66   |       | Non-executive  Director of Omega International PLC and Nations Healthcare Ltd., and  Consultant to Compass Group PLC |       | 2006                              |
| J. Robert  Lovejoy, 62   |       | Managing  Director of Groton Partners LLC (a private merchant banking firm)                                          |       | 2000                              |
| Georg R. Rafael,  69     |       | Managing  Director of Rafael Group S.A.M. (hoteliers)                                                                |       | 2002                              |
| James B.  Sherwood, 73   |       | Chairman of the  Company                                                                                             |       | 1994                              |
| Simon M.C.  Sherwood, 46 |       | President and  Chief Executive Officer of the Company                                                                |       | 1994                              |

 

The principaloccupation of each director during the last five years is that shown in thetable supplemented by the following information.

Mr. Campbellwas a member of Appleby Hunter Bailhache until March 1999 and retired as SeniorCounsel in July 2003.  Mr. Campbell isthe non-executive Chairman of the Board of The Bank of Bermuda Ltd., asubsidiary of HSBC Holdings plc, as well as Chairman of the bank’s AuditCommittee, and a non-executive director and Chairman of the Nominations andGovernance Committee of Argus Insurance Company Ltd., a public 

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company listed on theBermuda Stock Exchange.  Mr. Campbell isalso a non-executive director of Sea Containers Ltd. (“SCL”), a leasing andtransport company formerly listed on the New York Stock Exchange and currentlysubject to Chapter 11 reorganization proceedings in the United States andprovisional liquidation proceedings in Bermuda. These proceedings commenced in October 2006.

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

Ms. Leith was thefounder, owner and Managing Director of Leith’s Group which, from 1960 until itssale in 1995 to Accor, grew to encompass restaurants, a prestigiousLondon-based chef school, contract catering, and event and party catering.  She has served on the boards of BritishRailways, Whitbread PLC, Halifax PLC, Safeway PLC and Woolworths Group PLC, andis currently on the boards of Omega International (kitchen furnishings andequipment) and Nations Healthcare (healthcare services).

Mr. Lovejoyjoined Groton Partners in January 2006. In 2000-2005, he was Senior Managing Director of Ripplewood HoldingsLLC, a private equity investment firm. Prior to that position he was a Managing Director of LazardFreres & Co. LLC, an investment banking firm, and a General Partner ofLazard’s predecessor partnership for over 15 years.

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

Mr. James Sherwoodretired in December 2006 from his executive duties with the Company (havingceased to be a co-principal executive officer in October 2006) but continues asnon-executive Chairman.  He resigned as adirector and non-executive Chairman of SCL in March 2006 having founded itspredecessor company in 1965.  He alsoserved as President of SCL during that time until January 2006.  As noted above regarding Mr. Campbell, SCL iscurrently subject to Chapter 11 reorganization proceedings in the United Statesand provisional liquidation proceedings in Bermuda.  These proceedings commenced in October 2006.

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Mr. SimonSherwood gave the Company on February 16, 2007 six months notice of hisresignation as President and Chief Executive Officer of the Company.  He intends to remain in his current positionuntil August 2007 to facilitate the handover to a new chief executive, and hasindicated he will not stand for re-election as a director at the Company’sannual general meeting of shareholders, expected to be held in June 2007.  Mr. Simon Sherwood was Senior Vice President—Leisureof SCL (1997-2000) and was originally appointed Vice President in 1991, priorto which he was Manager, Strategic Consulting of Boston Consulting Group(1986-1990).  He was appointed ChiefExecutive Officer of the Company in October 2006, and is the stepson ofMr. James Sherwood.

Daniel J. O’Sullivanserved as a director of the Company from 1997 to June 2006 when he did notstand for re-election by shareholders at the Company’s 2006 annual generalmeeting.

*CorporateGovernance*

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

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

The presentmembers of the Company’s Audit Committee are Messrs. Campbell, Hurlock andLovejoy.  The Board has designated Mr. Lovejoyas the audit committee financial expert as defined by SEC rules.  The present members of the CompensationCommittee and the Nominating and Governance Committee are Ms. Leith and Messrs.Campbell, Hurlock, Lovejoy and Rafael. See Item 13—Certain Relationships and Related Transactions, and DirectorIndependence below.

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Interested personsmay communicate directly with any of the Company’s directors by writing to himor her at the Company’s registered office address (Orient-Express Hotels Ltd.,22 Victoria Street, Hamilton HM 12, Bermuda).

