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**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

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**(MarkOne)**

 
| **x**      | ** ** | **ANNUAL REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**      |
|------------|------------|----------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                     |
| ** ** | ** ** | **For the fiscal year ended December 31,  2008**                                                    |
| ** ** | ** ** | ** **                                                                                               |
| **OR**     |
|       |       |                                                                                                     |
| **o**      | ** ** | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
| ** ** | ** ** | ** **                                                                                               |
| ** ** | ** ** | **For the transition period  from            to** |

 

**Commission File Number 1-16017**

 

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**ORIENT-EXPRESSHOTELS LTD.**

(Exact name of registrant 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 telephone number, including area code: **(441) 295-2244**

 

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

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

 

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

 

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Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.

Yes o   No x

 

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 check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the Act duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x  No o

 

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

 

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

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

 

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

 

The aggregate market value of the Class A common shares held bynon-affiliates of the registrant computed by reference to the closing price on June 30,2008 (the last business day of the registrant’s second fiscal quarter in 2008)was approximately $1,840,200,000.

 

As of February 20,2009, 50,959,500 Class A common shares and 18,044,478 Class B commonshares of the registrant were outstanding. All of the Class B shares are owned by a subsidiary of theregistrant (see Note 14(d) to the Financial Statements (Item 8)).

 

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DOCUMENTS INCORPORATED BY REFERENCE:  **None**

 

 

 

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**TABLEOF CONTENTS**

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| ** **    | ** ** | ** **                                                                                                          | **Page** |
|---------------|------------|---------------------------------------------------------------------------------------------------------------------|----------|
|          |       |                                                                                                                |     |
| PART I   | Item 1.    | Business                                                                                                            | 4        |
|          | Item 1A.   | Risk Factors                                                                                                        | 23       |
|          | Item 1B.   | Unresolved  Staff Comments                                                                                          | 41       |
|          | Item 2.    | Properties                                                                                                          | 41       |
|          | Item 3.    | Legal  Proceedings                                                                                                  | 41       |
|          | Item 4.    | Submission  of Matters to a Vote of Security  Holders                                                               | 43       |
|          |       |                                                                                                                |     |
| PART II  | Item 5.    | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 44       |
|          | Item 6.    | Selected  Financial Data                                                                                            | 45       |
|          | Item 7.    | Management’s  Discussion and Analysis of Financial  Condition and Results of Operations                        | 46       |
|          | Item 7A.   | Quantitative  and Qualitative Disclosures About  Market Risk                                                        | 83       |
|          | Item 8.    | Financial  Statements and Supplementary Data                                                                        | 86       |
|          | Item 9.    | Changes  in and Disagreements with Accountants  on Accounting and Financial Disclosure                              | 140      |
|          | Item 9A.   | Controls  and Procedures                                                                                            | 140      |
|          | Item 9B.   | Other  Information                                                                                                  | 142      |
|          |       |                                                                                                                |     |
| PART III | Item 10.   | Directors,  Executive Officers and Corporate  Governance                                                            | 143      |
|          | Item 11.   | Executive  Compensation                                                                                             | 148      |
|          | Item 12.   | Security  Ownership of Certain Beneficial Owners  and Management and Related Stockholder  Matters                   | 153      |
|          | Item 13.   | Certain  Relationships and Related Transactions,  and Director Independence                                         | 159      |
|          | Item 14.   | Principal  Accountant Fees and Services                                                                             | 161      |
|          |       |                                                                                                                |     |
| PART IV  | Item 15.   | Exhibits  and Financial Statement Schedules                                                                         | 163      |
|          |       | Signatures                                                                                                          | 165      |
|          |       | Exhibit Index                                                                                                  | 167      |

 

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**Preliminary Note:**  Forward-looking statements concerning theoperations, performance, financial condition, plans and prospects ofOrient-Express Hotels Ltd. and its subsidiaries are based on management’scurrent assessments and assumptions, are not historical facts, and are subjectto various risks and uncertainties. Forward-looking statements can be identified by the fact that they donot relate only to historic or current facts, and often use words such as “anticipate”,“target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “believe” or otherwords of similar meaning.  Actual resultscould differ materially from those anticipated in the forward-lookingstatements due to a number of factors, including those described in Item1—Business, Item 1A—Risk Factors, Item 3—Legal Proceedings, Item 7—Management’sDiscussion and Analysis, Item 7A—Quantitative and Qualitative Disclosures aboutMarket Risk, and Item 12—Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters below.  Investors are cautioned not to place unduereliance on these forward-looking statements which are not guarantees of futureperformance.  Orient-Express Hotels Ltd.undertakes no obligation to update or revise publicly any forward-lookingstatement, whether as a result of new information, future events or otherwise.

 

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**PART I**

 

**ITEM1.  Business**

 

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

 

These reports and amendments to them areavailable free of charge on the internet website of the Company as soon asreasonably practicable after they are filed electronically with the SEC.  The internet website address ishttp://www.orient-express.com.  Unlessspecifically noted, information on the OEH website is not incorporated byreference into this Form 10-K annual report.

 

Pursuant to SEC Rule 3a12-3 under the1934 Act regarding foreign private issuers, the proxy solicitations of theCompany are not subject to the disclosure and procedural requirements of SECRegulation 14A under the 1934 Act, and transactions in the Company’sequity securities by its officers, directors and significant shareholders areexempt from the reporting and liability provisions of Section 16 of the1934 Act.

 

**Introduction**

 

OEH is a hotel and travel company focusedon the luxury end of the leisure market with exposure to both mature andemerging national economies.  The Company’spredecessor began acquiring hotels in 1976 and organized the Company in1995.  OEH currently owns and/or investsin 51 properties (all of which it manages) consisting of 41 highly individualdeluxe hotels, two restaurants, six tourist trains and two river/canal cruisebusinesses.  These are located in 25countries worldwide.  OEH acquires ormanages only very distinctive properties in areas of outstanding cultural,historic or recreational interest in order to provide luxury lifestyleexperiences for the discerning traveller.

 

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The locations of OEH’s 51 properties areshown in the map on page 3, where they number 47 because the HotelCipriani and Palazzo Vendramin are contiguous in Venice, the Hotel Splendidoand Splendido Mare are both in Portofino, and three separate safari lodgesoperate as a unit in Botswana.  Theseseven properties bring the total to 51.

 

Hotels and restaurants represent thelargest segment of OEH’s business, contributing 90% of revenue in 2008, 83% in2007 and 84% in 2006.  Tourist trains andcruises accounted for 12% of revenue in 2008, 14% in 2007 and 13% in 2006.  Property development activities accounted forthe remaining revenue in each year. Property revenue in 2008 was negative because of a change of accountingtreatment, as explained in Note 1(g) to the Financial Statements (Item 8below).

 

OEH’s worldwide portfolio of hotelscurrently consists of 3,897 individual guest rooms and multiple-room suites,each known as a “key”.  Hotels owned byOEH in 2008 achieved an average daily room rate (“ADR”) of $444 (2007—$428) anda revenue per available room (“RevPAR”) of $262 (2007—$263).  Approximately 70% of OEH’s customers areleisure travellers, with approximately 34% of customers in 2008 originatingfrom North America, 53% from Europe and the remaining 13% from elsewhere in theworld.

 

Revenue, earnings and identifiable assetsof OEH in 2008, 2007 and 2006 for its business segments and geographic areasare presented in Note 19 to the Financial Statements.

 

**OwnedHotels—Europe**

 

*Italy*

 

The **Hotel Cipriani**and **Palazzo Vendramin**—98 keys—in Venicewere built for the most part in the 1950s and are located on three acres onGiudecca Island across from the Piazza San Marco which is accessed by a freeprivate boat service.  Most of the roomshave views over the Venetian lagoon. Features include fine cuisine in three indoor and outdoor restaurants,gardens and terraces encompassing an Olympic-sized swimming pool, a tenniscourt, a spa and a large banquet and meeting facility situated in an historicrefurbished warehouse.

 

The **Hotel Splendido**and **Splendido Mare**—80 keys—overlookpicturesque 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.

 

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The **Villa San Michele**—46keys—is located in Fiesole, a short distance from Florence.  Originally built as a monastery in the 15thcentury with a façade attributed to Michelangelo, it has stunning views overhistoric Florence and the Arno River Valley. OEH has remodelled and expanded the guest accommodation to luxurystandards, including the addition of a swimming pool.  A shuttle bus service is provided intoFlorence.  The property occupies tenacres.  The Villa San Michele also operatesfor hotel guests the five-bedroom main house of the **Capannelle**wine estate in the Chianti region owned by James Sherwood.  See Item 13—Certain Relationships and RelatedTransactions, and Director Independence below.

 

The **Hotel Caruso Belvedere**—48keys—in Ravello is located on three hill-top acres overlooking the Amalfi coastnear Naples and ancient Roman and Greek archaeological sites such as Pompeiiand Paestum.  Once a nobleman’s palace,parts of the buildings date back to the 11th century.  Operated as a hotel for many years, OEHrebuilt the property after acquiring it and reopened in 2005.  Amenities include two restaurants, an outdoorswimming pool, spa and extensive gardens.

 

All of these Italian properties operateseasonally, closing for varying periods during the winter.

 

*Portugal*

 

**Reid’s Palace**—163 keys—is a famous hotel on the island of Madeira, situated onten acres of semitropical gardens on a cliff top above the sea and the bay ofFunchal, the main port city.  Opened in1891, the hotel has four restaurants and banquet/meeting facilities.  Leisure and sports amenities include freshand sea water swimming pools, a third tide-filled pool, tennis courts, oceanwater sports, a spa and access to two championship golf courses.  It has year-round appeal to European leisuretravellers, serving both winter escapes to the sun and regular summerholidays.  For-sale residential units maybe built in the future on the grounds of the hotel.

 

The **Lapa Palace**—109keys—is in the embassy district of Lisbon, near the city center and overlookingthe Tagus River. The historic part of the hotel was originally built in the1870s as the palace of a Portuguese noble family.  It opened as a luxury hotel in 1992 afterextensive conversion and expansion, including the addition of conferencefacilities and underground car parking. The hotel is set amid gardens with ornamental fountains and both indoorand outdoor swimming 

 

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pools and aspa, occupying a total of three acres. OEH owns an adjoining parcel of land suitable for building guest roomsor for-sale residential apartments.

 

*Elsewhere in Europe*

 

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

 

OEH owns **LaResidencia**—67 keys—located in the charming village of Deià on therugged 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 gastronomic El Olivio, as well as twolarge outdoor swimming pools, tennis courts and a spa with an indoor pool.

 

**Le Manoir aux Quat’Saisons**—32 keys—is located in Oxfordshire, England about an hour’s drivewest of London.  The main part of thehotel is a 16th century manor house set in 27 acres of gardens.  The property was developed by Raymond Blanc,one of Britain’s famous chef-patrons, and the hotel’s restaurant has two starsin the Michelin Guide.  Mr. Blanchas given a long-term commitment to remain the chef at the hotel.

 

OEH owns a 93.5% interest in the **Grand Hotel Europe**—301 keys—in St. Petersburg, Russia.  Originally built in 1875, the hotel occupiesone side of an entire city block on the fashionable Nevsky Prospect in theheart of the city near the Russian Museum, Shostakovich Philharmonia and othertourist and cultural attractions as well as the business center.  There are five restaurants on the premises,popular with locals and visitors alike, as well as a grand ballroom, meetingfacilities, a health club and spa and several retail shops.  OEH is currently finishing a phasedrefurbishment of the hotel.  The minorityinterest is owned by the City of St. Petersburg.

 

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**OwnedHotels—North America**

 

*United States*

 

The **Windsor Court**—322keys—opened in 1984 and is located in the central business district of NewOrleans near the French Quarter and the Mississippi riverfront.  Harrah’s operates the only land-based casinoin Louisiana across the street.  Eachguest room has panoramic views over the river or the city.  Facilities include three restaurants andlounges, a roof-top ballroom, several other banquet and meeting rooms, anoutdoor swimming pool and a health club. The hotel’s interior décor features a collection of historic Europeanart and antique furniture.  The hotel hasplanning permission to build in the future a conference center on a nearbyowned lot.

 

**Keswick Hall**—48 keys—is located in the rolling countryside of central Virginia,near Charlottesville.  Originally aprivate home dating from 1912, it is popular for weekend breaks and businessmeetings and, with the adjacent Keswick Club, features a spa and fitnesscenter, tennis courts, three swimming pools and an Arnold Palmer-designedchampionship golf course.  The total siteoccupies 600 acres including vacant land around the golf course being sold byOEH in parcels for private residential development.  See “Property Development” below.

 

The **Inn at Perry Cabin**—80keys—was built in 1812 as a country inn located in St. Michaels, Maryland onthe eastern shore of Chesapeake Bay.  Seton 25 waterfront acres that include an outdoor swimming pool as well as boatingand fishing on the Bay, it is an attractive conference and vacation destination,particularly for guests from the Washington, D.C. area.  OEH has completed a major renovation andexpansion of the hotel, including a new conference facility and a spa.  Vacant available land may be developed asresidences in the future.

 

OEH owns **El Encanto**—77keys—in Santa Barbara, California.  Thehotel is located in the hills above the restored Santa Barbara Mission, withviews out to the Pacific Ocean.  Built in1913 on a seven-acre site, the guest rooms are in cottages and low rise buildingsspread throughout mature gardens with a swimming pool and tennis court.  OEH closed this hotel in late 2006 forsignificant renovation, including the addition of 14 keys, a new main buildingwith spa, restaurant and meeting facilities, and a new pool and fitnesscenter.  Due to the current economicdownturn in the U.S., OEH has rescheduled the renovation for completion in2011.

 

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*Caribbean*

 

**La Samanna**—82 keys—is located on the island of St. Martin in the French WestIndies.  Built in 1973, the hotelconsists of several buildings on ten acres of land along a 4,000-footbeach.  Amenities include tworestaurants, two swimming pools, a spa, tennis courts, fitness and conferencecenters, boating and ocean water sports, and extensive gardens.  The hotel is open most of the year,seasonally closing during the autumn months.

 

OEH owns about 48 acres of additional landadjoining La Samanna on both the French and Dutch sides of St. Martin, which itis developing as for-sale residential villas and apartments.  See “Property Development” below.  Unsold furnished villas provide additionalroom stock for the hotel.

 

*Mexico*

 

OEH owns the **MaromaResort and Spa**—66 keys—on Mexico’s Riviera Maya on the Caribbeancoast of the Yucatan Peninsula, about 30 miles south of Cancun.  The resort opened in 1995 and has 25 acres ofland along a 750-foot beach with the Cozumel barrier reef offshore where guestsmay fish, snorkel and scuba-dive. Important Mayan archaeological sites are also nearby.  Rooms are arranged in low-rise villas andthere are three restaurants, tennis courts and extensive spa facilities.

 

In addition, OEH purchased in 2007 a28-acre tract adjacent to Maroma on which it plans to build and sell privatevillas in the future.  See “PropertyDevelopment” below.

 

OEH owns the **Casa deSierra Nevada**—37 keys—a luxury resort in the colonial town of SanMiguel de Allende.  Opened in 1952, thehotel consists of nine Spanish colonial buildings built in the 16th and 18thcenturies.  OEH has renovated the hotel,including the two restaurants, and has built new suites as well as a pool, spaand garden area.  In addition to the nineowned buildings, the hotel leases two buildings for administrativeoffices.  The total site is approximatelytwo acres.  OEH also owns a nearbycooking school and retail shop operated in conjunction with the hotel.  During 2008, OEH acquired the 20% minorityinterest it did not previously own.

 

**OwnedHotels—Rest of the World**

 

*South America*

 

Built in the 1920s on a three-acre sitefacing Copacabana Beach near the central business district of Rio de Janeiro,Brazil, the **Copacabana Palace**—225 keys—is a

 

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famous hotel inSouth America and features two fine-dining restaurants, spacious function andmeeting rooms including the hotel’s refurbished former casino rooms with spacefor up to 1,200 persons, a 500-seat theater, a large swimming pool, spa andfitness center, and a roof-top tennis court and pool.

 

In 2007, OEH acquired a 50%interest in a company owning 46 acres of beachfront land in Buzios, Brazil, apopular upmarket resort town about 100 miles east of Rio de Janeiro.  If necessary permits were issued, OEH hadplanned to acquire the entire property, most of which is environmentallyprotected, and build a new hotel of about 40 keys and 17 for-sale villas.  In February 2009, the Municipality of Buziosdesignated the property as having a “public interest” which is the first stepin a process for the compulsory purchase of the land in exchange for payment offair compensation to the owners, with a view to turning it into a municipalpark.  Accordingly, OEH’s developmentplan is in abeyance pending the outcome of this process.

 

In October 2007, OEHcommenced operation of **Hotel****das Cataratas**—203 keys—beside the famous Iguacu Falls in Brazilon the border with Argentina, having been awarded a 20-year lease by theBrazilian government.  It is the onlyhotel in the national park surrounding the falls, a World Heritage site.  First opened in 1958 on about four acres, thehotel has two restaurants, conference facilities, a swimming pool and tenniscourt, and tropical gardens looking out at the falls.  OEH is currently renovating the property inphases while it remains open for business, with completion scheduled in late2009.

 

The **Miraflores Park Hotel**—82keys—is located in the fashionable Miraflores residential district of Lima,Peru surrounded by parkland and looking out at the Pacific Ocean, yet near thecommercial and cultural center of the city. Opened in 1997, the hotel has two restaurants, a large ballroom, rooftopoutdoor pool, health and beauty facilities and a business center for guests,and occupies about one acre of land.

 

*Southern Africa*

 

The **Mount Nelson Hotel**—201keys—in Cape Town, South Africa is a famous historic property opened in1899.  With beautiful gardens and pools,it stands just below Table Mountain and is within walking distance of the mainbusiness, civic and cultural center of the city.  The hotel has a ballroom, two swimming pools,tennis courts, and a fitness center and spa, all situated on ten acres ofgrounds.  Expansion is planned throughincorporation into the hotel of adjoining residential properties owned by OEH.

 

The **Westcliff Hotel**—117keys—is the only garden hotel in Johannesburg, South Africa, opened in 1998 andsituated on six hillside acres with views over the city’s zoo andparkland.  Laid out in village style, itsresort amenities include two swimming pools, a tennis court and a healthclub.  The hotel 

 

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attractsbusiness guests because of its proximity to the city center.  A banquet and conference center occupies partof adjacent expansion land.

 

**Orient-Express Safaris**—39 keys total—consist of three separate game-viewing lodges inBotswana called **Khwai River Lodge, Eagle Island Camp**and **Savute Elephant Camp**.  Established in 1971, OEH leases the lodgesites in the Okavango River delta and nearby game reserves, where Africanwildlife can be observed from open safari vehicles or boats.  Each camp has 12 or 15 twin-bedded deluxetents under thatched roofs, and guests travel between the camps by lightaircraft. Boating, fishing, hiking and swimming are offered at the varioussites.

 

*Australia*

 

The **Observatory Hotel**—96keys—is in Sydney within walking distance of the central businessdistrict.  This hotel opened in 1993 andhas two restaurant and lounge areas, extensive meeting and banquet rooms, a spaand health club with indoor swimming pool, and a large parking garage on a siteof about one acre.  There is also accessto a nearby tennis court.

 

The **Lilianfels Blue Mountains**—85keys—is in the Blue Mountains National Park west of Sydney.  It is named after the original estate house,dating from 1890, where the hotel’s fine-dining restaurant is located.  The main hotel, built in 1992 and recentlyrefurbished, has a second restaurant and conference facilities.  The resort’s four acres of grounds encompassindoor and outdoor swimming pools, health club and spa, tennis court andextensive gardens with views over the Blue Mountains.  There is expansion land to add keys in thefuture.

 

*French Polynesia*

 

**Bora Bora Lagoon Resortand Spa**—76 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, private residential villas for sale can bedeveloped.  As previously reported, thehotel’s assets and liabilities have been designated as held for sale and itsresults have been reflected as discontinued operations for all periodspresented.  See Note 2 to the FinancialStatements.

 

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*Asia*

 

In July 2006,OEH acquired the Pansea group of six deluxe hotels in Southeast Asia describedbelow, each built and decorated in traditional local style.

 

**Napasai**—55 keys—is located on its own beach on thenorth side of Koh Samui island of Thailand in the Gulf of Siam.  Itoriginally opened in 2004 and features two restaurants, tennis courts, aswimming pool, a spa and water sports such as diving and snorkeling in thenearby coral reef.  The guest rooms are arranged in seaview cottages on atotal site of about 40 acres on which 14 private villas have been built withvacant land available to develop and sell additional villas.  See “PropertyDevelopment” below.  The hotel rents manyof the existing villas to its guests on a revenue-sharing basis with theowners.

 

On Bali in Indonesiaare two long-term leasehold properties, **JimbaranPuri Bali**—42 keys—and **UbudHanging Gardens**—38 keys.  Jimbaran Puri Bali originallyoccupied four beachfront acres on the south coast of the island.  Guestrooms are situated in cottages and, in addition to ocean water sports, thehotel features two restaurants and a swimming pool.  In 2007, OEH acquired a long lease of about threeadditional acres of vacant land beside the hotel on which OEH is building 22additional keys, each with a plunge pool, for opening in mid-2009.

 

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

 

**La Résidence d’Angkor**—55 keys—opened in 2002 and is situated inwalled gardens in Siem Reap, Cambodia.  The hotel occupies a site of abouttwo acres under long-term lease.  The ancient Temples of Angkor, theprincipal tourist attraction in the area, are near the hotel which has anindoor/outdoor restaurant and swimming pool. OEH has plans to add eight keys and a spa to this property in thefuture.

 

Built in 1920, **The Governor’s Residence**—48keys—in the embassy district of Rangoon, Burma (Myanmar) was originally theofficial home of one of the Burmese state governors in the 1920s.  It is ateak two-storey mansion surrounded by verandas overlooking lotus gardens, along-term leased site of about two acres that opened as a hotel in 1997. It includes a restaurant and swimming pool. OEH owns a 66% interest in the 

 

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property and has reached agreement in principle withthe other shareholders in the property to increase its interest to 100%.  The hotel was damaged by the cyclone thatstruck Burma in May 2008 and was closed for three months for repairs.

 

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

 

**HotelManagement Interests**

 

Through a 50%/50% joint venture with aSpanish investment company, OEH owns and manages the famous **Hotel Ritz**—167 keys—in central Madrid near the financialdistrict, Spanish parliament and many of the city’s well known touristattractions.  Opened in 1910, the hotelhas four spacious conference and banqueting suites, an indoor restaurant andthe popular Ritz Terrace restaurant outdoors in the gardens.  OEH and its 50% partner renovated the publicareas of the hotel and have plans for future refurbishment of the guest roomsincluding the addition of 13 keys.

 

**Charleston Place**—440 keys—is located in the heart of historic Charleston, SouthCarolina, a popular destination for tourists and business meetings.  Opened in 1986, the hotel has tworestaurants, extensive banqueting and conference space including a grandballroom, a fitness center with spa and swimming pool, and a shopping arcade of25 retail outlets leased to unaffiliated parties.  The hotel also owns the adjacent historicRiviera Theater remodelled as additional conference space and retail shops.  OEH has a 19.9% ownership interest in thishotel, manages the property under an exclusive long-term contract, and receivesinterest on partnership loans which it assumed at the time of its originalinvestment and on other loans made since then. See Note 3 to the Financial Statements regarding the change of accountingtreatment of this hotel at the end of 2008.

 

OEH has a 50%/50% joint venture with localinvestors in Peru which, under exclusive management of OEH, operates thefollowing three hotels under long-term renewable leases.

 

The **Hotel Monasterio**—126keys—is located in the ancient Inca capital of Cusco, an important touristdestination in Peru.  The hotel wasoriginally built as a Spanish monastery in the 16th century, converted to hoteluse in 1995, and upgraded by OEH since then. The deluxe guest rooms and two restaurants are arranged around open-aircloisters.  Because of Cusco’s highaltitude, specially oxygenated ventilation has been added to some of therefurbished rooms.  The three acre siteincludes a vacant convent adjoining the hotel which can in the future berebuilt as 55 additional keys.

 

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The **Machu Picchu SanctuaryLodge–**31 keys–is the only hotel at the famous mountaintop Inca ruinsat Machu Picchu.  All of the rooms havebeen refurbished to a high standard.  Thejoint venture also has a lease on seven acres at the foot of the ruins, closeto the town where tourists arrive by train, for possible future expansion.

 

The Peru hotel joint venture of OEH built andopened in April 2008 a small luxury bungalow hotel called **Las Casitas del Colca–**20 keys–on 57 acres north of Arequipanear the 11,000 foot high rim of Colca Canyon. The hotel features individual casitas with plunge pools, an intimatemain dining room and a swimming pool and spa. Guests enjoy tours of the scenic canyon famous for its giant condors.

 

**Restaurants**

 

OEH owns **‘21’ Club**, thefamous landmark restaurant at 21 West 52nd Street in mid-town Manhattan in NewYork City.  Originally a speakeasy duringProhibition in the 1920s, this restaurant is open to the public, occupies threebrownstone buildings and features fine American cuisine.  It serves à la carte meals in the originalbar restaurant and a separate dining room upstairs, and also has ten banquetingrooms used for functions, including the famous secret wine cellar.

 

In 2007, OEH contracted to purchase the land andbuilding of the Donnell branch of the New York Public Library on West 53rdStreet adjoining ‘21’ Club on West 52nd Street.  Subject to obtainingnecessary permits and acquiring additional air rights, OEH planned to demolishthe library building and construct a 40-story luxury hotel of up to 150 keysincluding condominium residences and a restaurant, spa, swimming pool, a newDonnell library branch, and expanded banqueting and dining space connected to ‘21’Club.  In February 2009, OEH informed the Library that it had determinednot to exercise OEH’s right under the amended purchase contract to extend theclosing date further, and that due to the current global financial crisis andconditions in the credit and real estate markets, OEH would not be in aposition to complete the purchase of the property as provided in the contract.  OEH expressed its desire to pursuediscussions with the Library to defer or restructure the project in a mutuallyagreeable manner.  See Note 16 to theFinancial Statements.

 

OEH has re-established the famous **La Cabaña**steak house in Buenos Aires dating from the 1930s.  OEH bought the contents and name of therestaurant and, after relocating to the fashionable Recoleta area of the city,reopened in 2003.  The main dining roomfeatures a traditional open fire for searing meats, and three private diningrooms have regional Argentine themes.

 

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

 

**Tourist Trains and Cruises**

 

OEH’s principal European tourist trains, called the **Venice Simplon-Orient-Express**, operate in two parts in aregularly scheduled overnight service between London and Venice and on shortexcursions in southern England.  OEH owns30 railway cars originally used on historic “Orient-Express” and other famousEuropean trains.  All have beenrefurbished in original 1920s/1930s décor and meet modern safetystandards.  The services are marketed asa continuation of the Orient-Express trains of pre-World War II years.  One train is based in Great Britain composedentirely of Pullman cars with a capacity for up to 250 passengers.  The other train is based on the EuropeanContinent made up of Compagnie Internationale des Wagons-Lits et du Tourismesleeping cars and day coaches with capacity for up to 180 passengers.  They operate once or twice weekly principallybetween London and Venice from March to November each year via Paris,Zurich and Innsbruck on a scenic route through the Alps.  Passengers travel under the English Channelby coach on the Eurotunnel shuttle train. Occasional trips are also made from time to time to Rome, Prague,Budapest and Istanbul and other European destinations.

 

The **British Pullman**cars of Venice Simplon-Orient-Express operate all year, originating out ofLondon on short excursions to places of historic or scenic interest in southernEngland, including some overnight trips when passengers stay at localhotels.  Both the British and Continentaltrains are available for private charter.

 

The **Northern Belle**tourist train offers day trips and charter service principally in the north ofEngland.  It builds on the success of OEH’sBritish Pullman business, which focuses on the south of England aroundLondon.  This train consists of sixdining cars elegantly decorated to be reminiscent of old British “Belle” trainsof the 1930s, plus related service cars, and can carry up to 250passengers.  Full course meals are servedon board and passengers stay in local hotels on overnight itineraries.

 

OEH owns the **Royal Scotsman**luxury tourist train, having purchased in 2007 the 50% interest it did notpreviously own.  Founded in 1985, theRoyal Scotsman is composed of nine Edwardian-style cars accommodating up to 36passengers.  Each compartment in the sixsleeping cars has a private bathroom. Operating from April to October each year, the train travelson itineraries of up to seven nights through the Scottish 

 

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countrysideaffording passengers the opportunity to visit clan castles, historicbattlegrounds, famous Scotch whiskey distilleries and other points of interest.

 

**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 franchise awarded in1999 and extendable every five years, upon the joint venture’s application, upto 30 additional years.  The jointventure pays the government a fee related to traffic levels which can bepartially offset against investment in track improvements.  The 70-mile Cusco-Machu Picchu line carriesmainly tourists visiting the famous Inca ruins, the principal means of accessbecause there is no convenient road, as well as local passenger traffic.  Beginning in 2009, OEH anticipates othercarriers may operate on this line for the first time in competition withPeruRail.  A second rail line runs fromCusco to Matarani on the Pacific Ocean via Puno on Lake Titicaca and Arequipaand principally serves freight traffic. The Cusco-Machu Picchu line connects two of OEH’s Peruvian hotelsallowing inclusive tours served by OEH’s **Hiram Bingham**luxury tourist train.  OEH also operatesa deluxe daytime tourist train called the **Andean Explorer**on the Cusco-Puno route through the High Andes mountains.

 

The **Eastern &Oriental Express** in Southeast Asia travels up to one round trip eachweek between Singapore, Kuala Lumpur and Bangkok.  The journey lasts between 48 and 72 hourseach way and includes two or three nights on board and side trips to Penang inMalaysia and the River Kwai in Thailand. Some overnight trips are also made from Bangkok to Chiang Mai andelsewhere in Thailand and to Vientiane, Laos. Originally built in 1970, the 24 cars were substantially rebuilt to anelegant oriental style of décor and fitted with modern facilities such asair-conditioning and private bathrooms. The train is made up of sleeping cars, three restaurant cars, a bar carand an open air observation car and can carry up to 130 passengers.  The Eastern & Oriental Express isavailable for charter by private groups. OEH manages the train exclusively and has a 25% shareholding in theowning company.

 

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 60 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 up to 120passengers who enjoy sightseeing along the river and guided shore excursions toplaces of historic interest.  Five toeight night itineraries are 

 

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offered,including airfare to and from the ship and hotel accommodation in Rangoon.  OEH also operates occasional cruises todifferent destinations, such as to Bhamo in the north of the country close tothe China border.  The ship does not operatein the hottest summer months and occasionally when the water level of theIrrawaddy River falls too low due to lack of rainfall.  The ship suffered major damage in the May 2008cyclone that struck Burma and is currently in drydock for repairs.  Service is scheduled to restart in late 2009.

 

OEH owns five luxury river and canal boats operatingas **Afloat in France** in Burgundy, Provenceand other rural regions of France.  In2007, OEH acquired the 50% interest in this business that it did not previouslyown.  The boats accommodate between sixand 12 passengers each in double berth compartments with private bathrooms, andsome have small plunge pools on deck. They operate seasonally between April and October on three tosix night itineraries with guests dining on board or in nearbyrestaurants.  Shore excursions areorganized each day.

 

**PropertyDevelopment**

 

OEH has been pursuing opportunities todevelop the real estate it owns at its hotels. In addition to expansion through building guest rooms and otherfacilities at the hotels, certain of OEH’s properties have adjacent vacant landavailable for construction and sale of deluxe residential villas andapartments, as noted above under the various “Owned Hotels” headings.  This activity is being curtailed in 2009because of weakening demand for newly built high-end residences in thelocations of OEH’s projects and difficulty in raising construction funding inthe current financial markets uncertainty.

 

OEH is continuing to build at La Samanna inSt. Martin the Porto Cupecoy village on 12 acres on the Dutch side of theisland, consisting of approximately 180 one to four bedroom condominiumapartments and 30,000 square feet of retail and restaurant space, and a 50-slipmarina.  Completion of construction iscurrently scheduled in late 2009.  At December31, 2008, 71 condominiums at Porto Cupecoy had been pre-sold.  OEH also has planning permission to constructa further 60 units at Porto Cupecoy in the future.

 

On the French side of La Samanna, OEH plansto build in phases up to 37 private residential villas on 36 acres.  A first phase of eight large villas has beencompleted in three or four bedroom configurations each with a private swimmingpool.  These are operated as part of thehotel pending their sale.  Commencement of construction of additionalvillas is being deferred.

 

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At Keswick Hall in Virginia, OEH willcontinue to offer for sale residential parcels of land in a minimum size of twoacres surrounding and adjacent to its Keswick Club championship golfcourse.  Two plots were sold in2008.  OEH has built the roads and otherinfrastructure, including some sample homes, while most purchasers build theirown custom-designed homes subject to development guidelines.  Each sale entitles the purchaser to join thehotel’s Keswick Club.

 

When OEH acquired the Pansea hotels groupin Southeast Asia in 2006, development of 14 private villas was alreadyunderway on the 40-acre site of Napasai on Koh Samui in Thailand.  Four remain for sale and up to 40 more may bebuilt in the future.

 

In 2007, OEH completed the purchase ofabout 28 acres of vacant land beside its Maroma Resort and Spa on the RivieraMaya in Mexico, on which up to 20 private residential villas may be built inthe future.  

 

Other hotels owned by OEH with availablevacant land include Reids Palace in Madeira, Lapa Palace in Lisbon, and Inn atPerry Cabin on the eastern shore of Maryland. Development may include sale of completed residences and, in many cases,ongoing management as integral parts of the adjacent hotels or, at KeswickHall, membership in the hotel’s golf club. The villas and apartments are being marketed and sold by local on-sitesales personnel of OEH and through third-party real estate agents with listingslocally and abroad.

 

**Management Strategies**

 

As theforegoing indicates, OEH has a global mix of hotel and other deluxe travelproducts that are geographically diverse and appeal to the high-end leisuremarket, reflecting an important management strategy.  As a result, about 70% of annual revenuederives from leisure customers while corporate/business travel accounts for therest.  OEH’s properties are distinctiveas well as luxurious and tend to attract guests prepared to pay higher ratesfor the travel experiences OEH offers.

 

OEHbenefits from long-term trends and developments favorably impacting the globalhotel, travel and leisure markets, including growth trends in the luxury hotelmarket in 

 

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manyparts of the world, increased travel and leisure spending by consumers,favorable demographic trends in relevant age and income brackets of U.S.,European and other populations, and increased online travel bookings.  These long-term trends suffered setbacks inrecent years due to the present turmoil in financial markets and slowingnational economies, the shock of terrorist attacks, the build-up and aftermathof regional conflicts in Iraq, Afghanistan and other parts of the world, andthe SARS epidemic.  Management believes,however, that the public’s confidence in international travel and demand forluxury hotel and tourist products will be sustained over the long term.

 

In the short term, because of the current globaleconomic uncertainty resulting in weakening demand for OEH’s travel products,OEH is taking the following steps, among others:

 

·                                           seeking to preserve liquidity by reducing costs,

 

·                                          deferring capital expenditures and new investment projects,

 

·                                          maximizing revenue opportunities and operating margins across OEH’sunique portfolio,

 

·                                          disposing of under-performing properties in order to rebalance theportfolio, and

 

·                                          reducing overhead costs to position assets for improving performancewhen demand recovers.

 

SeeItem 7–Management Discussion and Analysis. OEH management plans to grow the business in the long term by:

 

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

 

·                                          expanding existing hotels where land or space is available andpotential investment returns are relatively high,

 

·                                          developing vacant land as residences for sale,

 

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

 

·                                          acquiring additional distinctive luxury properties throughout theworld that have attractive potential investment returns.

 

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Factors in OEH’s evaluation of a potential acquisitioninclude the uniqueness and deluxe nature of the property, attractions andexperiences 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 management plans to continue owning or part-owningand managing most OEH properties, although OEH will consider contracts tomanage properties without part-ownership which meet its criteria in order tofacilitate entry into new markets or to preserve capital investment.  Ownership encourages OEH to develop thedistinctive local character of its properties and allows it to benefit fromcurrent cash flow and future gains should it sell a property.  Self-management has enabled OEH to capturethe economic benefits otherwise shared with a third-party manager, to controlthe operations, quality and expansion of the hotels, and to use its experiencewith price changes, expansions and renovations to improve cash flow and enhanceasset values.

 

Many of OEH’s individual properties, such as the HotelCipriani, Copacabana Palace and ‘21’ Club, have distinctive local character andbrand identity.  Management believes thatdiscerning travellers will choose an individually styled property in preferenceto a chain brand.  OEH links itsproperties together through the “Orient-Express” name which 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 above under “Property Development”, OEHis expanding its property development activities over time.  Management anticipates future profits bothfrom sales of land and completed units and from ongoing management of the unitsfor the owners as integral parts of the adjacent hotels.  In the short term, however, OEH is curtailingthis activity in the current weak economic and financial environment.

 

**Marketing, Sales and Public Relations**

 

OEH’s sales and marketing function is primarily basedupon direct sales (prioritizing electronic channels such as the internet andstrategic travel agents and tour operators), cross-selling to existingcustomers, and public relations.  After restructuringto align with market performance and distribution trends, OEH now has acorporate sales force of 

 

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about90 persons in 11 locations.  Theseinclude key account sales offices in New York, Sao Paulo, London, Paris,Cologne, Milan, Madrid, Moscow, Tokyo and Singapore, and reservations officesin Charleston (South Carolina), London and Singapore.  OEH also has local sales representativesresponsible for the hotels where they are based.  OEH’s sales staff train preferred travelindustry and distribution partners, negotiate with group and corporate accountrepresentatives, and conduct marketing initiatives such as direct mailings,e-commerce, trade show participation and event sponsorship.  OEH participates in a number of partnerprograms, such as “American Express Centurion” and “Virtuoso”.  OEH offers its top travel agents and otherindustry partners free participation in OEH’s “Bellini Club” providing trainingcourses, special commissions and sales support for all OEH products worldwide.

 

Websites and e-marketing are important direct salesand branding tools for OEH.  Through itsprincipal website (www.orient-express.com) and the websites of the individualproperties, OEH provides extensive descriptions and images of the propertiesand guest activities in English and other languages.  Direct online booking capability is providedas well as affiliate programs for online partners.  OEH operates other internet travel portalsthat direct customers to OEH’s properties, and works with other selectedelectronic distribution channels.

 

Because repeat customers appreciate the consistentquality of OEH’s hotels, trains, cruises and restaurants, an important part ofmanagement’s strategy is to promote OEH properties through variouscross-selling efforts.  These include theinhouse “Orient-Express Traveller” directory, worldwide preferred travel agentprograms, and direct communications to existing customers.  OEH sells luxury souvenir goods branded withthe names of its travel products.

 

OEH’s marketing strategy also focuses on publicrelations, which management believes is a highly cost-effective marketing toolfor luxury properties.  Because of theunique nature of its properties, guests are more likely to hear about OEH’shotels and tours through word-of-mouth or published articles rather thanthrough general advertising.  OEH has anin-house public relations office in London and representatives in 14 countriesworldwide, including contracts with third-party public relations firms, topromote its properties through targeted newspapers, general interest and travelmagazines, and broadcast, online and other media.

 

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**Industry Awards**

 

OEH has gained a worldwide reputation for quality andservice in the luxury segment of the leisure and business travel market.  Over the years, OEH’s properties have wonnumerous national and international awards given by trade or consumerpublications such as Conde Nast Traveller, Gourmet, Travel & Leisure,and Tatler, or industry bodies such as the American AutomobileAssociation.  The awards are based onopinion polls of readers or the professional opinion of journalists or panelsof experts.  The awards are believed toinfluence consumer choice and are therefore highly prized.

 

**Competition**

 

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

 

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

 

OEH’s luxury tourist trains have no directcompetitors.  Other trains exist onsimilar routes, including possible new services in 2009 on the Cusco-MachuPicchu line of PeruRail, but management believes OEH’s trains and onboardservice are 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 currently employs about 7,400 persons, about 2,600of whom are represented by labor unions. Approximately 6,500 persons are employed in the hotels and restaurants,800 in the trains and cruises business, and 100 in central administration andother activities.  Management believesthat OEH’s ongoing labor relations are satisfactory.

 

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**Government Regulation**

 

OEH andits properties are subject to numerous laws and government regulations such asthose relating to the preparation and sale of food and beverages, liquorservice, health and safety of premises, employee relationships, environmentalmatters, and planning and zoning rules. Management believes that OEH is incompliance in all material respects with relevant laws and regulations withrespect to its business.

 

**ITEM 1A.****                                            Risk Factors**

 

OEH investors should carefully consider the risksdescribed below and the other information contained in or incorporated byreference in this report.  These risksare separated into three general groups:

 

·                                          risks of OEH’s business,

 

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

 

·                                          risks of investing in Class Acommon shares.

 

Described below are only the risks OEH managementconsiders to be significant.  There maybe additional risks that are currently deemed less material or not presentlyknown to management.  If any of theserisks occurs, OEH’s business, prospects, financial condition, results ofoperations or cash flows could be materially adversely affected.  A risk that might have a material adverseeffect means that the risk may have one or more of these effects.  In that case, the market price of the Class Acommon shares could decline.

 

## **Risks of OEH’s Business**

## ** **

***OEH’s operations are subject toadverse factors generally encountered in the lodging, hospitality and travelindustries.***

 

Besides the specific conditions discussed in therisk factors below, these adverse factors include:

 

·                                          cyclical downturns arising fromchanges in general and local economic conditions and business activities, whichimpact levels of travel and demand for travel products,

 

·                                          recurrence of rising travel costssuch as increased air travel fares and higher fuel costs,

 

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·                                          political instability of thegovernments of some countries where OEH properties are located or operate,resulting in depressed demand,

 

·                                          less disposable income ofconsumers and the travelling public,

 

·                                          dependence on varying levels oftourism, business travel and corporate entertainment,

 

·                                          changes in popular travelpatterns,

 

·                                          competition from other hotels andleisure time activities,

 

·                                          periodic local oversupply of guestaccommodation, which may adversely affect occupancy and actual rates achieved,

 

·                                          increases in operating costs atOEH properties due to inflation and other factors which may not be offset byincreased revenues, and changes in costs of materials,

 

·                                          regional and local economic andpolitical conditions affecting market demand for travel products, includingrecessions, civil disorder, and acts or threats of terrorism,

 

·                                          expropriation or nationalizationof OEH properties by foreign governments,

 

·                                          foreign exchange rate movements impactingOEH’s revenues and costs,

 

·                                          adverse weather conditions ordestructive forces like fire or flooding that sometimes result in closure ofOEH’s properties,

 

·                                          reduction in domestic orinternational travel and demand for OEH’s properties due to actual orthreatened acts of terrorism or war, outbreak of contagious disease,travel-related accidents or industrial action, increased transportation andfuel costs, and natural disasters, and

 

·                                          seasonality, in that many of OEH’shotels and tourist trains are located in the northern hemisphere where theyoperate at low revenue or close during the winter months.

