UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

OR

Commission File Number 1-16017

ORIENT-EXPRESS HOTELS LTD.

(Exact name of registrant as specified in its charter)

22 Victoria Street,

Hamilton HM 12, Bermuda

(Address of principal executive offices)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None.

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

Indicate by check mark if the registrant is not required to file reports 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 all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE:  None

TABLE OF CONTENTS

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

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PART I

ITEM 1.  Business

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

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

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

Restatement of prior year financial statements

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

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

Introduction

OEH is a hotel and leisure group focused on the luxury end of the leisure market.  Organized in 1995, it currently owns and/or invests in 51 properties (all of which it manages) consisting of 41 highly individual deluxe hotels, two restaurants, six tourist trains and two river/canal cruise businesses.  These are located in 25 countries worldwide.  OEH acquires or manages only very distinctive properties in areas of outstanding cultural, historic or recreational interest in order to provide luxury lifestyle experiences for the discerning traveller.  OEH is also developing two other hotels not yet open.

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

Hotels and restaurants represent the largest segment of OEH’s business, contributing 83% of revenue in 2007, 84% in 2006 and 85% in 2005.  Tourist trains and cruises accounted for 14% of revenue in 2007, 13% in 2006 and 14% in 2005.  Property development activities accounted for the remaining revenue in each year.  OEH’s worldwide portfolio of hotels currently consists of 3,889 individual guest rooms and multiple-room suites, each known as a “key”.  Hotels owned by OEH in 2007 achieved an average daily room rate (“ADR”) of $428 (2006–$382) and a revenue per available room (“RevPAR”) of $263 (2006–$242).  Approximately 70% of OEH’s customers are leisure travellers, with approximately 46% of customers in 2007 originating from North America, 40% from Europe and the remaining 14% from elsewhere in the world.

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

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Owned Hotels–Europe

Italy

The Hotel Cipriani and Palazzo Vendramin–98 keys–in Venice were built for the most part in the 1950s and are located on three acres on Giudecca Island across from the Piazza San Marco which is accessed by a free private boat service.  Most of the rooms have 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 tennis court, and a large banquet and meeting facility situated in an historic refurbished warehouse.

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

The Villa San Michele–46 keys–is located in Fiesole, a short distance from Florence.  Originally built as a monastery in the 15th century with a façade attributed to Michelangelo, it has stunning views over historic Florence and the Arno River Valley.  OEH has remodelled and expanded the guest accommodation to luxury standards, including the addition of a swimming pool.  A shuttle bus service is provided into Florence.  The property occupies ten acres.  The Villa San Michele also operates for 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 Related Transactions, and Director Independence below.

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

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

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Portugal

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

The Lapa Palace–109 keys–is in the embassy district of Lisbon, near the city center and overlooking the Tagus River. The historic part of the hotel was originally built in the 1870s as the palace of a Portuguese noble family.  It opened as a luxury hotel in 1992 after extensive conversion and expansion, including the addition of conference facilities and underground car parking.  The hotel is set amid gardens with ornamental fountains and both indoor and outdoor swimming pools, occupying a total of three acres.  OEH owns an adjoining parcel of land suitable for building guest rooms or for-sale residential apartments.

Elsewhere in Europe

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

OEH owns La Residencia–64 keys–located in the charming village of Deià on the rugged northwest coast of the island of Mallorca, Spain in the Mediterranean.  Mallorca is a popular European tourist destination throughout the year.  The core of La Residencia was originally created from two adjoining 16th and 17th century country houses set on a hillside site of 30 acres.  The hotel features three restaurants including the gourmet El Olivio, one of the foremost on the island, as well as two large outdoor swimming pools, tennis courts and a spa with an indoor pool.

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Le Manoir aux Quat’Saisons–32 keys–is located in Oxfordshire, England about an hour’s drive west of London.  The main part of the hotel is a 16th century manor house set in 27 acres of gardens.  The property was developed by Raymond Blanc, one of Britain’s most famous chef-patrons, and the hotel’s restaurant has two stars in the Michelin Guide.  Mr. Blanc has 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 occupies one side of an entire city block on the fashionable Nevsky Prospect in the heart of the city near the Russian Museum, Shostakovich Philharmonia and other tourist 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, meeting facilities, a health club and spa and several retail shops.  OEH is currently finishing a phased refurbishment of the hotel, and plans to acquire the minority interest owned by the City of St. Petersburg.

Owned Hotels–North America

United States

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

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

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The Inn at Perry Cabin–80 keys–was built in 1812 as a country inn located in St. Michaels, Maryland on the eastern shore of Chesapeake Bay.  Set on 25 waterfront acres that include an outdoor swimming pool as well as boating and 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 and expansion of the hotel, including a new conference facility and a spa.  Vacant available land may be developed as residences in the future.

OEH owns El Encanto–77 keys–in Santa Barbara, California.  The hotel is located in the hills above the restored Santa Barbara Mission, with views out to the Pacific Ocean.  Built in 1913 on a seven-acre site, the guest rooms are in cottages and low rise buildings spread throughout mature gardens with a swimming pool and tennis court.  OEH closed this hotel in late 2006 for significant renovation, including the addition of 14 keys, and expects to reopen in 2009.

Caribbean

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

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

Mexico

OEH owns the Maroma Resort and Spa–65 keys–on Mexico’s Riviera Maya on the Caribbean coast of the Yucatan Peninsula, about 30 miles south of Cancun.  The resort opened in 1995 and has 25 acres of land along a 750-foot beach with the Cozumel barrier reef offshore where guests may fish, snorkel and scuba-dive.  Important Mayan archaeological sites are also nearby.  Rooms are arranged in low-rise villas and there are three restaurants, tennis courts and extensive spa facilities.  The hotel suffered hurricane damage in October 2005 and reopened in February 2006.