**ExecutiveOfficers**

The executiveofficers of the Company are as follows. As noted above under the heading “Directors”, Mr. Simon Sherwood isresigning as President and Chief Executive Officer of the Company.
| **Name, Age**              | ** ** | **Position**                                                                |
|----------------------------|------------|-----------------------------------------------------------------------------|
|                       |       |                                                                        |
| Simon M.C.  Sherwood, 46   |       | President since 1994 and Chief Executive Officer  since 2006                |
| Dean P. Andrews,  54       |       | Vice President—Hotels, North America since 1997                        |
| Filip Boyen, 48            |       | Vice President—Hotels, Africa, Australia and South  America since 2005 |
| Roger V.  Collins, 60      |       | Vice President—Technical Services since 2001                           |
| Adrian D.  Constant, 46    |       | Vice President—Hotels, Europe since 2001                               |
| Pippa Isbell, 53           |       | Vice President—Public Relations since 2000                             |
| Natale Rusconi,  80        |       | Vice President since 2004                                                   |
| Nicholas R.  Varian, 52    |       | Vice President—Tourist Trains and Cruises since 1994                   |
| Paul M. White,  42         |       | Vice President—Finance and Chief Financial Officer  since 2005         |
| David C.  Williams, 52     |       | Vice President—Sales and Marketing since 2004                          |
| Edwin S.  Hetherington, 57 |       | Secretary since 1994 and Vice President and General  Counsel since 2006     |

 

The principaloccupation of each person during the last five years is shown in the tablesupplemented by the following information.

The previousexperience of Mr. Simon Sherwood is reported under the heading “Directors”above.

Mr. Andrewswas with Omni Hotels (1981-1997) working in new hotel development and financialand asset management.

Mr. Boyen heldpositions with Marco Polo Hotels, Sun International Hotels and RamadaRenaissance until he joined

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OEH in 1997.  Initially, he served as General Manager ofBora Bora Lagoon Resort until 1999, when he became Managing Director of OEH’shotel and tourist train operation in Peru. He was appointed a Vice President in September 2005.

Mr. Collins,an engineer, has worked in the hotel industry since 1979 with GrandMetropolitan Hotels, Courage Inns and Taverns, and Trusthouse Forte Hotels,joining the Company’s predecessor, Orient-Express Hotels Inc., in1991.

Mr. Constant began his career in the hotelindustry in 1983, including positions at Intercontinental and Forte Hotels, andworked for Le Meridien Hotels (1993-2001) ending as Regional Manager forBrazil.

Ms. Isbellwas appointed a Manager of the Company in 1998 after selling the public relationsconsultancy she founded in 1987.  Herwork in the hospitality industry included representation of IntercontinentalHotels, Forte, Hilton International, Jarvis Hotels, and Millennium andCopthorne.

Mr. Rusconi hasbeen the Managing Director of the Hotel Cipriani since 1977.  Previously he worked with the Savoy HotelGroup and CIGA Hotels.

Mr. Varianjoined Orient-Express Hotels Inc. in 1985 from P&O SteamNavigation Company and has worked extensively on various cruise and touristtrain projects, becoming a Vice President in 1989.

Mr. White waspreviously Vice President—Hotels, Africa, Australia and South America from 2000until September 2005, when he became Vice President—Finance and Chief FinancialOfficer.  Mr. White was Director of HotelOperations for the same geographical region from 1998 to 2000, and FinancialController from 1991 to 1998.  He joinedOrient-Express Hotels Inc. in 1991 from Forte Hotels where he qualified as anaccountant.  He is currently a member ofthe Chartered Institute of Management Accountants.

Mr. Williamsjoined Orient-Express Hotels Inc. in 1981 as Sales and ReservationsManager.  He became responsible forstrategic marketing developments and business initiatives in the Americas,Europe and Asia.  He previously worked forCarlson Marketing Group.

Mr. Hetheringtonjoined Orient-Express Hotels Inc. in 1980.  Until the end of 2006, he was also VicePresident, General Counsel and Secretary of SCL.  As noted above under the heading “Directors”regarding Mr. Campbell, SCL is currently subject to Chapter 11 reorganizationproceedings in

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the United States andprovisional liquidation proceedings in Bermuda. These proceedings commenced in October 2006.

**ITEM 11.       ExecutiveCompensation**

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

The followingtable shows the salary and bonus of Messrs. James and Simon Sherwood paidin cash during 2006, and of all executive officers as a group, for services toOEH in all capacities.  The groupincludes Mr. James Sherwood who retired from his executive duties with OEH inDecember 2006:
| **Name of Individual or Group** | ** ** | **Principal  Capacities in  Which Served** | ** ** | **Cash  Compensation** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|------------------------|------------|
|                                                |       |                                                 |       |                   |       |
| James B.  Sherwood                                  |       | Chairman  and Director                               |       | $                      | 654,900    |   |
| Simon M.C.  Sherwood                                |       | President,  Chief Executive Officer and Director     |       | $                      | 932,400    |   |
| All executive officers  as a group (12 persons)     |       |                                                 |       | $                      | 4,898,000  |   |

 

Under the servicesagreement between OEH and SCL described under Item 13—Certain Relationships andRelated Transactions and Director Independence below, part of the salary andbonus of Mr. Hetherington is included in the corporate and administrativecharges of SCL to OEH and is excluded from the table.  See also Note 19 to the Financial Statements(Item 8 above).