 

The effects of many of thesefactors vary among OEH’s hotels and other properties because of theirgeographic diversity.

 

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For example, civil unrest in Burma in September 2007resulted in reservation cancellations at The Governor’s Residence and Road ToMandalay at the beginning of the seasonal high demand period for thoseproperties.  Bookings were recovering butsuffered a new setback when the hotel and ship were damaged by a cyclonehitting Burma in May 2008.

 

Also, as a result of the terrorist attacks in theUnited States in September 2001 and the subsequent military actions inAfghanistan and Iraq, international, regional and even domestic travel wasdisrupted.  Demand for most of OEH’sproperties declined substantially in the latter part of 2001 and in 2002.  Further acts of terrorism or a militaryaction, or the threat of either, could again reduce leisure and businesstravel, thereby adversely affecting OEH’s results.

 

The currently weakeningeconomies of North America, Europe and other regions and the current disruptionof financial markets in various parts of the world have resulted in shorterlead times for reservations at many of OEH’s properties in 2009 because ofcustomers’ economic uncertainty.  Shorterbooking lead times were also experienced in the 2001-2002 period.  As a result, OEH’s ability to forecastoperating results and cash flows has been reduced.  These factors have also affected OEH’sliquidity outlook.  See “Liquidity andWorking Capital–Liquidity” in Item 7–Management Discussion and Analysis.

 

***The hospitality industry is highlycompetitive, both for acquisitions of new hotels and restaurants and forcustomers at OEH’s properties.***

 

OEH competes for hotel and restaurant acquisitionopportunities with others who may have greater financial resources.  These competitors may be prepared to accept ahigher level of financial risk than OEH can prudently manage.  This competition may have the effect ofreducing the number of suitable investment opportunities offered to OEH andincreasing OEH’s acquisition costs because the bargaining power of propertyowners seeking to sell or to enter into management agreements is increased.

 

Some of OEH’s properties are located in areas wherethere are numerous competitors, particularly in city centers.  Competitive factors in the hospitalityindustry include:

 

·                                          convenience of location,

 

·                                          the quality of the property,

 

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·                                          room rates and menu prices,

 

·                                          the range and quality of foodservices 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 operates.  For example, newpassenger rail services may operate starting in 2009 on the Cusco-Machu Picchuline of PeruRail for the first time in direct competition, which may reducePeruRail’s profitability.  As another example,largely because of new hotel competition in Bora Bora as well as high coststructures, OEH decided in late 2007 to dispose of Bora Bora Lagoon Resort.

 

***The hospitality industry is heavilyregulated, including with respect to food and beverage sales, employeerelations, construction and environmental concerns, and compliance with theselaws could reduce revenues and profits of properties owned or managed by OEH.***

 

OEH and its various properties are subject tonumerous laws and government regulations, including those relating to thepreparation and sale of food and beverages, liquor service, and health andsafety of premises.  The properties arealso subject to laws governing OEH’s relationship with employees in such areasas minimum wage and maximum working hours, overtime, working conditions, hiringand firing employees and work permits.

 

The success of expanding existing properties dependsupon obtaining necessary building permits or zoning variances from localauthorities.  Failure to obtain or delayin obtaining these permits could adversely affect OEH’s strategy of increasingrevenues and earnings through expansion of existing properties.

 

OEH also is subject to U.S. and foreign laws andregulations relating to the environment and the handling of hazardoussubstances that may impose or create significant 

 

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potential environmental liabilities, even in situations where theenvironmental problem or violation occurred on a property before OEH acquiredit.

 

***OEH’s acquisition, expansion anddevelopment strategy may be less successful than expected and, therefore, itsgrowth may be limited.***

 

Management intends to increase the revenues andearnings of OEH in the long term through acquisition of new properties andexpansion of existing properties.  Theability to pursue new growth opportunities successfully will depend on OEHmanagement’s ability to:

 

·                                          identify properties suitable foracquisition and expansion,

 

·                                          negotiate purchases orconstruction on satisfactory terms,

 

·                                          obtain the necessary financing andgovernment permits,

 

·                                          build on schedule and with minimumdisruption to guests, and

 

·                                          integrate new properties into OEH’soperations.

 

Also, the acquisition of properties in new locationsmay present operating and marketing challenges that are different from thoseencountered in OEH’s existing locations. There can be no assurance that management will succeed in OEH’s growthstrategy, in particular in the face of the current global economic uncertainty.

 

OEH management plans to develop new properties inthe future.  New project development issubject to such adverse factors as:

 

·                                          site deterioration afteracquisition,

 

·                                          inability to obtain necessarygovernment permits,

 

·                                          inclement weather,

 

·                                          labor or material shortages,

 

·                                          work stoppages,

 

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·                                          availability of equity funding,construction finance and mortgage loans,

 

·                                          weak economic environment before, during or after development,

 

·                                          claims and disputes between OEH and other contracting parties,

 

·                                          untimely opening,

 

·                                          high start-up costs, and

 

·                                          weak initial market acceptance ofa new property.

 

For example, El Encanto in Santa Barbara wasoriginally closed for extensive renovations in late 2006, with an expectedreopening in 2008.  However, because ofchanges in rebuilding plans, delays in obtaining government permits, a slowerpace of construction than initially expected and difficulty in obtainingfinancing in the current economic turmoil, reopening of the hotel has beendelayed at least until 2011.

 

Asanother example, due to the current global financial crisis, including theproblems in the credit and real estate markets, OEH has been unable at thistime to obtain suitable financing and/or equity partners for its New York hoteldevelopment project adjoining ‘21’ Club. OEH has therefore advised the New York Public Library with whom it hascontracted to purchase the project site that OEH has determined not to exerciseits right further to extend the closing date of the purchase of the site andthat OEH would not be in a position to close the transaction as provided in thepurchase and sale agreement between the parties.  OEH has proposed to enter into discussionswith the Library to defer or restructure the project.  If OEH and the Library cannot reach asatisfactory resolution of the matter, the Library may initiate litigationagainst OEH making claims under the agreement.

 

***OEH may be unable to obtain thenecessary additional capital to finance the growth of its business.***

 

The acquisition, expansion and development ofleisure properties, as well as the ongoing renovations, refurbishments andimprovements required to maintain or upgrade OEH’s properties, are capitalintensive.  The availability of futureborrowings and access to capital markets for equity financing to fund theseacquisitions, expansions and projects depend on prevailing market conditionsand the acceptability 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 financingsmay require restrictive covenants that would limit OEH’s flexibility inoperating its business.  See also “RisksRelating to OEH’s Financial Condition and Results of Operations” below.

 

***OEH’s operations may be adverselyaffected by extreme weather conditions and the impact of natural disasters.***

 

OEH operates properties in a variety of locales,each of which is subject to local weather patterns affecting the properties andcustomer travel.  As OEH’s revenues aredependent on the revenues of individual properties, extreme weather conditionscan from time to time have a major adverse impact upon individual properties orparticular regions.  For example,hurricanes in August and October 2005 caused damage to the WindsorCourt Hotel in New Orleans and Maroma Resort and Spa on Mexico’s YucatanPeninsula, resulting in temporary closure of the hotels for repairs.  Similarly, The Governor’s Residence and Roadto Manadalay cruiseship, both in Burma, were damaged by a cyclone in May 2008.  OEH carries property and 

 

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loss of earnings insurance in amounts management deems reasonablyadequate, but damages may exceed the insurance limits or be outside the scopeof coverage.

 

***If the relationships between OEH andits employees were to deteriorate, OEH may be faced with labor shortages orstoppages, which would adversely affect its ability to operate its facilities.***

 

OEH’s relations with its employees in variouscountries could deteriorate due to disputes related to, among other things,wage or benefit levels, working conditions or management’s response to changesin government regulation of workers and the workplace.  Operations rely heavily on employees’providing a high level of personal service, and any labor shortage or stoppage causedby poor relations with employees, including labor unions, could adverselyaffect the ability to provide those services, which could reduce occupancy androom revenue and even tarnish OEH’s reputation.

 

***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.***

 

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

 

·                                          construction delays or cost overruns that may increase projectcosts,

 

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

 

·                                          write-off of development costs incurred for projects that are notpursued to completion,

 

·                                          natural disasters such as earthquakes, hurricanes, floods or firesthat could adversely impact a project,

 

·                                          defects in design or construction that may result in additionalcosts to remedy, or that require all or a portion of a property to be closedduring the period needed to rectify the situation,

 

·                                          inability to raise capital to fund a project because of pooreconomic or financial conditions, 

 

·                                          claims and disputes between OEH and other contracting partiesresulting in delay, monetary loss or project termination,

 

·                                          government restrictions on the nature or size of a project or timingof completion, or on the ownership of completed units such as by foreignnationals, and

 

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·                                          changes in market conditions for residences, such as creditavailability and pricing terms, or oversupply that may affect OEH’s ability tosell residential units at a profit or at price levels originally anticipated.

 

***OEH’s owned hotels and restaurantsare subject to risks generally incidental to the ownership of commercial realestate and often beyond its control.***

 

These include:

 

·                                          fluctuating demand for commercialreal estate as an investment,

 

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

 

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

 

·                                          the impact of present or futuregovernment legislation  and regulation (including environmentallaws),

 

·                                          the ongoing need for capitalimprovements to maintain or upgrade properties,

 

·                                          changes in property taxes andoperating expenses, and

 

·                                          the potential for uninsured orunderinsured losses.

 

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

 

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

 

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

## ** **

***Thecurrent uncertainty in the financial markets and sustained weakening of theeconomies of many countries could impact OEH’s business and financialcondition.***

 

Aswidely reported, financial markets in the United States, Europe and Asia havebeen experiencing extreme disruption recently, including, among other things,volatility in securities prices and diminished liquidity and creditavailability.  Furthermore, the economiesof the United States and other countries are slowing down, leading to economicrecessions which could, among other things, reduce the amounts persons andbusinesses spend on travel, hotels, dining and entertainment.  As a result, OEH may experience pressure onits pricing, reduced occupancy at its properties, and fewer customers fromtraditional markets for its hotels and other travel products.  OEH is not able to predict the likelyduration or severity of the current disruption in financial markets or thegeneral economic uncertainty in the United States and the world.  However, if economic conditions continue orworsen, they could decrease OEH’s future revenue, profitability and cash flowfrom operations which could adversely impact OEH’s liquidity and financialcondition, including its ability to comply with financial covenants in its loanfacilities.

 

***Thefinancial uncertainty and economic weakening identified in the previous riskfactor could adversely impact OEH’s liquidity and financial condition, inparticular OEH’s ability to raise additional funds for its cash requirementsfor working capital, commitments and debt service.***

 

Duringthe 12 months ending December 31, 2009, OEH has approximately $29,700,000of scheduled debt repayments, excluding amounts relating to revolvingfacilities, which it expects to meet through operating cash flow and otheravailable committed facilities.  Thisalso excludes $3,000,000 of debt at Keswick Hall which comes due when the relevantbuilding lots are sold. Additionally, OEH’s capital commitments amount to$76,600,000, of which $53,000,000 relates to the purchase of land and abuilding adjoining ‘21’ Club from the New York Public Library.  OEH has informed the Library that it wishesto defer or restructure the purchase. The balance of $23,600,000 is currently covered by committed funding andprojected operating cash flow. OEH expects to incur costs of a further$31,961,000 to complete its Porto Cupecoy development, funded largely bydeposits on sales as the work progresses and a short-term loan agreed inprinciple with a bank lender.

 

OEH isdiscussing with its advisers the most appropriate way of funding the remainingunfunded commitments.  Options availableto OEH, depending on availability in the current economic and financialenvironment and OEH’s continuing compliance with financial covenants in itsexisting loan facilities, include raising additional debt at property level,issuing debt instruments or equity, rescheduling loan repayments or capitalcommitments, disposing of properties or other assets for cash, or a combinationof the foregoing.  OEH has prepared cashflow projections which indicate it will have available cash from operations,appropriate debt finance and other sources sufficient to fund its workingcapital requirements, committed capital expenditures, committed acquisitionsand debt service for the foreseeable future. OEH is also taking steps to enhance its liquidity and capital position,including as follows:

 

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·                                        In December 2008, OEH amended its agreements with the New YorkPublic Library, which allowed it to defer closing of its purchase of theDonnell branch adjacent to ‘21’ Club. Under these amendments, OEH made an additional deposit with the Libraryof $3,000,000 in December 2008 and received a series of options to defer theclosing 30 days at a time by making further deposits, a portion of which wouldbe deemed interest, totaling $7,500,000 if all of the options were exercisedand resulting in a final payment of $36,300,000 due in July 2009.  OEH exercised the first extension option andmade an additional $1,000,000 deposit in January 2009, but did not elect toexercise a further option or make a further extension deposit in February 2009,and has advised the Library that, due to the current global financial crisisand conditions in the credit and real estate markets, OEH would not be in aposition to close on the purchase of the Donnell branch as provided in thepurchase contract.  OEH has advised theLibrary that it desires to pursue discussions to defer or restructure theproject in a mutually agreeable manner.  Byletter dated February 27, 2009, the Library advised OEH that it will be in defaultunder the purchase agreement if it does not close the transaction and that theLibrary may elect to exercise its rights and remedies under the agreement andis otherwise reserving its rights.  Therecan be no assurance that discussions will occur or, if they do, a resolution ofthe matter satisfactory to OEH will result.

 

·                                          The reopening of El Encanto in Santa Barbara (currently closed forrefurbishment) has been delayed to 2011, which defers $50,000,000 of capitalexpenditures and enables OEH to open this property in more favorable market conditions.

 

·                                          OEH has cancelled proposed hotel acquisitions previously underdiscussion in Zambia and Puglia, Italy and, with its proposed joint venturepartner, cancelled new hotel building projects previously discussed in Miami,Florida, Panama City, Panama, and Cartagena, Colombia.

 

·                                          Cash dividend payments on the Company’s Class A and B commonshares have been suspended, beginning in 2009.

 

·                                          OEH has reduced planned 2009 capital expenditures to $12,000,000needed to complete specific property improvements that were already underway,principally at the Grand Hotel Europe, St. Petersburg and Hotel Cipriani,Venice, or to comply with local building or health and safety regulations.  OEH plans to spend no more than $12,000,000replacing furniture, fixtures and equipment across all of its properties in2009.

 

·                                          OEH is achieving annual overhead cost savings of at least $20,000,000starting in the latter part of 2008 through 2009.  Personnel changes have been implementedfollowing a review of OEH’s hotel management and operating structures, andreductions have been made in selling, general and administrative costs.

 

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However,OEH cannot give assurance that, in the current economic and financialenvironment, additional sources of financing for OEH’s unfunded commitmentswill be available to OEH or available on commercially acceptable terms, or thatOEH will be able to reschedule loan repayments or capital commitments, or thatthe foregoing steps to enhance OEH’s liquidity and capital position will bridgeany shortfall.  If additional sources offinancing are unavailable, including because of possible future breach of loanfinancial covenants, OEH may be unable to fund its cash requirements forworking capital, commitments and debt service.

 

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

 

OEH’s financing agreements with several commercialbank lenders contain covenants that include limits on additional debtcollateralized by mortgaged properties, limits on property liens and limits onmergers and asset sales, and financial covenants requiring maintenance ofminimum net worth amounts or a minimum debt service coverage, or establishing amaximum debt 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 provisions and covenantsor even more restrictive ones.  If OEHfails to comply with the restrictions in its present or future financingagreements, a default may occur.  A defaultcould allow the creditors to accelerate the related debt as well as any otherdebt to which a cross-acceleration or cross-default provision applies.  A default could also allow the creditors toforeclose on the properties collateralizing the debt.

 

OEH is inregular discussions with its bankers regarding funding requirements and toensure its continued compliance with the financial covenants applicable to OEHin its existing loan facilities.  At December 31,2008, OEH was in compliance with all major covenants, although the Hotel Ritz,Madrid was out of compliance with a debt service coverage ratio in its firstmortgage loan facility which is non-recourse to and not credit-supported by OEHor its joint venture partner in that hotel. OEH and its partner are discussing with the lender how to bring thehotel back into compliance.

 

OEH recognizesthat, in the current economic climate, there is an enhanced risk of a covenantbreach if weak trading conditions lead to a deterioration of OEH’s results andthe costs of implementing remedial steps reduce OEH’s earnings in any givenperiod.  If current economic conditions,including the volatility recently experienced in foreign exchange and globaldebt markets, continue or worsen, OEH believes there is heightened risk that itcould breach certain financial covenants applicable to OEH during 2009.

 

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OEH’sliquidity would be adversely affected if a covenant breach occurred in amaterial loan facility and OEH were unable to agree with its bankers how theparticular financial covenant should be amended or how the breach could becured.  OEH expects to take pro-activesteps to meet with its bankers to seek an amendment to any specific financialcovenant if OEH believed that it was likely that the covenant would be breachedbecause of adverse trading conditions or incurrence of additional costs.  There can be no assurance, however, that OEH’sloan facility lenders would agree to modify any affected covenant, which couldimpact OEH’s ability to fund its cash requirements for working capital,commitments and debt service.

 

*Possible loan covenantbreach at March 31, 2009*

 

In particular,at March 31, 2009, OEH may breach a minimum $600,000,000 tangible net worthcovenant in two long-term debt facilities under which $102,900,000 had beenborrowed at December 31, 2008.  Therelevant loan agreements define tangible net worth as consolidated shareholders’equity less intangible assets.  Thisbreach may occur in part because of the following movements in OEH’s accounts:

 

·                  In the three months ended December 31, 2008, OEH raised $52,514,000of new equity capital, after fees and costs, by selling 8.5 million newlyissued class A common shares of the Company. OEH’s net loss in the quarter was $48,056,000, and OEH’s shareholders’equity was reduced by a further $61,109,000 mainly because of foreign exchangemovements of $50,048,000 which reduced the carrying value of OEH’s net assetsin U.S. dollars on translation from the applicable local currency, and becauseof costs of $8,825,000 associated with the change in the fair value ofeffective interest rate hedge derivatives. As a result, OEH’s consolidated shareholders’ equity fell by $57,126,000in the quarter. 

 

·                  Also in the three months ended December 31, 2008, the net book valueof intangible assets increased by $20,949,000 largely because goodwill of$40,395,000 was recognized as a result of the consolidation of Charleston PlaceHotel for the first time, partially offset by a reduction in the carrying valueof goodwill by an impairment charge of $9,252,000 and a reduction of $8,842,000as a result of foreign exchange movements in the quarter.

 

Combining these two movements, OEH’s tangible networth decreased by $78,075,000 in the three months ended December 31,2008.  OEH expects a further decline inits tangible net worth in the three months ended March 31, 2009.  The first quarter each year is traditionallyOEH’s lowest earning period due to the seasonality of its business and, ifforeign exchange rates move against OEH at the end of the quarter, this willfurther reduce shareholders’ equity.

 

Although OEHwas in compliance with this minimum tangible net worth covenant at December 31,2008, OEH is discussing with the lender on both loan facilities how thefinancial covenant calculation should be adjusted to reflect the impact of theinitial consolidation of Charleston Place Hotel, given that inclusion of thathotel on OEH’s balance sheet was not anticipated when the loan agreements wereentered into and the minimum net worth test amount was established, and how OEHshould treat the other non-cash movements which impacted the calculation atDecember 31, 2008 and which could affect the calculation in the future.

 

***OEH’s substantial indebtedness couldadversely affect its financial health.***

 

OEH has a large amount of debt in its capitalstructure and may incur additional debt from time to time.  As of December 31, 2008, itsconsolidated long-term indebtedness was $860,123,000 (including the currentportion).  This substantial indebtednesscould:

 

·                                          require OEH to dedicate much ofits cash flow from operations to debt service payments, and so reduce the availabilityof cash flow to fund working capital, capital expenditures, product and servicedevelopment and other general corporate purposes,

 

·                                          limit OEH’s ability to obtainadditional financing for its business,

 

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·                                          increase OEH’s vulnerability toadverse economic and industry conditions, including the seasonality of some ofits activities, or

 

·                                          limit its flexibility in planningfor, or reacting to, changes in its business and industry as well as the economygenerally.

 

OEH must also repay or refinance its indebtedness in the future.  Although OEH may seek to refinance itsindebtedness, it may be unable to obtain refinancing on satisfactory terms, inparticular because of the current economic uncertainty in debt markets.  Any failure of OEH to repay indebtedness whendue may result in a default under its indebtedness and cause cross-defaultsunder other indebtedness.

 

***Increases in prevailing interestrates may increase OEH’s interest payment obligations.***

 

Approximately 60% of OEH’s consolidated long-termdebt at December 31, 2008 accrues interest that fluctuates with prevailinginterest rates, so that any rate increases may increase OEH’s interest paymentobligations.  From time to time, OEHenters into hedging transactions in order to manage its floating interest rateexposure, but there can be no assurance those hedges will be successful.  At December 31, 2008, approximately$319,870,000 of long-term debt was subject to fixed interest rate swaps.

 

***Currency fluctuations may have amaterial adverse effect on OEH’s financial statements and/or its operatingmargins.***

 

Substantial portions of OEH’s revenues and expensesare denominated in non-U.S. currencies such as European euros, British poundssterling, Russian rubles, South African rand, Australian dollars, Peruviannuevos soles, Botswana pula, Brazilian reais, Mexican pesos, French Pacificfrancs and various Southeast Asian currencies. In addition, OEH buys assets and incurs liabilities in these foreigncurrencies.  Foreign exchange ratefluctuations may have a material adverse effect on OEH’s financial statementsand/or operating margins.

 

OEH’s financial statements are presented in U.S.dollars and can be impacted by foreign exchange fluctuations through both:

 

·                                          translation risk, which is therisk that the financial statements for a particular period or as of a certaindate depend on the prevailing exchange rates of the various currencies againstthe U.S. dollar, and

 

·                                          transaction risk, which is therisk that the currency of costs and liabilities fluctuates in relation to thecurrency of revenue and assets, which fluctuations may adversely affect OEH’soperating margins.

 

***The Company’s ability to paydividends on the Class A common shares is limited.***

 

The Company paid quarterly cash dividends on its Class Aand B common shares in the amount of $0.025 per share in 2004 through 2008 buthas suspended dividends beginning in 2009. There can be no assurance the Company will be able to resume dividendpayments in the future because of debt repayment requirements, a downturn toOEH’s business or other reasons.

 

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Under Bermuda law, the Company may not pay dividendsor make other distributions on the Class A and B common shares if thereare reasonable grounds for believing that OEH is, or after the payment wouldbe, unable to pay its liabilities as they become due, or if the realizablevalue of OEH’s assets is less than the aggregate of its liabilities, issuedshare capital and “share premium accounts” (share premium is defined as theamount of shareholders’ equity over and above the aggregate par value of issuedshares).  There can be no assurance theCompany will not be restricted by Bermuda law from paying dividends.

 

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

 

Implementationof existing and future standards and rules of the U.S. FinancialAccounting Standards Board (“FASB”) or other regulatory bodies could affect thepresentation of OEH’s financial statements and related disclosures.  Future regulatory requirements couldsignificantly change OEH’s current accounting practices and disclosures.  These changes in the presentation of OEH’sfinancial statements and related disclosures could change an investor’sinterpretation or perception of OEH’s financial position and results ofoperations.  For example, OEH becamesubject to FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes”, in the first quarter of 2007 requiring OEH to recognize at thattime a substantial initial FIN 48 liability with a corresponding adjustment toretained earnings.  See Note 12 to theFinancial Statements.  OEH’s futureincome tax cost may include a tax benefit as the initial FIN 48 provision isreleased or a tax cost as new FIN 48 liabilities are recognized, in addition tothe tax costs or benefits that relate to OEH’s trading activities and results.

 

OEHuses many methods, estimates and judgments in applying its accounting policies(see “Critical Accounting Policies” in Item 7—Management’s Discussion andAnalysis of this report).  By theirnature, these are subject to substantial risks, uncertainties and assumptions,and factors may arise over time that lead OEH to change its methods, estimatesand judgments which could significantly affect OEH’s results of operations.

 

As anexample of these estimates and judgments, in accordance with SFAS No. 142,“Goodwill and Other Intangible Assets”, OEH evaluates goodwill at leastannually, or when events or changes in circumstances, such as adverse changesin the industry or economic trends or an underperformance relative tohistorical or projected future operating results, indicate the carrying valuemay not be recoverable.  OEH’s impairmentanalysis incorporates various assumptions and uncertainties that it believesare reasonable and supportable considering all available evidence, such as thefuture cash flows of the business, future growth rates and the related discountrate. However, these assumptions and uncertainties are, by their very nature,highly judgmental.  There is no guaranteethat OEH’s business will achieve the forecasted results which have beenincluded in its impairment analysis.  IfOEH is unable to meet these assumptions in future reporting periods, OEH may berequired to record a further charge in a future statement of operations forgoodwill impairment losses, in addition to the impairment charge of $9,252,000recorded in 2008

 

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## **Risks of Investing in Class A Common Shares**

## ** **

***The Company is not restricted fromissuing additional Class A or B common shares, and any sales couldnegatively affect the trading price and book value of the Class A commonshares outstanding.***

 

The Company may in its discretion sell newly issued Class Aor B common shares from time to time. There can be no assurance that the Company will not make significantsales of Class A or B common shares in public offerings or privateplacements to raise capital, for funding future acquisitions, in employeeequity compensation programs or for other corporate purposes.  Any sales could materially and adverselyaffect the trading price of the Class A common shares outstanding orresult in dilution of the ownership interests of existing shareholders.

 

***The price of the Class A commonshares may fluctuate significantly, which may make it difficult forshareholders to sell the Class A common shares when they want or atdesired prices.***

 

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 can fluctuate as a resultof a variety of factors, many of which are beyond OEH’s control.  These factors include:

 

·                                          quarterly variations in operatingresults,

 

·                                          operating results that vary fromthe expectations of management, securities analysts and investors,

 

·                                          changes in expectations as tofuture financial performance, including financial estimates by securitiesanalysts and investors,

 

·                                          developments generally affectingOEH’s business or the hospitality industry,

 

·                                          market speculation about apotential acquisition of OEH,

 

·                                          announcements by OEH or itscompetitors of significant contracts, acquisitions, joint ventures or capitalcommitments,

 

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·                                          announcements by third parties ofsignificant claims or proceedings against OEH,

 

·                                          the dividend policy for the Class Aand B common shares,

 

·                                          future sales of equity orequity-linked securities, and

 

·                                          general domestic and internationaleconomic conditions.

 

In addition, the stock market in general canexperience volatility that is often unrelated to the operating performance of aparticular company.  Recently thisvolatility has been extreme.  These broadmarket fluctuations may adversely affect the market price of the Class Acommon shares.

 

***A subsidiary of the Company, whichhas three Company directors on its Board of Directors, may control the outcomeof most matters submitted to a vote of the Company’s shareholders.***

 

A wholly-owned subsidiary of the Company, Orient-ExpressHoldings 1 Ltd. (“Holdings”), currently holds all 18,044,478 outstanding Class Bcommon shares in the Company representing about 78% of the combined votingpower of Class A and B common shares for most matters submitted to a voteof shareholders, and the directors and officers of the Company hold Class Acommon shares representing an additional 0.3% of combined voting power.  In general, holders of Class A commonshares and holders of Class B common shares vote together as a singleclass, with holders of Class A common shares having one-tenth of one voteper share and holders of Class B common shares having one vote pershare.  Therefore, as long as the numberof outstanding Class B shares exceeds one-tenth the number of outstanding Class Acommon shares, Holdings could control the outcome of most matters submitted toa vote of the shareholders.

 

Under Bermuda law, common shares of the Companyowned by Holdings are outstanding and may be voted by Holdings.  The manner in which Holdings votes its sharesis determined by the five directors of Holdings, three of whom, John D.Campbell, Prudence M. Leith 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 control substantially allmatters affecting the Company, and to block a number of matters relating to anypotential change of control of the Company. See Item 12—Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.

 

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Certain institutional shareholders (collectivelyowning approximately 11.9% of the Company’s Class A common shares)identified in Item 3—Legal Proceedings and Item 4—Submission of Matters to aVote of Security Holders below have challenged the Company’s corporategovernance structure as it relates to the ownership and voting of Class Bcommon shares, including by proposing shareholder resolutions to amend theCompany’s bye-laws to treat the Class B shares as “treasury shares” withno voting rights and to cancel the Class B shares.  As reported below, those resolutions wererejected at the October 10, 2008 special general meeting of shareholdersof the Company by a majority of the votes of the outstanding Class A and Class Bcommon shares, voting together as a single class.  Following the defeat of the resolutions atthe special general meeting, these shareholders filed a petition in the SupremeCourt of Bermuda seeking similar and related relief, as reported below.  The Company believes the Bermuda litigationis without merit and intends to defend the action vigorously.

 

The corporate governance structure of the Companyhas been analyzed by legal counsel, and the Company’s management believes thatthe structure is valid under Bermuda law. It enables the Company to oppose any proposals that are contrary to thebest interests of the Company and its shareholders, including coercive orunfair offers to acquire the Company, and thus preserve the value of theCompany for all shareholders.  Thiscorporate governance structure has been in place since the Company’s initialpublic offering in 2000, and has been fully described in the Company’s publicfilings and clearly disclosed to investors considering buying the Company’s Class Acommon shares.  However, the outcome ofany litigation is uncertain.  Additionallitigation against the Company or other future challenges of the Company’sgovernance structure may occur which may cause the Company to incur addedcosts, such as legal expenses, to defend its corporate governance structure.

 

***Provisions in the Company’s charterdocuments, and the preferred share purchase rights currently attached to the Class Aand B common shares, may discourage a potential acquisition of OEH, even onethat the holders of a majority of the Class A common shares might favor.***

 

The Company’s memorandum of association and bye-lawscontain provisions that could make it more difficult for a third party toacquire OEH without the consent of the Company’s Board of Directors.  These provisions include:

 

·                                          a supermajority shareholder votingprovision for the removal of directors from office with or without cause,

 

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·                                          a supermajority shareholder votingprovision for “business combination” transactions with beneficial owners ofshares carrying 15% or more of the votes which may be cast at any generalmeeting of the Company, and

 

·                                          limitations on the voting rightsof such 15% beneficial owners.

 

Also, the Company’s Board of Directors has the rightunder Bermuda law to issue preferred shares without shareholder approval, whichcould be done to dilute the stock ownership of a potential hostileacquirer.  Although OEH managementbelieves these provisions provide the shareholders an opportunity to receive ahigher price by requiring potential acquirers to negotiate with the Company’sBoard of Directors, these provisions apply even if the offer is favored byshareholders holding a majority of the Company’s equity.

 

The Company has in place a shareholder rightsagreement providing for rights to purchase series A junior participatingpreferred shares of the Company.  Therights are not currently exercisable and they are attached to and tradetogether with the Class A and B common shares on a one-to-one basis.  These rights may have anti-takeover effectson a potential acquirer holding 15% or more of the outstanding Class A orB common shares.

 

These anti-takeoverprovisions are in addition to the ability of Holdings and directors andofficers of the Company to vote shares representing a significant majority ofthe total voting power of the Company’s common shares.  See the risk factor immediately above.

 

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

 

The Company is incorporated in Bermuda, a majorityof its directors and officers are residents of Bermuda, the United Kingdom andelsewhere in Europe, and most of its assets and the assets of its directors andofficers are located outside the United States. As a result, it may be difficult for shareholders to:

 

·                                          effect service of process withinthe United States upon the Company or its directors and officers, or

 

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·                                          enforce judgments obtained inUnited States courts against the Company or its directors and officers basedupon the civil liability provisions of the United States federal securitieslaws.

 

OEH has been advised by Appleby, its Bermuda legalcounsel, that there is doubt as to:

 

·                                          whether a judgment of a UnitedStates court based solely upon the civil liability provisions of the UnitedStates federal securities laws would be enforceable in Bermuda against theCompany or its directors and officers, and

 

·                                          whether an original action couldbe brought in Bermuda against the Company or its directors and officers toenforce liabilities based solely upon the United States federal securitieslaws.

 

**ITEM 1B.****                         Unresolved Staff Comments**

 

None.

 

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

 

OEHowns 36 hotels worldwide (including nine under long-term lease), four Europeantourist trains, its Burmese cruiseship and five small French canalboats, andtwo restaurants in the U.S. and Argentina, and owns interests of 50% or less infive hotels in Peru, Spain and the U.S., its Southeast Asian tourist train andPeruRail, all as described in Item 1—Business above.  The small regional sales, marketing andoperating offices of the hotels, tourist trains and cruise businesses are occupiedunder operating leases.

** **

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

 

Thereare no material legal proceedings, other than ordinary routine litigationincidental to OEH’s business and as described below, to which the Company orany of its subsidiaries is a party or to which any of their property issubject.

 

CorporateGovernance Structure

 

A wholly-owned subsidiary of the Company,Orient-Express Holdings 1 Ltd. (“Holdings”), currently owns all outstanding18,044,478 Class B common shares of the Company and may vote those sharesunder Bermuda law, which represent about 78% of 

 

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the combined voting power of the Class A and B common shares formost matters submitted to a vote of the Company’s shareholders.  See Item 12—Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters below.

 

On January 12, 2009, D.E. Shaw Oculus Portfolios LLC, D.E. ShawValence Portfolios LLC and CR Intrinsic Investments LLC filed a petition in theSupreme Court of Bermuda.  The petitionalleges, among other things, (i) that the Company has acted unlawfully byholding and voting, directly or indirectly, its own shares, (ii) that theCompany’s Board of Directors has exercised its fiduciary powers for an improperpurpose with respect to the holding and voting of Class B common shares ofthe Company, (iii) that the Company’s Board of Directors has breached itsfiduciary duties to the Company and failed to act in good faith and in the bestinterests of the Company and (iv) that the Company’s affairs have beenconducted in a manner oppressive or prejudicial to the interests of the holdersof the Class A common shares of the Company.

 

The named respondents in the petition are (i) the Company, (ii) Holdingsand (iii) the seven individual members of the Company’s current Board ofDirectors.

 

The petition does not seek damages but seeks, among other relief, (i) adeclaration that it is unlawful for the Company, directly or indirectly, tohold or vote the Class B common shares, (ii) a declaration that theBoard of Directors acted for an improper purpose by holding or voting the Class Bcommon shares, (iii) an amendment to the bye-laws of the Company thatwould have the effect of treating the Class B common shares as treasuryshares with no voting rights, (iv) an order requiring the cancellation ofall of the Class B common shares, (v) an order restraining Holdingsfrom exercising its voting rights in respect of the Class B common sharesand (vi) an order authorizing the petitioners to bring proceedings in thename of the Company to have the Class B common shares cancelled and/or toprevent Holdings from exercising voting rights in respect of the Class Bcommon shares.

 

The Company believes that the petition is without merit and intends todefend the action vigorously.  Thepetition does not seek damages and any remedial action against the Companywould likely be limited to compliance, if ordered, with the declaratory andinjunctive relief sought.  The corporate governance structure of theCompany, with dual Class A and Class B common shares and ownership ofthe Class B shares by Holdings, has been analyzed by legal counsel, and

 

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the Company’s management believesthat the structure is valid under Bermuda law. It enables the Company to oppose any proposals thatare contrary to the best interests of the Company and its shareholders,including coercive or unfair offers to acquire the Company, and thus preservethe value of the Company for all shareholders. This corporate governancestructure has been in place since the Company’s initial public offering in2000, and has been consistently described in the Company’s public filings anddisclosed to investors considering buying the Company’s Class A commonshares.

 

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

 

As described in Item 3—LegalProceedings above, D.E. Shaw Oculus Portfolios LLC, D.E. Shaw ValencePortfolios LLC and CR Intrinsic Investments LLC have filed a petition in theSupreme Court of Bermuda challenging the Company’s corporate governancestructure as it relates to the ownership and voting of Class B commonshares.  Before commencing that lawsuit,these shareholders in September 2008 purported to requisition a specialgeneral meeting of shareholders under section 74 of the Bermuda Companies Act(as amended) to consider two resolutions, namely (i) to amend the Company’sbye-laws to treat the Class B shares as treasury shares with no votingrights and (ii) to cancel the Class B shares.

 

As previously reported, on October 10,2008, the Company convened and held a special general meeting of holders of theClass A and Class B common shares of the Company, voting together asa single class, to consider the two resolutions.  The numbers of votes on each were as follows:

 

(1)                                  Amendment of the Company’s bye-laws to treat the Class B commonshares of the Company as treasury shares: FOR 3,010,025, AGAINST 18,168,430, and ABSTAIN 754.

#  

(2)                                  Authorization to cancel the Class B common shares of theCompany:  FOR 2,964,009, AGAINST18,214,419, and ABSTAIN 781.

#  

Accordingly, bothresolutions were defeated at the special general meeting.

 

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**PART II**

 

**ITEM 5.****                                  Market for Registrant’s Common Equity, Related Stockholder Mattersand Issuer Purchases 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—SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.  The following table presentsthe quarterly high and low sales prices of a Class A common share in 2007and 2008 as reported for New York Stock Exchange composite transactions:

 
| ** **     | ** ** | **2007** | ** ** | **2008** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
|           |       |     |       |     |       |   |   |   |   |
| First quarter  |       | $        | 61.65      |     | $          | 44.92 |   | $ | 58.56 |   | $ | 40.42 |   |
| Second quarter |       | 60.64    |       | 50.69    |       | 49.71 |   | 39.19 |   |
| Third quarter  |       | 58.97    |       | 42.60    |       | 43.28 |   | 23.55 |   |
| Fourth quarter |       | 65.36    |       | 50.69    |       | 24.47 |   | 3.80 |   |
|                |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

TheCompany paid quarterly cash dividends at the rate of $0.025 per Class Aand B common share in 2008 and 2007.  On November 3,2008, the Company announced it was suspending payment of quarterly dividendsbeginning in 2009.

 

TheIslands of Bermuda where the Company is incorporated have no applicablegovernment laws, decrees or regulations which restrict the export or import ofcapital or affect the payment of dividends or other distributions tonon-resident holders of the Class A and B common shares of the Company orwhich subject United States holders to taxes.

 

At February 20,2009, the number of record holders of the Class A common shares of theCompany was approximately 30.

 

During2008, the Company made no offering of its Class A common shares that wasnot registered in the United States. Also, during the fourth quarter of 2008, no purchases of the Company’scommon shares were made by or on behalf of the Company or any affiliated person.

 

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

 

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**ITEM 6.      SelectedFinancial Data**

 

**Orient-Express Hotels Ltd. andSubsidiaries**

 
| ** **                                                          | ** ** | **Year ended December 31,**                           | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                                                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                          | ** ** | **(In thousands except per share amounts)** | ** ** |
|                                                                |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Revenue                                                             |       | $                                                                    | 550,692    |   | $ | 578,415 |   | $ | 479,364 |   | $ | 421,090 |   | $ | 348,310 |   |
|                                                                |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Impairments/gains (1)                                               |       | $                                                                    | (32,715    | ) | $ | 2,312 |   | $ | 6,619 |   | $ | — |   | $ | — |   |
|                                                                |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Earnings from unconsolidated companies, net  of tax                 |       | $                                                                    | 16,771     |   | $ | 16,425 |   | $ | 11,970 |   | $ | 11,175 |   | $ | 9,084 |   |
|                                                                |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Net (loss)/earnings from continuing  operations                     |       | $                                                                    | (6,612     | ) | $ | 50,263 |   | $ | 36,665 |   | $ | 41,293 |   | $ | 31,697 |   |
|                                                                |       |                                                                 |       |   |   |   |   |   |   |   |   |
| (Loss)/earnings from discontinued  operations, net of tax (2)  |       | $                                                                    | (19,939    | ) | $ | (16,621 | ) | $ | 3,102 |   | $ | 246 |   | $ | (479 | ) |
|                                                                |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Net (loss)/earnings                                                 |       | $                                                                    | (26,551    | ) | $ | 33,642 |   | $ | 39,767 |   | $ | 41,539 |   | $ | 31,218 |   |
|                                                                |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Basic (loss)/earnings per share:                                    |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Net (loss)/earnings from continuing  operations                     |       | $                                                                    | (0.15      | ) | $ | 1.19 |   | $ | 0.90 |   | $ | 1.08 |   | $ | 0.92 |   |
| Net (loss)/earnings from discontinued  operations                   |       | (0.46                                                                | )          | (0.40 | ) | 0.08 |   | 0.01 |   | (0.01 | ) |
| Net (loss)/ earnings                                                |       | $                                                                    | (0.61      | ) | $ | 0.79 |   | $ | 0.98 |   | $ | 1.09 |   | $ | 0.91 |   |
|                                                                |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Diluted (loss)/earnings per share:                                  |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Net (loss)/earnings from continuing  operations                     |       | $                                                                    | (0.15      | ) | $ | 1.19 |   | $ | 0.89 |   | $ | 1.07 |   | $ | 0.92 |   |
| Net (loss)/earnings from discontinued  operations                   |       | (0.46                                                                | )          | (0.40 | ) | 0.08 |   | 0.01 |   | (0.01 | ) |
| Net (loss)/earnings                                                 |       | $                                                                    | (0.61      | ) | $ | 0.79 |   | $ | 0.97 |   | $ | 1.08 |   | $ | 0.91 |   |
|                                                                |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Total assets                                                        |       | $                                                                    | 2,069,133  |   | $ | 1,988,437 |   | $ | 1,751,663 |   | $ | 1,452,166 |   | $ | 1,316,058 |   |
|                                                                |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Long-term obligations                                               |       | $                                                                    | 860,123    |   | $ | 786,410 |   | $ | 669,697 |   | $ | 568,307 |   | $ | 583,706 |   |
|                                                                |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Shareholders’ equity                                           |       | $                                                                    | 782,598    |   | $ | 848,531 |   | $ | 806,996 |   | $ | 650,496 |   | $ | 521,280 |   |
|                                                                |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Dividends per share                                                 |       | $                                                                    | 0.10       |   | $ | 0.10 |   | $ | 0.10 |   | $ | 0.10 |   | $ | 0.10 |   |

 

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(1)                                  The gain in 2006 related to the sale of theinvestment in Harry’s Bar.  The gain in2007 related to the gain on the settlement of insurance proceeds forhurricane-damaged assets at Maroma Resort and Spa.  The impairments in 2008 consisted ofimpairment of goodwill at Lapa Palace, Hôtel de la Cité, Le Manoir auxQuat’Saisons, Keswick Hall and Windsor Court Hotel of $9,723,000, and impairmentof the equity investment in Hotel Ritz in Madrid of $22,992,000.