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

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

Owned Hotels–Rest of the World

South America

Built in the 1920s on a three-acre site facing Copacabana Beach near the central business district of Rio de Janeiro, Brazil, the Copacabana Palace–222 keys–is one of the most famous in South America and features two gourmet restaurants, spacious function and meeting rooms, a 500-seat theater, a large swimming pool, spa and fitness center, and a roof-top tennis court and pool.  The old casino rooms were refurbished and reopened in 2007 as additional function and meeting space for up to 1,200 persons.

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

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

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

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parkland and looking out at the Pacific Ocean, yet near the commercial and cultural center of the city.  Opened in 1997, the hotel has two restaurants, a large ballroom, rooftop outdoor pool, health and beauty facilities and a business center for guests, and occupies about one acre of land.

Southern Africa

The Mount Nelson Hotel–201 keys–in Cape Town, South Africa is a famous historic property opened in 1899.  With beautiful gardens and pools, it stands just below Table Mountain and is within walking distance of the main business, 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 of grounds.  Expansion is planned through incorporation into the hotel of adjoining residential properties owned by OEH.

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

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

Australia

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

The Lilianfels Blue Mountains–85 keys–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 gourmet restaurant is located.  The main hotel, built in 1992

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

French Polynesia

Bora Bora Lagoon Resort and Spa–77 keys–opened in 1993 and has bungalows situated over the lagoon water plus additional beach and garden bungalows, all built in traditional Tahitian style on a 12-acre site.  Guests dine in two restaurants and enjoy extensive water sports and tennis.  A recent renovation program included a new swimming pool, spa and conference facility.  On some of the resort’s available vacant land, private residential villas for sale can be developed.

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

Asia

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

Napasai–55 keys–is located on its own beach on the north side of Koh Samui island of Thailand in the Gulf of Siam.  It originally opened in 2004 and features two restaurants, tennis courts, swimming pool, spa and water sports such as diving and snorkeling in the nearby coral reef.  The guest rooms are arranged in seaview cottages on a total site of about 40 acres on which 14 private villas have been built with vacant land available to develop and sell additional villas.  See “Property Development” below.  Most purchasers of these villas have contracted with Napasai to make the villas available to hotel guests on a revenue-sharing basis with the purchasers.

On Bali in Indonesia are two long-term leasehold properties, Jimbaran Puri Bali–42 keys–and Ubud Hanging Gardens–38 keys.  Jimbaran Puri Bali originally occupied four beachfront acres on the south coast of the island.  Guest rooms are situated in cottages and, in addition to ocean water sports, the hotel features two restaurants and a swimming pool.  During 2007, OEH acquired a long lease of about three

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

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

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

Built in 1920, The Governor’s Residence–48 keys–in the embassy district of Rangoon, Burma (Myanmar) was originally the official home of one of the Burmese state governors.  It is a teak two-storey mansion surrounded by verandas overlooking lotus gardens, a long-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 property and has reached agreement in principle with the other shareholders in the property to increase its interest to 100%.

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

Hotel Management Interests

Through a 50%/50% joint venture with a Spanish investment company, OEH owns and manages the famous Hotel Ritz–167 keys–in central Madrid near the financial district, Spanish parliament and many of the city’s well known tourist attractions.  Opened in 1910, the hotel has four spacious conference and banqueting suites, an indoor restaurant and the famous Ritz Terrace restaurant outdoors in the gardens.  OEH and its 50% partner have embarked on an extensive capital improvement program, beginning with the public areas of the hotel.

Charleston Place–441 keys–is located in the heart of historic Charleston, South Carolina, a popular destination for tourists and business meetings.  Opened in 1986, the hotel has two restaurants, extensive banqueting and conference space

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including a grand ballroom, a health club with spa and swimming pool, and a shopping arcade of 25 retail outlets leased to unaffiliated parties.  The hotel also owns the adjacent historic Riviera Theater remodelled as additional conference space and retail shops.  OEH has a 19.9% ownership interest in this hotel, manages the property under an exclusive long-term contract, and receives interest on partnership loans which it assumed at the time of its original investment and on other loans made since then.

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

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

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

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

Restaurants

OEH owns ‘21’ Club, the famous landmark restaurant at 21 West 52nd Street in mid-town Manhattan in New York City.  Originally a speakeasy during Prohibition in the 1920s, this restaurant is open to the public, occupies three brownstone buildings and features gourmet American cuisine.  It serves à la carte meals in the original bar restaurant and a separate dining room upstairs, and also has a number of banqueting rooms used for functions, including the famous secret wine cellar.

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

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

Until the sale to its majority partner in June 2006, OEH owned a 49% interest in Harry’s Bar, a private 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 a regularly scheduled overnight service between London and Venice and on short excursions in southern England.  OEH owns 30 railway cars originally used on historic “Orient-Express” and other famous European trains.  All have been refurbished in original 1920s/1930s décor and meet modern safety standards.  The services are marketed as a continuation of the Orient-Express trains of pre-World War II years.  One train is based in Great Britain composed entirely of Pullman cars with a capacity for up to 250 passengers.  The other train is based on the European Continent made up of Compagnie Internationale des Wagons-Lits et du Tourisme sleeping cars and day coaches with capacity for up to 180 passengers.  They operate once or twice weekly principally between 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 Channel by 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 of London on short excursions to places of historic or scenic interest in southern England, including some overnight trips when

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passengers stay at local hotels.  Both the British and Continental trains are available for private charter.

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

OEH owns the Royal Scotsman luxury tourist train, having purchased in April 2007 the 50% interest it did not previously own.  Founded in 1985, the Royal Scotsman is composed of nine Edwardian-style cars accommodating up to 36 passengers.  Each compartment in the six sleeping cars has a private bathroom.  Operating from April to October each year, the train travels on itineraries of up to seven nights through the Scottish countryside affording passengers the opportunity to visit clan castles, historic battlegrounds, famous Scotch whiskey distilleries and other points of interest.