OEH has enteredinto agreements with Mr. Simon Sherwood and most of the Company’s otherexecutive officers entitling them to terminate employment in certaincircumstances constituting a change in control of the Company and to receive anamount equal to two times each officer’s annual compensation.  The agreements of the U.S. tax-payingofficers also require the Company to pay the excise tax on their severancepayments imposed pursuant to section 4999 of the U.S. Internal Revenue Code.

In 2006, each ofMs. Leith and Messrs. Campbell, Hurlock, Lovejoy, O’Sullivan and Rafaelreceived a fee of $2,750 for each meeting of the Board of Directors or acommittee thereof which he or she attended, and was also paid a Board retainerfee during their respective periods as director at the annual

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rate of $27,500.  Members of the Audit Committee (Messrs.Campbell, Hurlock and Lovejoy) were paid a retainer fee of $5,000 per year, andmembers of the Compensation Committee and Nominating and Governance Committee(Ms. Leith and Messrs. Campbell, Hurlock, Lovejoy and Rafael) were paid aretainer fee of $2,500 per year for service on each of those twoCommittees.  Mr. Lovejoy was also paid anadditional retainer fee of $20,000 per year as chairman of the Audit andCompensation Committees, and Mr. Hurlock an additional retainer fee of $5,000per year as chairman of the Nominating and Governance Committee.  Aggregate attendance and retainer feesamounted to $371,000 in 2006.  Thenon-executive directors are also entitled to 75% discounts off the usual roomrates and food and beverage prices for personal visits at OEH’s properties.

**Pensions**

Through May 2006,certain executive officers who are United Kingdom citizens participated in acontributory defined benefit pension plan established by an OEH subsidiary forBritish employees.  The amount ofcontribution by the subsidiary to the plan in respect of a specific personcannot readily be separated or individually calculated.  Participants in the plan are eligible toreceive at their normal retirement date an annual pension based on the numberof years of pensionable service and their final pensionable compensation.

In May 2006, thesubsidiary froze its U.K. defined benefit pension plan, thus stopping future benefitaccrual, so that the benefit payable to participants at their normal retirementdate will be calculated using pensionable service and final pensionable salaryat that date.  From May 2006 and forlater years, the OEH subsidiary established a defined contribution pension planfor British employees, including U.K. citizen officers, under which thesubsidiary contributes to individual pension accounts established byemployees.  The subsidiary currentlycontributes for the executive officer participants in the new plan at the rateof ten percent of annual salary.

Under the U.K.defined benefit plan, currently estimated accrued annual benefits payable toparticipating executive officers of the Company amounted to approximately$343,000 in the aggregate at December 31, 2006, and under the U.K. definedcontribution plan, the OEH subsidiary contributed on behalf of participatingexecutive officers a total of $124,000 during 2006.  See Note 10 to the Financial Statementsregarding pension plans.

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Certain U.S. subsidiaries of OEH haveadopted a 401(k) pension plan that permits employees to contribute amounts outof their compensation into individual tax-deferred pension accounts.  The maximum contribution an employee could makewas $15,000 in 2006.  One executiveofficer of the Company based in the U.S. participated in this plan in 2006, andOEH paid $2,000 into his account as a partial matching payment under the planin addition to his own contribution.

Messrs. JamesSherwood, Andrews, Boyen, Rusconi and Hetherington participated in no OEHpension plan in 2006.  During the yearthe Company and Mr. James Sherwood agreed that he would make his own privatepension arrangements upon the Company’s payment to him of a lump-sum of$179,000 and a one-time ten percent increase in his 2006 salary.

**2000 and 2004 Stock Option Plans**

Options to purchase Class A common shares of theCompany have been granted to directors, executive officers and selectedemployees under the Company’s 2000 and 2004 Stock Option Plans, which are administeredby the Compensation Committee of the Board of Directors and have substantiallythe same terms.  The plans provide forthe award of options to purchase up to 1,250,000 Class A and B commonshares at market value at the time of the award.  In general, options become exercisable threeyears after the date of grant and expire ten years from date of grant. Incertain circumstances constituting a change in control of the Company,outstanding options become immediately exercisable, and optionees may thereaftersurrender their options instead of exercising them and receive directly fromthe Company in cash the difference between the option exercise price and thevalue of the underlying shares determined according to the plans.

During 2006,options to purchase an aggregate of 95,750 Class A shares were granted todirectors and executive officers of the Company at prices of $34.88 to $42.87per share, including options on 18,200 shares to Mr. Simon Sherwood, 8,800shares to Mr. James Sherwood and 4,200 shares to each of the other directors(except 3,150 shares to Ms. Leith). Options were exercised by directors or officers during 2006 on anaggregate of 221,250 Class A shares at an aggregate gain of $5,069,000.  At December 31, 2006, options topurchase an aggregate of 435,250 Class A shares (of which 214,000 wereexercisable) were held by directors and executive officers at per shareexercise prices ranging from $13.00 to $42.87 and expiring between 2010 and2016.  See Note 14 to the FinancialStatements.