 

(2)                                  In December 2007, OEH decided to sellBora Bora Lagoon Resort.  Accordingly,the results of the hotel have been presented as discontinued operations.  Included in the loss from discontinuedoperations is goodwill and fixed assets impairment losses of $14,000,000 in2007 and $12,000,000 in 2008.

 

See notes to consolidatedfinancial statements (Item 8).

 

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

 

Thefollowing discussionincludes references to non-GAAP financial measures as defined inRegulation G of the SEC.  OEHpresents these measures because it believes they are of interest to theinvestment community by providing additional meaningful methods of evaluatingcertain aspects of OEH’s operating performance from period to period that maynot otherwise be apparent on the basis of U.S. generally accepted accountingprinciples.  These financial measuresshould be viewed in addition to, and not in lieu of, OEH’s consolidatedfinancial statements for the fiscal years presented in this report.

 

**Introduction**

 

OEH has threebusiness segments: (1) hotels and restaurants, (2) tourist trains andcruises and (3) real estate and property development.  Hotels currently consist of 41 deluxehotels.  Thirty-six of these are whollyor majority owned, and are referred to in this discussion as “ownedhotels”.  The other hotels, in which OEHhas unconsolidated equity interests and operate under management contracts, arereferred to in this discussion as “hotel management interests”.  This includes the Charleston Place Hotelwhich, as noted below and in Note 3 to the Financial Statements, OEH hasconsolidated into its financial statements effective December 31,2008.  Of the owned hotels, 12 arelocated in Europe, seven in North America (excluding Charleston Place Hotel)and 17 in the rest of the world.

 

In December 2007,Bora Bora Lagoon Resort was designated as held for sale and, accordingly, theresults of the hotel have been reflected as discontinued operations in allperiods presented.

 

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

 

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

 

OEH’s activereal estate projects are in St. Martin, French West Indies, Keswick, Virginiaand Koh Samui, Thailand.

 

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.

 

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In 2006, OEHsaw growth of 10% in RevPAR with average occupancy of 63% and ADR of $380.  In 2007, same store RevPAR increased 15% inU.S. dollars and 11% in local currency with ADR of $428. In 2008, same storeRevPAR increased 4% in dollars and 3% in local currency with ADR of $444.

 

OEH’slonger-term strategy to grow its business includes:

 

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

 

·                  Expansion ofhotels:  the returns on investment byadding new rooms or other facilities to a hotel are high as the incrementaloperating costs are low;

 

·                  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 land near to orsurrounding its hotels which it intends to develop over time for residentialreal estate sales.

 

In July 2006,OEH raised $99.2 million in cash by selling 2,500,000 newly-issued class Acommon shares at $40 each.  The proceedsof the sale were used primarily to fund the acquisition of the former Panseahotels group. In November 2008, OEH raised an additional $52.5 million incash, after fees and costs of the offering, by selling 8,490,000 newly-issuedclass A common shares at $6.50 each. The proceeds of this sale are being usedprimarily for general corporate purposes including working capital, debtservice and capital investment.

 

In 2008, 90%of OEH’s revenue was derived from the hotels and restaurants segment, 12% fromtourist trains and cruises, and a negative 2% from real estate due to thechange in application of accounting for revenue from the Porto Cupecoyproject.  In the hotels and restaurantssegment, 94% of revenue was from owned hotels, 4% from restaurants and 2% fromhotel 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.

 

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Revenue fromrestaurants is derived from food and beverages sold to customers.

 

Revenue fromhotel management interests includes fees received under management contracts,which are based upon a combination of a percentage of the revenue fromoperations and operating earnings calculated before specified fixed charges.

 

The revenuefrom the tourist trains and cruises segment primarily comprises tickets soldfor travel and food and beverage sales.

 

The revenuefrom real estate and property development is primarily derived from the sale ofland and buildings.

 

Operatingcosts include 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.

 

Depreciationand amortization includes depreciation of owned hotels, restaurants, touristtrains and cruise boats.

 

When OEHdiscusses results 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.

 

*Impact ofForeign Currency Exchange Rate Movements*

 

As reportedbelow in the comparisons of the 2008, 2007 and 2006 financial years under“Results of Operations”, OEH faces exposure arising from the impact oftranslating its global foreign currency earnings and expenses into U.S.dollars.  Nine of OEH’s owned hotels in2008 operated with currencies linked to the European euro, two operated inSouth African rand, two in Australian dollars, one in British pounds sterling,one in Botswana pula, two in Mexican pesos, one in Peruvian nuevo soles, six invarious Southeast Asian currencies and one in Russian rubles. Revenue of theVenice Simplon-Orient-Express, British Pullman, Northern Belle and RoyalScotsman tourist trains was

 

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primarily in British poundssterling, but the operating costs of Venice Simplon-Orient-Express were mainlydenominated in euros. Revenue of the Copacabana Palace and Hotel das Cataratasin Brazil was recorded in U.S. dollars, but substantially all of the hotels’expenses were denominated in Brazilian reals. Revenue derived by Maroma Resortand Spa and La Samanna was recorded in U.S. dollars, but the majority of thehotels’ expenses was denominated in Mexican pesos and the euro, respectively.

 

Except for thespecific instances described above, OEH’s properties match foreign currencyearnings and costs to provide a natural hedge against currency movements. Thereporting of OEH’s revenue and costs translated into U.S. dollars, however, canbe materially affected by foreign exchange rate fluctuations from period toperiod.

 

*Change ofApplication of Accounting Policy for Porto Cupecoy*

 

OEH accountsfor revenue from its real estate activities in accordance with SFAS No. 66,“Accounting for Sales of Real Estate”. Revenue represents the proceeds fromsales of undeveloped land and developed properties that OEH is holding forsale. Previously, revenue related to the Porto Cupecoy project still underconstruction has been recognized under the percentage-of-completion method.

 

SFAS No. 66details five separate tests that must be met in order to use thepercentage-of-completion method for condominiums still under construction,including a requirement that the aggregate sales proceeds and costs can bereasonably estimated. OEH has closely monitored each of the tests and concludedduring the fourth quarter of 2008 that, because of the sustained weakening ofthe European and U.S. economies in particular which resulted in a slowdown incondominium sales compared to prior estimates, the aggregate sales proceedsthat the project would generate could no longer be reasonably estimated withsufficient certainty to permit OEH to continue to recognize revenue under thepercentage-of-completion method at this time. Accordingly, OEH has reverted toaccounting for sales proceeds received at the Porto Cupecoy project as depositsuntil the criteria required by SFAS No. 66 are again met.

 

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Because ofthis change in the application of OEH’s accounting policy, the cumulativerevenue and operating costs recognized by OEH in respect of the Porto Cupecoyproject have been reversed through the statement of operations in the fourthquarter of 2008. Had OEH not changed from the application of the percentage-of-completionbasis, proforma 2008 earnings from operations would have been $4.9 millionhigher than as reported.

 

OEH willaccount for sales proceeds as deposits for Porto Cupecoy in the future untilthe criteria required by SFAS No. 66 are again met.  This change of application of accountingpolicy had no cash effect on OEH.

 

*MarketCapitalization*

 

The Company’s Class Acommon share price fell during 2008 from $57.52 at December 31, 2007 to$7.66 at December 31, 2008, a reduction in OEH’s market capitalizationfrom $2,442 million at December 31, 2007 to $390 million at December 31,2008.  A decline in quoted share pricesand market capitalizations was common for all listed lodging companies in 2008.OEH does not believe that the decline in its share price or marketcapitalization is specifically indicative of a permanent decline in the valueof the OEH’s assets over the period. OEH’s fixed assets are carried in thebalance sheet on a historical depreciated cost basis, and OEH managementperformed impairment tests on all long-lived assets. OEH management believesthe aggregate market value of these assets exceeds their carrying value, inpart because many of OEH’s assets were acquired many years ago.

 

*Asset andInvestment Impairments*

 

OEH regularly compares the carrying value of its fixed assets andgoodwill to its own undiscounted and discounted cash flow projections, in orderto determine whether any of these assets is impaired as required by SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”, and SFAS No. 142,“Goodwill and Other Intangible Assets”. OEH also periodically obtains third-party valuations of fixed assets to complywith bank loan requirements.

 

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At December 31,2008, OEH has identified the following estimated goodwill impairments withinits continuing operations, considering discounted future cash flows prepared asof the balance sheet date (dollars in millions):

 
| Le  Manoir aux Quat’Saisons |   | $   | 5.3    |   |
|----------------------------------|--------|-----|--------|--------|
| Windsor Court Hotel              |   | 2.6 |   |
| Lapa Palace                      |   | 1.0 |   |
| Hôtel  de la Cité      |   | 0.5 |   |
| Keswick  Hall                    |   | 0.3 |   |
|                             |   | $   | 9.7    |   |

 

Through a50%/50% joint venture with a Spanish partner, OEH has a 50% investment in andmanages the Hotel Ritz in Madrid. The joint venture company is highly leveragedwith first mortgage debt of $108.4 million which is non-recourse to the jointventure partners and unsecured debt of $16.7 million.  One half of the unsecured debt is guaranteedby each joint venture partner. OEH management believes substantial capitalexpenditure is necessary to improve the hotel’s long-term profitability.  As a result of the hotel’s discounted cashflow forecasts, OEH believes its investment in the joint venture is impairedand has reduced the carrying amount of that investment by $23.0 million.

 

Theseimpairments have no cash effect on OEH and arose primarily because of expectedreductions in future cash flows from these properties which resulted from theeconomic downturn in Europe, the U.S. and other parts of the world in thefourth quarter of 2008.

 

*Liquidity and FinancialCondition*

 

As reportedbelow under “Liquidity and Capital Resources—Liquidity”, OEH has substantialscheduled debt repayments and capital commitments in 2009, a large part ofwhich is currently unfunded, and is working to improve its liquidity andcapital position.  OEH plans to utilizecash from operations, appropriate debt finance and other funding sources and toreschedule loan

 

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repayments andcapital commitments.  Also as reportedbelow, OEH was in compliance with the major financial covenants in relevantloan facilities that applied to it at December 31, 2008.  OEH recognizes that it is exposed to enhancedrisk in the current economic climate of a covenant breach during 2009 if weaktrading conditions lead to a deterioration of OEH’s results.  OEH expects to take pro-active steps with itsbankers to resolve prospectively any likely breach.

 

**Resultsof Operations**

 

OEH’s operating results for the years 2008, 2007 and2006, expressed as a percentage of revenue, are as follows:

 
| ** **                                      | ** ** | **Year ended December 31** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue:                                        |       |                                      |       |   |   |   |   |
| Hotels  and restaurants                         |       | 90                                        | %          | 83 | % | 84 | % |
| Tourist  trains and cruises                     |       | 12                                        |       | 14 |   | 13 |   |
| Real  estate and property development           |       | (2                                        | )          | 3 |   | 3 |   |
|                                            |       | 100                                       |       | 100 |   | 100 |   |
| Expenses:                                       |       |                                      |       |   |   |   |   |
| Depreciation  and amortization                  |       | 7                                         |       | 7 |   | 7 |   |
| Operating                                       |       | 48                                        |       | 48 |   | 47 |   |
| Selling,  general and administrative            |       | 35                                        |       | 29 |   | 29 |   |
| Impairment  of goodwill                         |       | 2                                         |       | — |   | — |   |
| Impairment  of equity investment                |       | 4                                         |       | — |   | — |   |
| Gain  on sale of fixed assets or investments    |       | —                                    |       | — |   | (1 | ) |
| Net  finance costs                              |       | 8                                         |       | 7 |   | 11 |   |
| (Loss)/earnings  before income taxes            |       | (4                                        | )          | 9 |   | 7 |   |
| Provision  for income taxes                     |       | —                                    |       | (3 | ) | (2 | ) |
| Earnings  from unconsolidated subsidiaries      |       | 3                                         |       | 3 |   | 3 |   |
| Net (loss)/earnings  from continuing operations |       | (1                                        | )          | 9 |   | 8 |   |
| (Loss)/earnings  from discontinued operations   |       | (4                                        | )          | (3 | ) | — |   |
| Net (loss)/earnings  as a percentage of revenue |       | (5                                        | )%         | 6 | % | 8 | % |

 

As notedabove, because of the sustained weakening of the European and U.S. economies inparticular, the aggregate sales proceeds that the Porto Cupecoy real estatedevelopment project is expected to generate can no longer be reasonablyestimated with sufficient certainty to continue accounting for the project

 

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using thepercentage-of-completion method of accounting. Accordingly, management has reverted to accounting for sales proceedsfrom the project as deposits beginning in the fourth quarter of 2008.  The cumulative revenue and operating costsrecognized by OEH in respect of the project to date have been reversed throughthe income statement in the fourth quarter, which results in negative realestate revenue for 2008.

 

Segment net earnings before interest expense (butafter interest income from unconsolidated companies), foreign currency, tax(including tax on earnings from unconsolidated companies), depreciation andamortization (“segment EBITDA”) for the years 2008, 2007 and 2006 are analyzedas follows (dollars in millions):

 
| ** **                                     | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Segment  EBITDA:                               |       |                                       |       |   |   |   |   |
| Owned  Hotels:                                 |       |                                       |       |   |   |   |   |
| Europe                                         |       | $                                          | 62.6       |   | $ | 71.0 |   | $ | 52.7 |   |
| North  America                                 |       | 10.2                                       |       | 13.2 |   | 19.7 |   |
| Rest  of the world                             |       | 32.8                                       |       | 35.6 |   | 31.6 |   |
| Hotel  management and part-ownership interests |       | 23.3                                       |       | 23.8 |   | 19.9 |   |
| Restaurants                                    |       | 2.9                                        |       | 4.6 |   | 6.5 |   |
| Tourist  trains and cruises                    |       | 24.3                                       |       | 25.5 |   | 18.3 |   |
| Real  estate and property development          |       | (6.4                                       | )          | 4.1 |   | 3.5 |   |
| Impairment  of goodwill                        |       | (9.7                                       | )          | — |   | — |   |
| Impairment  of equity investment          |       | (23.0                                      | )          | — |   | — |   |
| Gain  on sales of fixed assets or investments  |       | —                                     |       | 2.3 |   | 6.6 |   |
| Central  overheads                             |       | (31.1                                      | )          | (26.0 | ) | (22.1 | ) |
|                                           |       |                                       |       |   |   |   |   |
|                                           |       | $                                          | 85.9       |   | $ | 154.1 |   | $ | 136.7 |   |

 

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The foregoing segment EBITDA reconciles to net (loss)/earnings from continuingoperations, as follows (dollars in millions):

 
| ** **                                                       | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                       | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                             |       |                                       |       |   |   |   |   |
| Net  (loss)/earnings from continuing operations                  |       | $                                          | (6.6       | ) | $ | 50.3 |   | $ | 36.7 |   |
| Add:                                                             |       |                                       |       |   |   |   |   |
| Depreciation  and amortization                                   |       | 39.0                                       |       | 38.9 |   | 34.5 |   |
| Interest  expense, net                                           |       | 50.6                                       |       | 45.5 |   | 44.4 |   |
| Foreign  currency, net                                           |       | (4.9                                       | )          | (1.0 | ) | 4.6 |   |
| Provision  for income taxes                                      |       | 0.8                                        |       | 15.6 |   | 10.8 |   |
| Share  of provision for income taxes of unconsolidated companies |       | 7.0                                        |       | 4.8 |   | 5.7 |   |
|                                                             |       |                                       |       |   |   |   |   |
| Total                                                            |       | $                                          | 85.9       |   | $ | 154.1 |   | $ | 136.7 |   |

 

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

 

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Operatinginformation for OEH’s owned hotels for the years ended December 31, 2008and 2007 is as follows:

 
|                             |   | **Year ended  December 31,** |   |     |   |   |   |
|----------------------------------|--------|----------------------------------------|--------|----------|--------|--------|--------|
|                             |   | **2008**                               |   | **2007** |   |   |   |   |   |
|                             |   |                                   |   |     |   |   |   |   |   |
| Average  Daily Rate (in dollars) |   |                                   |   |     |   |   |   |   |   |
| Europe                           |   | 757                                    |   | 686      |   |   |   |   |   |
| North  America                   |   | 390                                    |   | 371      |   |   |   |   |   |
| Rest  of the world               |   | 279                                    |   | 272      |   |   |   |   |   |
| Worldwide                        |   | 444                                    |   | 428      |   |   |   |   |   |
|                             |   |                                   |   |     |   |   |   |   |   |
| Rooms  Available (in thousands)  |   |                                   |   |     |   |   |   |   |   |
| Europe                           |   | 322                                    |   | 325      |   |   |   |   |   |
| North  America                   |   | 225                                    |   | 222      |   |   |   |   |   |
| Rest  of the world               |   | 454                                    |   | 408      |   |   |   |   |   |
| Worldwide                        |   | 1,001                                  |   | 955      |   |   |   |   |   |
|                             |   |                                   |   |     |   |   |   |   |   |
| Rooms  Sold (in thousands)       |   |                                   |   |     |   |   |   |   |   |
| Europe                           |   | 171                                    |   | 187      |   |   |   |   |   |
| North  America                   |   | 140                                    |   | 141      |   |   |   |   |   |
| Rest  of the world               |   | 280                                    |   | 259      |   |   |   |   |   |
| Worldwide                        |   | 591                                    |   | 587      |   |   |   |   |   |
|                             |   |                                   |   |     |   |   |   |   |   |
| Occupancy  (percentage)          |   |                                   |   |     |   |   |   |   |   |
| Europe                           |   | 53                                     |   | 58       |   |   |   |   |   |
| North  America                   |   | 62                                     |   | 64       |   |   |   |   |   |
| Rest  of the world               |   | 62                                     |   | 63       |   |   |   |   |   |
| Worldwide                        |   | 59                                     |   | 61       |   |   |   |   |   |
|                             |   |                                   |   |     |   |   |   |   |   |
| RevPAR  (in dollars)             |   |                                   |   |     |   |   |   |   |   |
| Europe                           |   | 402                                    |   | 396      |   |   |   |   |   |
| North  America                   |   | 242                                    |   | 236      |   |   |   |   |   |
| Rest  of the world               |   | 172                                    |   | 173      |   |   |   |   |   |
| Worldwide                        |   | 262                                    |   | 263      |   |   |   |   |   |

 
| ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | **Change %** | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|-------------------|------------|
|                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | **Local** | ** ** |
| ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollars**       | ** ** | **Currency** | ** ** |
| Same Store RevPAR (in dollars) | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| Europe                                             |       | 380        |       | 369        |       | 3                 | %          | -2 | % |
| North  America                                     |       | 230        |       | 226        |       | 2                 | %          | 2 | % |
| Rest  of the world                                 |       | 171        |       | 161        |       | 6                 | %          | 12 | % |
| Worldwide                                          |       | 258        |       | 248        |       | 4                 | %          | 3 | % |
|                                                    |            |            |            |            |            |                   |            |  |  |  |

 

Average daily rate is the average amount achieved forthe rooms sold.  RevPAR is revenue peravailable room, that is the rooms’ revenue divided by the number of availablerooms for each night of operation.  Samestore RevPAR is a comparison based on the operations of the same units in eachperiod, by excluding the effect of any acquisitions, dispositions or majorrefurbishments.  The same store dataexcludes the following operations:

 

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| Copacabana Palace     |   | Bora  Bora Lagoon Resort   |
|-----------------------|--------|----------------------------|
| Hotel Cipriani        |   | Mount Nelson Hotel         |
| Casa de Sierra Nevada |   | Hotel  das Cataratas       |
| La Samanna            |   | La Residence d’Angkor |

 

Year Ended December 31, 2008 compared to

Year Ended December 31, 2007

 

*Revenue*

** **
| **Year ended December 31,** | ** ** | **2008**                   | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                 | ** ** | **(dollars in thousands)** | ** ** |
| Revenue:                                   |       |                       |       |     |       |
|                                       |       |                       |       |     |       |
| Hotels  and restaurants                    |       |                       |       |     |       |
| Owned  hotels                              |       |                       |       |     |       |
| Europe                                     |       | $                          | 229,578    |     | $          | 228,522 |   |
| North  America                             |       | 88,118                     |       | 85,411   |       |
| Rest  of the world                         |       | 138,976                    |       | 128,771  |       |
| Hotel  management/part ownership interests |       | 10,629                     |       | 10,683   |       |
| Restaurants                                |       | 20,333                     |       | 22,638   |       |
|                                       |       | 487,634                    |       | 476,025  |       |
| Tourist  trains and cruises                |       | 77,212                     |       | 82,482   |       |
| Real  estate                               |       | (14,154                    | )          | 19,908   |       |
|                                       |       | $                          | 550,692    |     | $          | 578,415 |   |

 

Total revenue decreased by $27.7 million,or 5%, from $578.4 million in 2007 to $550.7 million in 2008.  Hotels and restaurants revenue increased by$11.6 million, or 2%, from $476.0 million in 2007 to $487.6 millionin 2008, but the revenue from tourist trains and cruises decreased by $5.3million, or 6%, from $82.5 million in 2007 to $77.2 million in 2008.

 

Owned hotel revenue increased by $14.0million, or 3%, from $442.7 million in 2007 to $456.7 million in 2008, of which$5.5 million was due to exchange rate fluctuations and $8.5 million was due toimprovements in hotel trading.  On agroup basis, average room rates increased without a significant decline inoccupancy.

 

Following the change in the fourth quarterof 2008 in the application of the accounting policy for revenue in respect ofthe Porto Cupecoy development project to account for sales proceeds asdeposits, revenue of $15.3 million recognized in 2007 was reversed in 2008.Real estate revenue derived from Keswick Hall was $1.1 million in 2008,compared to $4.6 million in 2007. There were no real estate sales in Koh Samui,Thailand in either 2007 or 2008.

 

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*OwnedHotels: *The increase in owned hotels revenue of $14.0 million is analyzed byregion as follows:

 

*Europe*

 
| **Year ended December 31,** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Average  daily rate (in dollars)           |       | 757      |       | 686      |       |
| Rooms  available (in thousands)            |       | 322      |       | 325      |       |
| Rooms  sold (in thousands)                 |       | 171      |       | 187      |       |
| Occupancy  (percentage)                    |       | 53       |       | 58       |       |
| RevPAR  (in dollars)                       |       | 402      |       | 396      |       |
| Same  store RevPAR (in dollars)            |       | 380      |       | 369      |       |

 

Revenue increased by $1.1 million from$228.5 million in 2007 to $229.6 million in 2008.  Had exchange rates in 2008 been the same asin 2007, Europe’s revenue would have been $9.2 million lower in 2008 than inthe previous year.

 

The Grand Hotel Europe revenue grew by $8.5million, or 18%, from $46.7 million in 2007 to $55.2 million in 2008. Of theincreased revenue, $7.1 million was due to improved trading in 2008.  Average rates in local currency increased by26% compared to 2007 and this increase offset a 3% fall in occupancy. Exchangerate movements were responsible for the other $1.4 million of revenue growth inthe period.

 

In Italy, revenue at the Hotel Splendidodecreased by $0.2 million from $29.5 million in 2007 to $29.3 million in 2008.Revenue fell by $2.4 million at the Villa San Michele, from $14.5 million in2007 to $12.0 million in 2008, and decreased by $0.6 million at Hotel CarusoBelvedere, from $14.4 million in 2007 to $13.8 million in 2008. Revenue at theHotel Cipriani decreased by $5.4 million from $39.5 million in 2007 to $34.1million in 2008.  Without the positiveeffect of exchange rate movements of $5.7 million in 2008 compared to theprevious year, revenue at the four Italian hotels collectively would have been$14.4 million lower in 2008 than in 2007, reflecting a decline in occupancy of13% across the four properties on a same store basis which was partially offsetby a 1% rise in average rates, when expressed in local currency.

 

Revenue at La Residencia increased by $1.9million, or 13%, from $14.9 million in 2007 to $16.8 million in 2008. Of theincreased revenue, $1.1 million was due to exchange rate movements with $0.8million of the revenue growth due to average rate improvements of 3%. Occupancyrate was unchanged in 2008 compared to 2007.

 

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Revenue at Le Manoir aux Quat’Saisonsdecreased by $0.7 million, or 3%, from $24.4 million in 2007 to $23.7 in 2008.Exchange rate movements caused revenue to fall by $1.9 million in 2008 comparedto the prior year.  Revenue increased by$1.2 million due to improved year on year trading.  Average rates and occupancy both increased,and non-rooms revenue increased by 13% in local currency.

 

Revenue at Reids Palace, Madeira increasedby $1.4 million, or 6%, to $24.9 million in 2008 from $23.5 million in 2007. Ofthe increased revenue, $1.6 million was due to exchange rate movements, withoutwhich revenue would have fallen by $0.2 million due to a 6% decline in occupancyin the current year which offset an 8% increase in average rates.

 

Revenue at Lapa Palace, Lisbon and Hôtel dela Cité, Carcassonne, decreased by $0.7 million and $0.6 million, respectively,to $12.5 million and $7.4 million, respectively in 2008. Had exchange rates in2008 been the same as in 2007, revenue at these two properties together wouldhave been $2.6 million lower than the combined revenue of $21.1 millionreported in 2007. Occupancy at both Lapa Palace and Hôtel de la Cité fell in2008 with only a small change in average rates.

 

On a same store basis across the Europeanhotels, RevPAR in local currency decreased by 2% but exchange rate movementstranslated this into a 3% increase in U.S. dollars.

 

*North America*

 
| **Year ended December 31,** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Average  daily rate (in dollars)           |       | 390      |       | 371      |       |
| Rooms  available (in thousands)            |       | 225      |       | 222      |       |
| Rooms  sold (in thousands)                 |       | 140      |       | 141      |       |
| Occupancy  (percentage)                    |       | 62       |       | 64       |       |
| RevPAR  (in dollars)                       |       | 242      |       | 236      |       |
| Same  store RevPAR (in dollars)            |       | 230      |       | 226      |       |

 

Revenue increased by $2.7 million, or 3%,from $85.4 million in 2007 to $88.1 million in 2008.

 

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Revenue at Inn at Perry Cabin, Maryland,increased by $0.6 million, or 5%, from $10.7 million in 2007 to $11.3 millionin 2008. Occupancy and average rates increased by 2%. Revenue derived from thehotel’s Linden spa, which opened in the third quarter of 2007, was $0.9 millionin 2008, compared to $0.4 million in 2007.

 

Windsor Court Hotel in New Orleans recordeda $1.3 million revenue decrease, or 5%, from $25.2 million in 2007 to $23.9million in 2008. Average rates increased by 2% but this could not offset a fallin occupancy of 6%.

 

Revenue at Maroma Resort and Spa, Mexicoincreased by $1.1 million, or 7%, from $16.4 million in 2007 to $17.5 millionin 2008, reflecting average rate improvements of 9% which offset reducedoccupancy, down 2% year on year.  Revenueat Casa de Sierra Nevada, Mexico increased by $0.8 million, to $3.1 million in2008 from $2.3 million in 2007. Part of the hotel was closed forrenovation during the first nine months of 2007.

 

Revenue at La Samanna, St Martin increasedby $1.2 million, or 6%, to $20.8 million in 2008 from $19.6 million in theprior year, with both average rate and occupancy increasing in 2008 compared to2007. Five of the eight villas built on land owned by OEH adjacent to LaSamanna were available for rental from mid-December 2008 for the firsttime, generating revenue of $0.4 million.

 

Revenue at Keswick Hall, Virginia decreasedby $0.1 million from $11.2 million in 2007 to $11.1 million in 2008. Averagerates fell by 2% but occupancy increased by 1% in 2008.

 

Across all of the North Americanproperties, on a same store basis RevPAR increased by 2%. Average occupancy was62% in 2008 compared to 64% in 2007.

 

*Rest of the World*

 
| **Year ended December 31,** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Average  daily rate (in dollars)           |       | 279      |       | 272      |       |
| Rooms  available (in thousands)            |       | 454      |       | 408      |       |
| Rooms  sold (in thousands)                 |       | 280      |       | 259      |       |
| Occupancy  (percentage)                    |       | 62       |       | 63       |       |
| RevPAR  (in dollars)                       |       | 172      |       | 173      |       |
| Same  store RevPAR (in dollars)            |       | 171      |       | 161      |       |

 

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Excluding Hotel das Cataratas, Brazil,which OEH started to operate in October 2007 and which recorded revenue of$8.3 million in 2008, revenue in the Rest of the World region increased by $3.9million, or 3%, from $128.8 million in 2007 to $130.6 million in 2008.

 

Revenue at the Copacabana Palace, Brazilincreased by $1.5 million, or 4%, to $40.5 million in 2008. Occupancy on a samestore basis fell by 4% in 2008 but average daily rates increased by 6%.

 

Revenue at OEH’s two Australian propertiesdecreased by $0.8 million, or 4%, from $23.3 million in 2007 to $22.5 millionin 2008. The U.S. dollar to Australian dollar exchange rate was the same inboth the current and prior year. The drop in revenue reflects the tradingperformance of the Observatory Hotel, Sydney, where both occupancy and averagedaily rates fell in 2008 compared to the previous year.

 

Southern Africa revenue decreased by $0.8million to $40.1 million for the year ended December 31, 2008.  Revenue at the Mount Nelson Hotel, Cape Towndecreased by $1.4 million and revenue at the Westcliff, Johannesburg decreasedby $0.3 million to $20.2 million and $9.9 million, respectively.  The movement of the South African rand andU.S. dollar exchange rate had a negative impact on the revenue of these twohotels of $5.2 million. Had the 2008 exchange rate remained at the 2007 level,South African revenue would have been $3.5 million higher than reported. Localcurrency average daily rates at the Mount Nelson increased by 12% and localcurrency rates increased by 15% at the Westcliff, which offset a drop inoccupancy at this hotel on a same store basis.

 

Revenue at Orient-Express Safaris,Botswana, increased by $1.0 million, or 11%, from $9.0 million in 2007 to $10.0million in 2008. Exchange rate movements between the U.S dollar and Botwananpula had a negative impact on revenues, year on year, of $1.2 million.  Accordingly, the trading improvement was $2.1million for the year ended December 31, 2008 compared to the prior year.

 

OEH’s sixAsian hotels collectively increased revenue by $3.9 million, or 24%, from $16.9million in 2007 to $20.0 million in 2008. This included a decrease in revenue at The Governors Residence, Yangon,which declined by $0.3 million to $0.8 million following the cyclone thatstruck Burma in May 2008 resulting in closure of the hotel for part of thesecond and third quarters.  Excluding TheGovernors Residence, the Asian hotels recorded good revenue growth due to higheraverage rates and occupancy.  Exchangerate movements had only a small negative effect of $0.1 million on the Asianhotels revenue.

 

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The Rest ofthe World region RevPAR, on a same store basis, increased by 12% in localcurrencies 2008 compared to 2007. This translated to a same store RevPAR increaseof 6% when expressed in U.S. dollars.

 

*HotelManagement and Part-Ownership Interests: *Revenue from hotel managementinterests decreased by $0.1 million, from $10.7 million in 2007 to $10.6million in 2008. Improved revenue from the Peru hotel investments, up $0.6million from $3.6 million in 2007 to $4.2 million in 2008, were offset by adecrease of $0.3 million from Charleston Place and a fall of $0.4 million fromHotel Ritz in Madrid.

 

*Restaurants: *Revenuedecreased by $2.3 million, from $22.6 million in 2007 to $20.3 million in 2008.Revenue at ‘21’ Club in New York fell by $2.7 million, or 13%, from $21.2million in 2007 to $18.5 million in 2008, reflecting a 11% drop in covers yearon year. Revenue at La Cabana, Buenos Aires increased by $0.3 million, to $1.3million in 2008.

 

*TouristTrains and Cruises:*  Revenue decreased by $5.3 million, or 6%,from $82.5 million in 2007 to $77.2 million in 2008.  This decrease included $2.5 million inrespect of the Road to Mandalay river cruiseship which was extensively damagedby the cyclone in Burma in May 2008. Operations were suspended to allowfor repairs, resulting in revenue falling by $2.5 million to $1.7 million in2008, compared to $4.2 million in 2007.

 

The Venice Simplon-Orient-Express revenue increased by$2.2 million from $25.9 million in 2007 to $28.1 million in 2008.  Exchange rate fluctuations reduced thetrain’s revenue when reported in U.S. dollars by $2.3 million.  Had exchange rates in 2008 stayed the same,the  revenue would have been $4.5 millionhigher in 2008 than in the previous year. Venice Simplon-Orient-Express revenueincreased partly because a higher number of passengers booked directly in 2008,instead of booking through agents or third-party tour operators, and also thediscounts given to groups and charters were reduced.

 

The Royal Scotsman, which became wholly owned in April 2007,generated revenue of $6.0 million in 2008 compared to $6.8 million in the prioryear. Of this decrease, $0.5 million was due to exchange rate fluctuations.

 

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Revenue generated by the day train services operatingin the United Kingdom — the British Pullman and the Northern Belle — decreasedby $2.2 million from $22.9 million in 2007 to $20.7 million in 2008, of which$1.7 million was due to the change in the British Pound to U.S. dollar exchangerate.

 

*Real Estate: *Following the change in the fourthquarter of 2008 in application of the accounting policy for revenue to accountfor sales proceeds as deposits for the Porto Cupecoy development project,revenue of $15.3 million recognized in 2007 was reversed in 2008. Real estaterevenue derived from Keswick Hall was $1.1 million in 2008, compared to $ 4.6million in 2007. Two lots were sold in 2008 compared to the sale of five lotsand one house in 2007.

 

*Depreciationand Amortization*

 

Depreciation and amortization expense increased by$0.1 million, from $38.9 million in 2007 to $39.0 million in 2008.

 

*OperatingExpenses*

 

Operating expenses decreased by $15.2 million, or5%, from $278.8 million in 2007 to $263.5 in 2008. As noted above, the2008 expense included a credit of $9.9 million following the change in the applicationof the accounting policy for the Porto Cupecoy development in the fourthquarter of 2008. A corresponding charge was included in the operating expensetotal of $278.8 million in 2007. If these two Porto Cupecoy balances wereexcluded, operating expenses increased by $4.6 million, or 2%, from $268.9million in 2008 to $273.5 million in 2008.

 

Of the$4.6 million cost increase in 2008, $3.5 million related to Hotel dasCataratas, which OEH began to operate in October 2007. The hotel incurredoperating costs of $1.1 million in 2007.

 

Elsewhere,operating expenses incurred by Keswick Hall were $4.1 million lower in 2008than in 2007 due to reduced real estate sales activity. Operating costs at theGrand Hotel Europe, St. Petersburg increased by $3.9 million, of which $0.4million was due to fluctuation in exchange rates. Excluding this exchange rateeffect, the increase was consistent with the additional revenue generated atthis hotel in the current year.

 

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Operatingexpenses at the European hotels, excluding Le Manoir aux Quat’Saisons, and atLa Samanna, which incurs a significant portion of its costs in euros, increasedby $0.8 million. Euro to U.S. dollar exchange rate movements caused expenses toincrease by $5.6 million.  Had exchangerates been the same in 2008 as in 2007, the euro-denominated costs when translatedinto U.S. dollars would have been $4.8 million lower in 2008 than in theprevious year.

 

Operatingexpenses incurred in the United Kingdom in 2008 increased by $0.8 to $60.4million. The Venice Simplon-Orient-Express train incurs significant operatingcosts in euros, primarily haulage, railway track access and staff costs, whichwere higher in 2008 than in 2007 due to movements of the British pound exchangerate to the euro.

 

As a percentage of revenue, operating expenses were48% of revenue in both 2008 and in 2007. Excluding the Porto Cupecoy costsmentioned above, operating expenses were 46% of revenue in 2007 and 50% ofrevenue in 2008.

 

*Selling,General and Administrative Expenses*

 

Selling,general and administrative expenses increased by $23.3 million, or 14%,from $169.0 million in 2007 to $192.3 million in 2008.

 

The selling, general and administrative expenses in2008 included $8.4 million at the Hotel das Cataratas, Brazil, which OEH beganto operate in October 2007, compared to $2.3 million in 2007. As notedabove, the 2008 expense included a credit of $1.0 million in respect of thePorto Cupecoy development following the change in accounting treatment of theproject. A corresponding charge was included in the operating expense total of$169.0 million in 2007.

 

Selling, general and administrative expenses incurredat Grand Hotel Europe, St. Petersburg increased by $1.9 million, or 19%, from$10.0 million in 2007 to $11.9 million in 2008, mainly as a result of wageinflation. Exchange rate movements caused $0.3 million of the cost increase.

 

Selling,general and administrative expenses at the European hotels, excluding Le Manoiraux Quat’Saisons, and at La Samanna increased by $1.4 million. Euro to U.S.dollar exchange rate movements caused costs to increase by $3.5 million.  Had exchange rates been the same in 2008 asin 2007, the euro costs when translated into U.S. dollars would have been $2.1million lower in 2008 than in the previous year.

 

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Aspreviously reported, OEH plans to achieve overhead cost savings of at least$20.0 million through 2009.  Somepersonnel changes took place in the fourth quarter of 2008 following a reviewof OEH’s hotel management and operating structures. Selling, general andadministrative expenses in 2008 included an amount of $2.7 million in respectof staff termination and restructuring costs.

 

As apercentage of revenue, selling, general and administrative expenses were 35% ofrevenue in 2008 compared to 29% of revenue in 2007.

 

*Impairmentof Goodwill*

 

As notedabove, OEH recorded an estimated goodwill impairment charge of $9.7 million in2008. The goodwill arose on the acquisition in previous years of Lapa Palace,Hôtel de la Cité, Windsor Court Hotel, Le Manoir aux’Quat Saisons and KeswickHall. There was no equivalent impairment expense in 2007.

 

*Impairmentof Equity Investment*

 

As notedabove, OEH recorded an impairment charge of $23.0 million in 2008 in respectits 50% investment in Hotel Ritz Madrid. There was no equivalent impairmentexpense in 2007.

 

*Segment EBITDA*

 
| **Year ended December 31,** | ** ** | **2008**                             | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|----------|------------|
| ** **                                 | ** ** | **(dollars in thousands)** | ** ** |
| Segment  EBITDA:                           |       |                                 |       |     |       |
|                                       |       |                                 |       |     |       |
| Hotels  and restaurants                    |       |                                 |       |     |       |
| Owned  hotels                              |       |                                 |       |     |       |
| Europe                                     |       | $                                    | 62,629     |     | $          | 71,033 |   |
| North  America                             |       | 10,182                               |       | 13,238   |       |
| Rest  of the world                         |       | 32,849                               |       | 35,611   |       |
| Hotel  management/part ownership interests |       | 23,302                               |       | 23,840   |       |
| Restaurants                                |       | 2,878                                |       | 4,564    |       |
|                                       |       | 131,840                              |       | 148,286  |       |
| Tourist  trains and cruises                |       | 24,279                               |       | 25,481   |       |
| Real  estate                               |       | (6,433                               | )          | 4,121    |       |
| Impairment  of goodwill                    |       | (9,723                               | )          | —   |       |
| Impairment  of equity investments          |       | (22,992                              | )          | —   |       |
| Gain  on disposal of assets                |       | —                               |       | 2,312    |       |
| Central  overheads                         |       | (31,117                              | )          | (26,072  | )          |
|                                       |       |                                 |       |     |       |
|                                       |       | $                                    | 85,854     |     | $          | 154,128 |   |

 

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Segment EBITDAmargins (calculated as segment EBITDA before impairment of fixed assets,goodwill and equity investments as a percentage of revenue) for the year ended December 31,2008 decreased by 5%, from 27% in 2007 to 22% in 2008.

 

In 2008, theEuropean hotels collectively reported a segment EBITDA of $62.6 millioncompared to $71.1 million in the same period in 2007.  As a percentage of European hotel revenue,the European segment EBITDA margin declined from 31% in 2007 to 27% in 2008.

 

Segment EBITDAin the North American region was $13.2 million in 2007 and $10.2 million in2008, a fall of $3.0 million.  As apercentage of North American hotel revenue, the North American segment EBITDAmargin declined from 15% in 2007 to 12% in 2008.

 

Segment EBITDAin the Rest of the World region decreased by $2.8 million to $32.8 million in2008 from $35.6 million in 2007.  The2008 segment EBITDA included the full year results of Hotel das Cataratas,Brazil, which OEH began operating in October 2007 and which is currentlyundergoing refurbishment. This hotel reported an EBITDA loss of $3.6 million in2008 compared to a loss of $0.3 million in 2007.  If the Hotel das Cataratas results in the twoyears were excluded, segment EBITDA for the Rest of the World region increasedby $0.7 million, to $36.5 million in 2008 compared to $35.9 million in 2007.The segment EBITDA margin in 2008, excluding Hotel das Cataratas, was 28%compared to a margin of 28% in 2007.

 

*Earningsfrom Operations*

 

Earnings from operations decreased by$36.2 million, or 38%, from $94.0 million in 2007 to $57.8 million in2008, due to the factors referred to in the preceding paragraphs.

 

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*Net Finance Costs*

 

Net financecosts increased by $1.2 million, or 3%, from $44.5 million in 2007 to $45.7million in 2008.  Net finance costsincluded foreign currency transaction gains of $4.9 million in 2008, comparedto a gain of $0.9 million in 2007. Excluding foreign currency gains, netfinance costs increased by $5.2 million, or 11%, from $45.4 million in 2007 to$50.6 million in 2008, reflecting an increase in average borrowings in 2008compared to the previous year. The net finance cost in 2008 included a cost of$2.9 million in respect of an interest rate hedge which, in accordance withSFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”,became ineffective during the year.

 

*Provision for Income Taxes*

 

The provisionfor income taxes decreased by $14.8 million, from $15.6 million in 2007 to$0.8 million in 2008.

 

On January 1,2008, OEH recognized a provision of $24.0 million in respect of its uncertaintax positions in accordance with FASB interpretation No. 48, “Accountingfor Uncertainty in Income Taxes”. The provision for income taxes of $2.4  million for 2008 included a tax credit of$11.8 million to reduce the FIN 48 liability recognized at December 31,2008 to $11.5 million, after also considering foreign exchange movements.