PeruRail is a 50%/50% joint venture between OEH and Peruvian partners formed to operate part of the state-owned railways in Peru under a 30-year franchise awarded in 1999 and extendable every five years, upon the joint venture’s application, up to 30 additional years.  The joint venture pays the government a fee related to traffic levels which can be partially offset against investment in track improvements.  The 70-mile Cusco-Machu Picchu line carries mainly tourists visiting the famous Inca ruins, the principal means of access because there is no convenient road, as well as local passenger traffic.  Beginning in 2008, other carriers will operate on this line for the first time in competition with PeruRail.  A second rail line runs from Cusco to Matarani on the Pacific Ocean via Puno on Lake Titicaca and Arequipa and principally serves freight traffic.  The Cusco-Machu Picchu line connects two of OEH’s Peruvian hotels allowing inclusive tours served by OEH’s Hiram Bingham luxury tourist train.  OEH also operates a 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 each week between Singapore, Kuala Lumpur and Bangkok.  The journey lasts between 48 and 72 hours each way and includes two or three nights on board and side trips to Penang in Malaysia and the River Kwai in Thailand.  Some overnight trips are also made from Bangkok to Chiang Mai and

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elsewhere in Thailand and, beginning in 2007, to Vientiane, Laos.  Originally built in 1970, the 24 cars were substantially rebuilt to an elegant oriental style of décor and fitted with modern facilities such as air-conditioning and private bathrooms.  The train is made up of sleeping cars, three restaurant cars, a bar car and an open air observation car and can carry up to 125 passengers.  The Eastern & Oriental Express is available for charter by private groups.  OEH manages the train exclusively and has a 25% shareholding in the owning company.

OEH owns and operates a deluxe river cruiseship on the Irrawaddy River in central Burma, or Myanmar, called the Road To Mandalay.  The ship was a Rhine River cruiser built in 1964 which OEH bought and refurbished.  It has 66 air-conditioned cabins with private bathrooms, spacious restaurant and lounge areas and a canopied sun deck with swimming pool.  The ship travels between Mandalay and Pagan up to eight times each month and carries 126 passengers who enjoy sightseeing along the river and guided shore excursions to places of historic interest.  Five to eight night itineraries are offered, including airfare to and from the ship and hotel accommodation in Rangoon.  OEH also operates occasional cruises to different destinations, such as to Bhamo in the north of the country close to the China border.  The ship does not operate in the hot summer season and occasionally when the water level of the Irrawaddy River falls too low due to lack of rainfall.

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

Property Development

OEH is pursuing opportunities to develop the real estate it owns at its hotels.  In addition to expansion through construction of guest rooms and other facilities at the hotels, certain of OEH’s properties have adjacent vacant land available for construction and sale of deluxe residential villas and apartments, as noted above under the various “Owned Hotels” headings.

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

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island, consisting of approximately 180 condominium apartments and 30,000 square feet of shop, restaurant and marina space.  The apartments range from 750 to 3,000 square feet in size.  OEH plans to build and sell the units in phases, with construction completion currently scheduled by 2010, and to retain management of most of the units sold.  At December 31, 2007, 71 condominiums at Cupecoy had been pre-sold.  OEH also has planning permission to build a further 60 units at Cupecoy.

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

At Keswick Hall in Virginia, OEH will continue to sell residential parcels of land surrounding and adjacent to its Keswick Club championship golf course.  Five plots were sold in 2007 in a minimum size of two acres.  OEH has built the roads and other infrastructure, including some sample homes, while most purchasers build their own custom-designed homes subject to development guidelines.  Each sale entitles the purchaser to join the hotel’s Keswick Club.

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

In 2007, OEH completed the purchase of about 28 acres of vacant land beside its Maroma Resort and Spa on the Riviera Maya in Mexico.  OEH management currently intends to build on most of this land up to 20 locally-designed private residential villas.  A sample unit is planned to be constructed in 2008.

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

Other hotels owned by OEH with available vacant land include Reids Palace in Madeira, Lapa Palace in Lisbon, and Inn at Perry Cabin on the eastern shore of Maryland.  Development will include sale of completed residences and, in many cases, ongoing management as integral parts of the adjacent hotels or, at Keswick Hall, membership in the hotel’s golf club.  The villas and apartments are being marketed and sold by local on-site sales personnel of OEH and through third-party real estate agents with listings locally and abroad.

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Management Strategies

As the foregoing indicates, OEH has a global mix of hotel and other deluxe travel products that are geographically diverse and appeal to the high-end leisure market, reflecting an important management strategy.  As a result, about 70% of annual revenue derives from leisure customers while corporate/business travel accounts for the rest.  OEH’s properties are distinctive as well as luxurious and tend to attract guests prepared to pay higher rates for the travel experiences OEH offers.

OEH benefits from trends and developments favorably impacting the global hotel, travel and leisure markets, including strong demand growth trends over the long term in the luxury hotel market in many parts 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 trends suffered a setback beginning in 2001 due to slowing national economies, the shock of terrorist attacks, the build-up and aftermath of the wars in Afghanistan and Iraq and the SARS epidemic.  Management believes, however, that the public’s confidence in international travel and demand for luxury hotel and tourist products will be sustained over the long term.

OEH management plans to grow the business by:

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

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

·                                developing vacant land as residences for sale,

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

·                                acquiring additional distinctive luxury properties throughout the world.

Factors in OEH’s evaluation of a potential acquisition include the uniqueness of the property, attractions for guests in the vicinity, acceptability of initial investment returns, upside potential through pricing, expansion or improved marketing, limitations on nearby competition, and convenient access.  Expansion at existing properties by adding rooms and facilities such as spas and conference space can provide

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attractive investment returns because incremental operating costs are low.

OEH management plans to continue owning or part-owning and managing most OEH properties, although OEH will consider contracts to manage properties without part-ownership which meet its criteria in order to facilitate entry into new markets or to preserve capital investment.  Ownership encourages OEH to develop the distinctive local character of its properties and allows it to benefit from all of the current cash flow and future capital gains should it sell a property.  Self-management has enabled OEH to capture the economic benefits otherwise shared with a third-party manager, to control the operations, quality and expansion of the hotels, and to use its experience with price changes, expansions and renovations to improve cash flow and enhance asset values.