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**ITEM 12.       SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters**

**Five Percent Shareholders**

The following table contains information concerningthe beneficial ownership of the Company’s Class A common shares and Class Bcommon shares by the only persons known to OEH to own beneficially more than 5%of the outstanding shares of either class of common shares.

Orient-ExpressHoldings 1 Ltd. (“Holdings”) listed in the table below is a subsidiary of theCompany which owns only Class B shares. Under Bermuda law, the shares owned by Holdings are outstanding and maybe voted.  In a takeover of OEH, thisstructure may assist in maximizing the value that shareholders of the Companyreceive in the takeover transaction. Each Class B share is convertible at any time into one Class A shareand, therefore, the shares listed as owned by Holdings represent Class B sharesand the Class A shares into which those shares are convertible.

Voting anddispositive power with respect to the Class B shares owned by Holdings isexercised by its Board of Directors, who are Messrs. Campbell, James Sherwoodand two other persons who are not directors or officers of the Company.  Each of these persons may be deemed to sharebeneficial ownership of the Class B shares owned by Holdings for which heserves as a director, as well as the Class A shares into which those Class Bshares are convertible, but is not shown in the table below.
| **Name and Address**                                               | ** ** | **No. of  Class A  and Class B  Shares** | ** ** | **Percent  of  Class A  Shares(1)** | ** ** | **Percent  of  Class B  Shares** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------------------|------------|---------------------------------------|------------|
|                                                                         |       |                                                         |       |                                     |       |                                  |       |
| Orient-Express Holdings  1 Ltd.  22 Victoria Street  Hamilton HM 12  Bermuda |       | 18,044,478                                                   |       | 29.9                                     | %          | 100.0                                 | %          |

 

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(1)                                  Thepercentage of Class A shares shown is based on the 42,251,600 Class Ashares outstanding on February 20, 2007, plus the Class A shares issuableupon conversion of the Class B shares beneficially owned by that person,if any.

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**Directors and Executive Officers**

The following table contains information concerningthe beneficial ownership of Class A common shares of the Company by eachdirector and executive officer of the Company and by all directors andexecutive officers of the Company as a group. Each person has sole voting and dispositive power with respect to his orher shares, except Mr. Campbell who shares voting and dispositive power withrespect to his shares, Mr. Lovejoy who shares voting and dispositive power withrespect to 200 shares, and Mr. James Sherwood who shares voting and dispositivepower with respect to 10,300 shares. Each individual’s holding is less than 1% of the Class A sharesoutstanding, other than Mr. James Sherwood with 1.3%.  The group total includes 214,000 Class Ashares covered by exercisable stock options held by directors and executiveofficers under the Company’s 2000 Stock Option Plan which, together with theother shares beneficially owned by directors and executive officers, represents1.9% of Class A shares outstanding.

As noted above,certain of these directors and executive officers of the Company may be deemedto share beneficial ownership of the Class B shares held by Holdings becausethey are also directors of that subsidiary, but those shares are not includedin the following table.
| **Name**                                                                                                         | ** ** | **No. of Class  A Shares** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
|                                                                                                             |       |                                      |       |
| Dean P. Andrews                                                                                                  |       | 1,000                                     |       |
| Filip Boyen                                                                                                      |       | —                                    |       |
| John D. Campbell                                                                                                 |       | 1,000                                     |       |
| Roger V. Collins                                                                                                 |       | —                                    |       |
| Adrian D.  Constant                                                                                              |       | —                                    |       |
| Edwin S.  Hetherington                                                                                           |       | 1,000                                     |       |
| James B. Hurlock                                                                                                 |       | 1,000                                     |       |
| Pippa Isbell                                                                                                     |       | 650                                       |       |
| Prudence M.  Leith                                                                                               |       | —                                    |       |
| J. Robert  Lovejoy                                                                                               |       | 5,200                                     |       |
| Georg R. Rafael                                                                                                  |       | —                                    |       |
| Natale Rusconi                                                                                                   |       | 3,500                                     |       |
| James B.  Sherwood                                                                                               |       | 545,295                                   |       |
| Simon M.C.  Sherwood                                                                                             |       | 14,400                                    |       |
| Nicholas R.  Varian                                                                                              |       | 600                                       |       |
| Paul M. White                                                                                                    |       | 1,000                                     |       |
| David C.  Williams                                                                                               |       | —                                    |       |
| All directors and  executive officers as a group (17 persons) including 214,000 exercisable  stock option shares |       | 788,645                                   |       |

 

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**Voting Control of the Company**

The following table lists the voting power held by theknown beneficial owners of more than 5% of the outstanding Class A orClass B common shares of the Company and all directors and executiveofficers as a group.  Those directors andexecutive officers of the Company who are deemed to be beneficial owners solelybecause they are directors of Holdings are not listed individually but areincluded in the group.
| **Name**                                                                                                         | ** ** | **No. of  Class A  Shares** | ** ** | **No. of  Class B  Shares** | ** ** | **Combined  Voting  Power** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|-----------------------------|------------|
| Holdings                                                                                                         |       | —                                |       | 18,044,478                            |       | 81.0                        | %          |
| All directors and  executive officers as a group (17 persons) including 214,000 exercisable  stock option shares |       | 788,645                               |       | 18,044,478                            |       | 81.4                        | %          |

 

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

Holdings and theCompany’s directors and executive officers hold in total approximately 31% innumber of the outstanding Class A and Class B shares having approximately 81%of the combined voting power of the outstanding common shares of the Companyfor most matters submitted to a vote of the Company’s shareholders. Othershareholders, accordingly, hold approximately 69% in number of the commonshares having about 19% of combined voting power in the Company.