 

The Company isincorporated in Bermuda, which does not impose an income tax.  Accordingly, the entire income tax provisionwas attributable to income tax charges incurred by subsidiaries operating injurisdictions that impose an income tax.

 

*Earnings fromUnconsolidated Companies*

 

Earnings fromunconsolidated companies, before taxes, which included OEH’s share of the netearnings of its equity investments as well as interest income related to loansand advances to the equity investees, increased by $2.6 million, or 12%, from$21.2 million to $23.8 million.

 

Earnings fromthe Peruvian railway joint venture increased by $1.7 million, or 19%, from $9.3million in 2007 to $11.0 million in 2008. The Peruvian hotel joint ventureearnings fell by $0.6 million from $3.0 million in 2007 to $2.4 million in 2008.

 

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Earnings fromCharleston Place increased by $0.3 million, from $9.8 million in 2007 to $10.1million in 2008. Interest income related to loans and advances to this jointventure totalled $11.8 million in 2007 and $11.9 million in 2008. OEH’s shareof earnings from Hotel Ritz, Madrid fell by $0.3 million from income of $0.4million in 2007 to a gain of $0.1 million in 2008.

 

In April 2007,OEH acquired the 50% interests in the Afloat in France and The Royal Scotsman businessesthat it did not previously own. OEH’s share of the losses generated by thesebusiness prior to the acquisitions in April 2007 totalled $1.3 million.There were no equivalent unconsolidated earnings in 2008.

 

The income taxexpense incurred by OEH in respect of these unconsolidated earnings was $7.0million in 2008, compared to $4.7 million in 2007.

 

*Earnings from DiscontinuedOperations*

 

The loss fromdiscontinued operations of Bora Bora Lagoon Resort in 2008 included goodwilland fixed assets impairment loss of $12.0 million ($14.0 million in 2007) and aloss from operations of $7.9 million ($2.6 million in 2007). In 2008, the lossfrom operations included a $3.0 million deferred tax charge in respect of taxlosses which are unlikely to be used.

 

Year ended December 31, 2007 compared to

Year ended December 31, 2006

 

*Revenue*

* *
| **Year ended December 31,** | ** ** | **2007**                             | ** ** | **2006** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|----------|------------|
| ** **                                 | ** ** | **(dollars in thousands)** | ** ** |
| Revenue:                                   |       |                                 |       |     |       |
|                                       |       |                                 |       |     |       |
| Hotels  and restaurants                    |       |                                 |       |     |       |
| Owned  hotels                              |       |                                 |       |     |       |
| Europe                                     |       | $                                    | 228,522    |     | $          | 180,365 |   |
| North  America                             |       | 85,411                               |       | 85,492   |       |
| Rest  of the world                         |       | 128,771                              |       | 101,979  |       |
| Hotel  management/part ownership interests |       | 10,683                               |       | 9,212    |       |
| Restaurants                                |       | 22,638                               |       | 22,544   |       |
|                                       |       | 476,025                              |       | 399,592  |       |
| Tourist  trains and cruises                |       | 82,482                               |       | 63,628   |       |
| Real  estate                               |       | 19,908                               |       | 16,144   |       |
|                                       |       | $                                    | 578,415    |     | $          | 479,364 |   |

 

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Total revenueincreased by $99.0 million, or 20.7%, from $479.4 million in 2006 to $578.4million in 2007.  Hotels and restaurantsrevenue increased by $76.4 million, or 19.1%, from $399.6 million in2006 to $476.0 million in 2007, and the revenue from tourist trains andcruises increased by $18.9 million, or 29.7%, from $63.6 million in 2006 to$82.5 million in 2007.  Real estate andproperty development contributed $19.9 million of revenue in 2007, up from$16.1 million in 2006, with revenues from Keswick Hall representing $4.6 millionand revenues from the Porto Cupecoy real estate development in St. Martinrepresenting $15.3 million.

 

The increasein hotels and restaurants revenue consisted of the following:

 

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

 

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

 

The increase in owned hotels revenue of $74.9 million is analyzed byregion as follows:

 

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

 

On a samestore basis, RevPAR increased by 10% in 2007 over 2006 and when translated toU.S. dollars also increased by 17%. Overall, revenue in Italy was $21.8 million ahead of revenue in 2006, anincrease of 29%.

 

*NorthAmerica:* Revenue decreased by $0.1 million, from $85.5 million in 2006 to $85.4million in 2007.  The 2006 revenueincluded an amount of $3.9 million in respect of El Encanto which was closedfor renovation throughout 2007 and generated no revenue in the year.  Excluding El Encanto, North American revenueincreased by $3.8 million, or 4.6% from 2006 to 2007.

 

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This increasewas underpinned by $1.6 million of revenue at Maroma Resort and Spa, along withrevenue growth at La Samanna, Keswick Hall, Inn at Perry Cabin and Casa deSierra Nevada.

 

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

 

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

 

RevPARincreased by 14% in local currencies and increased by 15% in U.S. dollars.

 

*TouristTrains and Cruises: *Revenue increased by $18.9 million, or 29.7%, from $63.6 million in2006 to $82.5 million in 2007.  $4.6million of this growth was due to the performance of the VeniceSimplon-Orient-Express.  The RoyalScotsman, which was acquired in April 2007, generated revenue of $6.8million in 2007.

 

*RealEstate: *Revenue increased by $3.8 million, or 23.6%, from $16.1 million in2006 to $19.9 million in 2007.  The PortoCupecoy development generated revenue of $15.3 million in 2007 for the firsttime, which more than made up for lower revenue at Keswick Hall in 2007.

 

*Depreciation andAmortization*

 

Depreciationand amortization increased by $4.4 million, or 12.7%, from$34.5 million in 2006 to $38.9 million in 2007.  The increase was due primarily to thecontinued investment in existing properties.

 

*Operating Expenses*

 

Operatingexpenses increased by $52.4 million, or 23.1%, from $226.4 million in2006 to $278.8 million in 2007. This was primarily due to the improved revenue and volumes in OEH’sbusinesses in the year.  As a percentageof revenue, operating expenses increased by 1% to 48% of revenue in 2007.

 

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*Selling, General andAdministrative Expenses*

 

Selling,general and administrative expenses increased by $28.4 million, or 20.2%,from $140.6 million in 2006 to $169.0 million in 2007.  As a percentage of revenue, selling, generaland administrative expenses remained flat at 29% of revenue in 2007.

 

*Segment EBITDA*

 

Segment EBITDAmargins (calculated as segment EBITDA as a percentage of revenue) for 2007 were27%, down from 28% for 2006.  Thedecrease was due to reduced margins in North America and the Rest of the World,notably at the Copacabana Palace in Brazil due to the strengthening of the realagainst the dollar during 2007.

 

*Earnings from Operations*

 

Earnings fromoperations increased by $16.2 million, or 21%, from $77.8 million in2006 to $94.0 million in 2007, due to the factors referred to in thepreceding paragraphs.

 

*Net Finance Costs*

 

Net financecosts decreased by $4.5 million, or 10%, from $49.0 million in 2006 to $44.5million in 2007.  This includes foreigncurrency transaction gains of $1.0 million in 2007 (2006-$4.6 millionloss).  Excluding foreign currency, netfinance costs increased by $1.0 million, or 2%, from $44.4 million in 2006 to$45.4 million in 2007.  The increase wasattributable to rising U.S. and U.K. interest rates during 2007.

 

*Provision for Income Taxes*

 

The provisionfor income taxes increased by $4.8 million, from $10.8 million in 2006 to$15.6 million in 2007.  The 2006provision for income taxes included deferred tax credits totalling $5.8 millionresulting from the reduction of valuation allowances established in respect oftax losses in Portugal and Australia. There were no comparable deferred tax credits in 2007.

 

OEH recognizeda provision of $28.8 million in respect of its uncertain tax positions upon theadoption of FIN 48 on January 1, 2007. The provision for income taxes of $15.6 million for 2007 includes a taxcredit of $7.1 million that reduces the FIN 48 liability recognized at December 31,2007.

 

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

 

*Earningsfrom Unconsolidated Companies*

 

Earnings from unconsolidated companies, which includeOEH’s share of the net earnings of its equity investments as well as interestincome related to loans and advances to the equity investees, increased by $4.4million, or 37%, from $12.0 million in 2006 to $16.4 million in 2007, mainlydue to increased earnings from Peruvian joint ventures.

 

*Earningsfrom Discontinued Operations*

 

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

 

In December 2007, OEH decided to sell Bora BoraLagoon Resort.  Consequently the hotel’sresults have been presented as discontinued operations.  Due to increased competition and high cost structuresin Bora Bora the results of the hotel were lower than expected so that animpairment loss had arisen.

 

**Liquidityand Capital Resources**

 

*WorkingCapital*

 

OEH had cash and cash equivalents of $65.8 million at December 31,2008, $24.8 million less than the $90.6 million at December 31,2007.  In addition, OEH had restrictedcash of $13.2 million (2007-$3.8 million), the majority of which relates to thePorto Cupecoy project in St. Martin which will be released when the next 12.5%phase of construction is completed.  At December 31,2008, there were undrawn amounts available to OEH under committed short-termlines of credit of $8.6 million (2007-$14.1 million) and undrawn amountsavailable to OEH under secured revolving credit facilities of $42.0 million,bringing total cash availability at December 31, 2008 to $129.6 million,including the restricted cash of $13.2 million (2007-$167.1 million).

 

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Current assets less current liabilities, including thecurrent portion of long-term debt, resulted in a working capital deficit of$31.5 million, a decrease of $66.8 million from a working capital balanceof $35.3 million at December 31, 2007. The main factor that contributed to the decrease in working capital wasthe decrease in net assets of Bora Bora Lagoon Resort due to an impairment lossof $12.0 million recognized in 2008. Assets and liabilities of the hotel have been included in workingcapital as assets and liabilities held for sale.  Excluding Bora Bora Lagoon Resort, the othermain factor that contributed to the decrease in working capital was theincreased use of cash for financing capital projects.  See discussion under the heading “Liquidity”below.

 

*CashFlow*

 

*Operating Activities.*  Net cash provided byoperating activities decreased by $27.8 million to $25.1 million for theyear ended December 31, 2008, from cash provided by operating activitiesof $52.9 million for the year ended December 31, 2007.  The decrease was due to worse performance ofthe continuing hotels in the fourth quarter of 2008, higher central costs (suchas redundancies and legal costs) as well as cash losses at Bora Bora LagoonResort.

 

*Investing Activities.*  Cash used in investingactivities was $124.9 million for the year ended December 31, 2008,compared to $126.9 million for the year ended December 31, 2007, adecrease of $2.0 million.  Capitalexpenditure of $111.6 million included $11.0 million for refurbishment of theGrand Hotel Europe, $11.4 million for refurbishment of the Italian hotels,$12.5 million for rebuilding Hotel das Cataratas, $12.8 million for El Encantoconstruction, $7.3 million for Copacabana Palace refurbishment, and $18.8million for construction at Porto Cupecoy and the villas at La Samanna.

 

Current year acquisitions of $3.0 million included theacquisition of the 20% minority interest in Casa de Sierra Nevada and the LaSamanna Spa acquisition.  The 2007acquisitions included the final payment for the Grand Hotel Europe, LaResidence d’Angkor minority interest acquisition, acquisitions of Afloat inFrance and the Royal Scotsman, acquisition of internet website intangibleassets, and investment in Buzios.  The2006 acquisitions included 75% of Casa de Sierra Nevada, 25% of Maromainterests and the Pansea Hotels group.

 

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

 

The $5.3 million increase in restricted cash mainlyrepresented the net movement in the escorow account used in the Porto Cupecoyproperty development.

 

*Financing Activities.*  Cash provided from financingactivities for the year ended December 31, 2008 was $76.7 million comparedto cash provided from financing activities of $83.8 million for the yearended December 31, 2007, a decrease of $7.1 million.

 

In November 2008, OEH raised an additional $52.5million in cash by selling 8,490,000 newly-issued class A common shares at$6.50 each. The proceeds of this sale are being used primarily for generalcorporate purposes including working capital, debt service and capitalinvestment.

 

*CapitalCommitments*

 

There were $23.6 million of capital commitmentsoutstanding at December 31, 2008 related to investments in owned hotels and afurther $53.0 million commitment outstanding related to the purchase of landand a building adjoining ‘21’ Club from the New York Public Library. OEH hasinformed the Library that it wishes to defer or restructure the purchase.  Outstanding contracts for project-relatedcosts on the Porto Cupecoy development amounted to $32.0 million at December31, 2008.

 

*Indebtedness*

 

At December 31, 2008, OEH had $860.1 millionof consolidated long-term debt, including the current portion, collateralizedby OEH assets with a number of commercial bank lenders which is payable overperiods of one to 11 years with a weighted average interest rate of5.07%.  See Note 9 to the FinancialStatements regarding the maturity of long-term debt.

 

Long-term debt at December 31, 2008 includes$79.6 million of debt obligations of Charleston Center LLC, owner of theCharleston Place Hotel in which OEH has a 19.9% equity investment. As notedbelow in “Off-Balance Sheet Arrangements”, at December 31, 2008, OEH considered the investment to be within thescope of FIN 46(R) and that OEH is the primary beneficiary of the variableinterest entity, as defined by FIN 46(R). OEH was therefore required to consolidate the hotel’s assets andliabilities effective December 31, 2008. This debtis non-recourse to the members of Charleston Center LLC, including OEH, andtherefore the hotel’s liabilities do not constitute obligations of OEH.

 

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Many OEH financing agreements contain covenants thatinclude limits on the property owning company’s ability to raise additionaldebt collateralized by these properties, limits on liens on the properties andlimits on mergers and asset sales and, in some cases, financial covenants suchas a minimum interest coverage ratio and debt service coverage ratio and amaximum debt to equity ratio.  Some ofthe Company guarantees of these facilities contain financial covenants on OEHcovering a minimum consolidated tangible net worth and a minimum consolidatedinterest coverage ratio. OEH was in full compliance with all major covenantsthat applied to OEH at December 31, 2008. See “Liquidity” below regardinga possible loan covenant breach at March 31, 2009.

 

Approximately 52% of the outstanding principal wasdrawn in euros at December 31, 2008, and the balance primarily drawn inU.S. dollars.  At December 31, 2008,60% of borrowings of OEH were in floating interest rates.

 

*Liquidity*

 

During the 12 months ending December 31, 2009,OEH has approximately $29.7 million of scheduled debt repayments, excludingamounts relating to revolving facilities, which it expects to meet throughoperating cash flow and other available committed facilities, and excluding$3.0 million of debt at Keswick Hall which comes due when the relevant buildinglots are sold.  Additionally, OEH’scapital commitments amount to $76.6 million of which $53.0 million relates tothe purchase of land and a building adjoining ‘21’ Club from the New YorkPublic Library.  OEH has informed theLibrary that it wishes to defer or restructure the purchase.  The balance of $23.6 million of capitalcommitments is currently covered by committed funding and projected operatingcash flows.  OEH expects to incur costsof a further $32.0 million to complete its Porto Cupecoy development, fundedlargely by deposits on sales at the work progresses and a short-term loanagreed in principle with a bank lender.

 

OEH is discussing with its financial advisers the mostappropriate way of funding the remaining unfunded commitments.  Options available to OEH, depending onavailability in the current economic and financial environment and OEH’scontinuing compliance with financial covenants in its existing loan facilities,include raising additional debt at property level, issuing debt instruments orequity, rescheduling loan repayments or capital commitments, disposing ofproperties or other assets for cash, or a combination of the foregoing.  OEH has prepared cash flow projections whichindicate it will have available cash from operations, appropriate debt financeand other sources sufficient to fund its working capital requirements, committedcapital expenditures, committed acquisitions and debt service for the next 12months and the foreseeable future.  OEHis taking steps to enhance its liquidity and capital position, including asfollows:

 

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·                              InDecember 2008, OEH amended its agreements with the New York PublicLibrary, which allowed it to defer closing of its purchase of the Donnellbranch adjacent to ‘21’ Club.  Pursuantto these amendments, OEH made an additional deposit with the Library of $3.0million in December 2008 and received a series of options to defer theclosing 30 days at a time by making further deposits, a portion of which wouldbe deemed interest, totaling $7.5 million if all of the options were exercisedand resulting in a final payment of $36.3 million due in July 2009.  OEH exercised the first extension option andmade an additional $1.0 million deposit in January 2009, but did not electto exercise a further option or make a further extension deposit in February 2009.  OEH has advised the Library that, due to the currentglobal financial crisis and conditions in the credit and real estate markets,it would not be in a position to close on the purchase of the Donnell branch asprovided in the purchase contract, which closing, absent a further extension,would have been due to occur at the end of February 2009.  OEH has informed the Library that it desiresto pursue discussions with the Library to defer or restructure the project in amutually agreeable manner.  By letterdated February 27, 2009, the Library advised OEH that it will be indefault under the purchase agreement if it does not close the transaction andthat the Library may elect to exercise its right and remedies under theagreement and is otherwise reserving its rights.  There can be no assurance that discussionswill occur or that, if they do, they will result in a resolution of the mattersatisfactory to OEH.

 

·                              The reopening of El Encanto in Santa Barbara (currently closed forrefurbishment) has been delayed to 2011, which defers $50.0 million of capitalexpenditures and enables OEH to open this property in more favorable marketconditions.

 

·                              OEH has cancelled proposed hotel acquisitions previously underdiscussion in Zambia and Puglia, Italy and, with its proposed joint venturepartner, cancelled new hotel building projects originally envisioned in Miami,Florida, Panama City, Panama, and Cartagena, Colombia.

 

·                              Cash dividend payments on the Company’s Class A and B commonshares have been suspended, beginning in 2009.

 

·                              OEH has reduced planned 2009 capital expenditures to $12.0 millionneeded to complete specific property improvements that are already underway,principally at the Grand Hotel Europe, St. Petersburg and Hotel Cipriani,Venice, or to comply with local building or health and safety regulations. OEHdoes not expect to spend more than a further $12.0 million replacing furniture,fixtures and equipment across all of its properties in 2009.

 

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·                              OEH is achieving annual overhead cost savings of at least $20.0million starting in the latter part of 2008 through 2009. Personnel changeshave been implemented following a review of OEH’s hotel management andoperating structures, and reductions have been made in selling, general andadministrative costs.

 

Notwithstanding the foregoing, OEH cannot giveassurance that, in the current economic and financial environment, additionalsources of financing for OEH’s unfunded commitments will be available to OEH oravailable on commercially acceptable terms, or that OEH will be able toreschedule loan repayments or capital commitments, or that the foregoing stepsto enhance its liquidity and capital position will bridge any shortfall.  If additional sources of financing areunavailable, including because of possible future breaches of loan financialcovenants, OEH may be unable to fund its cash requirements for working capital,commitments and debt service.

 

OEH is inregular discussions with its bankers regarding funding requirements and toensure its continued compliance with the financial covenants applicable to OEHin its existing loan facilities.  At December 31,2008, OEH was in compliance with all major covenants, although the Hotel Ritz,Madrid was out of compliance with a debt service coverage ratio in its firstmortgage loan facility which is non-recourse to and not credit-supported by OEHor its joint venture partner in that hotel. OEH and its partner are discussing with the lender how to bring thehotel back into compliance.

 

OEH recognizesthat, in the current economic climate, there is an enhanced risk of a covenantbreach if weak trading conditions lead to a deterioration of OEH’s results andthe costs of implementing remedial steps reduce OEH’s earnings in any givenperiod.  If current economic conditions,including the volatility recently experienced in foreign exchange and globaldebt markets, continue or worsen, OEH believes there is heightened risk that itcould breach certain financial covenants applicable to OEH during 2009.

 

OEH’sliquidity would be adversely affected if a covenant breach occurred in amaterial loan facility and OEH were unable to agree with its bankers how theparticular financial covenant should be amended or how the breach could becured.  OEH expects to take pro-activesteps to meet with its bankers to seek an amendment to any specific financialcovenant if OEH believed that it was likely that the covenant would be breachedbecause of adverse trading conditions or incurrence of additional costs.  There can be no assurance, however, thatOEH’s loan facility lenders would agree to modify any affected covenant, whichcould impact OEH’s ability to fund its cash requirements for working capital,commitments and debt service.

 

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*Possible loan covenant breach atMarch 31, 2009*

 

Inparticular, at March 31, 2009, OEH may breach a minimum $600 million tangiblenet worth covenant in two long-term debt facilities under which $102.9 millionhad been borrowed at December 31, 2008. The relevant loan agreements define tangible net worth as consolidatedshareholders’ equity less intangible assets. This breach may occur in part because of the following movements inOEH’s accounts:

 

·                  In the three months ended December 31, 2008, OEH raised $52.5million of new equity capital, after fees and costs, by selling 8.5 millionnewly issued class A common shares of the Company.  OEH’s net loss in the quarter was $48.1million, and OEH’s shareholders’ equity was reduced by a further $61.1 millionmainly because of foreign exchange movements of $50.0 million which reduced thecarrying value of OEH’s net assets in U.S. dollars on translation from theapplicable local currency, and because of costs of $8.8 million associated withthe change in the fair value of effective interest rate hedge derivatives.  As a result, OEH’s consolidated shareholders’equity fell by $57.1 million in the quarter. 

 

·                  Also in the three months ended December 31, 2008, the net book valueof intangible assets increased by $20.9 million largely because goodwill of$40.4 million was recognized as a result of the consolidation of CharlestonPlace Hotel for the first time, partially offset by a reduction in the carryingvalue of goodwill by an impairment charge of $9.3 million and a reduction of$8.8 million as a result of foreign exchange movements in the quarter.

 

Combining these two movements, OEH’s tangible networth decreased by $78.1 million in the three months ended December 31,2008.  OEH expects a further decline inits tangible net worth in the three months ended March 31, 2009.  The first quarter each year is traditionallyOEH’s lowest earning period due to the seasonality of its business and, ifforeign exchange rates move against OEH at the end of the quarter, this willfurther reduce shareholders’ equity.

 

AlthoughOEH was in compliance with this minimum tangible net worth covenant at December31, 2008, OEH is discussing with the lender on both loan facilities how thefinancial covenant calculation should be adjusted to reflect the impact of theinitial consolidation of Charleston Place Hotel, given that inclusion of thathotel on OEH’s balance sheet was not anticipated when the loan agreements wereentered into and the minimum net worth test amount was established, and how OEHshould treat the other non-cash movements which impacted the calculation atDecember 31, 2008 and which could affect the calculation in the future.

 

*ContractualObligations Summary*

 

The following table summarizes OEH’s material knowncontractual obligations, excluding accounts payable and accrued liabilities, in2009 and later years as of December 31, 2008 (dollars in thousands).

 
| ** **                  | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | **2009**                                   | ** ** | **2010-  2011** | ** ** | **2012-  2013** | ** ** | **There-  after** | ** ** | **Total** | ** ** |
| Working  capital facilities |       | $                                          | 55,169     |   | $ | — |   | $ | — |   | $ | — |   | $ | 55,169 |   |
| Debt                        |       | 138,066                                    |       | 489,766 |   | 149,460 |   | 69,242 |   | 846,534 |   |
| Capital  leases             |       | 1,902                                      |       | 5,553 |   | 594 |   | 5,540 |   | 13,589 |   |
| Operating  leases           |       | 6,654                                      |       | 13,090 |   | 12,625 |   | 103,561 |   | 135,930 |   |
| Capital  commitments        |       | 76,606                                     |       | — |   | — |   | — |   | 76,606 |   |
| Porto  Cupecoy project      |       | 31,961                                     |       | — |   | — |   | — |   | 31,961 |   |
|                        |       | $                                          | 310,358    |   | $ | 508,409 |   | $ | 162,679 |   | $ | 178,343 |   | $ | 1,159,789 |   |

 

Of the capital commitments obligations of $76.6million, $53.0 million relates to the purchase of land and a building adjoining‘21’ Club from the New York Public Library. OEH has informed the Library thatit wishes to defer or restructure the purchase.

 

OEHalso has obligations with respect to its pension benefit plans (see Note 11 tothe Financial Statements).

 

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Asnoted above, at December 31, 2008, OEH has a provision of $11.5 million inrespect of its uncertain tax positions in accordance with FIN 48. OEH is unableto estimate with any certainty when, or if, these liabilities will fall due.Accordingly, they are excluded from the contractual obligations table.

 

*Off–BalanceSheet Arrangements (including Charleston Place Hotel)*

 

OEH hadno material off-balance sheet arrangements at December 31, 2008 other thanthose involving its equity investees reported in Notes 1(h), 3, 4(b), 9(a) and20 to the Financial Statements, and commitments and contingencies andderivative financial instruments reported in Notes 1(v), 16 and 17.

 

Priorto December 31, 2008, OEH considered its investment in Charleston CenterLLC, owner of the Charleston PlaceHotel in which OEH has a 19.9% equity investment, to bean exemption from the scope of FIN No. 46(R),“Consolidation of Variable Interest Entities”. At December 31, 2008, OEHconsidered the investment no longer met the scope exception previously metbecause at that date OEH and its subsidiaries provided more than half of thehotel owning company’s total equity, subordinated debt and other forms ofsubordinated financial support. OEH has also determined that it is the primarybeneficiary of the variable interest entity, as defined by FIN 46(R).  Accordingly, OEH is required to consolidatethe hotel with effect from December 31, 2008.

 

****The assets and liabilities of Charleston Place Hotelhave been consolidated in the financial statements at their fair value as at December 31,2008, which were as follows (dollars in thousands):****

**** ****
| **** ****                                      | **** **** | ****December 31, 2008**** | **** **** |
|-----------------------------------------------------|----------------|-------------------------------------|----------------|
| **** ****                                      | **** **** | **** ****                      | **** **** |
| ****Current assets****                              | **** **** | ****$****                           | ****4,937****  | **** **** |
| ****Other assets****                                | **** **** | ****1,824****                       | **** **** |
| ****Property, plant and equipment****               | **** **** | ****196,650****                     | **** **** |
| ****Goodwill****                                    | **** **** | ****40,395****                      | **** **** |
| ****Total assets****                                | **** **** | ****243,806****                     | **** **** |
| **** ****                                      | **** **** | **** ****                      | **** **** |
| ****Current liabilities****                         | **** **** | ****(5,373****                      | ****)****      |
| ****Third-party debt****                            | **** **** | ****(79,626****                     | ****)****      |
| ****Deferred income taxes****                       | **** **** | ****(64,100****                     | ****)****      |
| ****Other liabilities****                           | **** **** | ****(12,306****                     | ****)****      |
| ****Total liabilities****                           | **** **** | ****(161,405****                    | ****)****      |
| **** ****                                      | **** **** | **** ****                      | **** **** |
| ****Net assets (before amount payable to OEH)****   | **** **** | ****$****                           | ****82,401**** | **** **** |
| **** ****                                      | **** **** | **** ****                      | **** **** |
| ****Book value of OEH’s variable interests**** | **** **** | ****$****                           | ****82,401**** | **** **** |

 

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****Goodwill represents theexcess of the reported amount of the previously held interests and the fairvalue of the newly consolidated liabilities and non-controlling interests, overthe fair value of the newly consolidated identifiable assets.  The fair value of the non-controllinginterests has been treated as $nil since the hotel had net liabilities prior toconsolidation.****

 

****The net assets have beenfair valued based on the estimated market values of the hotel’sproperties.  After fair valuing all otherassets and liabilities, goodwill of $40.4 million has been recorded of which$nil will be deductible as operating expenses for tax purposes.****

**** ****

Currentliabilities, third-party debt and other liabilities include $93.6 million ofdebt obligations of Charleston Center LLC. Each of the three loans included inthis amount is non-recourse to the members of Charleston Center LLC whoseseparate assets and liabilities, therefore, are neither available to pay thedebts of OEH nor constitute obligations of OEH.

 

## **Critical Accounting Policies andEstimates**

 

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

 

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.

 

*Long-lived assets andgoodwill*

 

In accordance with SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”, OEHmanagement periodically evaluates the recoverability of long-lived assetswhenever events or changes in circumstances indicate that the carrying amountmay not be recoverable.  Theseevaluations include analyses based on the cash flows generated by theunderlying assets, profitability information including estimated futureoperating results, trends or other determinants of fair value.  If the value of the asset determined by theseevaluations is less than its carrying amount, a loss, if any, is recognized forthe difference between the fair value and the carrying value of the asset.  Future adverse changes in market conditionsor poor operating results of the related business may indicate an inability torecover the carrying value of the asset, thereby possibly requiring animpairment charge in the future.

 

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In accordance with SFAS No. 142, “Goodwill andOther Intangible Assets”, goodwill must be evaluated annually for impairment.  Theimpairment testing under SFAS No. 142 is performed in two steps, first,the determination of impairment based upon the fair value of a reporting unitas compared with its carrying value and, second, if there is an impairment, themeasurement of the amount of impairment loss by comparing the implied fairvalue of goodwill with the carrying amount of that goodwill.  The impairment analysis incorporates variousassumptions and uncertainties that OEH believes are reasonable and supportableconsidering all available evidence, such as the future cash flows of thebusiness, future growth rates and the related discount rate.  However, these assumptions and uncertaintiesare, by their very nature, highly judgmental. There is no guarantee that OEH’s business will achieve the forecastedresults which have been included in its impairment analysis.  If OEH is unable to meet these assumptions infuture reporting periods, OEH may be required to record a further charge in afuture statement of operations for goodwill impairment losses, in addition tothe impairment charge of $9.3 million recorded in 2008 (see Note 6 to theFinancial Statements).

 

Other intangible assets withindefinite useful lives are also reviewed for impairment in accordance withSFAS No. 142.

 

*Depreciation*

 

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

 

*Pensions*

 

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

 

Managementbelieves that a 7.5% long-term return on plan assets in 2008 is reasonabledespite the recent market volatility.  Indetermining the expected long-term rate of return on assets, management hasreviewed anticipated future long-term performance of individual asset classesand the consideration of the appropriate asset allocation strategy given theanticipated requirements of the plan to determine the average rate of earningsexpected on the funds invested.  Theprojected returns are based on broad equity and bond indices, including fixedinterest rate gilts (U.K. Government issued long-term securities) of long-termduration since the plan operates in the U.K.

 

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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 2009 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 French West Indies, Brazil, Peru and oneproperty in Mexico where the functional currency is U.S. dollars.

 

For foreign subsidiaries with a functional currencyother than the U.S. dollar, income and expenses are translated into U.S.dollars, the reporting currency of the Company, at the average rates ofexchange prevailing during the year.  Theassets and liabilities are translated into U.S. dollars at the rates ofexchange on the balance sheet date and the related translation adjustments areincluded in accumulated other comprehensive income/(loss).  Translation adjustments arising fromintercompany financing that is long-term in nature is accounted for similarly. Foreigncurrency transaction gains and losses are recognized in earnings as they occur.

 

Thefunctional currency of Grand Hotel Europe has been changed from U.S. dollars toRussian rubles effective from January 1, 2007 due to the changes in thecurrency in which the hotel primarily expends and generates cash.

 

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##### *Taxassets*

##### * *

OEH maintainsa valuation allowance to reduce its gross deferred tax assets to reflect theamount, 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.

 

*Real estate developmentaccounting*

 

Revenue from real estate activities is accounted forunder SFAS No. 66, “Accounting for Sales of Real Estate”, and representsthe proceeds from sales of undeveloped land and developed properties that OEHis holding for sale. Profit from sales of land and developed properties isrecognized upon closing using the full accrual method of accounting, providedthat all the requirements prescribed by SFAS No. 66 have been met.  Revenue related to projects still underconstruction is recognized under the percentage-of-completion method where allcriteria specified in SFAS No. 66 have been met.  For sales that do not meet these criteria,revenue is deferred.

 

The process of real estate revenue recognitioninvolves significant estimates of total project revenue and costs. During thethree months ended December 31, 2008, the downturn in the global economyresulted in a slowdown in the condominium apartment sales at Porto Cupecoycompared to prior estimates. Accordingly, OEH’s management concluded that it was no longer possibleto estimate reasonably total project sales proceeds and profits and, therefore,revenue on the Porto Cupecoy project could no longer be recorded using thepercentage-of-completion method under SFAS No. 66.

 

**Recent Accounting Pronouncements**

 

*SFASNo. 141(R)*

 

In December 2007, the FASB issued SFAS No. 141(R),“Business Combinations”.  This revisedstatement requires assets and liabilities, including contingent liabilities,acquired in a business combination, as well as contingent consideration, to bemeasured at their fair values as of the date of the acquisition.  SFAS No. 141(R) requires that any changesto an acquired entity’s valuation allowance or changes in uncertain taxpositions that occur after the measurement period be recorded as a component ofincome tax expense.  Under the transitionprovisions of SFAS No. 141(R), the new requirement applies to all businesscombinations, regardless of the consummation date.  This statement also changes

 

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the treatment of restructuring charges, in-processresearch and development costs, and acquisition related costs.  SFAS No. 141(R) is effective for businesscombinations occurring in the first annual reporting period beginning afterDecember 15, 2008.  The income taxprovisions of SFAS No. 141(R) apply also to all historical businesscombinations on a prospective basis.  TheCompany is in the process of evaluating the effects of the adoption of SFAS No. 141(R).

 

*SFASNo. 160*

 

In December 2007,the FASB issued SFAS No. 160, “Non-Controlling Interests in ConsolidatedFinancial Statements — An Amendment of ARB No. 51”.  This statement clarifies the accounting andreporting for non-controlling interests, currently referred to as minorityinterests.  Under SFAS No. 160,non-controlling interests will be classified as a component of equity.  SFAS No. 160 is effective for fiscalyears beginning after December 15, 2008. The Company is in the process of evaluating the effects of the adoptionof SFAS No. 160.

 

*SFASNo. 161*

 

In March 2008**,** the FASBissued SFAS No. 161, “Disclosures about Derivative Instruments and HedgingActivities — An Amendment of FASB Statement No. 133”.  This statement changes the disclosurerequirements for derivative instruments and hedging activities.  Entities are required to provide enhanceddisclosures about (i) how and why an entity uses derivative instruments, (ii) howderivative instruments and related hedged items are accounted for under SFAS No. 133and its related interpretations and (iii) how derivative instruments andrelated hedged items affect an entity’s financial position, financialperformance and cash flows.  SFAS No. 161is effective for fiscal periods beginning after November 15, 2008.  The Company is in the process of evaluatingthe effects of the adoption of SFAS No. 161.

 

*FSP142-3*

 

****In April 2008, the FASB issued FSP 142-3,“Determination of the Useful Life of Intangible Assets”.  This FSP amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under SFAS No. 142, “Goodwilland Other Intangible Assets”.  This FSPis effective for financial statements issued for fiscal years beginning after December 15,2008. The Company does not expect any material impact from the adoption of theFSP.****

 

**ITEM7A.****                                      Quantitative and Qualitative Disclosures About Market Risk**

 

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

 

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The market risk relating to interest rates arisesmainly from the financing activities of OEH. Earnings are affected by changes in interest rates on floating rateborrowings, principally based on U.S. dollar LIBOR and EURIBOR, and onshort-term cash investments.  OEHmanagement assesses market risk based on changes in interest rates using asensitivity analysis.  If interest ratesincreased by 10% with all other variables held constant, annual net financecosts of OEH would have increased by approximately $2,700,000 based onborrowings outstanding at December 31, 2008.

 

The market risk relating to foreign currencies arisesfrom holding assets, buying, selling and financing in currencies other than theU.S. dollar, principally the European euro, British pound, South African rand,Brazilian real and Australian dollar. Some non-U.S. subsidiaries of the Company borrow in local currencies,and OEH may in the future enter into forward exchange contracts relating topurchases denominated in foreign currencies.

 

Nine of OEH’sowned hotels in 2008 operated with currencies linked to the European euro, twooperated in South African rand, two in Australian dollars, one in Britishpounds sterling, one in Botswana pula, two in Mexican pesos, one in Peruviannuevo soles, six in various Southeast Asian currencies and one in Russianrubles. Revenue of the Venice Simplon-Orient-Express, British Pullman, NorthernBelle and Royal Scotsman tourist trains was primarily in British poundssterling, but the operating costs of Venice Simplon-Orient-Express were mainlydenominated in euros. Revenue of the Copacabana Palace and Hotel das Cataratasin Brazil was recorded in U.S. dollars, but substantially all of the hotels’expenses were denominated in Brazilian reals. Revenue derived by Maroma Resortand Spa and La Samanna were recorded in U.S. Dollars, but the majority of thehotels’ expenses was denominated in Mexican pesos and the euro, respectively.

 

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

 

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OEH management uses a sensitivity analysis to assessthe potential impact on net earnings of changes in foreign currency financialinstruments from hypothetical changes in the foreign currency exchangerates.  The primary assumption used inthis model is a hypothetical 10% weakening or strengthening of the foreigncurrencies against the U.S. dollar.  At December 31,2008, as a result of this analysis, OEH management determined that the impacton foreign currency financial instruments of a 10% change in foreign currencyexchange rates in relation to the U.S. dollar would be approximately $3,400,000on OEH’s net earnings.

 

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**ITEM 8.  Financial Statements and Supplementary Data**

 

*Reportof Independent Registered Public Accounting Firm*

 

Board ofDirectors and Shareholders

Orient-ExpressHotels Ltd.

Hamilton,Bermuda

 

We haveaudited the accompanying consolidated balance sheets of Orient-Express HotelsLtd. and subsidiaries (the “Company”) as of December 31, 2008 and 2007,and the related consolidated statements of operations, shareholders’ equity,and cash flows for each of the three years in the period ended December 31,2008.  Our audits also included the consolidatedfinancial statement schedule listed in Item 15. These financial statements and the financial statement schedule are theresponsibility of the Company’s management.  Our responsibility is toexpress an opinion on these financial statements and the financial statementschedule based on our audits.

 

We conductedour audits 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 the financialstatements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable basis for our 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, 2008 and 2007, and the results of their operations andtheir cash flows for each of the three years in the period ended December 31,2008, in conformity with accounting principles generally accepted in the UnitedStates of America.  Also in our opinion,such consolidated financial statement schedule, when considered in relation tothe basic consolidated financial statements taken as a whole, presents fairly,in all material respects, the information set forth therein.

 

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We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), the Company’sinternal control over financial reporting as of December 31, 2008, basedon the criteria established in Internal Control—Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission and ourreport dated February 27, 2009 expressed an unqualified opinion on theCompany’s internal control over financial reporting.