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

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

Marketing, Sales and Public Relations

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

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responsibility for the hotels where they are based.  The responsibilities of OEH’s sales staff include working with the travel industry and preferred distribution partners, contacting group and corporate account representatives, and conducting marketing initiatives such as direct mailings and e-commerce.  OEH participates in a number of international programs, such as “American Express Centurion”, and organizations, such as “The Leading Hotels of the World”, to promote its properties.

Internet usage is an important direct sales and sales development tool.  Through OEH’s principal website (www.orient-express.com) and the websites of its individual properties, OEH provides extensive descriptions of the properties, including local activities for guests, and direct reservations capability in English and other languages.  OEH also provides an internet website (www.oeh.com) for preferred travel agents and other industry partners featuring latest news, sales assistance and marketing tools, and operates other internet travel portals that direct customers to OEH’s properties.  Online sales have lower transaction costs by saving travel agent commissions and tour operator discounts.  The internet also broadens marketing exposure and increases distribution.

Because repeat customers appreciate the consistent quality of OEH’s hotels, trains, cruises and restaurants, an important part of management’s strategy is to promote OEH properties through various cross-selling efforts.  These include preferred travel agent programs, direct mail to existing customers, in-house brochures and promotions, discounted special offers, and OEH’s in-house “Orient-Express Traveller” directory.  OEH sells luxury souvenir goods branded with the names of its travel products.

OEH’s marketing strategy also focuses on public relations, which management believes is a highly cost-effective marketing tool for luxury properties.  Because of the unique nature of its properties, guests are more likely to hear about OEH’s hotels and tours through word-of-mouth or published articles rather than through general advertising.  OEH has an in-house public relations office in London and representatives in ten countries worldwide, including contracts with third-party public relations firms, to promote its properties through targeted newspapers, general interest and travel magazines, and broadcast, online and other media.

Industry Awards

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

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travel market.  Over the years, OEH’s properties have won numerous national and international awards given by trade or consumer publications such as Conde Nast Traveller, Gourmet, Travel & Leisure and Tatler, or industry bodies such as the American Automobile Association.  The awards are based on opinion polls of readers or the professional opinion of journalists or panels of experts.  The awards are believed to influence consumer choice and are therefore highly prized.

Competition

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

OEH’s strategy is to acquire only hotels which have special locations and distinctive character.  Many are in areas with unique local history or high entry barriers because of zoning restrictions.  OEH builds 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 on price competition.

OEH’s luxury tourist trains have no direct competitors.  Other trains exist on similar routes, including new services in 2008 on the Cusco-Machu Picchu line of PeruRail, but management believes OEH’s trains and onboard service are unique and of such superior quality that guests consider an OEH train journey more as a luxury experience and an end in itself rather than as a means of transport.

Employees

OEH currently employs about 7,400 persons, about 2,500 of 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 the rest in central administration and sales.  Management believes that OEH’s ongoing labor relations are satisfactory.

Government Regulation

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

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health and safety of premises, employee relationships, environmental matters, and planning and zoning rules. Management believes that OEH is in compliance in all material respects with relevant laws and regulations with respect to its business.

ITEM 1A.       Risk Factors

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

·                       risks of OEH’s business,

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

·                       risks of investing in Class A common shares.

Described below are only the risks OEH management considers to be the most significant.  There may be additional risks that are deemed less material or not presently known to management.  If any of these risks occurs, OEH’s business, prospects, financial condition, results of operations or cash flows could be materially adversely affected.  A risk that might have a material adverse effect means that the risk may have one or more of these effects.  In that case, the market price of the Class A common shares could decline.

Risks of OEH’s Business

OEH’s operations are subject to adverse factors generally encountered in the hospitality and travel industries.

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

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

·                                political instability of the governments of some countries where OEH properties are located, resulting in depressed hotel demand,

·                                less disposable income of consumers and the travelling public,

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·                                dependence on varying levels of tourism, business travel and corporate entertainment,

·                                changes in popular travel patterns,

·                                competition from other hotels and leisure time activities,

·                                periodic local oversupply of guest accommodation, which may adversely affect occupancy and actual room rates achieved,

·                                increases in operating costs at OEH properties due to inflation and other factors which may not be offset by increased revenues, and changes in costs of materials,

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

·                                expropriation or nationalization of OEH properties by foreign governments,

·                                foreign exchange rate movements impacting OEH’s revenues and costs,

·                                adverse weather conditions or destructive forces like fire or flooding that sometimes result in closure of OEH’s properties,

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

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

The effect of these factors varies among OEH’s hotels and other properties because of their geographic diversity.  For example, civil unrest in Burma in September 2007 resulted in reservation cancellations at The Governor’s Residence and Road To Mandalay at the beginning of the seasonal high demand period for those properties.  Bookings are recovering but fourth quarter 2007 revenue was adversely affected.

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

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

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

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

·                                convenience of location,

·                                the quality of the property,

·                                room rates and menu prices,

·                                the range and quality of food services and amenities offered,

·                                types of cuisine, and

·                                name recognition.

Demographic, geographic or other changes in one or more of OEH’s markets could impact the convenience or desirability of its hotels and restaurants, and so could adversely affect their operations.

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

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

The hospitality industry is heavily regulated, including with respect to food and beverage sales, employee relations, construction and environmental concerns, and compliance with these laws could reduce revenues and profits of properties owned or managed by OEH.

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

The success of expanding existing properties depends upon obtaining necessary building permits or zoning variances from local authorities.  Failure to obtain or delay in obtaining these permits could adversely affect OEH’s strategy of increasing revenues and net earnings through expansion of existing properties.

OEH also is subject to U.S. and foreign laws and regulations relating to the environment and the handling of hazardous substances that may impose or create significant potential environmental liabilities, even in situations where the environmental problem or violation occurred on a property before OEH acquired it.

