Certain statements under this caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements to differ materially from the future results, performance or achievements expressed or implied in such forward-looking statements. Such factors include inter alia general economic and business conditions, cruise industry competition, the impact of tax laws and regulations, changes in other laws and regulations, delivery schedule of new vessels, emergency ship repairs, incidents involving cruise vessels at sea, reduced consumer demand for cruises as a result of any number of reasons, including armed conflict or political instability, changes in interest rates and weather.

General
SUMMARY
Royal Caribbean Cruises Ltd. (the "Company") reported improved net income and earnings per share for the year ended December 31, 1999 as shown in the table below. Net income increased 16.0% to $383.9 million or $2.06 per share on a diluted basis compared to $330.8 million or $1.83 per share in 1998. The improvements were attained despite a decline in revenues and operating income resulting from a temporary reduction in capacity. Monarch of the Seas missed 11 voyages during the first quarter of 1999 due to a grounding incident in mid-December 1998 and Grandeur of the Seas and Enchantment of the Seas lost two and six voyages, respectively, during the first half of 1999 due to unscheduled engine repairs. The Company recovers certain lost income from ships being out of service through its loss-of-hire insurance. Included in net income for 1999 is approximately $26.5 million of loss-of-hire insurance, which is recorded in Other income (expense).

Included in net income in 1999 and 1998 are charges of $14.0 million and $9.0 million, respectively, related to settlements with the U.S. Department of Justice and $3.3 million in 1999 related to a settlement with the State of Alaska. Net income for 1998 also includes a reduction in earnings of approximately $9.0 million related to the Monarch of the Seas incident. Accordingly, on a comparable basis, before the previously mentioned settlements and the Monarch of the Seas incident, earnings increased to $401.2 million or $2.15 per share in 1999, from $348.8 million or $1.93 per share in 1998.

As a result of the temporary decline in capacity and the inclusion of loss-of-hire insurance in Other income (expense) during 1999, certain operating margins are not comparative year over year.

FLEET EXPANSION
The Company's fleet expansion continued with the delivery of Voyager of the Seas in October 1999, the first of three Eagle-class vessels to be added to the Royal Caribbean International fleet. With the delivery of Voyager of the Seas, six Vision-class vessels from 1995 through 1998 and the acquisition of Celebrity Cruise Lines Inc. ("Celebrity") in 1997, the Company's capacity has increased approximately 131.2% from 14,228 berths at December 31, 1994 to 32,900 at December 31, 1999.

The Company has 10 ships on order and options to purchase two additional vessels. The delivery dates for the two vessels on option are in the second quarters of 2005 and 2006. The planned berths and expected delivery dates of the ships on order are as follows:

The Eagle-class vessels are the largest passenger cruise ships ever built. The Vantage-class vessels are a progression from Royal Caribbean International's Vision-class vessels, while the Millennium-class vessels are a progression from Celebrity Cruises' Century-class vessels.

Based on the ships currently on order, the Company's year-end berth capacity will increase 69.3% to 55,700 berths between 1999 and 2004.

In May 1998, the Company sold Song of America for $94.5 million and recognized a gain on the sale of $31.0 million. The Company continued to operate Song of America under a charter agreement until March 1999.

RESULTS OF OPERATIONS
The following table presents operating data as a percentage of revenues:

Year Ended December 31, 1999 Compared
to Year Ended December 31, 1998
REVENUES
Revenues decreased 3.4% to $2.5 billion in 1999 compared to $2.6 billion for the same period in 1998. The decline in revenues is due to a 2.9% decrease in capacity and a 0.6% decline in gross revenue per available lower berth ("Yield"). The reduction in capacity is associated with the departure of Song of America from the fleet in March 1999 and a temporary decline in capacity associated with ships out of service as mentioned previously. The reduction in capacity was partially offset by the full-year impact of Vision of the Seas which entered service in the second quarter of 1998 and Voyager of the Seas which entered service in the fourth quarter of 1999. The decrease in Yield is primarily due to a reduction in air revenue per diems associated with fewer guests using the Company's air program, partially offset by improved guest per diems.

The Company offers air transportation as a service to its guests through its air program. Generally, revenues received from air tickets sold to guests are approximately the same as the underlying cost to the Company. Therefore, when a guest purchases his or her own air transportation, rather than use the Company's air program, both the Company's revenues and operating expenses decrease by approximately the same amount.

EXPENSES
Operating expenses decreased 6.1% to $1.5 billion in 1999 as compared to $1.6 billion in 1998. Included in operating expenses are charges of $17.3 million and $9.0 million in 1999 and 1998, respectively, related to settlements with the U.S. Department of Justice and the State of Alaska, as previously mentioned. The decrease in operating expenses is primarily due to the decline in capacity and lower air costs from fewer guests using the Company's air program. As a percentage of revenues, operating expenses decreased from 60.5% in 1998 to 58.8% in 1999 primarily due to fewer guests using the Company's air program.