 

/s/ DeloitteLLP

 

London,England

February 27,2009

 

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**Orient-Express Hotels Ltd. and SubsidiariesConsolidated Balance Sheets**

** **
| ** **                                                                                                                             | ** ** | **December 31,**                | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                             | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                                                                                                                             | ** ** | **2008**                             | ** ** | **2007** | ** ** |
|                                                                                                                                   |       |                                 |       |   |   |
| **Assets**                                                                                                                             |       |                                 |       |   |   |
| Cash  and cash equivalents                                                                                                             |       | $                                    | 65,764     |   | $ | 90,565 |   |
| Restricted  cash                                                                                                                       |       | 13,224                               |       | 3,800 |   |
| Accounts  receivable, net of allowances of $1,105 and $1,292                                                                           |       | 48,568                               |       | 63,673 |   |
| Due  from related parties                                                                                                              |       | 10,013                               |       | 30,406 |   |
| Prepaid  expenses and other                                                                                                            |       | 19,916                               |       | 16,115 |   |
| Inventories                                                                                                                            |       | 45,841                               |       | 45,756 |   |
| Assets  of discontinued operations held for sale                                                                                       |       | 35,978                               |       | 54,417 |   |
| Real  estate assets                                                                                                                    |       | 83,983                               |       | 57,157 |   |
| Total  current assets                                                                                                                  |       | 323,287                              |       | 361,889 |   |
|                                                                                                                                   |       |                                 |       |   |   |
| Property,  plant and equipment, net of accumulated depreciation of $257,346 and $246,240                                               |       | 1,464,095                            |       | 1,273,956 |   |
| Investments                                                                                                                            |       | 67,464                               |       | 147,539 |   |
| Goodwill                                                                                                                               |       | 154,054                              |       | 133,497 |   |
| Other  intangible assets                                                                                                               |       | 20,255                               |       | 21,660 |   |
| Other  assets                                                                                                                          |       | 39,978                               |       | 49,896 |   |
|                                                                                                                                   |       | $                                    | 2,069,133  |   | $ | 1,988,437 |   |
| **Liabilities and Shareholders’ Equity**                                                                                          |       |                                 |       |   |   |
| Working  capital facilities                                                                                                            |       | $                                    | 54,179     |   | $ | 64,419 |   |
| Accounts  payable                                                                                                                      |       | 24,563                               |       | 30,132 |   |
| Accrued  liabilities                                                                                                                   |       | 74,522                               |       | 62,246 |   |
| Deferred  revenue                                                                                                                      |       | 56,731                               |       | 35,545 |   |
| Liabilities  of discontinued operations held for sale                                                                                  |       | 4,781                                |       | 5,619 |   |
| Current  portion of long-term debt and capital leases                                                                                  |       | 139,968                              |       | 127,795 |   |
| Total  current liabilities                                                                                                             |       | 354,744                              |       | 325,756 |   |
|                                                                                                                                   |       |                                 |       |   |   |
| Long-term  debt and obligations under capital leases                                                                                   |       | 720,155                              |       | 658,615 |   |
| Liability  for pension benefit                                                                                                         |       | 7,421                                |       | 6,935 |   |
| Other  liabilities                                                                                                                     |       | 22,562                               |       | 3,709 |   |
| Deferred  income taxes                                                                                                                 |       | 168,589                              |       | 119,112 |   |
| Liability  for uncertain tax positions                                                                                                 |       | 11,493                               |       | 24,025 |   |
|                                                                                                                                   |       | 1,284,964                            |       | 1,138,152 |   |
| Commitments  and contingencies                                                                                                         |       |                                 |       |   |   |
| Minority  interest                                                                                                                     |       | 1,571                                |       | 1,754 |   |
|                                                                                                                                   |       |                                 |       |   |   |
| Shareholders’  equity:                                                                                                            |       |                                 |       |   |   |
| Preferred  shares $0.01 par value (30,000,000 shares authorized, issued nil)                                                           |       | —                               |       | — |   |
| Class A  common shares $0.01 par value (120,000,000 shares authorized):  Issued — 50,959,500 (2007 — 42,456,000)   |       | 510                                  |       | 424 |   |
| Class B  common shares $0.01 par value (120,000,000 shares authorized):  Issued — 18,044,478 (2007 — 18,044,478)        |       | 181                                  |       | 181 |   |
| Additional  paid-in capital                                                                                                            |       | 570,727                              |       | 515,307 |   |
| Retained  earnings                                                                                                                     |       | 271,571                              |       | 302,369 |   |
| Accumulated  other comprehensive (loss)/income                                                                                         |       | (60,210                              | )          | 30,431 |   |
| Less:  reduction due to class B common shares owned by a subsidiary — 18,044,478                                                  |       | (181                                 | )          | (181 | ) |
| Total  shareholders’ equity                                                                                                       |       | 782,598                              |       | 848,531 |   |
|                                                                                                                                   |       | $                                    | 2,069,133  |   | $ | 1,988,437 |   |

 

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**Orient-Express Hotels Ltd. andSubsidiariesStatements of Consolidated Operations**

 
| **Year ended December 31,**                                                  | ** ** | **2008**                                                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                  | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
|                                                                                        |       |                                                                               |       |     |       |     |       |
| Revenue                                                                                     |       | $                                                                                  | 550,692    |     | $          | 578,415  |       | $ | 479,364 |   |
|                                                                                        |       |                                                                               |       |     |       |     |       |
| Expenses:                                                                                   |       |                                                                               |       |     |       |     |       |
| Depreciation  and amortization                                                              |       | 39,005                                                                             |       | 38,947   |       | 34,503   |       |
| Operating                                                                                   |       | 263,553                                                                            |       | 278,778  |       | 226,437  |       |
| Selling,  general and administrative                                                        |       | 192,327                                                                            |       | 169,018  |       | 140,580  |       |
| Impairment  of goodwill                                                                     |       | 9,723                                                                              |       | —   |       | —   |       |
| Total  expenses                                                                             |       | 504,608                                                                            |       | 486,743  |       | 401,520  |       |
|                                                                                        |       |                                                                               |       |     |       |     |       |
| Gain  on disposal of fixed assets                                                           |       | —                                                                             |       | 2,312    |       | —   |       |
|                                                                                        |       |                                                                               |       |     |       |     |       |
| Earnings  from operations                                                                   |       | 46,084                                                                             |       | 93,984   |       | 77,844   |       |
| Impairment  of investment in unconsolidated subsidiary                                      |       | (22,992                                                                            | )          | —   |       | —   |       |
| Gain  on sale of investment                                                                 |       | —                                                                             |       | —   |       | 6,619    |       |
|                                                                                        |       |                                                                               |       |     |       |     |       |
| Earning  before net finance costs, income taxes and earnings from unconsolidated  companies |       | 23,092                                                                             |       | 93,984   |       | 84,463   |       |
|                                                                                        |       |                                                                               |       |     |       |     |       |
| Interest  expense, net                                                                      |       | (50,612                                                                            | )          | (45,436  | )          | (44,367  | )          |
| Foreign  currency, net                                                                      |       | 4,925                                                                              |       | 917      |       | (4,610   | )          |
| Net  finance costs                                                                          |       | (45,687                                                                            | )          | (44,519  | )          | (48,977  | )          |
|                                                                                        |       |                                                                               |       |     |       |     |       |
| (Loss)/earnings  before income taxes and earnings from unconsolidated subsidiaries          |       | (22,595                                                                            | )          | 49,465   |       | 35,486   |       |
|                                                                                        |       |                                                                               |       |     |       |     |       |
| Provision  for income taxes                                                                 |       | (788                                                                               | )          | (15,627  | )          | (10,791  | )          |
|                                                                                        |       |                                                                               |       |     |       |     |       |
| (Loss)/earnings  before earnings from unconsolidated companies                              |       | (23,383                                                                            | )          | 33,838   |       | 24,695   |       |
|                                                                                        |       |                                                                               |       |     |       |     |       |
| Earnings  from unconsolidated companies, net of tax of $6,986, $4,772 and $5,741            |       | 16,771                                                                             |       | 16,425   |       | 11,970   |       |
|                                                                                        |       |                                                                               |       |     |       |     |       |
| Net  (loss)/earnings from continuing operations                                             |       | (6,612                                                                             | )          | 50,263   |       | 36,665   |       |
|                                                                                        |       |                                                                               |       |     |       |     |       |
| (Loss)/earnings  from discontinued operations, net of tax of $3,000, $nil and ($3,000)      |       | (19,939                                                                            | )          | (16,621  | )          | 3,102    |       |
|                                                                                        |       |                                                                               |       |     |       |     |       |
| Net  (loss)/earnings                                                                        |       | $                                                                                  | (26,551    | )        | $          | 33,642   |       | $ | 39,767 |   |
|                                                                                        |       |                                                                               |       |     |       |     |       |
| Basic  (loss)/earnings per share:                                                           |       |                                                                               |       |     |       |     |       |
| Net  (loss)/earnings from continuing operations                                             |       | $                                                                                  | (0.15      | )        | $          | 1.19     |       | $ | 0.90 |   |
| Net  (loss)/earnings from discontinued operations                                           |       | (0.46                                                                              | )          | (0.40    | )          | 0.08     |       |
| Net  (loss)/earnings                                                                        |       | $                                                                                  | (0.61      | )        | $          | 0.79     |       | $ | 0.98 |   |
|                                                                                        |       |                                                                               |       |     |       |     |       |
| Diluted  (loss)/earnings per share:                                                         |       |                                                                               |       |     |       |     |       |
| Net  (loss)/earnings from continuing operations                                             |       | $                                                                                  | (0.15      | )        | $          | 1.19     |       | $ | 0.89 |   |
| Net  (loss)/earnings from discontinued operations                                           |       | (0.46                                                                              | )          | (0.40    | )          | 0.08     |       |
| Net  (loss)/earnings                                                                        |       | $                                                                                  | (0.61      | )        | $          | 0.79     |       | $ | 0.97 |   |
|                                                                                        |       |                                                                               |       |     |       |     |       |
| Dividends  per share                                                                        |       | $                                                                                  | 0.10       |     | $          | 0.10     |       | $ | 0.10 |   |

 

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**Orient-Express Hotels Ltd. andSubsidiariesStatements of Consolidated Cash Flows**

 
| ** **                                                                                                             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                                             | ** ** | **(Dollars in thousands)**       | ** ** |
| Cash  flows from operating activities:                                                                                 |       |                                       |       |   |   |   |   |
| Net  (loss)/earnings from continuing operations                                                                        |       | $                                          | (6,612     | ) | $ | 50,263 |   | $ | 36,665 |   |
|                                                                                                                   |       |                                       |       |   |   |   |   |
| Adjustment  to reconcile net (loss)/earnings from continuing operations to net cash  provided by operating activities: |       |                                       |       |   |   |   |   |
| Depreciation  and amortization                                                                                         |       | 39,005                                     |       | 38,947 |   | 34,503 |   |
| Amortization  and write-off of finance costs                                                                           |       | 3,103                                      |       | 3,243 |   | 5,579 |   |
| Impairment  losses                                                                                                     |       | 32,715                                     |       | — |   | — |   |
| Undistributed  earnings of unconsolidated companies                                                                    |       | (11,690                                    | )          | (9,390 | ) | (7,011 | ) |
| Loss/(gain)  from sale of investments and fixed assets                                                                 |       | 382                                        |       | (3,018 | ) | (7,920 | ) |
| Stock-based  compensation                                                                                              |       | 2,800                                      |       | 1,442 |   | 1,179 |   |
| Other  non-cash items                                                                                                  |       | (136                                       | )          | 114 |   | 1,875 |   |
| Change  in deferred tax                                                                                                |       | (5,184                                     | )          | 1,699 |   | 813 |   |
| Change  in FIN 48 liability                                                                                            |       | (11,756                                    | )          | (7,091 | ) | — |   |
| Change  in assets and liabilities, net of effects from acquisition of subsidiaries:                                    |       |                                       |       |   |   |   |   |
| Decrease/(increase)  in accounts receivable, prepaid expenses and other                                                |       | 11,486                                     |       | (20,248 | ) | (10,835 | ) |
| Decrease/(increase)  in inventories                                                                                    |       | 51                                         |       | (5,509 | ) | (4,075 | ) |
| Increase  in real estate assets held for sale                                                                          |       | (57,289                                    | )          | (19,048 | ) | (12,821 | ) |
| Increase  in accounts payable, accrued liabilities, deferred revenue and other  liabilities                            |       | 28,813                                     |       | 19,483 |   | 10,211 |   |
| Dividends  received from unconsolidated companies                                                                      |       | 3,840                                      |       | 1,763 |   | — |   |
| Total  adjustments                                                                                                     |       | 36,140                                     |       | 2,387 |   | 11,498 |   |
| Net  cash provided by operating activities from continuing operations                                                  |       | 29,528                                     |       | 52,650 |   | 48,163 |   |
| Net  cash flow (used in)/provided by operating activities from discontinued  operations                                |       | (4,385                                     | )          | 283 |   | 1,275 |   |
| Net  cash provided by operating activities                                                                             |       | 25,143                                     |       | 52,933 |   | 49,438 |   |
|                                                                                                                   |       |                                       |       |   |   |   |   |
| Cash  flows from investing activities:                                                                                 |       |                                       |       |   |   |   |   |
| Capital  expenditures                                                                                                  |       | (111,628                                   | )          | (103,876 | ) | (108,618 | ) |
| Acquisitions  and investments, net of cash acquired                                                                    |       | (2,996                                     | )          | (21,877 | ) | (47,350 | ) |
| Increase  in restricted cash                                                                                           |       | (9,079                                     | )          | (3,800 | ) | — |   |
| Proceeds  from sale of investments and fixed assets                                                                    |       | 158                                        |       | 4,723 |   | 12,999 |   |
| Net  cash used in investing activities from continuing operations                                                      |       | (123,545                                   | )          | (124,830 | ) | (142,969 | ) |
| Net  cash used in investing activities from discontinued operations                                                    |       | (1,348                                     | )          | (2,119 | ) | (3,176 | ) |
| Net  cash used in investing activities                                                                                 |       | (124,893                                   | )          | (126,949 | ) | (146,145 | ) |
|                                                                                                                        |            |                                            |            |  |  |  |  |  |  |  |

 

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| ** **                                                                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                         | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                                                         | ** ** | **(Dollars in thousands)**       | ** ** |
| Cash  flows from financing activities:                                                                                             |       |                                       |       |   |   |   |   |
| Net  proceeds from/(repayments of) working capital facilities and redrawable loans                                                 |       | 56,425                                     |       | 53,838 |   | (3,558 | ) |
| Issuance  of common shares (net)                                                                                                   |       | 52,514                                     |       | — |   | 99,220 |   |
| Stock  options exercised                                                                                                           |       | 192                                        |       | 4,105 |   | 4,469 |   |
| Proceeds  from long-term debt                                                                                                      |       | 5,792                                      |       | 177,500 |   | 423,003 |   |
| Principal  payments under long-term debt                                                                                           |       | (33,936                                    | )          | (147,391 | ) | (383,401 | ) |
| Payment  of common share dividends                                                                                                 |       | (4,247                                     | )          | (4,238 | ) | (4,075 | ) |
| Net  cash provided by financing activities from continuing operations                                                              |       | 76,740                                     |       | 83,814 |   | 135,658 |   |
| Net  cash provided by financing activities from discontinued operations                                                            |       | —                                     |       | — |   | — |   |
| Net  cash provided by financing activities                                                                                         |       | 76,740                                     |       | 83,814 |   | 135,658 |   |
|                                                                                                                               |       |                                       |       |   |   |   |   |
| Effect  of exchange rate changes on cash                                                                                           |       | (2,031                                     | )          | 1,809 |   | 1,970 |   |
|                                                                                                                               |       |                                       |       |   |   |   |   |
| Net (decrease)/increase  in cash and cash equivalents                                                                              |       | (25,041                                    | )          | 11,607 |   | 40,921 |   |
| Cash  and cash equivalents at beginning of year (includes $360 (2008), $1,422  (2007), $82 (2006) of discontinued operations cash) |       | 90,925                                     |       | 79,318 |   | 38,397 |   |
| Cash  and cash equivalents at end of year (includes $120 (2008), $360 (2007),  $1,422 (2006) of discontinued operations cash)      |       | $                                          | 65,884     |   | $ | 90,925 |   | $ | 79,318 |   |
|                                                                                                                                    |            |                                            |            |  |  |  |  |  |  |  |

 

Seenotes to consolidated financial statements.

 

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

**Statementsof Consolidated Shareholders’ Equity**

** **
| **(Dollars in thousands)**                                                   | ** ** | **Preferred  Shares  At Par  Value** | ** ** | **Class A  Common  Shares  At Par  Value** | ** ** | **Class B  Common  Shares  At Par  Value** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income/(Loss)** | ** ** | **Common  Shares  Held By A  Subsidiary** | ** ** | **Total  Comprehensive  Income/(Loss)** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|----------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| Balance, January 1, 2006                                                |       | $                                    | —     |                                       | $          | 393                                        |       | $                                | 181        |                   | $          | 404,923                                              |       | $                                         | 266,093    |                                    | $          | (20,913 | ) | $ | (181 | ) |   |   |
|                                                                         |       |                                 |       |                                       |       |                                       |       |                             |       |                   |       |                                                 |       |                                      |       |                                    |       |
| Issuance of class A common shares in  public offering, net of issuance costs |       | —                               |       | 25                                         |       | —                                     |       | 99,195                           |       | —                 |       | —                                               |       | —                                    |       |                                    |       |
| Stock based compensation                                                     |       | —                               |       | —                                     |       | —                                     |       | 1,179                            |       | —                 |       | —                                               |       | —                                    |       |                                    |       |
| Stock options exercised                                                      |       | —                               |       | 4                                          |       | —                                     |       | 4,465                            |       | —                 |       | —                                               |       | —                                    |       |                                    |       |
| Dividends on common shares                                                   |       | —                               |       | —                                     |       | —                                     |       | —                           |       | (4,075                 | )          | —                                               |       | —                                    |       |                                    |       |
| Comprehensive income:                                                        |       |                                 |       |                                       |       |                                       |       |                             |       |                   |       |                                                 |       |                                      |       |                                    |       |
| Net earnings on common shares for the  year                                  |       | —                               |       | —                                     |       | —                                     |       | —                           |       | 39,767                 |       | —                                               |       | —                                    |       | $                                       | 39,767     |   |
| Other comprehensive income                                                   |       | —                               |       | —                                     |       | —                                     |       | —                           |       | —                 |       | 15,940                                               |       | —                                    |       | 15,940                                  |       |
|                                                                         |       |                                 |       |                                       |       |                                       |       |                             |       |                   |       |                                                 |       |                                      |       | $                                       | 55,707     |   |
| Balance, December 31, 2006                                              |       | —                               |       | 422                                        |       | 181                                        |       | 509,762                          |       | 301,785                |       | (4,973                                               | )          | (181                                      | )          |                                    |       |
|                                                                         |       |                                 |       |                                       |       |                                       |       |                             |       |                   |       |                                                 |       |                                      |       |                                    |       |
| FIN 48 liabilities                                                           |       | —                               |       | —                                     |       | —                                     |       | —                           |       | (28,820                | )          | —                                               |       | —                                    |       |                                    |       |
| Stock based compensation                                                     |       | —                               |       | —                                     |       | —                                     |       | 1,442                            |       | —                 |       | —                                               |       | —                                    |       |                                    |       |
| Stock options exercised                                                      |       | —                               |       | 2                                          |       | —                                     |       | 4,103                            |       | —                 |       | —                                               |       | —                                    |       |                                    |       |
| Dividends on common shares                                                   |       | —                               |       | —                                     |       | —                                     |       | —                           |       | (4,238                 | )          | —                                               |       | —                                    |       |                                    |       |
| Comprehensive income:                                                        |       |                                 |       |                                       |       |                                       |       |                             |       |                   |       |                                                 |       |                                      |       |                                    |       |
| Net earnings on common shares for the  year                                  |       | —                               |       | —                                     |       | —                                     |       | —                           |       | 33,642                 |       | —                                               |       | —                                    |       | $                                       | 33,642     |   |
| Other comprehensive income                                                   |       | —                               |       | —                                     |       | —                                     |       | —                           |       | —                 |       | 35,404                                               |       | —                                    |       | 35,404                                  |       |
|                                                                         |       |                                 |       |                                       |       |                                       |       |                             |       |                   |       |                                                 |       |                                      |       | $                                       | 69,046     |   |
| Balance, December 31, 2007                                              |       | —                               |       | 424                                        |       | 181                                        |       | 515,307                          |       | 302,369                |       | 30,431                                               |       | (181                                      | )          |                                    |       |
|                                                                         |       |                                 |       |                                       |       |                                       |       |                             |       |                   |       |                                                 |       |                                      |       |                                    |       |
| Issuance of class A common shares in  direct offering, net of issuance costs |       | —                               |       | 86                                         |       | —                                     |       | 52,428                           |       | —                 |       | —                                               |       | —                                    |       |                                    |       |
| Stock based compensation                                                     |       | —                               |       | —                                     |       | —                                     |       | 2,800                            |       | —                 |       | —                                               |       | —                                    |       |                                    |       |
| Stock options exercised                                                      |       | —                               |       | —                                     |       | —                                     |       | 192                              |       | —                 |       | —                                               |       | —                                    |       |                                    |       |
| Dividends on common shares                                                   |       | —                               |       | —                                     |       | —                                     |       | —                           |       | (4,247                 | )          | —                                               |       | —                                    |       |                                    |       |
| Comprehensive income:                                                        |       |                                 |       |                                       |       |                                       |       |                             |       |                   |       |                                                 |       |                                      |       |                                    |       |
| Net (loss) on common shares for the year                                     |       | —                               |       | —                                     |       | —                                     |       | —                           |       | (26,551                | )          | —                                               |       | —                                    |       | $                                       | (26,551    | ) |
| Other comprehensive loss                                                     |       | —                               |       | —                                     |       | —                                     |       | —                           |       | —                 |       | (90,641                                              | )          | —                                    |       | (90,641                                 | )          |
|                                                                         |       |                                 |       |                                       |       |                                       |       |                             |       |                   |       |                                                 |       |                                      |       | $                                       | (117,192   | ) |
| Balance, December 31, 2008                                              |       | $                                    | —     |                                       | $          | 510                                        |       | $                                | 181        |                   | $          | 570,727                                              |       | $                                         | 271,571    |                                    | $          | (60,210 | ) | $ | (181 | ) |   |   |

 

See notes to consolidatedfinancial statements.

 

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

**Notes to Consolidated FinancialStatements**

 

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

 

*(a)**                               Business*

 

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

 

At December 31,2008, OEH owned or invested in 41 deluxe hotels and resorts located in the UnitedStates, Mexico, Caribbean, Europe, southern Africa, South America, SoutheastAsia, Australia and South Pacific, two restaurants in New York and BuenosAires, six tourist trains in Europe, Southeast Asia and Peru, and a rivercruiseship in Burma and five canalboats in France.

 

*(b)**                               Basis of presentation*

 

Theaccompanying consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of Americaand reflect the results of operations, financial position and cash flows of theCompany and all its majority-owned subsidiaries and variable interest entitiesin which OEH is the primary beneficiary. The consolidated financial statements have been prepared using thehistorical basis in the assets and liabilities and the historical results ofoperations directly attributable to OEH, and all intercompany accounts andtransactions between the Company and its subsidiaries have beeneliminated.  Unconsolidated companiesthat are 20% to 50% owned are accounted for on an equity basis.

 

Onevaluating its various variable interests in Charleston Place Hotel, in whichOEH holds a 19.9% equity investment, OEH concluded that with effect from December 31,2008, the hotel no longer qualified for certain scope exemptions under FASBInterpretation No. 46(R), “Consolidation of Variable InterestEntities”.  OEH further concluded thatOEH is the primary beneficiary of the variable interest entity as defined byFIN 46(R) and has consolidated the entity effective December 31,2008.

 

In December 2007,OEH decided to sell Bora Bora Lagoon Resort and OEH continues to hold thissubsidiary for sale.  Accordingly, theresults of the hotel have been reflected as discontinued operations for allperiods presented.

 

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

 

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

 

*(c)**                                Restricted cash*

 

In thestatements of consolidated cash flows for the year ended December 31, 2008and the year ended December 31, 2007, changes in restricted cash balanceshave been reported in investing activities. The restricted cash of $3,800,000 at December 31, 2007 has beenreclassified from cash and cash equivalents.

 

*(d)**                               Foreign currency*

 

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

 

Forforeign subsidiaries with a functional currency other than the U.S. dollar,income and expenses are translated into U.S. dollars, the reporting currency ofthe Company, at the average rates of exchange prevailing during the year.  The assets and liabilities are 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 areaccounted for similarly.  Foreigncurrency transaction gains and losses are recognized in earnings as they occur.

 

*(e)**                                Estimates*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period.  Estimatesinclude, among others, the allowance for doubtful accounts, depreciation andamortization, carrying

 

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valueof assets including intangible assets, employee benefits, taxes including FIN48, and contingencies, projected revenue and costs for real estate revenuerecognition.  Actual results may differfrom those estimates.

 

*(f)**                                   Stock-based compensation*

 

Stock-basedcompensation expense for OEH’s share-based payment awards is recognized inearnings on a straight-line basis over the requisite service period of theaward.  Compensation expense forperformance share awards is recognized when it becomes probable that theperformance criteria, if any, specified in the awards will be achieved.  The total cost of a share-based payment awardis reduced by estimated forfeitures expected to occur over the vesting periodof the award.  The grant-date fair valueof share-based payment awards is determined using the Black-Scholes model.  See Note 15.

 

Underits 2007 performance share plan, the Company granted share-based payment awardswith performance and market conditions to certain employees during the yearended December 31, 2008.  The fairvalue of the awards at the grant date is determined using the Monte Carlomodel.  For awards with marketconditions, the conditions are incorporated into the calculations, and thecompensation value is not adjusted if the conditions are not met.  For awards with performance conditions,compensation expense is recognized when it becomes probable that theperformance criteria specified in the awards will be achieved and, accordingly,the compensation value is adjusted following the changes in the estimates ofshares likely to vest based on the performance criteria.

 

*(g)**                               Revenue recognition*

 

Hoteland restaurant revenue is recognized when the rooms are occupied and theservices are performed.  Tourist trainand cruise revenue is 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.  Revenue under managementcontracts is recognized based upon the attainment of certain financial results,primarily revenue and operating earnings, in each contract as defined.

 

*Real estate*

 

Revenue from real estate activities is accounted forunder SFAS No. 66, “Accounting for Sales of Real Estate”, and representsthe proceeds from sales of undeveloped land and 

 

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developedproperties that OEH is holding for sale. Profit from sales of land and developed properties is recognized uponclosing using the full accrual method of accounting, provided that all therequirements prescribed by SFAS No. 66 have been met.  Revenue related to projects still underconstruction are recognized under the percentage-of-completion method where allcriteria specified in SFAS No.66 have been met. For sales that do not meet these criteria, revenue is deferred.

 

Duringthe three months ended December 31, 2008, the downturn in the globaleconomy resulted in a slowdown in the condominium apartment sales at PortoCupecoy compared to prior estimates. Accordingly, OEH’s management concluded that it was no longer possibleto estimate reasonably total project sales proceeds and profits and, therefore,revenue on the Porto Cupecoy project could no longer be recorded using thepercentage-of-completion method under SFAS No. 66.

 

EffectiveOctober 1, 2008, revenue on the Porto Cupecoy project is accounted for asdeposits until the criteria required by SFAS No. 66 are met.  Under this method, all project-related costsare accumulated on the balance sheet as real estate assets held for sale andall customer sales proceeds are deferred on the balance sheet as deposits.

 

Revenueand costs previously recognized in OEH’s consolidated statements of operationshave been reversed in the three months ended December 31, 2008, in thefollowing amounts (dollars in thousands):

 
| ** **    | ** ** | ** **                       | ** ** | ** **                  | ** ** | **Year**                         | ** ** | ** **               | ** ** | ** **              | ** ** | ** **                   | ** ** | **Year**                    | ** ** | ** **          | ** ** |
|---------------|------------|----------------------------------|------------|-----------------------------|------------|----------------------------------|------------|--------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------|------------|---------------------|------------|
| ** **    | ** ** | **Three months ended** | ** ** | **ended**                   | ** ** | **Three months ended** | ** ** | **ended**                | ** ** | ** **              | ** ** |
| ** **    | ** ** | **September  30, 2007**     | ** ** | **December  31, 2007** | ** ** | **December  31, 2007**      | ** ** | **March  31, 2008** | ** ** | **June  30, 2008** | ** ** | **September  30, 2008** | ** ** | **December  31, 2008** | ** ** | **Total  Reversal** | ** ** |
| ** **    | ** ** | ** **                       | ** ** | ** **                  | ** ** | ** **                       | ** ** | ** **               | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                  |       |                |       |
| Revenue       |       | $                                | 10,671     |                        | $          | 4,669                            |       | $                        | 15,340     |                    | $          | 3,730                        |       | $                           | 4,413      |                | $          | 3,454 |   | $ | 11,597 |   | $ | 26,937 |   |
| Costs         |       | 7,660                            |       | 2,814                       |       | 10,474                           |       | 3,868                    |       | 4,247                   |       | 3,101                        |       | 11,216                      |       | 21,690              |       |
| Gross  profit |       | $                                | 3,011      |                        | $          | 1,855                            |       | $                        | 4,866      |                    | $          | (138                         | )          | $                           | 166        |                | $          | 353 |   | $ | 381 |   | $ | 5,247 |   |

 

*(h)**                               Earnings from unconsolidated companies*

 

Earningsfrom unconsolidated companies include OEH’s share of the net earnings of itsequity investments as well as interest income related to loans and advances tothe equity investees.  This interestincome amounted to $12,608,000 in 2008 (2007-$11,807,000; 2006-$10,700,000).

 

*(i)**                                  Marketing costs*

 

Marketingcosts are expensed as incurred (except in the case of real estate projects, seeNote 1(p)) and are reported in selling, general and administrativeexpenses.  Marketing costs include costsof advertising and other marketing activities. These costs were $41,017,000 in 2008 (2007-$39,444,000; 2006-$34,662,000).

 

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*(j)**                                   Interest expense, net*

 

OEHcapitalizes interest during the construction of assets. Interest expense, netexcludes interest which has been capitalized in the amount of $7,628,000 in2008 (2007-$5,619,000; 2006-$1,735,000).

 

*(k)**                               Foreign currency, net*

 

Foreigncurrency, net consists entirely of foreign currency exchange transaction gainsof $4,925,000 in 2008 (2007- gains of $917,000; 2006 – losses of $4,610,000).

 

*(l)**                                  Income taxes*

 

Deferredincome taxes result from temporary differences between the financial reportingand tax bases of assets and liabilities. Deferred taxes are recorded at enacted statutory rates and are adjustedas enacted rates change. Classification of deferred tax assets and liabilitiescorresponds with the classification of the underlying assets and liabilitiesgiving rise to the temporary differences or the period of expected reversal, asapplicable.  A valuation allowance isestablished, when necessary, to reduce deferred tax assets to the amount thatis more likely than not to be realized based on available evidence.

 

*(m)**                             Earnings per share*

 

Basicearnings per share exclude dilution and are computed by dividing net(loss)/earnings available to common shareholders by the weighted average numberof class A and B common shares outstanding for the period.  The number of shares used in computing basicearnings per share was 43,443,000 for the year ended December 31, 2008(2007-42,390,000; 2006-40,692,000).  Thenumber of shares used in computing diluted earnings per share was 43,443,000for the year ended December 31, 2008 (2007-42,574,000;2006-40,960,000).  For the year ended December 31,2008, the anti-dilutive effect of stock options on 197,659 class A commonshares (2007-2,251; 2006-nil) was excluded from the computation of dilutedearnings per share.

 

Thefollowing table is a reconciliation of the net (loss)/earnings and per shareamounts used in the calculation of basic (loss)/earnings per share and diluted(loss)/earnings per share (in thousands, except per share amounts):

 

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| ** **                          | ** ** | **Net (loss)/  earnings** | ** ** | **Number   of   Shares** | ** ** | **Per Share  Amount** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|------------------------------------|------------|----------------------------|------------|
| Year  ended December 31, 2008: |       |                           |       |                               |       |                       |       |
| Basic  loss per share               |       | $                              | (26,551    | )                                  | 43,443     |                       | $          | (0.61 | ) |
| Effect  of dilutive stock options   |       | —                         |       | —                             |       | —                     |       |
| Diluted  earnings per share         |       | $                              | (26,551    | )                                  | 43,443     |                       | $          | (0.61 | ) |
| Year  ended December 31, 2007: |       |                           |       |                               |       |                       |       |
| Basic  earnings per share           |       | $                              | 33,642     |                               | 42,390     |                       | $          | 0.79 |   |
| Effect  of dilutive stock options   |       | —                         |       | 184                                |       | —                     |       |
| Diluted  earnings per share         |       | $                              | 33,642     |                               | 42,574     |                       | $          | 0.79 |   |
| Year  ended December 31, 2006: |       |                           |       |                               |       |                       |       |
| Basic  earnings per share           |       | $                              | 39,767     |                               | 40,692     |                       | $          | 0.98 |   |
| Effect  of dilutive stock options   |       | —                         |       | 268                                |       | (0.01                      | )          |
| Diluted  earnings per share         |       | $                              | 39,767     |                               | 40,960     |                       | $          | 0.97 |   |

 

*(n)**          Inventories*

 

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

 

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

 

Property, plant and equipment, net arestated at cost less accumulated depreciation. The cost of significant renewals and betterments is capitalized anddepreciated, while expenditures for normal maintenance and repairs are expensedas incurred.

 

Depreciation expense is computed using thestraight-line method over the following estimated useful lives:

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

 

Art and certain antiques are notdepreciated.

 

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*(p)**          Real estate assets*

 

Real estate assets consist primarily of inventorycosts of real estate property developments. Expenditures directly related to non-hotel real estate developments,such as real estate taxes and capital improvements, are capitalized.  Inventory costs of real estate developmentinclude construction costs and ancillary costs, which are expensed as realestate is sold.  Direct selling costs,such as the costs of model apartments and their furnishings and semi-permanentsigns, are capitalized within the cost of real estate assets for sale.  Other costs directly associated with sales,such as direct sales commissions, are recorded as prepaid expenses and chargedto expense in the period in which the related revenue is recognized asearned.  Costs that do not meet thecriteria for capitalization, such as the salaries of sales personnel, generaland administrative expenses of the sales office, advertising and promotions,are expensed as incurred.  Land propertydevelopment costs are accumulated by project and are allocated to individualresidential units, principally using the relative sales value method.

 

*Reclassification of real estateassets*

 

During the year, OEH reclassified thevillas under construction at La Sammana in St. Martin in the amount of$32,340,000 from real estate assets to owned fixed assets, as it has beendecided not to market the villas actively for sale, but to operate them as partof the adjacent hotel.

 

*(q)**          Impairment of long-lived assets*

 

In accordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets”, OEH management reviewslong-lived assets whenever events or changes in circumstances indicate that thecarrying amount of the assets may not be recoverable.  In the event that an impairment occurs, OEHrecords a charge to income calculated as the excess of the asset’s carryingvalue over the estimated fair value.

 

*(r)**           Investments*

 

Investments include equity interests in andadvances to unconsolidated companies.

 

*(s)**           Goodwill and other intangible assets*

 

In accordance with SFAS No. 142, “Goodwill andOther Intangible Assets”, goodwill must be evaluated at least annually todetermine impairment.  Goodwill is notamortized.  The goodwill impairment testingunder SFAS No. 142 is performed in two steps, first, the determination ofimpairment based upon the fair value of a reporting unit as compared with itscarrying value and, second, if there is an implied impairment, the measurementof the amount of impairment loss is determined by comparing the implied fairvalue of goodwill with the carrying amount of that goodwill.  Impairment testing is performed annually atyear end.  Other intangible assets withindefinite useful lives are also reviewed for impairment in accordance withSFAS No. 142.

 

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*(t)**           Concentration of credit risk*

 

Due to the nature of the leisure industry,concentration of credit risk with respect to trade receivables is limited.  OEH’s customer base is comprised of numerouscustomers across different geographic areas.

 

*(u)*          *Pensions*

 

OEH’s primarydefined benefit pension plan is accounted for using actuarial valuationsrequired by SFAS No. 87, “Employers’ Accounting for Pensions”, and SFAS No. 158,“Employers’ Accounting for Defined Benefit Pension and Other Post-retirementPlans — An Amendment of FASB Statements No. 87, 88, 106 and 132(R)”.  Net funded status is recognized on thebalance sheet and any unrecognized prior service costs, experience gains andlosses, or transition obligation is reported as a component of other comprehensiveincome in shareholders’ equity. See Note 11.

 

In determiningthe expected long-term rate of return on assets, management has reviewedanticipated future long-term performance of individual asset classes and the considerationof the appropriate asset allocation strategy given the anticipated requirementsof the plan to determine the average rate of earnings expected on the fundsinvested.  The projected returns arebased on broad equity and bond indices, including fixed interest rate gilts(U.K. Government issued long-term securities) of long-term duration since theplan operates in the U.K.

 

Managementreviews OEH’s actual asset allocation on an annual basis and 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 is currently monitoring and evaluating thelevel of pension contributions based on various factors that include investmentperformance, actuarial valuation and tax deductibility.

 

*(v)**           Derivative financial instruments*

 

If a derivative instrument is notdesignated as a hedge for accounting purposes, the fluctuations in the fairvalue of the derivative are recorded in earnings.

 

If a derivative is designated as a fair value hedge,the changes in the fair value of the derivative and of the hedged itemattributable to the hedged risk are recognized in earnings.  If a derivative is designated as a cash flow hedge,the effective portions of changes in the fair value of the derivative arerecorded as a component of accumulated other comprehensive income/(loss) inshareholders’ equity and are recognized in the statement of consolidatedoperations when the hedged item affects earnings.  The ineffective portion of a hedgingderivative’s change in the fair value will be immediately recognized inearnings.

 

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 determined that a derivative isnot highly effective as a hedge, OEH will discontinue hedge accountingprospectively.

 

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OEH is exposed to interest rate risk on itsfloating rate debt and management tries to manage the impact of interest ratechanges on earnings and cash flows.  OEH’spolicy is to enter into interest rate swap and interest rate cap agreementsfrom time to time to hedge the variability in interest rate cash flows due tointerest rate risk on floating rate debt. These swaps effectively convert the floating rate interest payments on aportion of the outstanding debt into fixed payments.

 

Hedges of net investments in foreignoperations are accounted for similarly to cash flow hedges.  Any gain or loss on the hedging instrumentrelating to the effective portion of the hedge is recorded in othercomprehensive income within foreign currency translation adjustment.  The gain or loss relating to the ineffectiveportion will be recognized immediately in earnings within foreign currency gainsand losses.  Gains and losses deferred inother comprehensive income are recognized in earnings upon disposal of theforeign operation.  OEH links all hedgesthat are designated as net investment hedges to specifically identified netinvestments in foreign subsidiaries.

 

*(w)*          *Fairvalue accounting*

 

*SFAS No. 157*

 

In September 2006, the FASB issuedSFAS No. 157, “Fair Value Measurements”, which (i) applies to certainassets and liabilities that are being measured and reported on a fair valuebasis, (ii) defines fair value, establishes a framework for measuring fairvalue in accordance with generally accepted accounting principles, and expandsdisclosure about fair value measurements and (iii) enables the reader ofthe financial statements to assess the inputs to develop those measurements byestablishing a hierarchy for ranking the quality and reliability of theinformation used to determine fair values.

 

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

 

The Company adopted SFAS No. 157 effective January 1,2008, except as it applies to those non-financial asset and non-financialliabilities as noted in FSP FAS 157-2 described below.  There was no material impact on the Company’sfinancial statements from the adoption of the standard.  The following table summarizes the valuationof OEH’s assets and liabilities by the SFAS No. 157 fair value hierarchyat December 31, 2008 (dollars in thousands):

 

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| ** **                      | ** ** | **December 31, 2008** | ** ** |
|---------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **Level 1**                | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets  at fair value:          |       |                            |       |   |   |   |   |   |   |
| Derivate  financial instruments |       | $                               | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Total  assets                   |       | $                               | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Liabilities  at fair value:     |       |                            |       |   |   |   |   |   |   |
| Derivate  financial instruments |       | $                               | —     |   | $ | 6,823 |   | $ | 5,858 |   | $ | 12,681 |   |
| Total  liabilities              |       | $                               | —     |   | $ | 6,823 |   | $ | 5,858 |   | $ | 12,681 |   |

 

The tablebelow presents a reconciliation of the beginning and ending balances ofliabilities having fair value measurements based on significant unobservableinputs (Level 3) (dollars in thousands):

 
| ** **                             | ** ** | **Beginning  balance at  January 1, 2008** | ** ** | **Transfers  into  Level 3** | ** ** | **Realized  losses  included in  earnings** | ** ** | **Unrealized  losses included  in other  comprehensive  income** | ** ** | **Ending  balance at  December 31,  2008** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Liabilities  at fair value:            |       |                                                      |       |                              |       |                                             |       |                                                                       |       |                                                 |       |
| Derivate  financial instruments   |       | $                                                         | —     |                              | $          | 685                                              |       | $                                                                          | 673        |                                                 | $          | 4,500 |   | $ | 5,858 |   |
| Total  liabilities                     |       | $                                                         | —     |                              | $          | 685                                              |       | $                                                                          | 673        |                                                 | $          | 4,500 |   | $ | 5,858 |   |

 

OEH reviewsits fair value hierarchy classifications quarterly.  Changes in significant observable valuationinputs identified during these reviews may trigger reclassification of fairvalue hierarchy levels of financial assets and liabilities.  These reclassifications are reported astransfers in Level 3 at their fair values at the beginning of the period inwhich the change occurs and the transfers out at their fair values at the endof the period.  During the three monthsended December 31, 2008, OEH transferred certain derivative instrumentsdue to increased significance of unobservable inputs used to estimate fairvalue for these securities.

 

The fair value of OEH’s derivativefinancial instruments is computed based on an income approach using appropriatevaluation techniques including discounting future cash flows and other methodsthat are consistent with accepted economic methodologies for pricing financialinstruments.  Where credit value adjustmentsexceeded 20% of the fair value of the derivatives, Level 3 inputs are assumedto have a significant impact on the fair value of the derivatives in theirentirety and the valuation has been classified in the Level 3 category.

 

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

 

*SFAS No. 159*

 

The Company adopted SFAS No. 159, “The Fair ValueOption for Financial Assets and Financial Liabilities”, effective January 1,2009 which had no material impact on the Company’s financial statements.

 

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*(x)**           Recent accounting pronouncements*

 

*SFASNo. 141(R)*

 

In December 2007, the FASB issued SFASNo. 141(R), “Business Combinations”. This revised statement requires assets and liabilities, includingcontingent liabilities, acquired in a business combination, as well ascontingent consideration, to be measured at their fair values as of the date ofthe acquisition.  SFAS No. 141(R) requiresthat any changes to an acquired entity’s valuation allowance or changes inuncertain tax positions that occur after the measurement period be recorded asa component of income tax expense.  Underthe transition provisions of SFAS No. 141(R), the new requirement appliesto all business combinations, regardless of the consummation date.  This statement also changes the treatment ofrestructuring charges, in-process research and development costs, andacquisition related costs.  SFAS No. 141(R) iseffective for business combinations occurring in the first annual reportingperiod beginning after December 15, 2008. The income tax provisions of SFAS No. 141(R) apply also to allhistorical business combinations on a prospective basis.  The Company is in the process of evaluatingthe effects of the adoption of SFAS No. 141(R).

 

*SFASNo. 160*

 

In December 2007,the FASB issued SFAS No. 160, “Non-Controlling Interests in ConsolidatedFinancial Statements – An Amendment of ARB No. 51”.  This statement clarifies the accounting andreporting for non-controlling interests, currently referred to as minorityinterests.  Under SFAS No. 160,non-controlling interests will be classified as a component of equity.  SFAS No. 160 is effective for fiscalyears beginning after December 15, 2008. The Company is in the process of evaluating the effects of the adoptionof SFAS No. 160.

 

*SFASNo. 161*

 

In March 2008**,** the FASB issued SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133”.  This statement changes the disclosurerequirements for derivative instruments and hedging activities.  Entities are required to provide enhanceddisclosures about (i) how and why an entity uses derivative instruments, (ii) howderivative instruments and related hedged items are accounted for under SFAS No. 133and its related interpretations and (iii) how derivative instruments andrelated hedged items affect an entity’s financial position, financialperformance and cash flows.  SFAS No. 161is effective for financial statements issued for fiscal years and interimperiods beginning after November 15, 2008. The Company is in the process of evaluating the effects of the adoptionof SFAS No. 161.