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

Management intends to increase the revenues and earnings of OEH through acquisition of new properties and expansion of existing properties.  The ability to pursue new growth opportunities successfully will depend on OEH management’s ability to:

·                              identify properties suitable for acquisition and expansion,

·                              negotiate purchases or construction on satisfactory terms,

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·                              obtain the necessary financing and government permits,

·                              build on schedule and with minimum disruption to guests, and

·                              integrate new properties into OEH’s operations.

Also, the acquisition of properties in new locations may present operating and marketing challenges that are different from those encountered in OEH’s existing locations.  There can be no assurance that management will succeed in OEH’s growth strategy.

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

·                              site deterioration after acquisition,

·                  inability to obtain necessary government permits,

·                              inclement weather,

·                              labor or material shortages,

·                              work stoppages,

·                              continued availability of construction and permanent financing,

·                              untimely opening,

·                              high start-up costs, and

·                              weak initial market acceptance of a new property.

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

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

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

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

The availability of future borrowings and access to the capital markets for equity financing to fund these acquisitions, expansions and projects depend on prevailing market conditions and the acceptability of financing terms offered to OEH.  There can be no assurance that future borrowings or 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 of common shares.  Future debt financings may require restrictive covenants that would limit OEH’s flexibility in operating its business.

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

Substantial portions of OEH’s revenues and expenses are denominated in non-U.S. currencies such as European euros, British pounds sterling, Russian rubles, South African rand, Australian dollars, Peruvian nuevos soles, Botswana pula, Brazilian reais, Mexican pesos, French Pacific francs and various Southeast Asian currencies.  In addition, OEH buys assets and incurs liabilities in these foreign currencies.  Foreign exchange rate fluctuations may have a material adverse effect on OEH’s financial statements and/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 the risk that the financial statements for a particular period or as of a certain date depend on the prevailing exchange rates of the various currencies against the U.S. dollar, and

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

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OEH’s operations may be adversely affected 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 and customer travel.  As OEH’s revenues are dependent on the revenues of individual properties, extreme weather conditions can from time to time have a major adverse impact upon individual properties or particular regions.  For example, La Samanna in St. Martin suffered substantial wind and flood damage from a hurricane in November 1999.  Although the hotel was fully insured for the repair costs, it remained closed until February 2000, so that OEH missed much of the high season that year.   Similarly, hurricanes in August and October 2005 caused damage to the Windsor Court Hotel in New Orleans and Maroma Resort and Spa on Mexico’s Yucatan Peninsula, resulting in temporary closure of the hotels for repairs.  OEH carries property and loss of earnings insurance in amounts management deems reasonably adequate, but damages may exceed the insurance limits or be outside the scope of coverage.

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

OEH’s relations with its employees in various countries could deteriorate due to disputes related to, among other things, wage or benefit levels, working conditions or management’s response to changes in 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 caused by poor relations with employees, including labor unions, could adversely affect the ability to provide those services, which could reduce occupancy and room revenue and even tarnish OEH’s reputation.

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

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

·                              construction delays or cost overruns that may increase project costs,

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

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

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

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

·                              inability to raise capital to fund a project,

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

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

OEH’s owned hotels and restaurants are subject to risks generally incident to the ownership of commercial real estate and often beyond its control.

These include:

·                      fluctuating demand for commercial real estate as an investment,

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

·                      changes in interest rates and the availability, cost and terms of financing,

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

·                      the ongoing need for capital improvements to maintain or upgrade properties,

·                      changes in property taxes and operating expenses, and

·                      the potential for uninsured or underinsured losses.

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Loss or infringement of OEH’s brand names could adversely affect its business.

In the competitive hotel and leisure industry in which OEH operates, trade names and trademarks are important in the revenue generation, marketing and promotion of its properties.  OEH has a large number of trade names and trademarks, and expends resources each year on their surveillance, registration and protection.  OEH’s future growth is dependent in part on increasing and developing its brand identities.  The loss, dilution or infringement of any of OEH’s brand identities could have an adverse effect on its business, results of operations and financial condition.

Risks Relating to OEH’s Financial Condition and Results of Operations

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

OEH’s financing agreements with several commercial bank lenders contain covenants that include limits on additional debt collateralized by mortgaged properties, limits on property liens and limits on mergers and asset sales, and financial covenants requiring maintenance of minimum net worth amounts or a minimum interest expense coverage, or establishing a maximum debt to equity ratio or a maximum loan to collateral value ratio.  Indebtedness is also collateralized by substantially all of OEH’s properties.  Future financing agreements may contain similar provisions and covenants or even more restrictive ones.  If OEH fails to comply with the restrictions in its present or future financing agreements, a default may occur.  A default could allow the creditors to accelerate the related debt as well as any other debt to which a cross-acceleration or cross-default provision applies.  A default could also allow the creditors to foreclose on the properties collateralizing the debt.

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

Approximately 76% of OEH’s consolidated long-term debt at December 31, 2007 accrues interest that fluctuates with prevailing interest rates, so that any rate increases may increase OEH’s interest payment obligations.  From time to time, OEH enters into hedging transactions in order to manage its floating interest rate exposure, but there can be no assurance those hedges will be successful.  At December 31, 2007,

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

The Company’s ability to pay dividends on the Class A common shares is limited.

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

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

OEH’s substantial indebtedness could adversely affect its financial health.

OEH has a significant amount of debt and may incur additional debt from time to time.  As of December 31, 2007, its consolidated long-term indebtedness was $786,410,000 (including the current portion).  This substantial indebtedness could:

·                              require OEH to dedicate much of its cash flow from operations to debt service payments, and so reduce the availability of cash flow to fund working capital, capital expenditures, product and service development and other general corporate purposes,

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

·                              increase OEH’s vulnerability to adverse economic and industry conditions, including the seasonality of some of its activities, or

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

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OEH must also repay or refinance a significant amount of indebtedness in future years.  Although OEH may seek to refinance its indebtedness, it may be unable to obtain refinancing on satisfactory terms.  Any failure of OEH to repay any indebtedness when due may result in a default under its indebtedness and cause cross-defaults under other indebtedness.