Marketing, selling and administrative expenses increased 3.5% to $371.8 million in 1999 from $359.2 million in 1998. The increase is primarily due to an increased investment in information technology spending and an increase in international advertising to enhance the Company's brand awareness worldwide. As a percentage of revenue, marketing, selling and administrative expenses increased to 14.6% in 1999 from 13.6% in 1998. Approximately half of the margin increase is the result of higher expenses described above and approximately half is due to a decline in revenues from ships out of service.

Depreciation and amortization remained relatively consistent at $197.9 million in 1999 compared to $194.6 million in 1998.

OTHER INCOME (EXPENSE)
Gross interest expense (excluding capitalized interest) decreased to $165.2 million in 1999 as compared to $182.8 million in 1998. The decline is primarily due to a decrease in the average debt level from prepayments made during 1998 as well as a decrease in interest rates. Capitalized interest increased $19.6 million from $15.0 million in 1998 to $34.6 million in 1999, due to an increase in expenditures related to ships under construction.

Included in Other income (expense) in 1999 is $26.5 million of loss-of-hire insurance resulting from ships out of service. Other income (expense) in 1998 includes a gain of $31.0 million from the sale of Song of America as well as a $32.0 million charge related to the write-down to fair market value of Viking Serenade. Also included in Other income (expense) in 1998 is $3.8 million of net costs related to the Monarch of the Seas incident. (See Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.)

Year Ended December 31, 1998 Compared
to Year Ended December 31, 1997
REVENUES
Revenues increased 36.0% to $2.6 billion compared to $1.9 billion in 1997. The increase in revenues was primarily due to a 31.2% increase in capacity and a 3.6% increase in Yield. The acquisition of Celebrity (which occurred in July 1997) accounted for approximately two-thirds of the capacity increase, while additions to the Royal Caribbean International fleet accounted for the balance of the increase. The increase in Yield was due to an increase in occupancy levels to 105.2% as compared to 104.2% in 1997 as well as an increase in cruise ticket per diems, partially offset by a reduction in shipboard revenue per diems. The reduction in shipboard revenue per diems is due to the inclusion of Celebrity's results for the full year 1998 as compared to six months in 1997. Celebrity derives a higher percentage of its shipboard revenue from concessionaires than does Royal Caribbean International, resulting in a dilutive effect on the per diem. Concessionaires pay a net commission to the Company which is recorded as revenue, in contrast to in-house operations, where shipboard revenues and related cost of sales are recorded on a gross basis.

EXPENSES
Operating expenses increased 30.7% in 1998 to $1.6 billion as compared to $1.2 billion in 1997. The increase in operating expenses was primarily due to the increase in capacity. Included in operating expenses is a $9.0 million charge related to the plea agreement with the U.S. Department of Justice. As a percentage of revenues, operating expenses decreased 2.4% in 1998 primarily due to improved ticket pricing as well as the inclusion of Celebrity's results for the full year of 1998 versus six months of 1997. Celebrity's operating expenses as a percentage of revenues were lower than Royal Caribbean International's due to lower shipboard cost of sales as a result of the higher use of concessionaires onboard Celebrity vessels as discussed above.

Marketing, selling and administrative expenses increased 31.9% in 1998 to $359.2 million from $272.4 million in 1997. The increase was primarily due to the acquisition of Celebrity as well as higher advertising and staffing costs. As a percentage of revenues, marketing, selling and administrative expenses decreased to 13.6% in 1998 as a result of economies of scale.

Depreciation and amortization increased to $194.6 million in 1998 from $143.8 million in 1997. The increase was primarily due to the acquisition of Celebrity as well as additions to the Royal Caribbean International fleet.

OTHER INCOME (EXPENSE)
Interest expense, net of capitalized interest, increased to $167.9 million in 1998 as compared to $128.5 million in 1997. The increase is due to the increase in the average debt level as a result of the Company's fleet expansion program as well as the acquisition of Celebrity in July 1997.

Included in Other income (expense) in 1998 is a $31.0 million gain from the sale of Song of America as well as a $32.0 million charge related to the write-down to fair market value of Viking Serenade. Based on the Company's strategic objectives, the unique circumstances of this vessel and indications of the current value of Viking Serenade, the Company recorded a write-down of the carrying value to its estimated fair market value. The Company continues to operate and depreciate the vessel which is classified as part of Property and Equipment on the balance sheet.

On December 15, 1998, Monarch of the Seas experienced significant damage to the ship's hull and equipment, resulting in the ship being out of service until mid-March 1999. The incident resulted in a net reduction in earnings of approximately $9.0 million or $0.05 per share in the fourth quarter of 1998. This reduction is comprised of lost revenue, net of related variable expenses, of $5.2 million, and costs associated with repairs to the ship, guest transportation and lodging, commissions and various other costs, net of estimated insurance recoveries, of $3.8 million. The costs of $3.8 million were included in Other income (expense) for the quarter and year ended December 31, 1998.

Included in Other income (expense) in 1997 is a $4.0 million gain from the sale of Sun Viking.

EXTRAORDINARY ITEM
Included in 1997 is an extraordinary charge of $7.6 million or $0.05 per share related to the early extinguishment of debt.