 

*FSP142-3*

 

****In April 2008, the FASB issued FSP 142-3,“Determination of the Useful Life of Intangible Assets”.  This FSP amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under SFAS No. 142, “Goodwilland Other Intangible Assets”.  This FSPis effective for financial statements issued for fiscal years beginning after December 15,2008. The Company does not expect any material impact from the adoption of theFSP.****

 

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

 

****During the three months ended December 31, 2007,OEH decided to sell its investment in Bora Bora Lagoon Resort and thissubsidiary continues to be held for sale. Accordingly, the results of the hotel have been presented as adiscontinued operation for all periods presented.****

 

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

**** ****
| **** ****                                           | **** **** | ****Years ended December 31,**** | **** ****  |
|----------------------------------------------------------|----------------|-------------------------------------------------|-----------------|
| **** ****                                           | **** **** | ****2008****                                    | **** ****  | ****2007**** | **** **** | ****2006**** | **** **** |
| **** ****                                           | **** **** | **** ****                                  | **** ****  | **** **** | **** **** | **** **** | **** **** |
| ****Revenue****                                          | **** **** | ****$****                                       | ****8,399****   | **** **** | ****$**** | ****11,582**** | **** **** | ****$**** | ****13,440**** | **** **** |
| ****(Loss)/earnings from discontinued operations****     | **** **** | ****$****                                       | ****(4,939****  | ****)**** | ****$**** | ****(2,629**** | ****)**** | ****$**** | ****102**** | **** **** |
| ****Impairment loss****                                  | **** **** | ****(12,000****                                 | ****)****       | ****(13,992**** | ****)**** | ****—**** | **** **** |
| **** ****                                           | **** **** | ****(16,939****                                 | ****)****       | ****(16,621**** | ****)**** | ****102**** | **** **** |
| ****Deferred tax (charge)/ benefit****                   | **** **** | ****(3,000****                                  | ****)****       | ****—**** | **** **** | ****3,000**** | **** **** |
| ****Net (loss)/earnings from discontinued operations**** | **** **** | ****$****                                       | ****(19,939**** | ****)**** | ****$**** | ****(16,621**** | ****)**** | ****$**** | ****3,102**** | **** **** |

 

****Due to an increase in competition and other marketfactors, operating profits and cash flows of the Bora Bora Lagoon Resort werelower than expected in 2007 and previous years, which gave rise to animpairment of goodwill and long-lived assets in the amount of $3,891,000 and$10,101,000, respectively, recorded in the three months ended December 31,2007.  In 2008, the operating results andfuture outlook, including the ability of potential purchasers to fund anacquisition, have further deteriorated, so that an additional impairment offixed assets in the amount of $12,000,000 has been recognized in the threemonths ended September 30, 2008. The fair value of the investment was estimated by management based oncurrent price negotiations for the sale of the business and considering othermarket factors.  The impairments havebeen calculated after taking into account the cumulative translationadjustments recorded in other comprehensive income in respect of thissubsidiary.****

 

****Assets and liabilities of the hotel have beenclassified as held for sale and consisted of the following (dollars inthousands):****

**** ****

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**** ****
| **** ****                                             | **** **** | ****December 31,**** | **** **** |
|------------------------------------------------------------|----------------|---------------------------|----------------|
| **** ****                                             | **** **** | ****2008****              | **** **** | ****2007**** | **** **** |
| **** ****                                             | **** **** | **** ****            | **** **** | **** **** | **** **** |
| ****Current assets****                                     | **** **** | ****$****                 | ****2,202****  | **** **** | ****$**** | ****3,686**** | **** **** |
| ****Other assets****                                       | **** **** | ****97****                | **** **** | ****3,121**** | **** **** |
| ****Property, plant and equipment, net of depreciation**** | **** **** | ****31,510****            | **** **** | ****45,091**** | **** **** |
| ****Goodwill****                                           | **** **** | ****2,169****             | **** **** | ****2,519**** | **** **** |
| ****Total assets held for sale****                         | **** **** | ****$****                 | ****35,978**** | **** **** | ****$**** | ****54,417**** | **** **** |
| ****Liabilities held for sale****                          | **** **** | ****$****                 | ****(4,781**** | ****)**** | ****$**** | ****(5,619**** | ****)**** |

 

****3.********            ********Consolidation of variable interest entity –Charleston Place Hotel****

 

****OEH holds a 19.9% equity investment in CharlestonCenter LLC, owner of Charleston Place Hotel. It has also made a number of loans to the hotel.  On evaluating its various variable interestsin the hotel, OEH concluded that effective December, 31, 2008, the hotel nolonger qualified for certain scope exemptions under FIN 46(R), “Consolidationof Variable Interest Entities”, because OEH’s share of loans provided to thehotel had increased and OEH provided a majority of subordinated financialsupport.  OEH further concluded that OEHis the primary beneficiary of the variable interest entity as defined in FIN 46(R) becauseit is expected to absorb a majority of the entity’s residual gains or lossesbased on the current organizational structure. OEH has consolidated the entity effective December 31, 2008. Previouslythe entity had been accounted for under the equity method of accounting.****

 

****The assets and liabilities of Charleston Place Hotelhave been consolidated into the financial statements at their fair value as at December 31,2008 which were as follows (dollars in thousands):****

**** ****
| **** ****                                                 | **** **** | ****December 31, 2008**** | **** **** |
|----------------------------------------------------------------|----------------|-------------------------------------|----------------|
| **** ****                                                 | **** **** | **** ****                      | **** **** |
| ****Current assets****                                         | **** **** | ****$****                           | ****4,937****  | **** **** |
| ****Other assets****                                           | **** **** | ****1,824****                       | **** **** |
| ****Property, plant and equipment****                          | **** **** | ****196,650****                     | **** **** |
| ****Goodwill****                                               | **** **** | ****40,395****                      | **** **** |
| ****Total assets****                                           | **** **** | ****243,806****                     | **** **** |
| **** ****                                                 | **** **** | **** ****                      | **** **** |
| ****Current liabilities****                                    | **** **** | ****(5,373****                      | ****)****      |
| ****Third-party debt****                                       | **** **** | ****(79,626****                     | ****)****      |
| ****Deferred income taxes****                                  | **** **** | ****(64,100****                     | ****)****      |
| ****Other liabilities****                                      | **** **** | ****(12,306****                     | ****)****      |
| ****Total liabilities****                                      | **** **** | ****(161,405****                    | ****)****      |
| **** ****                                                 | **** **** | **** ****                      | **** **** |
| ****Net assets (before amounts payable to OEH of  $97,000)**** | **** **** | ****$****                           | ****82,401**** | **** **** |
| ****Book value of OEH’s variable interest****             | **** **** | ****$****                           | ****82,401**** | **** **** |

 

****Goodwill represents theexcess of the reported amount of the previously held interests and the fairvalue of the newly consolidated liabilities and non-controlling interests, overthe fair value of the newly consolidated identifiable assets.  The fair value of the non-controlling interestshas been treated as $nil since the hotel has net liabilities.****

**** ****

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****The net assets have beenfair valued based on the estimated market values of the hotel’sproperties.  After fair valuing all otherassets and liabilities, goodwill of $40,395,000 has been recorded of which $nilwill be deductible as operating expenses for tax purposes.****

 

****The third-party debt ofCharleston Center LLC is non-recourse to its members, including OEH, andtherefore the hotel’s separate assets and liabilities are not available to paythe debts of OEH and do not constitute obligations of OEH.****

 

****The results of theoperation of Charleston Place Hotel will be included in the consolidatedfinancial statements of OEH from January 1, 2009 and therefore anyintercompany transactions will be eliminated from that point forward.****

 

****The proforma results ofoperations data presented below assume that consolidation of the hotel had beenmade at the beginning of 2007 (dollars in thousands, except per share amounts):****

**** ****
| **** ****              | **** **** | **Year  ended December 31,** | **** ****  |
|-----------------------------|----------------|-----------------------------------|-----------------|
| **** ****              | **** **** | ****2008****                      | **** ****  | ****2007**** | **** **** |
| **** ****              | **** **** | **** ****                    | **** ****  | **** **** | **** **** |
| ****Revenue****             | **** **** | ****$****                         | ****608,432**** | **** **** | ****$**** | ****641,131**** | **** **** |
| ****Net (loss)/earnings**** | **** **** | ****$****                         | ****(34,354**** | ****)**** | ****$**** | ****25,537**** | **** **** |
| ****Earnings per share****  | **** **** | **** ****                    | **** ****  | **** **** | **** **** |
| ****Basic****               | **** **** | ****$****                         | ****(0.79****   | ****)**** | ****$**** | ****0.60**** | **** **** |
| ****Diluted****             | **** **** | ****$****                         | ****(0.79****   | ****)**** | ****$**** | ****0.60**** | **** **** |

 

**4.****            ****Significant acquisitions,dispositions and investments**

 

*(a)**         **Acquisitions*

 

*2008 Acquisitions*

 

*Casa de Sierra Nevada Minority Interest*

 

On March 7, 2008, OEH agreed to accelerate the purchase of the 20%minority interest in Casa de Sierra Nevada it did not own for a cashconsideration of $2,329,000.  Followingguidance in SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity”, and EITF 00-4, “Majorityowner’s accounting for a transaction in the shares of a consolidated subsidiaryand a derivative indexed to the minority interest in that subsidiary”, deferredconsideration of $2,330,000, which had been recorded on the originalacquisition of 80% was cleared and the difference of $1,000 between the finalsettlement and original forward contract value was recorded in earnings asinterest income.

 

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*La Samanna Spa*

 

On March 14, 2008, the subsidiary of OEH that owns La Samanna agreedto terminate the existing lease with the third party operator of the spa on thehotel’s premises and to transfer the employees, equipment and other assets ofthe spa to La Samanna effective April 1, 2008 for a cash consideration of$650,000.

 

The following table summarizes the preliminary fair value of the assetsacquired at the date of acquisition (dollars in thousands) :

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

 

Equipment of the spa has beenfair valued based on the estimated replacement cost.  Goodwill of $630,000 has been recorded ofwhich $nil will be deductible as operating expenses for tax purposes.  This acquisition enabled OEH to take control ofthe spa operation and receive 100% of operating revenues that the business isexpected to generate in future years, which contributed to the purchase priceand resulted in goodwill.

 

The acquisition of the spa hasbeen accounted for as a purchase in accordance with SFAS No. 141,“Business Combinations”.  The results ofthe operation have been included in the consolidated financial statements ofOEH from March 14, 2008.

 

OEH’s results would not have been materially differenthad these acquisitions in 2008 occurred at the beginning of the year.

* *

*2007 Acquisitions*

 

*Afloatin France*

 

On April 12,2007, OEH exercised its option to acquire the remaining 50% it did not own inthe company operating the Afloat in France canal and river cruise business, fora cash consideration of $2,700,000, bringing OEH’s investment to 100%ownership.

 

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The followingtable summarizes the fair values of the 50% share of the assets acquired andliabilities assumed at the date of acquisition (dollars in thousands):

 
| ** **                            | ** ** | **April 12, 2007** | ** ** |
|---------------------------------------|------------|------------------------------|------------|
|                                  |       |                         |       |
| Goodwill  and other intangible assets |       | $                            | 3,876      |   |
| Total  assets acquired                |       | 3,876                        |       |
|                                  |       |                         |       |
| Current  liabilities                  |       | (1,176                       | _          |
| Total  liabilities assumed            |       | (1,176                       | )          |
| Net  assets acquired                  |       | $                            | 2,700      |   |
|                                  |       |                         |       |
| Cash  consideration                   |       | $                            | 2,700      |   |

 

OEH’s combinedinvestments in the Afloat in France business result in total goodwill asfollows (dollars in thousands):

 
| ** **                                                        | ** ** | **April 12, 2007** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|
|                                                              |       |                         |       |
| Purchase  price paid for the initial 50%, less accumulated losses |       | $                            | 251        |   |
| Purchase  price of the second 50% interest                        |       | 2,700                        |       |
|                                                              |       | 2,951                        |       |
| Add:                                                              |       |                         |       |
| Fair  value of liabilities assumed                                |       | 2,353                        |       |
| Less:                                                             |       |                         |       |
| Fair  value of assets acquired                                    |       | —                       |       |
| Total  goodwill                                                   |       | $                            | 5,304      |   |

 

The canalboatsoperated by the acquired company had been purchased by OEH in 2004 and leased tothe operating company. Goodwill and other intangible assets of $5,304,000 hasbeen recorded, of which $nil will be deductible as operating expenses for taxpurposes. This acquisition enabled OEH to take full control of the Afloat inFrance operation and to receive 100% of operating revenues that the business isexpected to generate in future years, which contributed to the purchase priceand resulted in goodwill.

 

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

 

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*RoyalScotsman*

 

OnApril 25, 2007, OEH exercised its option to acquire the remaining 50% itdid not own in the company owning and operating the Royal Scotsman touristtrain, for a cash consideration of £1,375,000 (equivalent to $2,711,000),bringing OEH’s investment to 100% ownership.

 

The followingtable summarizes the fair values of the 50% share of the assets acquired andliabilities assumed at the date of acquisition (dollars in thousands):

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

 

OEH’s combinedinvestments in the Royal Scotsman business result in total goodwill as follows(dollars in thousands):

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

 

Property,plant and equipment of the Royal Scotsman have been fair valued based on theestimated replacement cost of the train. Goodwill of $1,749,000 has beenrecorded of which $nil will be deductible as operating expenses for tax 

 

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purposes. Thisacquisition enabled OEH to take full control of the Royal Scotsman operationand receive 100% of operating revenues that the business is expected togenerate in future years, which contributed to the purchase price and resultedin goodwill.

 

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

 

*La Résidence Phou Vao minority interests*

 

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

 

*Finalretention payment relating to Grand Hotel Europe*

 

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

 

*2006Acquisitions*

 

*PanseaHotels Group*

 

InJune 2006, OEH acquired the 50% of the Napasai hotel-owning company sharesnot owned by the Pansea Hotels group for $10,500,000 cash consideration, andacquired the Pansea group itself in July 2006 for a total cashconsideration of $33,562,000 (including an $8,000,000 loan OEH had previouslymade to Pansea group, accrued interest, other prior payments, and acquisitioncosts) and assumption of sundry debts owed by the Pansea Hotels group to thirdparties of $15,524,000.

 

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

 

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

 

The net assetsof the Pansea Hotels group have been fair valued based on the estimated marketvalues of the freehold and leasehold properties. After fair valuing all otherassets and liabilities, goodwill of $13,815,000 has been recorded of which $nilwill be deductible as operating expenses for tax purposes. Included in thegoodwill is a debit balance of $2,316,000 for minority interest relating tolosses carried forward as at the date of acquisition. In the future periods,minority interest share of profits will be credited against goodwill to theextent of the previously recorded minority interest losses.

 

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

 

InDecember 2006, OEH acquired an additional 34% interest in the formerPansea hotel in Cambodia for a cash consideration of $1,290,050 increasing itsshare in the hotel equity from 65% to 99%. The purchase price was partlyallocated to fixed assets ($918,000), resulting in a deferred tax liability of$184,000. Goodwill of $318,000 has been recognized on this acquisition, ofwhich $nil will be deductible for tax purposes.

 

*Casade Sierra Nevada*

 

InFebruary 2006, OEH acquired a 75% interest in Casa de Sierra Nevada in SanMiguel de Allende, Mexico. The total purchase price, including acquisitioncosts, was $8,800,000 paid in cash. The acquisition included adjacent buildingsand land.

 

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

 

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| ** **                                            | ** ** | **February 8, 2006** | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|
|                                                  |       |                           |       |
| Property,  plant and equipment                        |       | $                              | 8,600      |   |
| Goodwill  and other intangible assets                 |       | 3,831                          |       |
| Total  assets acquired                                |       | 12,431                         |       |
|                                                  |       |                           |       |
| Current  liabilities                                  |       | (261                           | )          |
| Other  long-term liabilities (deferred consideration) |       | (2,850                         | )          |
| Deferred  income taxes                                |       | (520                           | )          |
| Total  liabilities assumed                            |       | (3,631                         | )          |
| Net  assets acquired                                  |       | $                              | 8,800      |   |

 

The netassets of Casa de Sierra Nevada have been fair valued based on the estimatedmarket value of the buildings. After fair valuing all other assets andliabilities, goodwill of $3,571,000 has been recorded of which $nil will bedeductible as operating expenses for tax purposes.

 

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

 

InDecember 2006, OEH acquired a further 5% interest in the hotel for a cashconsideration of $520,000. In accordance with the shareholders’ agreement, OEHwas going to purchase a further 5% in January 2009 and the remaining 15%in January 2010 for a cash consideration set forth in the agreement. Thisliability was recorded at the fair value of the deferred consideration and theminority interest was reduced accordingly. As reported above in this Note 4(a),in March 2008, OEH accelerated the purchase of this 20% minority interest.

 

*MaromaResort and Spa*

 

EffectiveJanuary 1, 2006, OEH purchased the remaining 25% interest in Maroma Resortand Spa for a cash consideration of $5,400,000 bringing its interest to 100%. Adeferred tax liability of $1,853,000 has been recorded on the acquisition. Goodwillof $4,728,000 has been recognized on this acquisition.

 

*(b)  Investments*

 

OnJune 7, 2007, OEH acquired 50% of a company holding real estate in Buzios,Brazil, for a cash consideration of $5,000,000. OEH planned to build a hoteland villas on the acquired land. The remaining 50% of the property holdingcompany was expected to be sold to OEH for a cash

 

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considerationof $5,000,000 when the building permits were obtained from the localauthorities. In accordance with the sale and purchase agreement with the ownersof the other 50%, if permits are not received, the owners have an option torepurchase OEH’s 50% share for the amount of investment made to date, or if theowners do not exercise this option, OEH has an option to sell 100% of thecompany to a third party at the market price in order to realize its investment.In February 2009, the Municipality of Buzios designated the property ashaving a “public interest” which is the first step in a process for thecompulsory purchase of the land in exchange for a payment of fair compensationto the owners. In accordance with the foregoing provisions of the sale andpurchase agreement, OEH expects to realize its investment from the proceeds ofthe value agreed or determined pursuant to this process.

 

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

 

Investmentsrepresent equity interests of 50% or less and in which OEH exerts significantinfluence but does not consolidate. OEH does not have effective control ofthese unconsolidated companies and, therefore, accounts for these investmentsusing the equity method.

 

OEH’sinvestments in and loans and advances to unconsolidated companies amounted to$67,464,000 at December 31, 2008 (2007-$147,539,000). OEH’s earnings fromunconsolidated companies were $16,771,000 in 2008 (2007-$16,425,000; 2006-$11,970,000).See Note 20.

 

As discussedin Note 3, Charleston Place LLC has been consolidated into the financialstatements of OEH with effect from December 31, 2008. The summarizedbalance sheet information presented, therefore, does not include this hotel atDecember 31, 2008. The summarized profit and loss account informationpresented does include OEH’S earnings from this hotel for the year endedDecember 31, 2008.

 

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

 

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| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Current  assets                                  |       | $                     | 55,877     |   | $ | 60,890 |   |
| Property,  plant and equipment, net              |       | 266,461               |       | 358,708 |   |
| Other  assets                                    |       | 47,084                |       | 51,376 |   |
| Total  assets                                    |       | $                     | 369,422    |   | $ | 470,974 |   |
|                                             |       |                  |       |   |   |
| Current  liabilities                             |       | $                     | 30,293     |   | $ | 48,710 |   |
| Long-term  debt                                  |       | 165,202               |       | 246,420 |   |
| Other  liabilities                               |       | 4,744                 |       | 97,663 |   |
| Total  shareholders’ equity                 |       | 169,183               |       | 78,181 |   |
| Total  liabilities and shareholders’ equity |       | $                     | 369,422    |   | $ | 470,974 |   |

 
| ** **                                         | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue                                            |       | $                                          | 209,093    |   | $ | 196,564 |   | $ | 173,858 |   |
| Earnings  from operations before net finance costs |       | $                                          | 44,789     |   | $ | 40,979 |   | $ | 34,509 |   |
| Net  earnings                                      |       | $                                          | 8,645      |   | $ | 7,472 |   | $ | 2,127 |   |

 

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 notmeet this obligation, OEH has the right to dilute the other participant andobtain a majority equity interest in the affected joint venture company. OEHalso has rights to purchase the other participant’s interests, exercisable inlimited circumstances such as its bankruptcy.

 

Due to thedownturn in the travel and hospitality industry in Europe and elsewhere,operating results of Hotel Ritz in Madrid were lower than expected in the threemonths ended December 31, 2008. The earnings forecast for the next fewyears has been revised and an impairment assessment performed on OEH’s 50% investmentin the hotel company. At December 31, 2008, an impairment loss of$22,992,000 has been recognized relating to OEH’s investment in this hotel. Thefair value of OEH’s investment was estimated using the hotel’s discountedfuture cash flow forecasts.

 

As aconsequence of the impairment loss recognized by OEH relating its equityinvestment in Hotel Ritz, the joint venture company qualified as a significantsubsidiary of OEH under Rule 3-09 of SEC Regulation S-X at December 31,2008.  The equity investee’s 2008 revenue(unaudited) was $43,765,000, its earnings from operations were $7,453,000(unaudited) and its net earnings (unaudited) were $190,000. 

 

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

 

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

 
| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Land  and buildings                      |       | $                     | 1,290,322  |   | $ | 1,074,059 |   |
| Machinery  and equipment                 |       | 200,252               |       | 205,873 |   |
| Fixtures,  fittings and office equipment |       | 217,644               |       | 220,664 |   |
| River  cruiseship and canalboats         |       | 13,223                |       | 19,600 |   |
|                                     |       | 1,721,441             |       | 1,520,196 |   |
| Less:  accumulated depreciation          |       | (257,346              | )     | (246,240 | ) |
|                                     |       | $                     | 1,464,095  |   | $ | 1,273,956 |   |

 

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

 

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| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Freehold  and leased land and buildings  |       | $                     | 15,535     |   | $ | 17,948 |   |
| Machinery  and equipment                 |       | 2,630                 |       | 2,573 |   |
| Fixtures,  fittings and office equipment |       | 3,538                 |       | 1,654 |   |
|                                     |       | 21,703                |       | 22,175 |   |
| Less:  accumulated depreciation          |       | (4,784                | )          | (2,953 | ) |
|                                     |       | $                     | 16,919     |   | $ | 19,222 |   |

 

**6.****                                      Goodwill**

 

The changes in the carrying amount of goodwill for the year endedDecember 31, 2008 are as follows (dollars in thousands):

 
| ** **                                             | ** ** | **Hotels &  Restaurants** | ** ** | **Trains &  Cruises** | ** ** | **Total** | ** ** |
|--------------------------------------------------------|------------|------------------------------------|------------|--------------------------------|------------|-----------|------------|
|                                                   |       |                               |       |                           |       |      |       |
| Balance as of January 1, 2008 |       | $                                  | 125,301    |                           | $          | 8,196     |       | $ | 133,497 |   |
| Goodwill arising during the year                       |       | 42,020                             |       | —                         |       | 42,020    |       |
| Goodwill impairment (from continuing operations)       |       | (9,252                             | )          | —                         |       | (9,252    | )          |
| Foreign currency translation adjustment                |       | (11,688                            | )          | (523                           | )          | (12,211   | )          |
| Balance as at December 31, 2008                   |       | $                                  | 146,381    |                           | $          | 7,673     |       | $ | 154,054 |   |

 

OEH’s goodwill impairment testing isperformed in two steps, first, the determination of impairment based upon thefair value of each reporting unit as compared with its carrying value and,second, if there is an implied impairment, the measurement of the amount of theimpairment loss is determined by comparing the implied fair value of goodwillwith the carrying value of the goodwill. If the carrying value of the reporting unit’s goodwill exceeds itsimplied fair value, the goodwill is deemed to be impaired and is written downto the extent of the difference.

 

The determination of impairment incorporatesvarious assumptions and uncertainties that OEH believes are reasonable andsupportable considering all available evidence, such as the future cash flowsof the business, future growth rates and the related discount rate. However,these assumptions and uncertainties are, by their very nature, highlyjudgmental.  If the assumptions are notmet, OEH may be required to recognize additional goodwill impairment losses.

 

At the date of this report, OEH has notcompleted its impairment analysis.  Basedon the work performed, however, OEH has concluded that an impairment loss canbe reasonably estimated and has recorded a non-cash goodwill impairment chargeof $9,252,000 representing its best estimate of the impairment loss present atDecember 31, 2008, as follows (dollars in thousands):

 
| ** **                       | ** ** | **December 31, 2008** | ** ** |
|----------------------------------|------------|---------------------------------|------------|
| Le Manoir aux Quat’ Saisons |       | $                               | 5,270      |   |
| Lapa Palace                      |       | 1,028                           |       |
| Hôtel de la Cité       |       | 85                              |       |
| Windsor Court Hotel              |       | 2,588                           |       |
| Keswick Hall                     |       | 281                             |       |
|                             |       | $                               | 9,252      |   |

 

The impairment charge recorded by OEH is anestimate subject to finalization of the second step of the testing noted abovefor a number of reporting units.  This isdue to timing issues related to the economic downturn in the fourth quarter of2008, the number of reporting units and the complexity of the valuationcalculations required.  OEH expects tocomplete this testing during the quarter ending March 31, 2009. 

 

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**7.****                                      Other intangible assets****                                               **(Dollars in thousands)

 
| ** **                                | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|
| **Amortized intangible assets** | ** ** | **Carrying  amount**            | ** ** | **Accumulated  amortization** | ** ** | **Net book  value** | ** ** |
|                                      |       |                            |       |   |   |   |   |
| Favorable lease                           |       | $                               | 11,925     |   | $ | (790 | ) | $ | 11,135 |   |
| Internet sites                            |       | 1,967                           |       | (165 | ) | 1,802 |   |
| Total                                     |       | $                               | 13,892     |   | $ | (955 | ) | $ | 12,937 |   |

 

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

 
| **Unamortized intangible assets** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|
|                              |       |                            |       |
| Tradename                         |       | $                               | 7,318      |   |
|                              |       |                            |       |
| Total                             |       | $                               | 21,255     |   |

 

Amortization expense for the year ended December 31, 2008 was$337,000 (2007-$461,000; 2006-$160,000).

 

Estimated amortization expense for each of the years ended from 2009 to2013 is $340,000.

 

**8.****                                      Working capital facilities**

 

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

 
| ** **                                                                                                     | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                     | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Unsecured  working capital facilities, with a weighted average interest rate of 5.68% and  6.51%, respectively |       | $                     | 54,179     |   | $ | 64,419 |   |
|                                                                                                                |            |                       |            |  |  |  |  |

 

OEH hadapproximately $63,000,000 of working capital lines of credit atDecember 31, 2008 (2007-$65,000,000) issued by various financialinstitutions and having various expiration dates, of which $8,608,000 wasundrawn (2007-$14,121,000).

 

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**9.****                                      Long-term debt and obligations under capital leases**

 

*(a)**                                 Long-term debt*

 

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

 
| ** **                                                                                                                                                                        | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Loans  from banks collateralized by property, plant and equipment payable over periods  of 1 to 11 years, with a weighted average interest rate of 5.05% and 5.77%,  respectively |       | $                     | 846,534    |   | $ | 767,916 |   |
| Loan  secured by river cruiseship payable over 3 years, with a weighted interest  rate of 7.48% at December 31,2007, based on LIBOR                                          |       | —                |       | 2,500 |   |
| Obligations  under capital lease (see Note 9(b))                                                                                                                                  |       | 13,589                |       | 15,994 |   |
|                                                                                                                                                                              |       | 860,123               |       | 786,410 |   |
| Less:  current portion                                                                                                                                                            |       | 139,968               |       | 127,795 |   |
|                                                                                                                                                                              |       | $                     | 720,155    |   | $ | 658,615 |   |

 

Long-term debtat December 31, 2008 includes $79,600,000 of debt obligations of CharlestonCentre LLC, owner of the Charleston Place Hotel in which OEH has a 19.9% equityinvestment. This debt is non-recourse to the members of Charleston Centre LLC,including OEH, and therefore the hotel’s separate assets and liabilities arenot available to pay the debts of OEH and do not constitute obligations of OEH.The carrying value of the debt is equal to its fair value.

 

Certain creditagreements of OEH have restrictive covenants. At December 31, 2008, OEHwas in compliance with all major covenants that applied to OEH, including aminimum consolidated net worth test and a minimum consolidated interestcoverage test as defined under a bank-syndicated €190,000,000 loan facility. OEHdoes not currently have any covenants in its loan agreements which limit thepayment of dividends.

 

The followingis a summary of the aggregate maturities of consolidated long-term debtexcluding obligations under capital leases at December 31, 2008 (dollarsin thousands):

 

 
| **Year ending December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
|                                        |       |       |       |
| 2009                                        |       | 138,066    |       |
| 2010                                        |       | 46,359     |       |
| 2011                                        |       | 443,407    |       |
| 2012                                        |       | 95,660     |       |
| 2013                                        |       | 53,800     |       |
| 2014  and thereafter                        |       | 69,242     |       |
|                                        |       | $          | 846,534    |   |
|                                             |            |            |            |  |

 

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TheCompany has guaranteed $527,000,000 of the long-term debt of its subsidiarycompanies as at December 31, 2008.

 

Of thecurrent portion of long-term debt, $105,373,000 (2007-$45,140,000) related torevolving facilities which, although falling due within 12 months, areavailable for re-borrowing throughout the period of the loan facilities whichare repayable in 2011 and 2012.

 

TheCompany has guaranteed, through 2011, $4,714,000 of the debt obligations of thePeruRail operations, an unconsolidated joint venture in which OEH has a 50%investment and, through 2009, $7,003,000 of PeruRail contingent obligationsrelating to the performance of its governmental rail concessions.  The Company has also guaranteed, through2009, a $3,000,000 bank loan to Eastern and Oriental Express Ltd. in which OEHhas a 25% equity investment, and $8,340,000 of a working capital loan facilityof Hotel Ritz, Madrid in which OEH has a 50% equity investment.

 

OEH hasa 50% investment in an unconsolidated joint venture company that owns threehotels in Peru.  The Company hascontingently guaranteed, through 2014, $7,417,000 of debt obligations of thejoint venture and, through 2016, a further $8,216,000 of its debt obligations.  The guarantees are contingent because theymay only be enforced in the event there is a change in control of the jointventure, which would occur only if OEH’s ownership of the economic and votinginterests in the joint venture falls below 50%, an event which has notoccurred.

 

*(b)          Obligations under capital leases*

 

Thefollowing is a summary of future minimum lease payments under capital leasestogether with the present value of the minimum lease payments at December 31,2008 (dollars in thousands):

 
| **Year ending December 31,**           | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|------------|------------|
|                                                  |       |       |       |
| 2009                                                  |       | $          | 2,553      |   |
| 2010                                                  |       | 2,563      |       |
| 2011                                                  |       | 4,058      |       |
| 2012                                                  |       | 649        |       |
| 2013                                                  |       | 683        |       |
| 2014  and thereafter                                  |       | 24,568     |       |
| Minimum  lease payments                               |       | 35,074     |       |
| Less:  amount of interest contained in above payments |       | 21,485     |       |
| Present  value of minimum lease payments              |       | 13,589     |       |
| Less:  current portion                                |       | 1,902      |       |
|                                                  |       | $          | 11,687     |   |

 

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

 

**10.          Other liabilities**

 

Otherliabilities consist of $1,462,000 of deferred consideration on acquisition ofland next to Maroma Resort and Spa after discounting to present value,$1,990,000 of deferred income relating to guarantees given by OEH in connectionwith bank loans entered into by the Peruvian hotel joint venture

 

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operation (seeNote 20), $6,804,000 in respect of interest rate swaps (see Note 17) and$12,306,000 of long-term accrued interest at Charleston Place Hotel (see Note3).

 

**11.          Pension plans**

 

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

 

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

 
| ** **                                        | ** ** | **Year ended  December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                        | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                              |       |                                   |       |   |   |   |   |
| Discount  rate                                    |       | 5.70                                   | %          | 5.70 | % | 5.10 | % |
| Expected  long-term rate of return on plan assets |       | 7.50                                   | %          | 7.50 | % | 7.50 | % |

 

The significant weighted-average assumptions used todetermine benefit obligations of the plan at year end were as follows:

 
| ** **     | ** ** | **December 31,** | ** ** |
|----------------|------------|-----------------------|------------|
| ** **     | ** ** | **2008**              | ** ** | **2007** | ** ** |
|           |       |                  |       |   |   |
| Discount  rate |       | 5.70                  | %          | 5.70 | % |

 

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

 

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

 

The weighted-average asset allocation of OEH’s definedbenefit pension plan as of December 31, 2008 and 2007 by asset category asa percentage of plan assets was as follows:

 

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| ** **                | ** ** | **Year ended  December 31,** | ** ** |
|---------------------------|------------|----------------------------------------|------------|
| ** **                | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Asset  Category           |       |                                   |       |   |   |
| Equity  securities        |       | 99                                     | %          | 100 | % |
| Fixed  income investments |       | —                                 |       | — |   |
| Other                     |       | 1                                      |       | — |   |
| Total                     |       | 100                                    | %          | 100 | % |

 

Theallocation of the assets was in compliance with the target allocation set inthe plan investment policy.

 

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

 
| ** **                                                   | ** ** | **Year ended  December 31,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Change  in benefit obligation:                               |       |                                   |       |   |   |
| Benefit  obligation at beginning of year                     |       | $                                      | 21,922     |   | $ | 22,377 |   |
| Service  cost                                                |       | —                                 |       | — |   |
| Interest  cost                                               |       | 1,160                                  |       | 1,164 |   |
| Plan  participants’ contributions                       |       | —                                 |       | — |   |
| Net  transfer in                                             |       | —                                 |       | — |   |
| Actuarial  (gain)/loss                                       |       | (910                                   | )          | (1,894 | ) |
| Benefits  paid                                               |       | (80                                    | )          | (74 | ) |
| Curtailment  gain                                            |       | —                                 |       | — |   |
| Settlement                                                   |       | —                                 |       | (32 | ) |
| Foreign  currency translation                                |       | (6,097                                 | )          | 381 |   |
| Benefit  obligation at end of year                           |       | 15,995                                 |       | 21,922 |   |
|                                                         |       |                                   |       |   |   |
| Change  in plan assets:                                      |       |                                   |       |   |   |
| Fair  value of plan assets at beginning of year              |       | 15,200                                 |       | 13,700 |   |
| Actual  return on plan assets                                |       | (3,615                                 | )          | 574 |   |
| Employer  contributions                                      |       | 836                                    |       | 800 |   |
| Plan  participants’ contributions                       |       | —                                 |       | — |   |
| Net  transfer in                                             |       | —                                 |       | — |   |
| Benefits  paid                                               |       | (80                                    | )          | (74 | ) |
| Settlement                                                   |       | —                                 |       | (24 | ) |
| Foreign  currency translation                                |       | (3,567                                 | )          | 224 |   |
| Fair  value of plan assets at end of year                    |       | 8,774                                  |       | 15,200 |   |
| Funded  status at end of year                                |       | $                                      | (7,221     | ) | $ | (6,722 | ) |
| Net  actuarial loss recognized in other comprehensive income |       | $                                      | 13,516     |   | $ | 10,714 |   |

 

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

 

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

 

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| ** **                      | ** ** | **Year ended  December 31,** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Projected  benefit obligation   |       | $                                      | 15,995     |   | $ | 21,922 |   |
| Accumulated  benefit obligation |       | $                                      | 15,995     |   | $ | 21,922 |   |
| Fair  value of plan assets      |       | $                                      | 8,774      |   | $ | 15,200 |   |

 

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

 
| ** **                                     | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                     | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                           |       |                                  |       |   |   |   |   |   |   |   |
| Service  cost                                  |       | $                                     | —     |   | $ | — |   | $ | 459 |   |
| Interest  cost on projected benefit obligation |       | 1,160                                 |       | 1,164 |   | 877 |   |
| Expected  return on assets                     |       | (1,103                                | )          | (1,076 | ) | (824 | ) |
| Net  amortization and deferrals                |       | 448                                   |       | 554 |   | 484 |   |
| Net  periodic benefit cost                     |       | $                                     | 505        |   | $ | 642 |   | $ | 996 |   |

 

OEH expects to contribute $1,097,000 to its definedbenefit pension plan in 2009.  Thefollowing benefit payments, which reflect assumed future service, are expectedto be paid (dollars in thousands):

 
| **Year ending December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
|                                        |       |       |       |
| 2009                                        |       | $          | 63         |   |
| 2010                                        |       | 81         |       |
| 2011                                        |       | 114        |       |
| 2012                                        |       | 184        |       |
| 2013                                        |       | 68         |       |
| Next  five years                            |       | 1,539      |       |
|                                             |            |            |            |  |

 

Included in the liability for pension benefit on theconsolidated balance sheet at December 31, 2008 is an amount of $200,000(2007-$213,000) relating to deferred benefit pension obligations at the hotels inBali, Indonesia.  The accrual was made basedon actuarial valuation as at December 31, 2008.  There are no assets to be disclosed.

 

OEH has another defined benefit pension plan in SouthAfrica for certain employees of the Mount Nelson Hotel.  The total number of active members is three,and the remaining members are retired pensioners.  The latest actuarial valuation performed asat December 31, 2007 and updated to December 31, 2008 showed a netpension plan surplus of approximately $84,000 based on fair value of planassets of $1,446,000 and projected benefit obligation of $1,362,000.  The surplus has not been recognized in thefinancial statements as it is deemed not recoverable.

 

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Certain employees of OEH are members of the BritishRail pension plan, which is a governmental multi-employer defined benefitpension plan.  Total OEH contributionsinto the plan for 2008 and 2007 were $74,000 and $78,000, respectively.

 

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

 
| ** **                     | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|
| ** **                     | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
|                           |       |                                       |       |   |   |
| Employer’s  contributions |       | $                                          | 1,705      |   | $ | 1,692 |   |
|                                |            |                                            |            |  |  |  |  |

 

**12.          Income taxes**

 

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

 

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

 
| ** **         | ** ** | **Year ended December 31, 2008** | ** ** |
|--------------------|------------|------------------------------------------------------|------------|
| ** **         | ** ** | **Current**                                          | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|               |       |                                                 |       |   |   |   |   |
| Bermuda            |       | $                                                    | —     |   | $ | — |   | $ | — |   |
| United  States     |       | 1,742                                                |       | (1,994 | ) | (252 | ) |
| Rest  of the world |       | 7,271                                                |       | (6,231 | ) | 1,040 |   |
|               |       | $                                                    | 9,013      |   | $ | (8,225 | ) | $ | 788 |   |

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

 

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

 

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 2008 or 2007.

 

Earnings from unconsolidated companies are reported net of tax. The taxprovision applicable to these unconsolidated companies in the year ended December 31,2008 was $6,986,000 (2007-$4,772,000; 2006-$5,741,000).

 

Deferred income taxesreflect the net tax effects of temporary differences between the carrying amountof assets and liabilities for financial reporting purposes and the amounts usedfor income tax purposes.  The followingrepresents OEH’s net deferred tax liabilities (dollars in thousands):

 
| ** **                                                          | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2008**              | ** ** | **2007** | ** ** |
|                                                                |       |                  |       |   |   |
| Gross  deferred tax assets (primarily operating loss carryforwards) |       | $                     | 56,541     |   | $ | 54,770 |   |
| Less:  valuation allowance                                          |       | (3,371                | )          | (4,378 | ) |
| Net  deferred tax assets                                            |       | 53,170                |       | 50,392 |   |
| Deferred  tax liabilities                                           |       | (207,274              | )          | (151,004 | ) |
| Net  deferred tax liabilities                                       |       | $                     | (154,104   | ) | $ | (100,612 | ) |

 

A net deferred tax liability of $64,100,000 wasrecognized at December 31, 2008 on the consolidation of Charleston CenterLLC in accordance with FIN 46(R), “Consolidation of Variable Interest Entities.”This liability results from the difference between the tax basis of the hotel’sdepreciable assets and the fair value of these assets consolidated in the OEHbalance sheet.

 

The deferred tax assets consist primarily of tax losscarryforwards. The gross amount of tax loss carryforwards is $223,650,000. Ofthis amount, $77,680,000 will expire in the five years ending December 31,2013 and a further $16,955,000 will expire in the five years ending December 31,2018. The remaining losses of $129,015,000 will expire after December 31,2018 or have no expiry date. A valuation allowance has been provided againstgross deferred tax assets where it is thought more likely than not that thebenefits associated with these assets will not be realized.

 

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

 

Except for earnings that are currently distributed, noadditional material provision has been made for income taxes on theundistributed earnings of subsidiaries or for unrecognized deferred taxliabilities for temporary differences related to investments in subsidiaries,as such earnings are expected to be permanently reinvested, the investments areessentially permanent in duration, or OEH has concluded that no additional taxliability will arise as a result of distribution of such earnings.  A liability could arise if amounts aredistributed by such subsidiaries or if the subsidiaries are ultimately disposedof.  It is not practicable to estimatethe additional income taxes related to permanently reinvested earnings or thetemporary differences related to investments in subsidiaries.

 

OEH’s 2008 taxprovision of $2,350,000 included a charge of $424,000 in respect of theprovision for uncertain tax positions, under FASB interpretation No. 48,“Accounting for Uncertainty in Income Taxes”, including a charge of $257,000that relates to the potential interest and penalty costs associated with theuncertain tax positions.  OEH’s 2008 taxbenefit also included a benefit of $12,180,000 in respect of the FIN 48provision, following the resolution of a number of uncertain tax positions incertain jurisdictions in which OEH operates for which a FIN 48 provision wasrecognized upon adoption on January 1, 2007. The tax benefit included abenefit of $5,903,000 that relates to the potential interest and penalty coststhat had been included in the FIN 48 provision in respect of these uncertaintax positions.

 

At December 31, 2008, the total amounts ofunrecognized tax benefits included the following (dollars in thousands):

 

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| ** **                                                     | ** ** | **Total** | ** ** | **Principal** | ** ** | **Interest** | ** ** | **Penalties** | ** ** |
|----------------------------------------------------------------|------------|-----------|------------|---------------|------------|--------------|------------|---------------|------------|
| Balance  at January 1, 2008                                    |       | $         | 24,025     |          | $          | 14,912       |       | $             | 2,035      |   | $ | 7,078 |   |
| Additional  uncertain tax provision identified during the year |       | 424       |       | 167           |       | 136          |       | 121           |       |
| Uncertain  tax provisions released during the year             |       | (12,180   | )          | (6,277        | )          | (994         | )          | (4,909        | )          |
| Foreign  exchange                                              |       | (776      | )          | (622          | )          | (37          | )          | (117          | )          |
| Balance  at December 31, 2008                                  |       | $         | 11,493     |          | $          | 8,180        |       | $             | 1,140      |   | $ | 2,173 |   |

 

At December 31,2008, OEH recognized a $11,493,000 liability in respect of its uncertain taxpositions. All of this FIN 48 provision arises in jurisdictions in which OEHconducts business other than Bermuda.

 

OEH believes that it is reasonably possible that within the next 12months the FIN 48 provision will decrease by approximately $3,000,000 to$4,500,000 as a result of the resolution of tax positions in certainjurisdictions in which OEH operates.

 

**13.          Supplemental cash flow information and restricted cash**

** **
| ** **      | ** ** | **Year ended December 31,** | ** ** |
|-----------------|------------|--------------------------------------------|------------|
| ** **      | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **      | ** ** | **(Dollars in thousands)**       | ** ** |
| Cash  paid for: |       |                                       |       |   |   |   |   |
| Interest        |       | $                                          | 54,995     |   | $ | 49,820 |   | $ | 40,979 |   |
| Income  taxes   |       | $                                          | 16,248     |   | $ | 13,477 |   | $ | 14,719 |   |

 

Non-cashinvesting and financing activities:

 

Inconjunction with certain acquisitions in 2008, 2007 and 2006 (see Note 4(a))liabilities were assumed as follows (dollars in thousands):

 
| ** **                                             | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                   |       |                                       |       |   |   |   |   |
| Fair  value of assets acquired                         |       | $                                          | 2,996      |   | $ | 22,605 |   | $ | 89,551 |   |
| Cash  paid                                             |       | (2,996                                     | )          | (21,877 | ) | (50,122 | ) |
| Loan  advanced in 2004 and other prior payments   |       | —                                     |       | — |   | (9,950 | ) |
| Liabilities  assumed                                   |       | $                                          | —     |   | $ | 728 |   | $ | 29,479 |   |

 

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*Restrictedcash*

 

Restrictedcash of $13,224,000 at December 31, 2008 and $3,800,000 at December 31,2007 consisted mainly of the Porto Cupecoy escrow account.  Cash received for residential condominiumpurchases at Porto Cupecoy is held in escrow and released into OEH’s currentbank account when the next phase of construction is completed.  At December 31, 2008, the Porto Cupecoyescrow account balance amounted to $8,168,000 (2007 - $3,800,000).