OEH is subject to accounting regulations and uses certain accounting estimates and judgments that may differ significantly from actual results.

Implementation of existing and future standards and rules of the U.S. Financial Accounting Standards Board (“FASB”) or other regulatory bodies could affect the presentation of OEH’s financial statements and related disclosures.  Future regulatory requirements could significantly change OEH’s current accounting practices and disclosures.  These changes in the presentation of OEH’s financial statements and related disclosures could change an investor’s interpretation or perception of OEH’s financial position and results of operations.  For example, OEH became subject to FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), in the first quarter of 2007 requiring OEH to recognize at that time a substantial initial FIN 48 liability with a corresponding adjustment to retained earnings.  See Note 11 to the Financial Statements.  OEH’s future income tax cost may include a tax benefit as the initial FIN 48 provision is released or a tax cost as new FIN 48 liabilities are recognized, in addition to the tax costs or benefits that relate to OEH’s trading activities and results.

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

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Risks of Investing in Class A Common Shares

The Company is not restricted from issuing additional Class A or B common shares, and any sales could negatively affect the trading price of the Class A common shares outstanding.

The Company may in its discretion sell newly issued Class A or B common shares from time to time.  There can be no assurance that the Company will not make significant sales of Class A or B common shares.  Any sales could materially and adversely affect the trading price of the Class A common shares outstanding.

The price of the Class A common shares may fluctuate significantly, which may make it difficult for shareholders to sell the Class A common shares when they want or at desired prices.

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

The Company’s share price can fluctuate as a result of a variety of factors, many of which are beyond OEH’s control.  These factors include:

·                              quarterly variations in operating results,

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

·                              changes in expectations as to future financial performance, including financial estimates by securities analysts and investors,

·                              developments generally affecting OEH’s business,

·                              market speculation about a potential acquisition of OEH,

·                              announcements by OEH or its competitors of significant contracts, acquisitions, joint ventures or capital commitments,

·                              announcements by third parties of significant claims or proceedings against OEH,

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

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·                              future sales of equity or equity-linked securities, and

·                              general domestic and international economic conditions.

In addition, the stock market in general can experience volatility that is often unrelated to the operating performance of a particular company.  These broad market fluctuations may adversely affect the market price of the Class A common shares.

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

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

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

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

The Company’s memorandum of association and bye-laws contain provisions that could make it more difficult for a

35

third party to acquire OEH without the consent of the Company’s Board of Directors.  These provisions include:

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

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

·                              limitations on the voting rights of such 15% beneficial owners.

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

The Company has in place a shareholder rights agreement providing for rights to purchase series A junior participating preferred shares of the Company.  The rights are not currently exercisable and they are attached to and trade together with the Class A and B common shares on a one-to-one basis.  These rights may have anti-takeover effects on a potential acquirer holding 15% or more of the outstanding Class A or B common shares.

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

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

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

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

·                              enforce judgments obtained in United States courts against the Company or its directors and officers based upon the civil liability provisions of the United States federal securities laws.

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

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

·                              whether an original action could be brought in Bermuda against the Company or its directors and officers to enforce liabilities based solely upon the United States federal securities laws.

ITEM 1B.       Unresolved Staff Comments

None.

ITEM 2.          Properties

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

ITEM 3.          Legal Proceedings

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

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ITEM 4.          Submission of Matters to a Vote of Security Holders

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

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PART II

ITEM 5.                          Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Class A common shares of the Company are traded on the New York Stock Exchange under the symbol OEH.  All of the Class B common shares of the Company are owned by a subsidiary of the Company and not listed.  See Item 12–Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.  The following table presents the quarterly high and low sales prices of a Class A common share in 2007 and 2006 as reported for New York Stock Exchange composite transactions:

The Company paid quarterly cash dividends at the rate of $0.025 per Class A and B common share in 2006 and 2007.

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

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

During 2007, the Company made no offering of its Class A common shares that was not registered in the United States.  Also, during the fourth quarter of 2007, no purchases of the Company’s common shares were made by or on behalf of the Company or any affiliated person.

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ITEM 6.                            Selected Financial Data

Orient-Express Hotels Ltd. and Subsidiaries

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

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

See notes to consolidated financial statements (Item 8).

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

Overview

OEH has three business segments: (1) hotels and restaurants, (2) tourist trains and cruises, and (3) real estate and property development.  Hotels currently consist of 41 deluxe hotels.  Thirty-six of these hotels are wholly or majority owned, and are referred to in this discussion as “owned hotels”.  The other five hotels, in which OEH has unconsolidated equity interests and operate under management contracts, are referred to in this discussion as “hotel management interests”.  Of the owned hotels, 12 are located in Europe, seven in North America and 17 in the rest of the world.

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

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

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

Revenue per available room, or RevPAR, is a performance indicator used widely within the hotel 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 a proportion of the rooms available to be sold.  ADR on its own gives no indication of the relative occupancy of the hotel and could be shown as increasing while the number of rooms sold had fallen, resulting in a reduction in rooms revenue over a prior period.

OEH’s results in 2005 improved over those in 2004, with same store RevPAR increases of 16%, coupled with the acquisition of the Grand Hotel Europe in 2005, driving revenue increases of 21% and net earnings growth of 33% to $41.5 million.  In 2006, OEH saw further growth of 10% in RevPAR as performance approached 2000 levels.  In 2006 average occupancy was 63% with ADR $380.  In 2007, same store RevPAR increased 15% in dollars and 11% in local currency with ADR of $428.

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OEH has a strategy to grow its business that includes:

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

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

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

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

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

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

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

Revenue from restaurants is derived from food and beverages sold to customers.  Revenue from hotel management interests includes fees received under management contracts, which are based upon a combination of a percentage of the revenue from operations and operating earnings calculated before specified fixed charges.

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The revenue from the tourist trains and cruises segment primarily comprises tickets sold for travel and food and beverage sales.