Under Bermuda law,the Class B shares owned by Holdings (representing approximately 81% of thecombined voting power) are outstanding and may be voted by thatsubsidiary.  The investment by Holdingsin Class B shares and the manner in which Holdings votes those shares aredetermined by the Board of Directors of Holdings (two of whom are alsodirectors of the Company) consistently with the exercise by those directors oftheir fiduciary duties to the subsidiary. Holdings, therefore, has the ability to elect at least a majority of themembers of the Board of Directors of the

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Company and to controlthe outcome of most matters submitted to a vote of the Company’s shareholders.

With respect to anumber of matters which would tend to change control of the Company, itsmemorandum of association and bye-laws contain provisions that could make itharder for a third party to acquire OEH without the consent of the Company’sBoard of Directors. These provisions include supermajority shareholder votingprovisions for the removal of directors and for “business combination”transactions with beneficial owners of shares carrying 15% or more of the voteswhich may be cast at any general meeting of shareholders, and limitations onthe voting rights of such 15% beneficial owners. Also, the Company’s Board ofDirectors has the right under Bermuda law to issue preferred shares withoutshareholder approval, which could be done to dilute the share ownership of apotential hostile acquirer. Also, the rights to purchase series A juniorpreferred shares, one of which is attached to each Class A andClass B common share of the Company, may have anti-takeover effects.  See Note 13(c) to the FinancialStatements.  Although OEH managementbelieves these provisions provide for an opportunity to receive a higher bid byrequiring potential acquirers to negotiate with the Company’s Board ofDirectors, these provisions apply even if the offer may be consideredbeneficial by many shareholders.

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

**ITEM 13.       CertainRelationships and Related Transactions, and Director Independence**

*RelatedParty Transactions*

Mr. JamesSherwood owns a private residential apartment in the Hotel Cipriani in Venice,Italy, a hotel owned by a subsidiary of the Company. OEH has grantedMr. Sherwood a right of first refusal to purchase the hotel in the eventOEH proposes to sell it.  The purchaseprice would be the offered sale price in the case of a cash sale or the fairmarket value of the hotel, as determined by an independent valuer, in the caseof a non-cash sale.  Similarly, ifMr. Sherwood proposes to sell his apartment, he has granted OEH a right offirst refusal to purchase it at fair market value or, at Mr. Sherwood’soption in the case of a proposed cash sale, the offered sale price.  In addition, the Company has granted anoption to Mr. Sherwood to purchase the hotel at fair market value if achange in control of the Company occurs.

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Mr. JamesSherwood and the subsidiary of the Company which owns the Hotel Cipriani haveentered into an agreement under which he may rent his apartment to the hotel inreturn for 50% of the amounts paid by hotel guests for use of theapartment.  In 2006, the hotel paidMr. Sherwood $150,000 for the use of his apartment.  Also, in any calendar year when the apartmentis made available to the hotel for 90 days or more when the hotel is opento guests, the hotel is obligated to clean, repair and insure the apartment atits expense and provide Mr. Sherwood and his guests with all hotelservices other than food and drink free of charge, including electricity, airconditioning, telephone rental, water and room services for the apartment.  To the extent that the apartment is madeavailable to the hotel for less than 90 days per year, Mr. Sherwoodmust pay a proportionate share of those expenses.

Mr. James Sherwoodand his two stepsons including Mr. Simon Sherwood own Capannelle S.r.l., avineyard in the Chianti region of Italy that produces wine, olive oil and otherproducts principally for public sale.  In2006, the vineyard sold $86,500 of products to OEH hotels at prices the same asits public prices.

Capannelle and theCompany’s subsidiary that owns the Villa San Michele near Florence, Italy haveentered into an agreement under which Capannelle makes the main house and otherparts of the vineyard available to short-stay guests provided by thehotel.  The incremental costs ofCapannelle and Villa San Michele in servicing the guests each year are nettedagainst the amounts charged by the hotel for guest accommodation, food, beverageand other hotel services, and the net amount is shared equally betweenCapannelle and Villa San Michele.  In2006, Capannelle earned $19,400 from this arrangement which continues on ayear-to-year basis unless terminated by either party.

In August 2006 Mr.Simon Sherwood purchased one of the 14 private residential villas developed atthe Napasai hotel of OEH in Koh Samui, Thailand.  The purchase price was $775,000 paid in cashand generating a profit to the hotel similar to that from unrelated third partypurchasers of the other villas sold.  Mr.Simon Sherwood and the hotel have entered into a management agreement for hisvilla based on the hotel’s standard terms, including the hotel’s right to rentthe property to hotel guests when not occupied by Mr. Simon Sherwood or hisguests.