Liquidity and Capital Resources
SOURCES AND USES OF CASH
Net cash provided by operating activities was $583.4 million in 1999 as compared to $526.9 million in 1998 and $434.1 million in 1997. The increase was primarily due to higher net income.

In 1999, the Company issued 10,825,000 shares of common stock. The net proceeds to the Company were approximately $487.4 million. (See Note 7 - Shareholders' Equity.)

During the year ended December 31, 1999, the Company's capital expenditures were approximately $1.0 billion as compared to $0.6 billion during 1998 and $1.1 billion during 1997. The largest portion of capital expenditures related to the delivery of Voyager of the Seas in 1999, delivery of Vision of the Seas in 1998, delivery of Rhapsody of the Seas, Enchantment of the Seas and Mercury in 1997, as well as progress payments for ships under construction in all years. Also included in capital expenditures are shoreside capital expenditures primarily related to information technology in support of the Company's growth plans.

The Company received proceeds of $94.5 million from the sale of a vessel during 1998.

Capitalized interest increased to $34.6 million in 1999 from $15.0 million in 1998 and $15.8 million in 1997. The increase during 1999 was due to an increase in expenditures related to ships under construction.

During 1999, the Company paid quarterly cash dividends on its common stock totaling $69.1 million as well as quarterly cash dividends on its preferred stock, totaling $12.5 million. During 1998, the Company paid quarterly cash dividends on its common stock totaling $55.2 million as well as quarterly cash dividends on its preferred stock, totaling $12.5 million.

The Company made principal payments totaling approximately $127.9 and $343.2 million under various term loans and capital leases during 1999 and 1998, respectively.

FUTURE COMMITMENTS
The Company currently has 10 ships on order for an additional capacity of 22,800 berths. The aggregate contract price of the 10 ships, which excludes capitalized interest and other ancillary costs, is approximately $3.9 billion, of which the Company deposited $247.0 million during 1999, $119.3 million during 1998 and $23.7 million during 1997. Additional deposits are due prior to the dates of delivery of $88.1 million in 2000, $64.6 million in 2001 and $39.6 million in 2002. The Company anticipates that overall capital expenditures, based on ships currently on order plus estimates of other shoreside capital expenditures, will be approximately $1.3, $1.6 and $1.4 billion for 2000, 2001 and 2002, respectively. The amount and timing of such expenditures are the Company's current projections. Any additional ships ordered would have an impact on these estimates. The Company also has options to purchase two additional Vantage-class vessels with delivery dates in the second quarters of 2005 and 2006. The options have an aggregate contract price of $804.6 million. The Company has the right to cancel the first option on or before August 31, 2000 and the second option on or before delivery of Radiance of the Seas, which is currently scheduled for the first quarter of 2001.

The Company has $2.3 billion of long-term debt of which $128.1 million is due during the 12-month period ending December 31, 2000. (See Note 6 - Long-Term Debt.)

As a normal part of the Company's business, depending on market conditions, pricing and the Company's overall growth strategy, the Company continuously considers opportunities to enter into contracts for the building of additional ships. The Company may also consider the sale of ships. The Company also continuously considers potential acquisitions and strategic alliances. If any of these were to occur, they would be financed through the incurrence of additional indebtedness, the issuance of additional shares of equity securities or through cash flows from operations.

FUNDING SOURCES
As of December 31, 1999, the Company's liquidity was $1.1 billion consisting of $63.5 million in cash and cash equivalents and $1.0 billion available under its $1.0 billion unsecured revolving credit facility (the "$1 Billion Revolving Credit Facility"). Effective January 2000, the Company has $300.0 million available from April 1, 2000 through June 30, 2000 under a $300.0 million credit facility. Capital expenditures and scheduled debt payments will be funded through a combination of cash flows provided by operations, drawdowns under the Company's available credit facilities, the incurrence of additional indebtedness and sales of securities in private or public securities markets. In addition, the agreements related to the ships under construction, excluding Radiance of the Seas and Brilliance of the Seas, require the shipyards to make available export financing for up to 80% of the contract price of the vessels.

OTHER
The Company enters into interest rate swap agreements to manage interest costs as part of its liability risk management program. The differential in interest rates to be paid or received under these agreements is recognized in income as part of interest expense over the life of the contracts. The objective of the program is to modify the Company's exposure to interest rate movements. The Company continuously evaluates its debt portfolio, including its interest rate swap agreements, and makes periodic adjustments to the mix of fixed rate and floating rate debt based on its view of interest rate movements. (See Note 11-Financial Instruments.)

IMPACT OF YEAR 2000
The Company experienced no significant computer system failures or disruptions as a result of the changeover from 1999 to 2000 (the "Year 2000 issue"), and the Year 2000 issue had no material adverse effect on the results of the operations, liquidity or financial condition of the Company. Since January 1, 1998, the Company incurred approximately $3.6 million in expense on efforts directly related to fixing the Year 2000 issue, as well as an additional $3.8 million of capital expenditures related to the accelerated replacement of non-compliant systems. Prior to 1998, the Company did not separately track associated Year 2000 software compliant costs.