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

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

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

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

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

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Results of Operations

OEH’s operating results for the years 2007, 2006 and 2005, expressed as a percentage of revenue, are as follows:

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

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

Management evaluates the operating performance of OEH’s segments on the basis of segment EBITDA and believes that segment EBITDA is a useful measure of operating performance because segment EBITDA is not affected by non-operating factors such as leverage and the historic cost of assets.  EBITDA is a financial measure commonly used in OEH’s industry.  OEH’s segment EBITDA, however, may not be comparable in all instances to EBITDA as disclosed by other companies.  Segment EBITDA should not be considered as an alternative to earnings from continuing operations or net earnings (as determined in accordance with U.S. generally accepted accounting principles) as a measure of OEH’s operating performance, or as an alternative to net cash provided by operating, investing and financing activities (as determined in accordance with U.S. generally accepted accounting principles) as a measure of

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OEH’s ability to meet cash needs.

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

Average daily rate is the average amount achieved for the rooms sold.  RevPAR is revenue per available room, that is the rooms’ revenue divided by the number of available rooms for each night of operation.  Same store RevPAR is a comparison based on the operations of the same units in each period, by excluding the effect of any acquisitions, dispositions or major refurbishments.  The same store data excludes the following operations: El Encanto, Maroma Resort and Spa, Casa de Sierra Nevada, La Residencia, Reids Palace, Hotel de la Cité, Le Manoir aux Quat’Saisons, Grand Hotel Europe, Windsor Court and the six Asian hotels for the periods in which they

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were closed, or where the number of rooms available differed from the previous year due to refurbishment

Year Ended December 31, 2007

compared to Year Ended December 31, 2006

Revenue

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

The increase in hotels and restaurants revenue consisted of the following:

·                  $74.9 million attributable to owned hotels, or 20.4%, from $367.8 million 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 Place and the Hotel Ritz, Madrid, investments.

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

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

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

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

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

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

Rest of the World.  Revenue increased by $26.8 million, or 26.3%, from $102.0 million in 2006 to $128.8 million in 2007.  Revenue at all properties showed good growth in 2007.  Southern African revenue increased 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 full year 2007.

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

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

Real Estate.  Revenue increased by $3.8 million, or 23.6%, from $16.1 million in 2006 to $19.9 million in 2007.  The Cupecoy development generated revenues of $15.3 million in 2007 for the first time, which more than made up for lower revenues at Keswick Hall in 2007.

Depreciation and Amortization

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

Operating Expenses

Operating expenses increased by $52.4 million, or 23.1%, from $226.4 million in 2006 to $278.8 million in 2007.  This was primarily due to the improved revenues and volumes in OEH’s businesses in the year.  As a percentage of revenue, operating expenses increased by 1% to 48% of revenue in 2007.

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Selling, General and Administrative 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, General and Administrative Expenses remained flat at 29% of revenue in 2007.

Margins

Segment EBITDA margins (calculated as segment EBITDA as a percentage of revenue) for 2007 were 27%, down from 28% for 2006.  The decrease 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 real against the dollar during 2007.

Earnings from Operations

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

Net Finance Costs

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

Provision for Income Taxes

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

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

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The company is incorporated in Bermuda, which does not impose an income tax.  Accordingly, the entire income tax provision was attributable to income tax charges incurred by subsidiaries operating in jurisdictions that impose an income tax.

Earnings from Unconsolidated Companies

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

Earnings from discontinued operations

The loss from discontinued operations of Bora Bora Lagoon 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 $3.1 million included $3.0 million deferred tax credits on losses carried forward.

In December 2007, OEH decided to sell Bora Bora Lagoon Resort.  Consequently the hotel’s results have been presented as discontinued operations.  Due to increased competition and high cost structures in Bora Bora the results of the hotel were lower than expected so that an impairment loss had arisen.

Year Ended December 31, 2006

compared to Year Ended December 31, 2005

Revenue

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

The increase in hotels and restaurants revenue consisted of the following:

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

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

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

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

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

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

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

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

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

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

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Depreciation and Amortization

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

Operating Expenses

Operating expenses increased by $26.9 million, or 13%, from $199.5 million in 2005 to $226.4 million in 2006.  This was primarily due to the improved revenues and volumes in OEH’s businesses in the year.  As a percentage of revenue, operating expenses remained flat at 47% in 2006.

Selling, General and Administrative Expenses

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

Margins

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

Earnings from Operations

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

Net Finance Costs

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

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Provision for Income Taxes

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

Earnings from Unconsolidated Companies

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

Earnings from discontinued operations

Earnings from discontinued operations were the results of the Bora Bora Lagoon Resort.  The increase from $0.2 million to $3.1 million was due to a $3.0 million deferred tax credit recorded in 2006 for losses carried forward.

Liquidity and Capital Resources

Working Capital

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

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

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the other main factor that contributed to the decrease in working capital was the greater use of short-term financing and the increase in the current portion of long-term debt.  OEH is planning to refinance the debt that becomes due next year.

Cash Flow

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

Investing Activities.  Cash used in investing activities was $123.1 million for the year ended December 31, 2007, compared to $146.1 million for the year ended December 31, 2006, a decrease of $23.0 million.  Capital expenditure of $103.9 million included $12.0 million for refurbishment of the Grand Hotel Europe, $11.9 million for refurbishment of the Italian hotels, $10.0 million for El Encanto construction, $7.2 million for Copacabana Palace, $6.1 million for construction at Cupecoy in St. Maarten, and $4.4 million paid for the Maroma land acquisition.

Proceeds from fixed asset disposals of $4.7 million in 2007 included insurance compensation received for the hurricane-damaged assets of Maroma Resort and Spa of $2.3 million.  In 2006 proceeds included the sale of Harry’s Bar investment.

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

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

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

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last year OEH received cash of $99.2 million from the issuance of common shares.  In 2007, OEH used more of its working capital facilities to finance operations and expenditures than last year.