In connection withthe initial public offering of OEH in August 2000 and in anticipation ofthe separation of the two companies, OEH and SCL entered into a tax sharingagreement

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that allocatesresponsibilities for tax matters between the two companies for periods prior tothe separation of OEH and SCL.  Ingeneral, OEH will continue to be responsible for taxes of itself and itssubsidiaries after the separation from SCL, and SCL has agreed to indemnify OEHfor all taxes attributable to the separation itself.  OEH and SCL also entered into a services agreementcovering the provision to OEH of various support services and office space bySCL, for which OEH paid a fee plus reimbursements approximating SCL’scosts.  This agreement terminated atDecember 31, 2006 after OEH gave the contractual one-year notice of terminationat the end of 2005.

See also Note 19to the Financial Statements (Item 8 above) regarding related partytransactions.

*DirectorIndependence*

The seven membersof the Board of Directors of the Company are identified in Item 10–Directors and Executive Officers ofthe Registrant.  Regarding theindependence of directors from OEH’s management, the Board has reviewed themateriality of any relationship that each of the seven directors of the Companyhas with OEH either directly or indirectly through another organization. Thecriteria applied included the director independence requirements set forth inthe Company’s Corporate Governance Guidelines, any other managerial, familial,professional, commercial or affiliated relationship between a director and theCompany, a subsidiary or another director and, with respect to the Company’sAudit Committee, the SEC’s independence rules. Based on this review, the Board has determined that Ms. Leith andMessrs. Campbell, Hurlock, Lovejoy and Rafael are independent directors.  The Company’s Corporate Governance Guidelinesare filed as a exhibit to this report and are available at OEH’s websitewww.orient-express.com.

**ITEM 14.       PrincipalAccountant Fees and Services**

The following table presents the fees of Deloitte& Touche LLP, OEH’s independent auditor, for audit and permitted non-auditservices in 2006 and 2005:
|                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |
| Audit fees          |       | $        | 1,912,000  |     | $          | 1,736,000 |   |
| Audit-related  fees |       | 437,000  |       | 217,000  |       |
| Tax fees            |       | 467,000  |       | 445,000  |       |
| All other fees      |       | —   |       | —   |       |
| Total               |       | $        | 2,816,000  |     | $          | 2,398,000 |   |

 

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Audit servicesconsist of work performed in connection with the audit of financial statementsand management’s assessment of the effectiveness of internal control overfinancial reporting for each fiscal year and in the review of financialstatements included in quarterly reports during the year, as well as worknormally done by the independent auditor in connection with statutory andregulatory filings, such as statutory audits of non-U.S. subsidiaries, andconsents and comfort letters for SEC registration statements.

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

Tax servicesconsist of all services performed by the independent auditor’s tax personnel,except those services specifically related to the audit or review of financialstatements, and include fees in the areas of tax return preparation andcompliance and tax planning and advice.

Other servicesconsist of those services permitted to be provided by the independent auditorbut not included in the other three categories. There were none provided in 2006 and 2005.

The AuditCommittee of the Board of Directors of the Company has established a policy topre-approve all audit and permitted non-audit services provided by theindependent auditor.  Prior to engagementof the auditor for the next year’s audit, management and the auditor submit tothe Committee a description of the audit and permitted non-audit servicesexpected to be provided during that year in each of four categories of servicesdescribed above, together with a fee proposal for those services.  Prior to the engagement of the independentauditor, the Audit Committee considers with management and the auditor andapproves (or revises) both the description of audit and permitted non-auditservices proposed and the budget for those services. If circumstances ariseduring the year when it becomes necessary to engage the independent auditor foradditional services not contemplated in the original pre-approval, the AuditCommittee at its regularly scheduled meetings requires separate pre-approvalbefore engaging the independent auditor. To ensure prompt handling of unexpected matters, the Committee maydelegate pre-approval authority to one or more of its members who report anypre-approval decisions to the Committee at its next scheduled meeting.  For 2006 and 2005, all of the audit and permittednon-audit services described above were pre-approved under the policy.