 

**14.          Shareholders’ equity**

 

*(a)          Public offering*

 

In November 2008,the Company issued and sold in a registered direct offering in the UnitedStates 8,490,000 class A common shares. Net proceeds amounted to $52,514,000.

 

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

 

*(b)          Dualcommon share capitalization*

 

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

 

*(c)           Shareholder rights agreement*

 

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

 

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participatingpreferred share of the Company at an exercise price of $142 (the “PurchasePrice”) for each one one-hundredth of such junior preferred share, subject toadjustment in certain events.  From andafter the date on which any person acquires beneficial ownership of 15% or moreof the outstanding class A common shares or 15% or more of the outstandingclass B common shares, each holder of a right (other than the acquiring person)will be entitled upon exercise to receive, at the then current Purchase Priceand in lieu 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 isacquired or 50% or more of its consolidated assets or earning power is sold,each holder of a right will be entitled to receive, upon exercise at the thencurrent Purchase Price, that amount of common equity of the acquiring companywhich at the time of such transaction would have a market value of two timesthe Purchase 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 15% 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 of15% or more of the outstanding class A common shares or 15% of more of theoutstanding class B common shares.

 

*(d)          Acquired shares*

 

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

 

*(e)           Preferred shares*

 

TheCompany has 30,000,000 authorized preferred shares, par value $0.01 each, 500,000of which have been reserved for issuance as series A junior participatingpreferred shares upon exercise of preferred share purchase rights held byclass A and B common shareholders in connection with the shareholderrights agreement.  See Note 14(c).

 

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**15.          Employee stock option plans,performance share plan and stock appreciation rights plan**

 

At December 31, 2008, OEH had three share-basedcompensation plans, which are described below. The compensation cost that has been charged against earnings for theseplans was $2,800,000 for the year ended December 31, 2008(2007-$1,442,000; 2006-$1,179,000).

 

*(a)          2000 and 2004 stock option plans*

 

Under the Company’s 2000 and 2004 stock option plans,options to purchase up to 750,000 and 1,000,000, respectively, class Acommon shares may be awarded to employees of OEH at fair market value at thedate of grant.  Options are exercisablethree years after award and must be exercised ten years from the date ofgrant.  At December 31, 2008,101,200 class A common shares were reserved under the 2000 plan forissuance pursuant to options awarded to 20 persons, and 894,750 class A commonshares were reserved under the 2004 plan for issuance pursuant to optionsawarded to 105 persons.  At December 31,2008, options on 20,300 and 64,250 class A common shares were available forfuture grants under the 2000 and 2004 stock option plans, respectively.

 

The total compensation cost related to unexercisedoptions at December 31, 2008 to be recognized over the period January 1,2009 to December 31, 2011, was $4,393,000.  The fair value of grants issued in the yearto December 31, 2008 was $2,099,000 (2007-$5,005,000;2006-$2,211,000).  The fair value ofoptions which vested in the year to December 31, 2008 was $822,000.  Transactions under the plans have been asfollows:

 
| ** **                             | ** ** | **Shares** | ** ** | **Option Price** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------------|------------|
| Outstanding  at January 1, 2008   |       | 562,950    |       | $13.06  -$59.23       |       |
| Granted                                |       | 494,300    |       | $5.89  -$51.90        |       |
| Forfeited                              |       | (47,800    | )          | $13.06  -$59.23       |       |
| Exercised                              |       | (13,500    | )          | $13.40  -$14.70       |       |
| Outstanding  at December 31, 2008 |       | 995,950    |       | $5.89  -$59.23        |       |
| Exercisable  at December 31, 2008 |       | 198,500    |       | $13.06  -$28.50       |       |

 

The options outstanding at December 31, 2008,were as follows:

 
| ** **           | ** ** | **Number of Shares**  | ** ** | **Weighted Average of** | ** ** |
|----------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| **Exercise  Prices** | ** ** | **Outstanding  at  12/31/2008** | ** ** | **Exercisable  at  12/31/2008**   | ** ** | **Remaining  Contractual  Lives** | ** ** | **Exercise  Prices for  Outstanding  Options** | ** ** | **Exercise  Prices for  Exercisable  Options** | ** ** |
|                 |       |                            |       |                              |       |   |   |   |   |   |   |
| $                    | 5.89       |                            | 417,500    |                              | —     |   | 9.9 |   | $ | 5.89 |   | — |   |
| $                    | 13.06      |                            | 14,250     |                              | 14,250     |   | 3.8 |   | $ | 13.06 |   | $ | 13.06 |   |
| $                    | 13.40      |                            | 26,000     |                              | 26,000     |   | 4.4 |   | $ | 13.40 |   | $ | 13.40 |   |
| $                    | 14.70      |                            | 68,500     |                              | 68,500     |   | 5.6 |   | $ | 14.70 |   | $ | 14.70 |   |
| $                    | 19.00      |                            | 25,750     |                              | 25,750     |   | 2.2 |   | $ | 19.00 |   | $ | 19.00 |   |
| $                    | 21.40      |                            | 2,000      |                              | 2,000      |   | 6.1 |   | $ | 21.40 |   | $ | 21.40 |   |
| $                    | 28.40      |                            | 33,000     |                              | 33,000     |   | 6.7 |   | $ | 28.40 |   | $ | 28.40 |   |
| $                    | 28.50      |                            | 29,000     |                              | 29,000     |   | 6.5 |   | $ | 28.50 |   | $ | 28.50 |   |
| $                    | 34.88      |                            | 12,500     |                              | —     |   | 7.2 |   | $ | 34.88 |   | — |   |
| $                    | 34.90      |                            | 17,500     |                              | —     |   | 7.6 |   | $ | 34.90 |   | — |   |
| $                    | 35.85      |                            | 28,500     |                              | —     |   | 9.7 |   | $ | 35.85 |   | — |   |
| $                    | 36.45      |                            | 11,000     |                              | —     |   | 7.7 |   | $ | 36.45 |   | — |   |
| $                    | 36.50      |                            | 40,050     |                              | —     |   | 7.5 |   | $ | 36.50 |   | — |   |
| $                    | 42.87      |                            | 15,600     |                              | —     |   | 7.9 |   | $ | 42.87 |   | — |   |
| $                    | 45.69      |                            | 25,000     |                              | —     |   | 8.6 |   | $ | 45.69 |   | — |   |
| $                    | 46.08      |                            | 24,700     |                              | —     |   | 9.4 |   | $ | 46.08 |   | — |   |
| $                    | 51.90      |                            | 22,100     |                              | —     |   | 9.2 |   | $ | 51.90 |   | — |   |
| $                    | 52.51      |                            | 14,150     |                              | —     |   | 8.2 |   | $ | 52.51 |   | — |   |
| $                    | 52.51      |                            | 133,900    |                              | —     |   | 8.7 |   | $ | 52.51 |   | — |   |
| $                    | 52.59      |                            | 16,350     |                              | —     |   | 8.5 |   | $ | 52.59 |   | — |   |
| $                    | 59.23      |                            | 18,600     |                              | —     |   | 8.9 |   | $ | 59.23 |   | — |   |
|                 |       | 995,950                         |       | 198,500                           |       |   |   |   |   |   |   |

 

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| ** **                   | ** ** | **For options granted  during the  year ended December 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                                                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                         |       |                                                                                       |       |   |   |   |   |
| Weighted  average fair value |       | $                                                                                          | 4.25       |   | $ | 20.72 |   | $ | 15.36 |   |
|                              |            |                                                                                            |            |  |  |  |  |  |  |  |

 

Estimates of fair values of stock options on the grantdates using the Black-Scholes option pricing model were based on the followingassumptions:

 
| ** **                           | ** ** | **For years  ended December 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                 |       |                                             |       |   |   |   |   |
| Expected  share price volatility     |       | 38.9%-47.5                                       | %          | 38.68%-39.30 | % | 40.45 | % |
| Risk-free  interest rate             |       | 1.67%-3.2                                        | %          | 3.28%-5.05 | % | 4.95 | % |
| Expected  annual dividends per share |       | $0.10                                            |       | $0.10 |   | $0.10 |   |
| Expected  life of stock options      |       | 5 years                                          |       | 5 years |   | 5 years |   |

 

Expected volatilities are based on historicalvolatility of the Company’s class A common share price and other factors.  The expected term of options granted is basedon historical data and represents the period of time that options are expectedto be outstanding.  The risk-free ratefor periods within the expected life of the option is based on the U.S.Treasury yield curve in effect at the time of grant.

 

Cashreceived from exercised options was $192,000 for the year ended December 31,2008 (2007-$4,105,000; 2006-$4,469,000).

 

*(b)          2007 performance share plan*

 

In2007, OEH adopted the 2007 performance share plan.  Under this plan, awards of up to 500,000class A common shares may be granted to employees.  The shares covered by the awards will beissued after at least one year from the grant date upon payment of a nominalamount, subject to meeting performance criteria set forth in the awards.  Awards may also be granted under the planwithout any specified performance criteria. When the shares are issued underthe awards, the grantees are also entitled to receive a cash equivalent of thedividends, if any, that would have been paid on the shares in respect ofdividend record dates occurring during the period between the award grant dateand the share issue date.

 

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At December 31, 2008, 63,365 class A commonshares were reserved under the plan for issuance pursuant to awards made tonine persons.  At the same date, 436,635class A common shares were available for future awards under the plan.

 

The awards issued in 2007 and one in 2008 covering atotal of 33,601 class A common shares do not specify any performance criteriaand will vest as long as the grantees stay in employment after three years fromthe grant date.

 

In 2008, the Company granted to nine employeesshare-based awards with performance and market conditions covering a total of29,764 class A common shares.  Half ofeach award is subject to performance criteria based on OEH’s earnings beforetax for the year ending December 31, 2010, and the other half of eachaward is subject to market criteria based on OEH’s total shareholder returncompared to the average total shareholder return of a specified group of otherhotel and leisure companies over the period of three years.

 

The total compensation cost related to non-vestedawards granted under the plan at December 31, 2008, to be recognized overthe period January 1, 2009 to December 31, 2011, was $1,078,000.  The fair value of grants awarded in the yearto December 31, 2008 was $598,000 (2007-$1,415,000; 2006-$nil).

 

The summary of the status of the non-vestedawards as of December 31, 2008 and changes during the year ended December 31,2008 is presented as follows:

 
| ** **                            | ** ** | **Shares** | ** ** | **Weighted-average  grant date fair value** | ** ** |
|---------------------------------------|------------|------------|------------|------------------------------------------------------------|------------|
| Non-vested  at January 1, 2008   |       | 30,200     |       | $                                                          | 46.86      |   |
| Granted                               |       | 33,765     |       | $                                                          | 17.72      |   |
| Forfeited                             |       | (600       | )          | $                                                          | 52.51      |   |
| Non-vested  at December 31, 2008 |       | 63,365     |       | $                                                          | 31.28      |   |

 

Estimates of fair values of the awards withperformance and market conditions issued in 2008 were made using the MonteCarlo valuation model, and estimates of fair values of the awards withoutperformances and market conditions issued in 2007 and 2008 were made usingBlack-Scholes valuation model based on the following assumptions:

 

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| ** **                           | ** ** | **For years  ended December 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                 |       |                                             |       |   |   |   |   |
| Expected  share price volatility     |       | 33.1                                             | %          | 38.68%-  38.73 | % | — |   |
| Risk-free  interest rate             |       | 1.76                                             | %          | 4.07%-4.59 | % | — |   |
| Expected  annual dividends per share |       | $0.10                                            |       | $0.10 |   | — |   |
| Expected  life of awards             |       | 3 years                                          |       | 3 years |   | — |   |

 

Thebasis of assumptions was similar to that used for the 2000 and 2004 stockoption plans.

 

*(c)           2007stock appreciation rights plan*

 

OEHadopted a stock appreciation rights plan in 2007 under which stock appreciationrights (“SARs”) may be awarded to eligible employees.  Each award is to be settled in cash measuredby the increase (if any) of the publicly-quoted price of the Company’s class Acommon shares over the three-year period following the date of the award,multiplied by the number of SARs granted in the individual award.  At December 31, 2008, no SARs had beengranted.

 

 

**16.          Commitmentsand contingencies**

 

Outstanding contracts to purchase fixed assets wereapproximately $76,606,000 at December 31, 2008 (2007-$86,970,000;2006-$21,839,000), including the New York City contract referred to in the nextparagraph.

 

On November 7, 2007, OEH entered into agreementswith the New York Public Library to purchase the land and building occupied bythe Library’s Donnell branch located directly behind and adjacent to OEH’s ‘21’Club in New York City.  Under theseagreements, OEH was to demolish the building and build a luxury hotel andresidences which would include a rebuilt Donnell library branch.  The total cash purchase price was$59,000,000, including $10,000,000 due April 30, 2011 (30 months after theoriginally scheduled closing date for the transaction).  OEH paid $3,000,000 upon signing the purchaseagreement and a further $3,000,000 on December 4, 2008, in connection withthe execution of amendments which gave OEH a series of options to defer theclosing date 30 days at a time by making further deposits, a portion of whichwould be deemed interest and the balance credited against the purchaseprice.  If each option was exercised, OEHwould pay a total of $7,500,000 for the extensions and a balance of $36,300,000would be due in July 2009.  OEH paid$1,000,000 for the first extension in January 2009, but did not elect toextend the closing or make the extension payment in February 2009.  OEH informed the Library that, due to the currentglobal financial crisis and conditions in the credit and real estate markets,OEH would not be in a position to close on the purchase of the Donnell branchas provided by the December 2008 amendments to the November 2007purchase agreement.  OEH also advised theLibrary that it desires to pursue discussions with the Library with respect todeferring or restructuring the project in a mutually agreeable manner.  By letter dated February 27, 2009, the Libraryadvised OEH that it will be in default under the purchase agreement if it doesnot close the transaction and that the Library may elect to exercise its rightsand remedies under the agreement and is otherwise reserving its rights.  There can be no assurance that suchdiscussions will occur or that, if they do, they will result in a resolution ofthe matter satisfactory to OEH.

 

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Future rental payments under operating leases inrespect of equipment rentals and leased premises are payable as follows(dollars in thousands):

 
| ** **           | ** ** | **Year ended  December 31,** | ** ** |
|----------------------|------------|----------------------------------------|------------|
|                 |       |                                   |       |
| 2009                 |       | $                                      | 6,654      |   |
| 2010                 |       | 6,642                                  |       |
| 2011                 |       | 6,448                                  |       |
| 2012                 |       | 6,320                                  |       |
| 2013                 |       | 6,305                                  |       |
| 2014  and thereafter |       | 103,561                                |       |
|                 |       | $                                      | 135,930    |   |

 

Rental expense for the year ended December 31,2008 amounted to $9,034,000 (2007-$4,267,000; 2006-$2,077,000).

 

Outstanding contracts for project related costs on thePorto Cupecoy development amounted to $31,960,000 at December 31, 2008(2007-$15,931,000)

 

**17.          Derivative financial instruments**

 

*Interest rate swaps*

 

OEH is exposed to interest rate risk on its floatingrate debt, and in the last few years has entered into interest rate swapagreements that limit the exposure to a fixed rate level.

 

In September 2006,OEH entered into five-year interest rate swap agreements for the notionalamounts of €75,000,000 ($118,000,000) and €24,700,000 ($38,900,000) that limitthe exposure from interest rate fluctuations of Euro debt to a fixed ratelevel.

 

Although the interest rate swap for €24,700,000economically hedges the interest rate risk, it has not qualified as a cash flowhedge from inception and, therefore, changes in the fair value of this swaphave been recorded within interest expense of $1,484,000 loss for the yearended December 31, 2008 (2007-$427,000 gain).

 

The interest rate swap for €75,000,000 has beendesignated and has qualified as a cash flow hedge of the floating rate debteffective December 31, 2006 until April 1, 2008, when hedgeaccounting was discontinued as the hedged interest rate has changed from whatwas originally documented.  Accordingly,the movements in the fair value of the swap from April 1, 2008 have beenrecorded within interest expense in 

 

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earnings.  The movements recorded in other comprehensiveincome were $1,624,000 loss for the year ended December 31, 2008(2007-$1,519,000 gain).  The ineffectiveportion and changes in fair value subsequent to the discontinuing of hedgeaccounting recorded within interest expense in earnings were $3,258,000 lossfor the year ended December 31, 2008 (2007-$23,000 gain).

 

In October 2007,OEH entered into five-year interest rate swap agreements for the notionalamounts of $10,000,000 and $20,000,000 that limit the exposure from interestrate fluctuations of U.S. dollar debt to a fixed rate level.  The swaps have been designated and qualifiedas cash flow hedges of the floating rate debt effective since October 18,2007.  These swaps are expected to be,and have been, highly effective.  Themovements recorded in other comprehensive income were $1,310,000 loss for theyear ended December 31, 2008 (2007-$971,000).  The ineffective portion recorded in earningswas $nil for the year ended December 31, 2008 (2007-$50,000 loss).

 

In April 2008,OEH entered into six different three to five year interest rate swap agreementsfor the total notional amount of $151,000,000, amortizing to $96,800,000, thatlimit the exposure from interest rate fluctuations of U.S. dollar debt to afixed rate level.

 

Theswaps have been designated and have qualified as cash flow hedges of thefloating rate debt effective since April 29, 2008.  These swaps are expected to be, and havebeen, highly effective.  The movementsrecorded in other comprehensive income were $6,276,000 loss for the year ended December 31,2008 (2007-$nil).

 

Of theexisting losses at December 31, 2008, approximately $4,063,000 will bereclassified into earnings in the next 12 months, assuming no further changesin fair value of the contracts.

 

Tocomply with the provision of SFAS No. 157, “Fair Value Measurements,” OEHincorporates credit valuation adjustments to reflect appropriately both its ownnon-performance risk and the respective counterparty’s non-performance risk inthe fair value measurements.  Inadjusting the fair value of its derivative contracts for the effect ofnon-performance risks, OEH has considered the impact of netting and anyapplicable credit enhancements, such as collateral postings, thresholds, mutualputs and guarantees.

 

At December 31,2008 and December 31, 2007, the fair values of the outstanding interestrate swaps were as follows (dollars in thousands):

 

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| ** **                  | ** ** | **December 31, 2008** | ** ** |
|-----------------------------|------------|---------------------------------|------------|
| **Derivative Name**    | ** ** | **Current  asset**              | ** ** | **Non-current  asset** | ** ** | **Current  liability** | ** ** | **Non-  current  liability** | ** ** |
| Euro  swap €75,000,000 |       | $                               | —     |   | $ | — |   | $ | 1,334 |   | $ | 1,672 |   |
| Euro  swap €24,700,000 |       | —                          |       | — |   | 336 |   | 557 |   |
| USD  swap $10,000,000       |       | —                          |       | — |   | 329 |   | 529 |   |
| USD  swap $20,000,000       |       | —                          |       | — |   | 663 |   | 890 |   |
| USD  swaps $151,000,000     |       | —                          |       | — |   | 3,214 |   | 3,157 |   |
|                        |       | $                               | —     |   | $ | — |   | $ | 5,876 |   | $ | 6,805 |   |
|                        |       |                            |       |   |   |   |   |   |   |
| ** **                  | ** ** | **December 31,  2007**     | ** ** |
| **Derivative  Name**        | ** ** | **Current  asset**              | ** ** | **Non-current  asset** | ** ** | **Current  liability** | ** ** | **Non-  current  liability** | ** ** |
| Euro  swap €75,000,000 |       | $                               | 627        |   | $ | 1,660 |   | $ | — |   | $ | — |   |
| Euro  swap €24,700,000 |       | 199                             |       | 347 |   | — |   | — |   |
| USD  swap $10,000,000       |       | —                          |       | — |   | — |   | 337 |   |
| USD  swap $20,000,000       |       | —                          |       | — |   | — |   | 685 |   |
| USD  swaps $151,000,000     |       | —                          |       | — |   | — |   | — |   |
|                        |       | $                               | 826        |   | $ | 2,007 |   | $ | — |   | $ | 1,022 |   |

 

The fairvalues of the swaps were recorded as accounts receivable, other non-currentassets, accrued liabilities and other long-term liabilities.

 

*Netinvestment hedges*

 

OEHdesignated its euro-denominated revolving indebtedness as a net investmenthedge of long-term investments in its euro-functional subsidiaries.  The amount of gains and losses related to theeffective portion of the net investment hedge, net of tax, recorded in othercomprehensive income was $4,648,000 gain for the year ended December 31,2008 (2007-$nil).  There has been noineffective portion of the hedge.

 

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

 

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

 
| ** **                                          | ** ** | **Year ended  December 31,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                          | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Foreign  currency translation adjustments           |       | $                                      | (40,851    | ) | $ | 38,191 |   |
| Derivative  financial instruments                   |       | (8,633                                 | )          | 730 |   |
| Pension  liability, net of tax of $3,106 and $1,950 |       | (10,726                                | )          | (8,490 | ) |
|                                                |       | $                                      | (60,210    | ) | $ | 30,431 |   |

 

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

 

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| ** **                                                              | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                              | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net(loss)/earnings  on common shares                                    |       | $                                          | (26,551    | ) | $ | 33,642 |   | $ | 39,767 |   |
| Foreign  currency translation adjustments                               |       | (79,042                                    | )          | 34,646 |   | 24,390 |   |
| Change  in fair value of derivatives                                    |       | (9,363                                     | )          | 730 |   | 68 |   |
| Change  in pension liability, net of tax of $1,057, ($1,583) and $3,630 |       | (2,236                                     | )          | 28 |   | (8,518 | ) |
| Comprehensive  (loss)/income                                            |       | $                                          | (117,192   | ) | $ | 69,046 |   | $ | 55,707 |   |

 

**19.****                               Information concerning financial reporting for segments andoperations in different geographical areas**

 

OEH’s segmentinformation has been prepared in accordance with SFAS No. 131, ****“****Disclosuresabout Segments of an Enterprise and Related Information****”****.  OEH has three reporting segments, (i) hotelsand restaurants, (ii) tourist trains and cruises, and (iii) realestate and property development, which are grouped into various geographicalregions.  Hotels at December 31,2008 are located in the United States, Caribbean, Mexico, Europe, southernAfrica, South America, Southeast Asia, Australia and South Pacific, restaurantsare located in New York and Buenos Aires, tourist trains operate in Europe,Southeast Asia and Peru, a river cruiseship operates in Burma and fivecanalboats in France, and real estate developments are located in the U.S.,Caribbean, Mexico, Europe, Southeast Asia and South Pacific.  Segment performance is evaluated based uponsegment net earnings before interest expense, foreign currency, tax (includingtax on earnings from unconsolidated companies), depreciation and amortization (“segmentEBITDA”).  Segment information ispresented in accordance with the accounting policies described in Note 1.

 

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

 

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| ** **                                                       | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                       | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue:                                                         |       |                                       |       |   |   |   |   |
| Hotels  and restaurants                                          |       |                                       |       |   |   |   |   |
| Owned  hotels – Europe                                      |       | $                                          | 229,578    |   | $ | 228,522 |   | $ | 180,365 |   |
| –  North America                                            |       | 88,118                                     |       | 85,411 |   | 85,492 |   |
| –  Rest of World                                            |       | 138,976                                    |       | 128,771 |   | 101,979 |   |
| Hotel  management/part ownership interests                       |       | 10,629                                     |       | 10,683 |   | 9,212 |   |
| Restaurants                                                      |       | 20,333                                     |       | 22,638 |   | 22,544 |   |
|                                                             |       | 487,634                                    |       | 476,025 |   | 399,592 |   |
| Tourist  trains and cruises                                      |       | 77,212                                     |       | 82,482 |   | 63,628 |   |
| Real  estate                                                     |       | (14,154                                    | )          | 19,908 |   | 16,144 |   |
|                                                             |       | $                                          | 550,692    |   | $ | 578,415 |   | $ | 479,364 |   |
| Depreciation  and amortization:                                  |       |                                       |       |   |   |   |   |
| Hotels  and restaurants                                          |       |                                       |       |   |   |   |   |
| Owned  hotels – Europe                                      |       | $                                          | 18,017     |   | $ | 16,788 |   | $ | 14,243 |   |
| –  North America                                            |       | 7,630                                      |       | 7,514 |   | 7,503 |   |
| –  Rest of World                                            |       | 9,089                                      |       | 9,422 |   | 8,233 |   |
| Restaurants                                                      |       | 921                                        |       | 998 |   | 936 |   |
|                                                             |       | 35,657                                     |       | 34,722 |   | 30,915 |   |
| Tourist  trains and cruises                                      |       | 3,348                                      |       | 4,225 |   | 3,588 |   |
|                                                             |       | $                                          | 39,005     |   | $ | 38,947 |   | $ | 34,503 |   |
|                                                             |       |                                       |       |   |   |   |   |
| Segment  EBITDA:                                                 |       |                                       |       |   |   |   |   |
| Owned  hotels – Europe                                      |       | $                                          | 62,629     |   | $ | 71,033 |   | $ | 52,708 |   |
| –  North America                                            |       | 10,182                                     |       | 13,238 |   | 19,652 |   |
| –  Rest of World                                            |       | 32,849                                     |       | 35,611 |   | 31,615 |   |
| Hotel  management/part ownership interests                       |       | 23,302                                     |       | 23,840 |   | 19,932 |   |
| Restaurants                                                      |       | 2,878                                      |       | 4,564 |   | 6,530 |   |
| Tourist  trains and cruises                                      |       | 24,279                                     |       | 25,481 |   | 18,316 |   |
| Real  estate                                                     |       | (6,433                                     | )          | 4,121 |   | 3,514 |   |
| Gain  on sale of investment                                      |       | —                                     |       | — |   | 6,619 |   |
| Gain  on disposal of fixed assets                                |       | —                                     |       | 2,312 |   | — |   |
| Impairment  of goodwill                                          |       | (9,723                                     | )          | — |   | — |   |
| Impairment  of equity investment                                 |       | (22,992                                    | )          | — |   | — |   |
| Central  overheads                                               |       | (31,117                                    | )          | (26,072 | ) | (22,209 | ) |
|                                                             |       | $                                          | 85,854     |   | $ | 154,128 |   | $ | 136,677 |   |
|                                                             |       |                                       |       |   |   |   |   |
| Segment  EBITDA/net earnings reconciliation:                     |       |                                       |       |   |   |   |   |
| Segment  EBITDA                                                  |       | $                                          | 85,854     |   | $ | 154,128 |   | $ | 136,677 |   |
| Less                                                             |       |                                       |       |   |   |   |   |
| Depreciation  and amortization                                   |       | 39,005                                     |       | 38,947 |   | 34,503 |   |
| Interest  expense, net                                           |       | 50,612                                     |       | 45,436 |   | 44,367 |   |
| Foreign  currency, net                                           |       | (4,925                                     | )          | (917 | ) | 4,610 |   |
| Provision  for income taxes                                      |       | 788                                        |       | 15,627 |   | 10,791 |   |
| Share  of provision for income taxes of unconsolidated companies |       | 6,986                                      |       | 4,772 |   | 5,741 |   |
| (Loss)/earnings  from continuing operations                      |       | $                                          | (6,612     | ) | $ | 50,263 |   | $ | 36,665 |   |
|                                                             |       |                                       |       |   |   |   |   |
| Earnings  from unconsolidated companies:                         |       |                                       |       |   |   |   |   |
| Hotels  and restaurants                                          |       |                                       |       |   |   |   |   |
| Hotel  management/part ownership interests                       |       | $                                          | 9,090      |   | $ | 11,462 |   | $ | 7,875 |   |
| Restaurants                                                      |       | —                                     |       | — |   | 277 |   |
|                                                             |       | 9,090                                      |       | 11,462 |   | 8,152 |   |
| Tourist  trains and cruises                                      |       | 7,681                                      |       | 4,963 |   | 3,818 |   |
|                                                             |       | $                                          | 16,771     |   | $ | 16,425 |   | $ | 11,970 |   |
|                                                             |       |                                       |       |   |   |   |   |
| Capital  expenditure:                                            |       |                                       |       |   |   |   |   |
| Hotels  and restaurants                                          |       |                                       |       |   |   |   |   |
| Owned  hotels – Europe                                      |       | $                                          | 31,631     |   | $ | 36,039 |   | $ | 48,308 |   |
| –  North America                                            |       | 26,892                                     |       | 38,440 |   | 36,691 |   |
| –  Rest of World                                            |       | 30,017                                     |       | 18,349 |   | 12,255 |   |
| Restaurants                                                      |       | 530                                        |       | 608 |   | 1,114 |   |
|                                                             |       | 89,070                                     |       | 93,436 |   | 98,368 |   |
| Tourist  trains and cruises                                      |       | 3,777                                      |       | 4,380 |   | 9,711 |   |
| Real  estate                                                     |       | 18,781                                     |       | 6,060 |   | 539 |   |
|                                                             |       | $                                          | 111,628    |   | $ | 103,876 |   | $ | 108,618 |   |

 

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| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Identifiable  assets:                      |       |                  |       |   |   |
| Hotels  and restaurants                    |       |                  |       |   |   |
| Owned  Hotels – Europe                |       | $                     | 669,760    |   | $ | 745,933 |   |
|  – North America                 |       | 685,421               |       | 392,762 |   |
|  – Rest of World                 |       | 415,601               |       | 461,151 |   |
| Hotel  management/part ownership interests |       | 44,730                |       | 138,600 |   |
| Restaurants                                |       | 36,210                |       | 42,396 |   |
|                                       |       | 1,851,722             |       | 1,780,842 |   |
| Tourist  trains and cruises                |       | 133,428               |       | 150,439 |   |
| Real  estate                               |       | 83,983                |       | 57,157 |   |
|                                       |       | $                     | 2,069,133  |   | $ | 1,988,437 |   |

 

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

 
| ** **     | ** ** | **Year ended December 31,** | ** ** |
|----------------|------------|--------------------------------------------|------------|
| ** **     | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue:       |       |                                       |       |   |   |   |   |
| Europe         |       | $                                          | 300,630    |   | $ | 303,261 |   | $ | 237,336 |   |
| North  America |       | 99,363                                     |       | 133,675 |   | 123,725 |   |
| Rest  of World |       | 150,699                                    |       | 141,479 |   | 118,303 |   |
|           |       | $                                          | 550,692    |   | $ | 578,415 |   | $ | 479,364 |   |

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Long-lived  assets at book value: |       |                  |       |   |   |
| Europe                            |       | $                     | 686,465    |   | $ | 759,103 |   |
| North  America                    |       | 625,202               |       | 411,489 |   |
| Rest  of World                    |       | 394,201               |       | 406,060 |   |
|                              |       | $                     | 1,705,868  |   | $ | 1,576,652 |   |

 

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

 
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Property,  plant and equipment |       | $                     | 1,464,095  |   | $ | 1,273,956 |   |
| Investments                    |       | 67,464                |       | 147,539 |   |
| Goodwill                       |       | 154,054               |       | 133,497 |   |
| Other  intangible assets       |       | 20,255                |       | 21,660 |   |
|                           |       | $                     | 1,705,868  |   | $ | 1,576,652 |   |

 

**20.****                               Related party transactions**

 

OEH guarantees a $3,000,000bank loan to Eastern and Oriental Express Ltd., in which OEH has a minorityshareholder interest.  This guarantee wasin place before December 31, 2004. The amount due to OEH from Eastern and Oriental Express Ltd. at December 31,2008 was $1,290,000 (2007-$1,330,000).

 

OEH manages under a long-term contract the Charleston Place Hotel(accounted for under the equity method until December 31, 2008) and madeloans to the hotel-owning company.  Asdiscussed in Note 3, with effect from December 31, 2008, the hotel-owningcompany has been consolidated into the financial statements of OEH.  For the year ended December 31, 2008,OEH earned $4,867,000 (2007-$5,200,000; 2006-$4,939,000) 

 

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in management fees which are recorded in revenue, and $12,068,000(2007-$11,807,000; 2006-$10,700,000) in interest income on partnership andother loans, which is recorded in earnings from unconsolidated companies.

 

OEH manages under long-term contracts the Hotel Monasterio, MachuPicchu Sanctuary Lodge and Las Casitas del Colca owned by its 50/50 jointventure with local Peruvian interests, as well as the 50/50 owned PeruRailoperation, and provides loans, guarantees and other credit accommodation tothese joint ventures.  In the year ended December 31,2008, OEH earned management and guarantee fees of $7,685,000 (2007-$6,477,000;2006-$5,314,000) and loan interest of $44,000 (2007-$63,000; 2006-$87,000)which are recorded in revenue.  Theamount due to OEH from its joint venture Peruvian operations at December 31,2008 was $6,502,000 (2007-$6,277,000).

 

OEH manages under a long-term contract the Hotel Ritz in Madrid, Spain,in which OEH holds a 50% interest accounted for under the equity method.  For the year ended December 31, 2008,OEH earned $1,321,000 (2007-$1,867,000; 2006-$1,057,000) in management fees,which are included in revenue.  Theamount due to OEH from the Hotel Ritz at December 31, 2008 was$1,883,000(2007-$2,624,000).  See Note 4(b) regardingimpairment of this investment.

 

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

 

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**Summary of quarterlyearnings (unaudited)**

 
| ** **                                                                      | ** ** | **Quarter ended** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                      | ** ** | **December  31**       | ** ** | **September  30** | ** ** | **June  30** | ** ** | **March  31** | ** ** |
| **2008**                                                                        |       |                   |       |   |   |   |   |   |   |
| ** **                                                                      |       |                   |       |   |   |   |   |   |   |
| Revenue                                                                         |       | $                      | 76,227     |   | $ | 178,429 |   | $ | 181,356 |   | $ | 114,680 |   |
| Earnings  from operations                                                       |       | $                      | (46,365    | ) | $ | 34,123 |   | $ | 34,449 |   | $ | 885 |   |
| Net  finance costs                                                              |       | (11,849                | )          | (14,110 | ) | (8,844 | ) | (10,884 | ) |
| Earnings/(loss)  before income taxes and earnings from unconsolidated companies |       | (58,214                | )          | 20,013 |   | 25,605 |   | (9,999 | ) |
| (Provision  for)/ benefit from income taxes                                     |       | 12,063                 |       | (6,686 | ) | (9,722 | ) | 3,557 |   |
| Earnings  from unconsolidated companies net of tax                              |       | 2,642                  |       | 4,224 |   | 5,838 |   | 4,067 |   |
| Net  earnings/(loss) from continuing operations                                 |       | (43,509                | )          | 17,551 |   | 21,721 |   | (2,375 | ) |
| Net  (loss)/earnings from discontinued operations                               |       | (4,547                 | )          | (11,172 | ) | (2,257 | ) | (1,963 | ) |
| Net  (loss)/earnings                                                            |       | $                      | (48,056    | ) | $ | 6,379 |   | $ | 19,464 |   | $ | (4,338 | ) |
|                                                                            |       |                   |       |   |   |   |   |   |   |
| Net  earnings/(loss) per share:                                                 |       |                   |       |   |   |   |   |   |   |
| Basic                                                                           |       | $                      | (1.04      | ) | $ | 0.15 |   | $ | 0.46 |   | $ | (0.10 | ) |
| Diluted                                                                         |       | $                      | (1.04      | ) | $ | 0.15 |   | $ | 0.46 |   | $ | (0.10 | ) |
| Dividends  per share                                                            |       | $                      | 0.025      |   | $ | 0.025 |   | $ | 0.025 |   | $ | 0.025 |   |

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

 

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**ITEM9.****                                  Changes in and Disagreements with Accountants on****Accounting and Financial Disclosure**

 

None.

 

**ITEM9A.****                         Controls and Procedures**

 

*Disclosure Controls and Procedures*

 

The Company’s chief executive officer and chief financial officer haveevaluated the effectiveness of OEH’s disclosure controls and procedures (asdefined in SEC Rule (13a-15(e)) as of December 31, 2008 and,based on that evaluation, believe those disclosure controls and procedures areeffective as of that date.

 

*Management’s Annual**Report on**Internal Control over Financial Reporting*

 

OEH management is responsible for establishingand maintaining adequate internal control over financial reporting (as definedin SEC Rule 13a-15(f)).  OEH’sinternal control over financial reporting is designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with U.S. generallyaccepted accounting principles. Management assessed the effectiveness of OEH’s internal control overfinancial reporting as of December 31, 2008.  In making this assessment, management usedthe criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) in Internal Control—Integrated Framework.  Based on this assessment and those criteria,management believes that OEH’s internal control over financial reporting waseffective as of December 31, 2008.

 

Deloitte LLP,OEH’s independent registered public accounting firm, issued the report below onthe effectiveness of OEH’s internal control over financial reporting.

 

*Reportof Independent Registered Public Accounting Firm*

 

Board ofDirectors and Shareholders

Orient-ExpressHotels Ltd.

Hamilton,Bermuda

 

We haveaudited the internal control over financial reporting of Orient-Express HotelsLtd. and subsidiaries (the “Company”) as of December 31, 2008, based oncriteria established in Internal Control—Integrated Framework issued by

 

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the Committeeof Sponsoring Organizations of the Treadway Commission.  The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financialreporting.  Our responsibility is to expressan opinion on the Company’s internal control over financial reporting based onour audit.

 

We conductedour audit in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects.  Ouraudit included obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based onthe assessed risk, and performing such other procedures as we considerednecessary in the circumstances.  We believethat our audit provides a reasonable basis for our opinion.

 

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 the company’sboard of directors, management, and other personnel to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; 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

 

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any evaluationof the effectiveness 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 ouropinion, the Company maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2008, based on thecriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission.

 

We have alsoaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated financial statements andconsolidated financial statement schedule listed in Item 15 as of and for theyear ended December 31, 2008 of the Company and our report dated February27, 2009 expressed an unqualified opinion on those consolidated financialstatements and financial statement schedule.

 

/s/ DeloitteLLP

 

London,England

February 27,2009

 

*Changes in Internal Control over FinancialReporting*

 

There have been no changes in OEH’s internal control over financialreporting during the fourth quarter of 2008 that have materially affected, orare reasonably likely to materially affect, OEH’s internal control overfinancial reporting.

 

It should be noted that any system of controls, however well designedand operated, can provide only reasonable, and not absolute, assurance that theobjectives of the system are met, such as prevention and detection ofmisstatements.  In addition, the designof any control system is based in part upon certain assumptions about thelikelihood of future events.  Controlsmay become inadequate because of changes in conditions, or the degree ofcompliance with the policies or procedures may deteriorate, for example.  Because of these and other inherentlimitations of control systems, there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.

 

**ITEM9B.****                         Other Information**

 

None.

 

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**PART III**

 

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

 

**Directors**

 

The directors of the Company are as follows:

 
| **Name, Age**     | ** ** | **Principal Occupation  and Other Major  Affiliations**                                           | ** ** | **Year  First  Became   Director** | ** ** |
|------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | ** **                                                                                                       | ** ** | ** **                              | ** ** |
| John  D. Campbell, 66  |       | Senior Counsel (retired) of Appleby (attorneys)                                                                  |       | 1994                                    |       |
| James  B. Hurlock, 75  |       | Non-executive  Chairman of the Board of the Company, and Partner (retired) of  White & Case (attorneys) |       | 2000                                    |       |
| Prudence  M. Leith, 68 |       | Non-executive  Director of Omega International Group PLC, and Consultant to Compass Group  PLC                   |       | 2006                                    |       |
| J.  Robert Lovejoy, 64 |       | Managing  Director of Groton Partners LLC (a private merchant banking firm)                                      |       | 2000                                    |       |
| Georg  R. Rafael, 71   |       | Managing Director of Rafael Group S.A.M. (hoteliers)                                                             |       | 2002                                    |       |
| James  B. Sherwood, 75 |       | Retired Chairman of the Board of the Company                                                                     |       | 1994                                    |       |
| Paul  M. White, 44     |       | President and Chief Executive Officer of the Company                                                             |       | 2008                                    |       |

 

The principal occupation of each director during thelast five years is that shown in the table supplemented by the followinginformation.

 

Mr. Campbell was a member of the law firm Appleby(formerly named Appleby Hunter Bailhache) until March 1999 and retired asSenior Counsel in July 2003.  Mr. Campbellis the non-executive Chairman of the Board of The Bank of Bermuda Ltd., asubsidiary of HSBC Holdings plc, and a non-executive director and Chairman ofthe Nominations and Governance

 

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Committeeof Argus Group Holdings Ltd., a public company listed on the Bermuda StockExchange engaged principally in the insurance business.  Mr. Campbell is also a non-executivedirector of Sea Containers Ltd. (“SCL”), a leasing and transport companyformerly listed on the New York Stock Exchange and formerly subject to Chapter11 reorganization proceedings in the United States which ended in February 2009.

 

Mr. Hurlock acted as Chairman of the ManagementCommittee of White & Case LLP overseeing worldwide operations from1980 until his retirement in 2000.  Healso served as Interim CEO of Stolt-Nielsen Transportation Group Ltd., achemical transport services company, from July 2003 until June 2004.  Mr. Hurlock was appointed non-executiveChairman of the Board in June 2007.

 

Ms. Leith was the founder, owner and ManagingDirector of Leith’s Group which, from 1960 until its sale in 1995 to Accor,grew to encompass restaurants, a prestigious London-based chef school, contractcatering, and event and party catering. She is a food writer, novelist, and television and radio foodexpert.  Ms. Leith has served on theboards of British Railways, Whitbread PLC, Halifax PLC, Safeway PLC, WoolworthsGroup PLC and Nations Healthcare Ltd., and is currently on the board of OmegaInternational, a supplier of kitchen furnishings and equipment listed on theAIM market of the London Stock Exchange.

 

Mr. Lovejoy joined Groton Partners in January 2006.  In 2000-2005, he was Senior Managing Directorof Ripplewood Holdings LLC, a private equity investment firm.  Prior to that position he was a ManagingDirector of Lazard Freres & Co. LLC, an investment banking firm, and aGeneral Partner of Lazard’s predecessor partnership for over15 years.  Mr. Lovejoy is alsoa non-executive director of One Liberty Properties Inc., a commercial andindustrial real estate investment trust listed on the New York Stock Exchange.