Capital Commitments

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

Indebtedness

At December 31, 2007, OEH had $786.4 million of consolidated long-term debt, including the current portion, collateralized by OEH assets with a number of commercial bank lenders which is payable over periods of one to 11 years with a weighted average interest rate of 6.36%.  See Note 8 to the Financial Statements regarding the maturity of long-term debt.

These financing agreements contain covenants that include limits on the property owning company’s ability to raise additional debt collateralized by these properties, limits on liens on the properties and limits on mergers and asset sales and, in some cases, financial covenants such as a minimum interest coverage ratio and debt service coverage ratio and a maximum debt to equity ratio.  Some of the Company guarantees of these facilities contain financial covenants on OEH covering a minimum consolidated tangible net worth and a minimum consolidated interest coverage ratio.  OEH is in full compliance with these covenants, and management believes they will not substantially limit OEH’s ability to finance future acquisitions or capital expenditure plans.

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

Liquidity

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

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

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to fund its working capital requirements, capital expenditures, acquisitions and debt service for 2008 and later years.

Contractual Obligations Summary

The following table summarizes OEH’s material known contractual obligations, excluding accounts payable and accrued liabilities, in 2008 and later years as of December 31, 2007 (dollars in thousands).

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

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

The preceding discussion and analysis of OEH’s financial condition and results of operations is based on its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires OEH management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.  On an ongoing basis, OEH management evaluates these estimates.  Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the result of which form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

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Critical accounting policies are those that reflect significant judgments or uncertainties, and potentially result in materially different results under different assumptions and conditions.  OEH management believes the following are OEH’s most critical accounting policies and estimates.

Long-lived assets and goodwill

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, OEH management periodically evaluates the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  These evaluations include analyses based on the cash flows generated by the underlying assets, profitability information including estimated future operating results, trends or other determinants of fair value.  If the value of the asset determined by these evaluations is less than its carrying amount, a loss, if any, is recognized for the difference between the fair value and the carrying value of the asset.  Future adverse changes in market conditions or poor operating results of the related business may indicate an inability to recover the carrying value of the asset, thereby possibly requiring an impairment charge in the future.

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

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

Depreciation

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

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

Pensions

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

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

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

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

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Foreign currency

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

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

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

Tax assets

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

Real estate development accounting

Revenue from real estate activities is accounted for under SFAS No. 66, “Accounting for Sales of Real Estate”, and represents the proceeds from sales of undeveloped lands and developed properties that OEH is holding for sale, as well as revenue recognized for condominiums under the percentage-of-completion method.  Profit from sales of land and developed properties is recognized upon closing using the full accrual method of accounting, provided that all the requirements prescribed by SFAS No. 66 have been met.  Revenues related to the sale of condominiums are recognized in accordance with SFAS No. 66 when a minimum of 10% of the purchase price of a condominium has been received in cash, the buyer has demonstrated sufficient level of continuing investment, the period of cancellation with refund has expired, receivables are deemed collectible, and certain minimum sales and construction levels have been attained.  Revenues related to

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projects still under construction are recognized under the percentage-of-completion method.  For sales that do not meet these criteria, revenue is deferred.

The process of real estate revenue recognition involves significant estimates of total project revenue and costs.  Actual results may differ from these estimates.

Recent Accounting Pronouncements

FIN 48

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

SFAS 157

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

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SFAS 158

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post-retirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R)”.  This statement requires an employer to recognize the over-funded or under-funded status of defined benefit pension plans and post-retirement plans (other than a multi-employer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.  SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position and requires disclosure in the notes to financial statements of certain additional information related to net periodic benefit cost for the next fiscal year.  SFAS No. 158 defines the funded status of a defined benefit plan as its assets less its projected benefit obligation and defines the funded status of a post-retirement plan as its assets less its accumulated post-retirement benefit obligation.  Calendar year-end companies, such as OEH, were required to adopt the recognition and disclosure provisions of SFAS No. 158 as of December 31, 2006.  The measurement date provisions are not required to be adopted until 2008.  The Company adopted the recognition and disclosure provisions of SFAS No. 158 with effect from December 31, 2006.  See Note 10 to the Financial Statements.

SFAS 159

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115”.  This statement permits an entity to choose to measure many financial instruments and certain other items at fair value.  Most of the provisions in SFAS No. 159 are elective; however, the amendment to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, applies to all entities with available-for-sale and trading securities. The fair value option established by SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates.  A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date.  The fair value option (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method, (b) is irrevocable (unless a new election date occurs) and (c) is applied only to entire instruments and not to portions of instruments.  SFAS No. 159 is effective as of the

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beginning of an entity’s first fiscal year that begins after November 15, 2007.  The adoption of SFAS No. 159 is not expected to have any impact on OEH’s consolidated financial statements.

SFAS 141(R)

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

SFAS 160

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

ITEM 7A.  Quantitative and Qualitative Disclosures About Market Risk

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

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

The market risk relating to foreign currencies arises from holding assets, buying, selling and financing in currencies other than the U.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 to purchases denominated in foreign currencies.

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

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

OEH management uses a sensitivity analysis to assess the potential impact on net earnings of changes in foreign currency financial instruments from hypothetical changes in the foreign currency exchange rates.  The primary assumption used in this model is a hypothetical 10% weakening or

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strengthening of the foreign currencies against the U.S. dollar.  At December 31, 2007, as a result of this analysis, OEH management determined that the impact on foreign currency financial instruments of a 10% change in foreign currency exchange rates in relation to the U.S. dollar would be approximately $3,600,000 on OEH’s net earnings.

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ITEM 8.  Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Orient-Express Hotels Ltd.

Hamilton, Bermuda

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

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Orient-Express Hotels Ltd. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, such financial statement schedule, when considered in relation to the 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 standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 29, 2008 expressed an unqualified opinion on the Company’s internal control over financial reporting.

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Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Orient-Express Hotels Ltd.

Hamilton, Bermuda

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

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

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

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

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

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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

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Orient-Express Hotels Ltd. and Subsidiaries

Consolidated Balance Sheets