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**PART IV**

**ITEM 15.       Exhibitsand Financial Statement Schedules**
|                                                                                                                                                                                            | ** ** | **Page  Numbers** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| 1.       Financial  Statements                                                                                                                          |       |              |
|                                                                                                                                                                                       |       |              |
| Reports of  independent registered public accounting firm                                                                                                                                  |       | 60                |
| Consolidated  financial statements - years ended December 31, 2006, 2005 and 2004:                                                                                                         |       |              |
| Balance  sheets (December 31, 2006 and 2005)                                                                                                                                               |       | 64                |
| Statements  of operations                                                                                                                                                                  |       | 65                |
| Statements  of cash flows                                                                                                                                                                  |       | 66                |
| Statements  of shareholders’ equity                                                                                                                                                   |       | 67                |
| Notes to  financial statements                                                                                                                                                             |       | 68                |
|                                                                                                                                                                                       |       |              |
| 2.       Financial  Statement Schedule                                                                                                                  |       |              |
|                                                                                                                                                                                       |       |              |
| Schedule II - Valuation and qualifying accounts (years  ended December 31, 2006, 2005 and 2004)                                                                                            | 131        |
|                                                                                                                                                                                       |
| 3.       Exhibits.    The  index to exhibits appears below, on the pages immediately following the  signature pages to this report. |
|                                                                                                                                                                                            |            |                   |  |

 

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ORIENT-EXPRESSHOTELS LTD. AND SUBSIDIARIES

Schedule II–Valuation and Qualifying Accounts
| **Column A**                | ** ** | **Column B**                          | ** ** | **Column C**                         | ** ** | **Column D**                    | ** ** | **Column E** | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------|------------|-------------------|------------|
| ** **                       | ** ** | ** **                                 | ** ** | **Additions**                             | ** ** | ** **                           | ** ** | ** **        | ** ** |
| **Description**                  | ** ** | **Balance  at  beginning  of period** | ** ** | **Charged  to  costs and  expenses** | ** ** | **Charged to  other  accounts** | ** ** | **Deductions**    | ** ** | **Balance  at  end  of period** | ** ** |
|                             |       |                                       |       |                                      |       |                                 |       |              |       |   |   |
| Year ended  December 31, 2006:   |       |                                       |       |                                      |       |                                 |       |              |       |   |   |
| Allowance for  doubtful accounts |       | $                                          | 980,000    |                                      | $          | 261,000                              |       | $                 | 102,000    | (2) | $ | 44,000 | (1) | $ | 1,299,000 |   |
|                             |       |                                       |       |                                      |       |                                 |       |              |       |   |   |
| Year ended  December 31, 2005:   |       |                                       |       |                                      |       |                                 |       |              |       |   |   |
| Allowance for  doubtful accounts |       | $                                          | 1,027,000  |                                      | $          | 164,000                              |       | $                 | (111,000   | )(2) | $ | 88,000 | (1) | $ | 980,000 |   |
|                             |       |                                       |       |                                      |       |                                 |       |              |       |   |   |
| Year ended  December 31, 2004:   |       |                                       |       |                                      |       |                                 |       |              |       |   |   |
| Allowance for doubtful  accounts |       | $                                          | 976,000    |                                      | $          | 112,000                              |       | $                 | 60,000     | (2) | $ | 121,000 | (1) | $ | 1,027,000 |   |

 

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(1)                                  Baddebts written off, net of recoveries.

(2)                                  Foreigncurrency translation adjustments.

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.
| Dated:  March 1, 2007 | ORIENT-EXPRESS HOTELS LTD. |
|---------------------------------|----------------------------|
|                            |                       |
|                            |                       |
|                            | By:                        | /s/  Simon  M.C. Sherwood |   |
|                            |                       | Simon M.C.  Sherwood |   |
|                            |                       | President and |   |
|                            |                       | Chief Executive  Officer |   |

 

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

Dated: March 1, 2007
| Name                                | ** ** | **Title**                                               |
|-------------------------------------|------------|---------------------------------------------------------|
|                                |       |                                                    |
|                                |       |                                                    |
| /s/  John  D. Campbell    |       | Director                                                |
| John D. Campbell                    |       |                                                    |
|                                |       |                                                    |
|                                |       |                                                    |
| /s/  James  B. Hurlock    |       | Director                                                |
| James B. Hurlock                    |       |                                                    |
|                                |       |                                                    |
|                                |       |                                                    |
| /s/  Prudence  M. Leith   |       | Director                                                |
| Prudence M.  Leith                  |       |                                                    |
|                                |       |                                                    |
|                                |       |                                                    |
| /s/  J.  Robert Lovejoy   |       | Director                                                |
| J. Robert  Lovejoy                  |       |                                                    |
|                                |       |                                                    |
|                                |       |                                                    |
| /s/  Georg  R. Rafael     |       | Director                                                |
| Georg R. Rafael                     |       |                                                    |
|                                |       |                                                    |
|                                |       |                                                    |
| /s/  James  B. Sherwood   |       | Chairman and Director                                   |
| James B.  Sherwood                  |       |                                                    |
|                                |       |                                                    |
|                                |       |                                                    |
| /s/  Simon  M.C. Sherwood |       | President, Chief Executive                              |
| Simon M.C.  Sherwood                |       | Officer and Director                                    |
|                                |       |                                                    |
|                                |       |                                                    |
| /s/  Paul  M. White       |       | Vice President-Finance and                              |
| Paul M. White                       |       | Chief Financial Officer (Principal Accounting  Officer) |

 