 

Mr. Rafael was until early 2002 the Vice Chairmanof the Executive Committee of Mandarin Oriental Hotels, having sold to them in2000 Rafael Hotels Ltd., a deluxe hotel owning and operating company that Mr. Rafaelestablished in 1986.  Before RafaelHotels, he was joint Managing Director of Regent International Hotels, a hotelgroup Mr. Rafael helped start in 1972.

 

Mr. Sherwood retired from his executive dutieswith the Company in December 2006 (having ceased to be a co-principalexecutive officer in October 2006) and stepped down as Chairman of theBoard in June 2007.  He resigned asa director and non-executive Chairman of SCL in March 2006 having founded

 

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itspredecessor company in 1965.  He alsoserved as President of SCL during that time until January 2006.  As noted above regarding Mr. Campbell,SCL was formerly subject to Chapter 11 reorganization proceedings in the UnitedStates which ended in February 2009.

 

Mr. White was appointed President and ChiefExecutive Officer of the Company in August 2007, having served as VicePresident—Finance and Chief Financial Officer from September 2005.  Previously, he was Vice President—Hotels,Africa, Australia and South America from 1999 to 2005, and was Director ofHotel Operations for the same geographical region in 1998 and 1999.  He joined the Company’s predecessor,Orient-Express Hotels Inc., in 1991 from Forte Hotels, initially as FinancialController.  Having qualified as anaccountant, he is currently a member of the Chartered Institute of ManagementAccountants, and was the Company’s acting chief financial and accountingofficer until March 2008 when Martin O’Grady assumed those duties for theCompany.

 

**ExecutiveOfficers**

 

The executive officers of the Company are as follows:

 
| **Name, Age**         | ** ** | **Position**                                                              | ** ** |
|----------------------------|------------|---------------------------------------------------------------------------|------------|
|                       |       |                                                                      |       |
| Paul  M. White, 44         |       | President and Chief Executive Officer since  August 2007             |       |
| Martin  O’Grady, 45   |       | Vice President—Finance and Chief Financial Officer  since March 2008 |       |
| Filip  J.M. Boyen, 50      |       | Vice President—Operations since September 2007                  |       |
| Roger  V. Collins, 62      |       | Vice President—Design and Technical Services since  2001             |       |
| Edwin  S. Hetherington, 59 |       | Vice President, General Counsel and Secretary since  December 2006        |       |
| Pippa  Isbell, 55          |       | Vice President—Corporate Communications since  September 2007        |       |
| Maurizio  Saccani, 58      |       | Vice President, Italy since September 2007                           |       |
| Nicholas  R. Varian, 54    |       | Vice President and Chief Development Officer since  September 2007   |       |
| David  C. Williams, 54     |       | Vice President—Sales and Marketing since 2004                        |       |

 

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The principal occupation of each person during thelast five years is shown in the table supplemented by the followinginformation.

 

Mr. White’s previous experience is reported aboveregarding the Company’s directors.

 

Prior to becoming an officer of the Company, Mr. O’Gradyserved as Chief Financial Officer of Orion Capital Managers LP, a Europeanprivate equity real estate investment firm including hotels.  From 1999 until 2005, he worked for SecurityCapital European Realty, where he served as Chief Financial Officer of AccessSelf Storage, a retail self-storage operator in the United Kingdom, France andAustralia.  From 1992 until 1998, Mr. O’Gradyheld a number of senior finance and accounting positions with Jardine MathesonGroup, an Asian-based conglomerate, including Group Financial Controller ofMandarin Oriental Hotels from 1992 to 1995. Mr. O’Grady began his career with PricewaterhouseCoopers and is anAssociate Chartered Accountant in England and Wales.

 

Mr. Boyen held positions with Marco Polo Hotels,Sun International Hotels and Ramada Renaissance before he joined OEH in1997.  Initially, he served as GeneralManager of Bora Bora Lagoon Resort until 1999, when he became Managing Directorof OEH’s hotel and tourist train operations in Peru.  He was appointed Vice President—Hotels,Africa, Australia and South America in September 2005.

 

In November 2008, Mr. Boyen settled aninvestigation into alleged insider dealing in shares of a mining companypublicly traded in the United Kingdom brought by the Financial ServicesAuthority, an independent non-governmental body that regulates the financialservices industry in the United Kingdom (“FSA”).   In settling the matter, the FSA imposed acivil penalty of $152,000 on Mr. Boyen for engaging in market abuse fortrading on behalf of himself and a third party on the basis of insideinformation in contravention of the U.K. Financial Services and Markets Act2000.  Mr. Boyen fully cooperatedwith the FSA’s investigation.  None ofthe activities or information involved in the investigation related to OEH orthe Company’s securities.

 

Mr. Collins, an engineer, has worked in the hotelindustry since 1979 with Grand Metropolitan Hotels, Courage Inns and Taverns,and Trusthouse Forte Hotels, having joined Orient-Express Hotels Inc. in1991.

 

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Mr. Hetherington started withOrient-Express Hotels Inc. as Counsel and Secretary 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 was formerly subject to Chapter 11reorganization proceedings in the United States which ended in February 2009.

 

Ms. Isbell joined the Company in 1998 afterselling the public relations consultancy she founded in 1987.  Her work in the hospitality industry includedrepresentation of Intercontinental Hotels, Forte, Hilton International, JarvisHotels, and Millennium and Copthorne. From 2000 to September 2007, she served as Vice President—PublicRelations of the Company.

 

Mr. Saccani joined Orient-Express Hotels Inc. in1978 as Food and Beverage Manager of the Hotel Cipriani.  After serving as Manager in Italy of theVenice Simplon-Orient-Express, he became Managing Director of the Villa SanMichele in 1985 and, by 2007, had assumed responsibility for all of the Company’shotels in Italy.

 

Mr. Varian transferred to Orient-ExpressHotels Inc. in 1985 from P&O Steam Navigation Company, and has workedextensively on various cruise and tourist train projects, becoming VicePresident—Trains and Cruises in 1989 and taking responsibility for the Asianhotels in 2006.

 

Mr. Williams joined Orient-Express Hotels Inc. in1981 as Sales and Reservations Manager. He became responsible for strategic marketing developments and businessinitiatives in the Americas, Europe and Asia. He previously worked for Carlson Marketing Group.

 

Dean P. Andrews resigned as a Vice President of theCompany in January 2008.

 

**Corporate Governance**

 

The Board of Directors of the Company has establishedcorporate governance measures substantially in compliance with requirements ofthe New York Stock Exchange (“NYSE”). These include a set of Corporate Governance Guidelines, Charters foreach of the standing Audit Committee, Compensation Committee and Nominating andGovernance Committee of the full Board, and a Code of Business Conduct forDirectors, Officers and Employees.  TheBoard of Directors has also adopted a Code of Business Practices for theCompany’s Principal Executive, Financial and Accounting Officers, which is filedas an exhibit to this report.  Thesedocuments are published on the

 

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

 

The present members of the Company’s Audit Committeeare Messrs. Campbell, Hurlock and Lovejoy. The Board has designated Mr. Lovejoy, an independent director, asan 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 Item13—Certain Relationships and Related Transactions, and Director Independencebelow.  In addition, the Board hasdesignated Messrs. Hurlock, Lovejoy and Rafael as a committee to considerstrategic overtures to the Company.

 

The non-executive directors of the Company meetregularly without management present.  Mr. Hurlockpresides at these executive sessions of the Board.

 

Interested persons may communicate directly with anyof the Company’s directors by writing to him or her at the Company’s registeredoffice address (Orient-Express Hotels Ltd., 22 Victoria Street, Hamilton HM 12,Bermuda).

 

**ITEM 11.****                           Executive Compensation**

 

Because the Company is a foreign private issuer, it isresponding to this Item 11 as permitted by Item 402(a)(1) of SECRegulation S-K.

 

The following table shows the salary and bonus of Mr. Whitepaid in cash during 2008, and of all executive officers as a group (excluding Mr. Andrewswho resigned in January 2008) for services to OEH in all capacities:

 

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| **Name of Individual or Group** | ** ** | **Principal   Capacities in  Which Served** | ** ** | **Cash   Compensation** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------|------------|
|                                                |       |                                                       |       |                         |       |
| Paul  M. White                                      |       | President,  Chief Executive Officer and Director           |       | $                            | 1,258,000  |   |
| All  executive officers as a group (nine persons)   |       |                                                       |       | $                            | 5,444,300  |   |

 

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

 

**Pensions**

 

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

 

In May 2006, the subsidiary froze its U.K.defined benefit pension plan, thus stopping future benefit accrual, so that thebenefit payable to participants at their normal retirement date will becalculated using pensionable service and final pensionable salary at thatdate.  From May 2006 and for lateryears, the OEH subsidiary established a defined contribution pension plan forBritish employees, including U.K.-based officers, under which the subsidiarycontributes to individual pension accounts established by employees.  The subsidiary currently contributes for theexecutive officer participants in the new plan at the rate of up to ten percentof annual salary.

 

Under the U.K. defined benefit plan, currentlyestimated accrued annual benefits payable to participating executive officersof the Company amounted to approximately $313,000in the aggregate at December 31, 2008, and under the U.K. definedcontribution plan, the OEH subsidiary contributed on behalf of participatingexecutive officers a total of $226,000during 2008.  See Note 11 to theFinancial Statements regarding pension plans.

 

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Certain U.S. subsidiaries of OEH have adopted a 401(k)pension plan that permits employees to contribute amounts out of theircompensation into individual tax-deferred pension accounts.  The maximum contribution an employee couldmake was $15,500 in 2008.  Two executiveofficers of the Company based in the U.S. participated in this plan in 2008,and OEH paid $2,000 into each of their accounts as partial matching paymentsunder the plan in addition to their own contributions.

 

**2000 and 2004 Stock Option Plans**

 

Options to purchase Class A commonshares of the Company have been granted to directors, executive officers andselected employees under the Company’s 2000 and 2004 Stock Option Plans, whichare administered by the Compensation Committee of the Board of Directors andhave substantially the same terms.  Theplans provide for the award of options to purchase up to 1,750,000 Class Acommon shares 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.  In certain circumstances constituting achange in control of the Company, outstanding options become immediatelyexercisable, and optionees may thereafter surrender their options instead ofexercising them and receive directly from the Company in cash the differencebetween the option exercise price and the value of the underlying sharesdetermined according to the plans.

 

During 2008, options to purchase an aggregate of278,200 Class A shares were granted to directors and executive officers ofthe Company at prices of $5.89 to $51.90 per share, including options on 62,600shares to Mr. White and 5,250 shares to each of the non-executive directors.  Options were exercised by directors orofficers during 2008 on an aggregate of 7,500 Class A shares at anaggregate gain of $262,700.  At December 31,2008, options to purchase an aggregate of 559,150 Class A shares (of which157,650 were exercisable) were held by directors and executive officers at pershare exercise prices ranging from $5.89 to $59.23 and expiring between 2010and 2018.  See Note 15 to theFinancial Statements.

 

**2007Performance Share Plan**

 

The Company’s 2007 Performance Share Plan isadministered by the Compensation Committee of the Board of Directors.  Under this plan, directors, executiveofficers and selected

 

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employeesmay be awarded an amount of Class A shares in the Company to be issued inwhole or in part to the grantee of the award after at least one year, dependingon whether specified performance criteria in the individual award have been metsuch as earnings targets, total shareholder return goals or other criteriaestablished by the Compensation Committee. Shares may also be issued under the awards before the vesting period haselapsed if a change in control of the Company occurs or certain other earlyvesting events occur.  The plan alsopermits the Compensation Committee to make awards without any performancecriteria.  A total of 500,000 Class Ashares may be issued under the plan.

 

During 2008, awards were made under the plan withperformance criteria based on total shareholder return and earnings before taxon 9,726 Class A shares to Mr. White and 20,038 to the otherexecutive officers.  In addition, anaward on 4,000 Class A shares without performance criteria was made to oneofficer.  All of these awards will vestin 2011.  No shares were issued under theplan during the year.  See Note 15 to theFinancial Statements.

 

In early 2009, awards without performance criteriawere made under the plan to directors and executive officers covering 83,321 Class Ashares vesting in 2010 and 68,070 Class A shares vesting in 2012.

 

**Non-ExecutiveDirector Fees**

 

In 2008, each of Ms. Leith and Messrs. Campbell,Lovejoy, Rafael and Sherwood received a Board of Directors retainer fee at theannual rate of $28,750, and a fee of $2,750 for each meeting of the Board or acommittee thereof which he or she attended. Messrs. Campbell and Lovejoy as members of the Audit Committee werepaid a retainer fee of $5,000 per year, and Ms. Leith and Messrs. Campbell,Lovejoy and Rafael as members of the Compensation Committee and Nominating andGovernance Committee were paid a retainer fee of $2,500 per year for service oneach of those two Committees.  Mr. Lovejoywas also paid an additional retainer fee of $20,000 per year as chairman of theAudit and Compensation Committees.  AsChairman of the Board, chairman of the Nominating and Governance Committee anda member of the Audit Committee, Mr. Hurlock was paid $500,000 in lieu ofannual retainer or per meeting attendance fees.

 

In March 2007, the Company and Mr. Sherwoodentered into an agreement regarding his retirement from executive duties withOEH in December 2006, and his continuing thereafter as a non-executivedirector of the Company including Chairman of the Board until June 2007.  The agreement requires the Company

 

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toprovide office accommodation and secretarial services to Mr. Sherwood, andprivate medical cover for him and his wife under OEH’s employee healthinsurance.  The agreement also requiresthe Company to reimburse Mr. Sherwood up to $92,500 per year for hispersonal business expenses while he remains a non-executive director during thethree-year period ending June 2010.

 

In September 2007, the Company and Mr. Sherwoodentered into another agreement under which he provided consultancy services toOEH for property acquisitions and guest relations under the supervision of theCompany’s President and Chief Executive Officer, and was compensated for thoseservices at $185,000 per year plus reimbursement of his reasonable businessexpenses incurred in providing the services. This agreement was terminated in June 2008.

 

Aggregate retainer, attendance and other director feesto Ms. Leith and Messrs. Campbell, Hurlock, Lovejoy, Rafael andSherwood described above amounted to $1,129,000 in 2008.

 

See Item 13—Certain Relationships and RelatedTransactions, and Director Independence regarding other agreements between OEHand Mr. Sherwood.

 

Mr. Hurlock may stay at OEH’s properties withoutcharge, except for third-party provided services used during his visits.  The other non-executive directors areentitled to 75% discounts off the usual room rates and food and beverage pricesfor their personal visits at OEH’s properties.

 

**CompensationCommittee Interlocks and Insider Participation**

 

The Compensation Committee of the Company’s Board ofDirectors is composed of five non-executive directors.  No Compensation Committee member has servedas an officer or employee of the Company in an executive capacity.  No executive officer of the Company serves onthe board of directors or compensation committee of another company that has anexecutive officer serving on the Company’s Board of Directors or itsCompensation Committee.

 

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

 

**FivePercent Shareholders**

 

The following table contains informationconcerning the beneficial ownership of the Company’s Class A common sharesand Class B common shares by the only persons known to the Company to ownbeneficially more than 5% of the outstanding shares of either class of commonshares.

 

Orient-ExpressHoldings 1 Ltd. (“Holdings”) listed in the table below is a subsidiary of theCompany, which owns only Class B shares. Under Bermuda law, the shares owned by Holdings are outstanding and maybe voted.  In a strategic transactioninvolving OEH such as a takeover of the Company, this structure may assist inmaximizing the value that the Company and its shareholders receive in thetransaction.  See Item 3—LegalProceedings regarding a petition filed in the Bermuda Supreme Court in January 2009by certain Class A shareholders of the Company challenging thisstructure.  Each Class B share isconvertible at any time into one Class A share and, therefore, the shareslisted as owned by Holdings represent Class B shares and the Class Ashares into which those shares are convertible.

 

Voting and dispositive power with respect to the Class Bshares owned by Holdings is exercised by its Board of Directors, who are Ms. Leith,Messrs. Campbell and Sherwood, and two other persons who are not directorsor officers of the Company.  Each ofthese persons may be deemed to share beneficial ownership of the Class Bshares owned by Holdings for which he or she serves as a director, as well asthe Class A shares into which those Class B shares 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                                                         |       | 26.1                                                  | %          | 100.0                                             | %          |
|                                                                                                                   |       |                                                               |       |                                                  |       |                                              |       |
| The Indian Hotels Co. Ltd. and Samsara Properties  Ltd. (2)   Mandlik House, Mandlik Road   Mumbai 400 001, India |       | 4,880,764                                                          | (9)        | 9.6                                                   | %          | —                                            |       |

 

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| **Name and Address**                                                                                                           | ** ** | **No. of   Class A  and Class B  Shares** | ** ** | **Percent  of   Class A   Shares (1)** | ** ** | **Percent  of   Class B   Shares** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                               | ** ** | ** **                                                         | ** ** | ** **                                            | ** ** | ** **                                        | ** ** |
| T. Rowe Price Associates Inc. (3)  100 E. Pratt Street   Baltimore, Maryland 21202                                                       |       | 4,516,600                                                          | (9)        | 8.9                                                   | %          | —                                            |       |
|                                                                                                                                     |       |                                                               |       |                                                  |       |                                              |       |
| REYL & Cie. SA and Carey Trustees Ltd., as  Trustee (4)  62 Rue du Rhone   CH-1204 Geneva, Switzerland                          |       | 4,273,077                                                          | (9)        | 8.4                                                   | %          | —                                            |       |
|                                                                                                                                     |       |                                                               |       |                                                  |       |                                              |       |
| Jumeirah Assets LLC et al. (5)  c/o Dubai Holding  Emirates Towers/Offices, Level 49   P.O. Box 73311   Dubai, United Arab Emirates |       | 3,911,611                                                          | (9)        | 7.7                                                   | %          | —                                            |       |
|                                                                                                                                     |       |                                                               |       |                                                  |       |                                              |       |
| D.E. Shaw & Co. LP et al. (6)    120 West 45th Street   Tower 45, 39th Floor   New York, New York 10036          |       | 3,218,678                                                          | (9)        | 6.3                                                   | %          | —                                            |       |
|                                                                                                                                     |       |                                                               |       |                                                  |       |                                              |       |
| CR Intrinsic Investors LLC et al. (7)   72 Cummings Point Road   Stamford, Connecticut 06902                                        |       | 2,835,000                                                          | (9)        | 5.6                                                   | %          | —                                            |       |
|                                                                                                                                     |       |                                                               |       |                                                  |       |                                              |       |
| Federated Investors Inc. et al (8)   Federated Investors Tower   Pittsburgh, Pennsylvania 15222                                          |       | 2,643,431                                                          | (9)        | 5.2                                                   | %          | —                                            |       |

 

----

(1)           The percentage of Class A shares shown is based on 50,959,500 Class Ashares outstanding on February 20, 2009, plus the Class A sharesissuable upon conversion of the Class B shares beneficially owned by thatperson, if any.

 

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

 

(3)           The information with respect to T. Rowe Price Associates Inc. (“Price”)relates only to Class A shares and is derived from its Schedule 13G reportas of February 13, 2009 and filed with the SEC on that date.  The report 

 

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states that (a) Price is a registered investmentadviser and (b) it has sole voting power with respect to 1,254,200 Class Ashares and sole dispositive power with respect to 4,516,600 Class Ashares.

 

(4)           The information with respect to REYL & Cie. SA (“REYL”) andCarey Trustees Ltd., as Trustee of the Wings Settlement (“Carey”), relates onlyto Class A shares and is derived from their joint Schedule 13D report asof November 24, 2008 and filed with the SEC on that date.  The report states that (a) REYL is aninvestment manager of the assets of a life insurance policy of which Carey isthe subscriber and sole beneficiary, (b) Carey has the power to requestthe appointment of the investment manager of the policy’s assets and (c) REYLand Carey have shared voting and dispositive power with respect to 4,273,077 Class Ashares.

 

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

 

(6)           The information with respect to D. E. Shaw &Co. LP (“D. E. Shaw”) relates only to Class A shares and is derived fromthe joint Schedule 13D report as amended as of January 14, 2009 and filedwith the SEC on that date by D. E. Shaw, D. E. Shaw Valence Portfolios LLC (“Valence”),D. E. Shaw Oculus Portfolios LLC (“Oculus”), D. E. Shaw & Co. LLC (“ShawLLC”) and David E. Shaw.  The reportstates that (a) Mr. Shaw is President and sole shareholder of D. E.Shaw & Co. Inc. which is the general partner of D. E. Shaw which inturn is the managing member and investment adviser of Valence and theinvestment adviser of Oculus and D. E. Shaw Synoptic Portfolios 2 LLC (“Synoptic”),(b) Mr. Shaw is President and sole shareholder of D. E. Shaw &Co. II Inc. which is the managing member of Shaw LLC which in turn is themanaging member of Oculus and Synoptic, (c) D. E. Shaw and Mr. Shawhave shared voting and dispositive power with respect to 3,218,678 Class Ashares, (d) Valence has shared voting and dispositive power with respectto 2,273,300 Class A shares, (e) Oculus has shared voting anddispositive power with respect to 945,344 Class A shares, and (f) ShawLLC has shared voting and dispositive power with respect to 945,378 Class Ashares which are comprised of the Oculus shares and 34 Class A sharesbeneficially owned by Synoptic.

 

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(7)           The information with respect to CR Intrinsic Investors LLC (“CRIntrinsic Investors”) relates only to Class A common shares and is derivedfrom the joint Schedule 13D report as amended as of January 14, 2009 andfiled with the SEC on that date by CR Intrinsic Investors, CR IntrinsicInvestments LLC (“CR Intrinsic Investments”) and Steven A. Cohen.  The report states that (a) Mr. Cohencontrols CR Intrinsic Investments, (b) CR Intrinsic Investors has aninvestment management agreement with CR Intrinsic Investments and holds allinvestment and voting power with respect to securities held by CR IntrinsicInvestments and (c) CR Intrinsic Investors, CR Intrinsic Investments and Mr. Cohenhave shared voting and dispositive power with respect to 2,835,000 Class Ashares.

 

(8)           The information with respect to Federated Investors Inc. (“Federated”)relates only to Class A shares and is derived from the joint Schedule 13Greport dated February 10, 2009 and filed with the SEC on February 13,2009 by Federated, Voting Shares Irrevocable Trust (the “Trust”) and John F.Donahue, Rhodora J. Donahue and J. Christopher Donahue (collectively, the “Donahues”).  The report states that (a) Federated isa parent holding company of Federated Equity Management Co. of Pennsylvania andFederated Global Investment Management Corp. (together, the “Advisers”) whichact as investment advisers to investment companies and separate accounts thatown Class A shares, (b) the Advisers are wholly-owned subsidiaries ofFII Holdings Inc. which is a wholly-owned subsidiary of Federated, (c) allof the voting shares of Federated are owned by the Trust for which the Donahuesact as trustees, (d) Federated and the Trust have sole voting and dispositivepower with respect to 2,643,431 Class A shares and (e) the Donahuesindividually have shared voting and dispositive power with respect to 2,643,431Class A shares.

 

(9)           Class A shares only.

 

**Directors and Executive Officers**

 

The following table contains information concerningthe beneficial ownership of Class A common shares of the Company by eachcurrent director 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

 

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sharesvoting and dispositive power with respect to his shares, Mr. Lovejoy whoshares voting and dispositive power with respect to 1,200 shares, and Mr. Sherwoodwho shares voting and dispositive power with respect to 10,300 shares.  Each individual’s holding is less than 1% ofthe Class A shares outstanding, other than Mr. Sherwood with1.1%.  The group total includes 157,650 Class Ashares covered by exercisable stock options held by directors and executiveofficers under the Company’s 2000 and 2004 Stock Option Plans which, togetherwith the other shares beneficially owned by directors and executive officers,represents 1.5% of Class A shares outstanding.

 

As noted above, certain of the directors of theCompany may be deemed to share beneficial ownership of the Class B sharesheld by Holdings because they are also directors of that subsidiary, but thoseshares are not included in the following table.

 
| **Name**                                                                                                         | ** ** | **No. of Class   A Shares** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
|                                                                                                             |       |                                            |       |
| Filip  J.M. Boyen                                                                                                |       | 23,700                                          |       |
| John  D. Campbell                                                                                                |       | 11,000                                          |       |
| Roger  V. Collins                                                                                                |       | 2,450                                           |       |
| Edwin  S. Hetherington                                                                                           |       | 11,000                                          |       |
| James  B. Hurlock                                                                                                |       | 1,000                                           |       |
| Pippa  Isbell                                                                                                    |       | 650                                             |       |
| Prudence  M. Leith                                                                                               |       | 4,250                                           |       |
| J.  Robert Lovejoy                                                                                               |       | 6,200                                           |       |
| Martin  O’Grady                                                                                             |       | —                                          |       |
| Georg  R. Rafael                                                                                                 |       | 2,500                                           |       |
| Maurizio  Saccani                                                                                                |       | —                                          |       |
| James  B. Sherwood                                                                                               |       | 545,295                                         |       |
| Nicholas  R. Varian                                                                                              |       | 600                                             |       |
| Paul  M. White                                                                                                   |       | 22,100                                          |       |
| David  C. Williams                                                                                               |       | 12,000                                          |       |
| All  directors and executive officers as a group (15 persons) including 157,650  exercisable stock option shares |       | 800,395                                         |       |

 

The foregoing table does not include currentlyunexercisable options to purchase an aggregate of 401,500 Class A sharesheld by directors and executive officers under the Company’s 2000 and 2004Stock Option Plans, and currently unvested awards covering an aggregate of214,755 Class A shares held by directors and executive officers under theCompany’s 2007 Performance Share Plan.

 

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**Voting Control of the Company**

 

The following table liststhe voting power held by the known beneficial owners of more than 5% of theoutstanding Class A or Class B common shares of the Company and alldirectors and executive officers as a group. The directors of the Company who are deemed to be beneficial ownerssolely because they are directors of Holdings are not listed individually butare included in the group.

 
| **Name**                                                                                                        | ** ** | **No. of  Class A  Shares** | ** ** | **No. of  Class B  Shares** | ** ** | **Combined  Voting  Power** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|-----------------------------|------------|
|                                                                                                            |       |                                  |       |                                  |       |                        |       |
| Holdings                                                                                                        |       | —                                |       | 18,044,478                            |       | 78.0                        | %          |
| Indian Hotels et al.                                                                                            |       | 4,880,764                             |       | —                                |       | 2.1                         | %          |
| Price                                                                                                           |       | 4,516,600                             |       | —                                |       | 2.0                         | %          |
| REYL and Carey                                                                                                  |       | 4,273,077                             |       | —                                |       | 1.8                         | %          |
| Jumeirah et al.                                                                                                 |       | 3,911,611                             |       | —                                |       | 1.7                         | %          |
| D.E. Shaw et al.                                                                                                |       | 3,218,678                             |       | —                                |       | 1.4                         | %          |
| CR Intrinsic Investors et al.                                                                                   |       | 2,835,000                             |       | —                                |       | 1.2                         | %          |
| Federated et al.                                                                                                |       | 2,643,431                             |       | —                                |       | 1.1                         | %          |
| All directors and executive officers as a group (15 persons)  including 157,650 exercisable stock option shares |       | 800,395                               |       | 18,044,478                            |       | 78.3                        | %          |

 

In general the holders of Class Aand B common shares of the Company vote together as a single class on mostmatters submitted to general meetings of shareholders, with holders of Class Bshares having one vote per share and holders of Class A shares havingone-tenth of a vote per share.  Each Class Bshare is convertible at any time into one Class A share.  In all other material respects, the Class Aand B shares are identical and are treated as a single class of common shares.

 

Holdings and the Company’sdirectors and executive officers hold in total approximately 27% in number ofthe outstanding Class A and Class B shares having approximately 78%of the combined voting power of the outstanding common shares of the Companyfor most matters submitted to a vote of the Company’s shareholders.  Other shareholders, accordingly, holdapproximately 73% in number of the outstanding common shares having about 22%of combined voting power in the Company.

 

Under Bermuda law, the Class Bshares owned by Holdings (representing approximately 78% of the combined votingpower) are outstanding and may be voted by that subsidiary.  The investment by Holdings in Class Bshares and the manner in which Holdings votes those shares are determined bythe Board 

 

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ofDirectors of Holdings (three of whom are also directors of the Company) consistentlywith the exercise by those directors of their fiduciary duties to thesubsidiary.  Holdings, therefore, has theability to elect at least a majority of the members of the Board of Directorsof the Company and to control the outcome of most matters submitted to a voteof the Company’s shareholders.

 

With respect to a number ofstrategic matters which would tend to change control of the Company, itsmemorandum of association and bye-laws contain provisions that could make itmore difficult for a third party to acquire OEH without the consent of theCompany’s Board of Directors.  Theseprovisions include supermajority shareholder voting provisions for the removalof directors and for “business combination” transactions with beneficial ownersof shares carrying 15% or more of the votes which may be cast at any generalmeeting of shareholders, and limitations on the voting rights of such 15%beneficial owners.  Also, the Company’sBoard of Directors has the right under Bermuda law to issue preferred shareswithout shareholder approval, which could be done to dilute the share ownershipof a potential hostile acquirer.  Also,the rights to purchase series A junior participating preferred shares, oneof which is attached to each Class A and Class B common share of theCompany, may have anti-takeover effects. See Note 14(c) to the Financial Statements.  Although OEH management believes theseprovisions provide the Company and its shareholders with the opportunity toreceive apropriate value in a strategic transaction by requiring potentialacquirers to negotiate with the Company’s Board of Directors, these provisionsapply even if the potential transaction may be considered beneficial by manyshareholders.

 

Information responding toItem 201(d) of SEC Regulation S-K is omitted because the Company is aforeign private issuer.

 

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

 

**RelatedParty Transactions**

 

Mr. Sherwood owns aprivate residential apartment in the Hotel Cipriani in Venice, Italy, a hotelowned by a subsidiary of the Company. OEH has granted Mr. Sherwood a right of first refusal to purchasethe hotel in the event OEH proposes to sell it. The purchase price would be the offered sale price in the case of a cashsale or the fair market value of the hotel, as determined by an independentvaluer, in the case of a non-cash sale. Similarly, if Mr. Sherwood proposes to sell his apartment, he hasgranted OEH a right of first refusal to 

 

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purchaseit at fair market value or, at Mr. Sherwood’s option in the case of aproposed cash sale, the offered sale price. In addition, the Company has granted an option to Mr. Sherwood topurchase the hotel at fair market value if a change in control of the Companyoccurs.

 

Mr. Sherwood and thesubsidiary of the Company which owns the Hotel Cipriani have entered into anagreement under which he may rent his apartment to the hotel in return for 50%of the amounts paid by hotel guests for use of the apartment.  In 2008, the hotel paid Mr. Sherwood$178,100 for the use of his apartment. Also, in any calendar year when the apartment is made available to thehotel for 90 days or more when the hotel is open to guests, the hotel isobligated to clean, repair and insure the apartment at its expense and provide Mr. Sherwoodand his guests with all hotel services other than food and beverages free ofcharge, including electricity, air conditioning, telephone rental, water androom services for the apartment.  To theextent that the apartment is made available to the hotel for less than90 days per year, Mr. Sherwood must pay a proportionate share ofthose expenses.

 

Mr. Sherwood ownsCapannelle S.r.l., a wine estate in the Chianti region of Italy that produceswine, olive oil and other products principally for public sale.  In 2008, the estate sold $59,700 of productsto OEH hotels at prices the same as its public prices.

 

Capannelle and the Company’ssubsidiary that owns the Villa San Michele near Florence, Italy have enteredinto an agreement under which Capannelle makes the main house and other partsof the wine estate available to short-stay guests provided by the hotel.  The incremental costs of Capannelle and VillaSan Michele in servicing the guests each year are netted against the amountscharged by the hotel for guest accommodation, food, beverage and other hotelservices, and the net amount is shared equally between Capannelle and Villa SanMichele.  In 2008, Capannelle earned$17,900 from this arrangement which continues on a year-to-year basis unlessterminated by either party.

 

See also “Non-Executive DirectorFees” in Item 11–Executive Compensation regarding other agreements between OEHand Mr. James Sherwood, and Note 20 to the Financial Statements (Item 8above) regarding other related party transactions.

 

**DirectorIndependence**

 

The seven members of theBoard of Directors of the Company are identified in Item 10—Directors,Executive Officers and Corporate Governance. Regarding the independence 

 

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ofdirectors from OEH’s management, the Board has reviewed the materiality of anyrelationship that each of the seven directors of the Company has with OEHeither directly or indirectly through another organization, including the feesand other compensation described under “Non-Executive Director Fees” in Item11—Executive Compensation.  The criteriaapplied included the director independence requirements set forth in theCompany’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 and Messrs. 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 presentsthe fees of Deloitte LLP, OEH’s independent auditor, for audit and permittednon-audit services in 2007 and 2008:

 
| ** **         | ** ** | **2007** | ** ** | **2008** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
|               |       |     |       |     |       |
| Audit fees         |       | $        | 2,072,000  |     | $          | 2,551,000 |   |
| Audit-related fees |       | 244,000  |       | 374,000  |       |
| Tax fees           |       | 487,000  |       | 495,000  |       |
| All other fees     |       | —   |       | —   |       |
| Total              |       | $        | 2,803,000  |     | $          | 3,420,000 |   |

 

Audit services consist ofwork performed in connection with the audits of financial statements and theeffectiveness of internal control over financial reporting for each fiscal yearand in the review of financial statements included in quarterly reports duringthe year, as well as work normally done by the independent auditor inconnection with statutory and regulatory filings, such as statutory audits ofnon-U.S. subsidiaries, and consents and comfort letters for SEC registrationstatements.

 

Audit-related servicesconsist of assurance and related services that are normally performed by theindependent auditor and that are reasonably related to the audit or review offinancial statements but are not reported under audit services, including duediligence reviews in potential transactions and audits of benefit plans.

 

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Tax services consist of allservices performed by the independent auditor’s tax personnel, except thoseservices specifically related to the audit or review of financial statements,and include fees in the areas of tax return preparation and compliance and taxplanning and advice.

 

Other services consist ofthose services permitted to be provided by the independent auditor but notincluded in the other three categories. There were none provided in 2007 and 2008.

 

The Audit Committee of theBoard of Directors of the Company has established a policy to pre-approve allaudit and permitted non-audit services provided by the independentauditor.  Prior to engagement of theauditor for the next year’s audit, management and the auditor submit to theCommittee a description of the audit and permitted non-audit services expectedto be provided during that year in each of four categories of servicesdescribed above, together with a fee proposal for those services.  Prior to the engagement of the independentauditor, the Audit Committee considers with management and the auditor andapproves (or revises) both the description of audit and permitted non-auditservices proposed and the budget for those services.  If circumstances arise during the year whenit becomes necessary to engage the independent auditor for additional servicesnot contemplated in the original pre-approval, the Audit Committee at itsregularly scheduled meetings requires separate pre-approval before engaging theindependent auditor.  To ensure prompthandling of unexpected matters, the Committee may delegate pre-approvalauthority to one or more of its members who report any pre-approval decisionsto the Committee at its next scheduled meeting. For 2007 and 2008, all of the audit and permitted non-audit servicesdescribed above were pre-approved under the policy.

 

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**PART IV**

 

**ITEM 15.****                                             ****Exhibitsand Financial Statement Schedules**

 
| ** **                                                                                                                                                                                                  | **Page Number** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------|
| 1.             Financial Statements                                                                                                             |                 |
|                                                                                                                                                                                                        |                 |
| Reports of  independent registered public accounting firm                                                                                                                                                   | 86                   |
| Consolidated financial  statements - years ended December 31, 2008, 2007 and 2006:                                                                                                                     |                 |
| Balance  sheets (December 31, 2008 and 2007)                                                                                                                                                           | 88                   |
| Statements  of operations                                                                                                                                                                                   | 89                   |
| Statements  of cash flows                                                                                                                                                                                   | 90                   |
| Statements  of shareholders’ equity                                                                                                                                                                    | 92                   |
| Notes to  financial statements                                                                                                                                                                              | 93                   |
|                                                                                                                                                                                                        |                 |
| 2.             Financial Statement Schedule                                                                                                     |                 |
|                                                                                                                                                                                                        |                 |
| Schedule  II – Valuation and qualifying accounts (years ended December 31, 2008,  2007 and 2006)                                                                                                  | 164                  |
|                                                                                                                                                                                                        |                 |
| 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—Valuationand 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, 2008: |       |                                       |       |                                      |       |                                 |       |              |       |   |   |
| Allowance for doubtful accounts    |       | $                                          | 1,292,000  |                                      | $          | 171,000                              |       | $                 | (74,000    | )(2) | $ | 284,000 | (1) | $ | 1,105,000 |   |
|                               |       |                                       |       |                                      |       |                                 |       |              |       |   |   |
| Year ended December 31, 2007: |       |                                       |       |                                      |       |                                 |       |              |       |   |   |
| Allowance for doubtful accounts    |       | $                                          | 1,071,000  |                                      | $          | 291,000                              |       | $                 | 72,000     | (2) | $ | 142,000 | (1) | $ | 1,292,000 |   |
|                               |       |                                       |       |                                      |       |                                 |       |              |       |   |   |
| Year ended December 31, 2006: |       |                                       |       |                                      |       |                                 |       |              |       |   |   |
| Allowance for doubtful accounts    |       | $                                          | 921,000    |                                      | $          | 107,000                              |       | $                 | 87,000     | (2) | $ | 44,000 | (1) | $ | 1,071,000 |   |

 

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(1)                                  Bad debts written off, netof recoveries.

 

(2)                                  Foreign currency translationadjustments.

 

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**SIGNATURES**

 

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

 
| Dated: February 27, 2009 |    |
|--------------------------|---------|
|                     |    |
|                     |    | ORIENT-EXPRESS  HOTELS LTD. |
|                     |    |   |
|                     |    |   |
| ** **               | **By:** | **/s/ Paul M. White** |
|                     |    | Paul M. White |
|                     |    | President  and Chief Executive Officer |

 

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Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the date indicated.

 

Dated:February 27, 2009

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

 

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**EXHIBIT INDEX**

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

 

OEHhas no instrument with respect to long-term debt not listed above under whichthe total amount of securities authorized exceeds 10% of the total assets ofOEH on a consolidated basis.  The Companyagrees to furnish to the SEC upon request a copy of each instrument withrespect to long-term debt not filed as an exhibit to this report.

 

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| **Exhibit  No.** | ** ** | **Incorporated by  Reference to**                                                  | ** ** | **Description**                                                                                                                                                                                                                                           |
|------------------|------------|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                               |       |                                                                                                                                                                                                                                                      |
| 10.1             |       |                                                                               |       | Orient-Express Hotels Ltd. 2000 Stock Option Plan                                                                                                                                                                                                         |
| 10.2             |       |                                                                               |       | Orient-Express Hotels Ltd. 2004 Stock Option Plan                                                                                                                                                                                                         |
| 10.3             |       |                                                                               |       | Orient-Express Hotels Ltd. 2007 Performance Share Plan                                                                                                                                                                                                    |
| 10.4             |       |                                                                               |       | Orient-Express Hotels Ltd. 2007 Stock Appreciation Rights Plan                                                                                                                                                                                            |
| 10.5             |       | Exhibit 10.3 to 2004 Form 10-K Annual Report (File  No. 1-16017)         |       | Amended and Restated Agreement Regarding Hotel Cipriani Interests  dated February 8, 2005 between James B. Sherwood, Hotel Cipriani S.r.l.  and Orient-Express Hotels Ltd.                                                                           |
| 10.6             |       | Exhibit 10.4 to 2004 Form 10-K Annual Report  (File No. 1-16017)         |       | Amended and Restated Right of First Refusal and  Option Agreement Regarding Indirectly Held Hotel Cipriani Interests dated  February 8, 2005 between James B. Sherwood and Orient-Express Hotels Ltd.                                                |
| 10.7             |       | Exhibit 10.4 to Form S-1 Registration  Statement No. 333-12030      |       | Agreement dated February 18, 1982 between  James B. Sherwood and Hotel Cipriani S.p.A. regarding apartment                                                                                                                                           |
| 10.8             |       | Exhibit 10.10 to 2003 Form 10-K Annual  Report (File No. 1-16017)   |       | Contract of Special Partnership or Joint Venture  dated August 1, 2002 between Alberghiera Fiesolana S.p.A. and Capannelle  S.r.l.                                                                                                                   |
| 10.9             |       | Exhibit 10 to July 25, 2007  Form 8-K Current Report (File 1-16017) |       | Form of Severance Agreement dated  December 1, 2006, as amended July 25, 2007, between Orient-Express  Hotels Ltd. and Paul White                                                                                                          |
| 10.10            |       | Exhibit 10.11 to 2006 Form 10-K Annual  Report (File No. 1-16017)   |       | Form of Severance Agreement dated  December 1, 2006 between Orient-Express Hotels Ltd. and each of Filip  Boyen, Roger Collins, Pippa Isbell, Nicholas Varian and Martin O’Grady (dated  November 15, 2007 for Mr. O’Grady) |

 

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| **Exhibit  No.** | ** ** | **Incorporated by  Reference to**                                                | ** ** | **Description**                                                                                                                                                                            |
|------------------|------------|----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                             |       |                                                                                                                                                                                       |
| 10.11            |       | Exhibit 10.12 to 2006 Form 10-K Annual  Report (File No. 1-16017) |       | Form of Severance Agreement dated  December 1, 2006 between Orient-Express Hotels Ltd. and each of Edwin  Hetherington and David Williams                                        |
| 11               |       |                                                                             |       | Statement of computation of per share earnings                                                                                                                                             |
| 12               |       |                                                                             |       | Statement of computation of ratios                                                                                                                                                         |
| 14               |       | Exhibit 14 to 2003 Form 10-K Annual  Report (File No. 1-16017)    |       | Code of Business Practices for Principal  Executive, Financial and Accounting Officers                                                                                                     |
| 21               |       |                                                                             |       | Subsidiaries of Orient-Express Hotels Ltd.                                                                                                                                                 |
| 23               |       |                                                                             |       | Consent of Deloitte LLP relating to Form S-3  Registration Statement No. 333-155364 and Form S-8 Registration  Statements No. 333-58298, No. 333-129152 and 333-147448 |
| 31               |       |                                                                             |       | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                |
| 32               |       |                                                                             |       | Section 1350 Certification                                                                                                                                                            |
| 99               |       | Exhibit 99 to 2004 Form 10-K Annual Report  (File No. 1-16017)         |       | Corporate Governance Guidelines of Orient-Express  Hotels Ltd.                                                                                                                             |

 

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