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**EXHIBIT INDEX**
| Exhibit  No. | ** ** | **Incorporated by  Reference to**                                        | ** ** | **Description**                                                                                                                                                                                                          |
|--------------|------------|--------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                     |       |                                                                                                                                                                                                                     |
| 3.1          |       | Exhibit 3.1 to  Form S-1 Registration Statement No. 333-12030            |       | Memorandum of  Association and Certificate of Incorporation of Orient- Express Hotels Ltd.                                                                                                                               |
| 3.2          |       | Exhibit 3 to  July 6, 2006 Form 8-K Current Report (File No. 1-16017)    |       | Bye-Laws  of Orient-Express Hotels Ltd.                                                                                                                                                                                  |
| 3.3          |       | Exhibit 4.2 to  Form S-1 Registration Statement No. 333-12030            |       | Rights Agreement  between Orient-Express Hotels Ltd. and Fleet National Bank, as Rights Agent,  dated June 1, 2000                                                                                                       |
| 4.1          |       | Exhibit 1.1 to  July 26, 2006 Form 8-K Current Report (File No. 1-16017) |       | Secured Facility  Agreement, dated July 20, 2006, for Orient-Express Hotels Ltd. arranged by  Barclays Capital with Barclays Bank PLC acting as Agent and Barclays Bank PLC  acting and Security Trustee                 |
| 4.2          |       | Exhibit 1.2 to  July 26, 2006 Form 8-K Current Report (File No. 1-16017) |       | Secured Facility  Agreement, dated July 20, 2006, for Orient-Express Hotels Ltd. arranged by  Barclays Capital with Banca Nazionale del Lavoro S.p.A. acting as Lender and  Barclays Bank PLC acting as Security Trustee |

 

OEH has no instrument with respect to long-term debtnot listed above under which the total amount of securities authorized exceeds10% of the total assets of OEH on a consolidated basis. The Company agrees tofurnish to the SEC upon request a copy of each instrument with respect tolong-term debt not filed as an exhibit to this report.
| 10.1 |   | Exhibit 10.1 to  Form S-1 Registration Statement No. 333-12030  |   | Orient-Express  Hotels Ltd. 2000 Stock Option Plan |
|------|--------|-----------------------------------------------------------------|--------|----------------------------------------------------|
| 10.2 |   | Exhibit 10.2 to  2004 Form 10-K Annual Report (File No.1-16017) |   | Orient-Express  Hotels Ltd. 2004 Stock Option Plan |

 

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| Exhibit  No. | ** ** | **Incorporated by  Reference to**                                 | ** ** | **Description**                                                                                                                                                                                        |
|--------------|------------|-------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                              |       |                                                                                                                                                                                                   |
| 10.3         |       | 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.                           |
| 10.4         |       | 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. |
| 10.5         |       | 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.                                                                                                                 |
| 10.6         |       | Exhibit 2.1 to  Form S-1 Registration Statement No. 333-12030     |       | Services  Agreement dated August 1, 2000 among Sea Containers Ltd., Sea Containers  Services Ltd. and Orient-Express Hotels Ltd.                                                                       |
| 10.7         |       | Exhibit 10.6 to  2001 Form 10-K Annual Report (File No. 1-16017)  |       | Amendment to  Services Agreement dated January 1, 2001 (Exhibit 10.6 above).                                                                                                                           |
| 10.8         |       | Exhibit 2.3 to  Form S-1 Registration Statement No. 333-12030     |       | Tax Sharing  Agreement dated August 1, 2000 between Sea Containers Ltd. and Orient-Express  Hotels Ltd.                                                                                                |
| 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        |       |                                                              |       | Severance  Agreement dated December 1, 2006 between Orient-Express Hotels Ltd. and Simon  M.C. Sherwood                                                                                                |
| 10.11        |       |                                                              |       | Form of  Severance Agreement dated December 1, 2006 between Orient-Express Hotels Ltd.  and each of Filip Boyen, Roger Collins, Adrian Constant, Pippa Isbell,  Nicholas Varian, and Paul White        |

 

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| Exhibit  No. | ** ** | **Incorporated by  Reference to**                              | ** ** | **Description**                                                                                                       |
|--------------|------------|----------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|
|         |       |                                                           |       |                                                                                                                  |
| 10.12        |       |                                                           |       | Form of  Severance Agreement dated December 1, 2006 between Dean Andrews, Edwin  Hetherington and David Williams      |
| 11           |       |                                                           |       | Statement of  computation of per share earnings                                                                       |
| 12           |       |                                                           |       | Statement of  computation of ratios                                                                                   |
| 14           |       | Exhibit 14 to  2003 Form 10-K Annual Report (File No. 1-16017) |       | Code of Business  Practices for Principal Executive, Financial and Accounting Officers                                |
| 21           |       |                                                           |       | Subsidiaries of  Orient- Express Hotels Ltd.                                                                          |
| 23           |       |                                                           |       | Consent of  Deloitte & Touche LLP relating to Form S-8 Registration Statements No.  333-58298 and No. 333- 129152 |
| 31           |       |                                                           |       | Rule  13a-14(a)/15d-14(a) Certifications                                                                              |
| 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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