UNITED
STATES


SECURITIES AND EXCHANGE
COMMISSION


Washington,
DC. 20549





FORM
20-F





(Mark
One)





o
            REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) OR (g)OF
      THE SECURITIES EXCHANGE ACT OF 1934


OR





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





For
      the fiscal year
      ended                                          December
      31, 2008


OR





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


For the
transition period from _________________ to _________________





OR





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


Date of event requiring this shell
companyreport_______________________________





For
      the transition period fromCommission
      file number
            001-16601





Frontline
      Ltd(Exact
      name of Registrant as specified in its charter)(Translation
      of Registrant's name into English)Bermuda(Jurisdiction
      of incorporation or organization)Par-la-Ville
      Place, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda(Address
      of principal executive offices)





Georgina
      Sousa, Telephone: (1) 441 295 6935, Facsimile: (1) 441 295
      3494,
              Par-la-Ville
      Place, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda(Name,
      Telephone, E-mail and/or Facsimile number and Address of Company Contact
      Person)





Securities
registered or to be registered pursuant to section 12(b) of the Act





Title
      of each class
            
            Name
      of each exchange on which registeredOrdinary
      Shares, $2.50 Par Value
            
            New
      York Stock Exchange


Securities
registered or to be registered pursuant to section 12(g) of the
Act.






1





None(Title
      of Class)


Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act.





Ordinary
      Shares, $2.50 Par Value(Title
      of Class)


Indicate
the number of outstanding shares of each of the issuer's classes of capital or
common stock as of the close of the period covered by the annual
report.





77,858,502
Ordinary Shares, $2.50 Par Value





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





If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.





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 Securities Exchange Act of 1934 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 whether the registrant has submitted electronically and posted on
its corporate web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).





Yes o                                           
No o





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





Large
      accelerated filer  x
            Accelerated
      filer  o
            Non-accelerated
      filer  o





Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:





U.S.
      GAAP x
            International
      Financial Reporting Standings o
            Other
      o





If
"Other" has been checked in response to the previous question, indicate by check
mark which financial statement


item the
registrant has elected to follow:





Yes
o                                           No
o







If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).





Yes o                                           
No x














2








INDEX
TO REPORT ON FORM 20-F




PAGE
 
 PART
      IItem
      1.
              Identity
      of Directors, Senior Management and Advisers......................................
              5Item
      2.
              Offer
      Statistics and Expected Timetable.........................................................
              5Item
      3.
              Key
      Information....................................................................................
              5Item
      4.
              Information
      on the Company......................................................................
              18Item
      4A.
              Unresolved
      Staff Comments.......................................................................
              39Item
      5.
              Operating
      and Financial Review and Prospects................................................
              39Item
      6.
              Directors,
      Senior Management and Employees................................................
              57Item
      7.
              Major
      Shareholders and Related Party Transactions...........................................
              59Item
      8.
              Financial
      Information..............................................................................
              61Item
      9.
              The
      Offer and Listing..............................................................................
              62Item
      10.
              Additional
      Information.............................................................................
              63Item
      11.
              Quantitative
      and Qualitative Disclosures about Market Risk.................................
              71Item
      12.
              Description
      of Securities other than Equity Securities.........................................
              71PART
      IIItem
      13.
              Defaults,
      Dividend Arrearages and Delinquencies.............................................
              72Item
      14.
              Material
      Modifications to the Rights of Security Holders and Use of
      Proceeds............
              72Item
      15.
              Controls
      and Procedures...........................................................................
              72Item
      16.
              Reserved.............................................................................................
              73Item
      16A.
              Audit
      Committee Financial Expert...............................................................
              73Item
      16B.
              Code
      of Ethics.......................................................................................
              73Item
      16C.
              Principal
      Accountant Fees and Services.........................................................
              73Item
      16D.
              Exemptions
      from the Listing Standards for Audit Committees..............................
              73Item
      16E.
              Purchases
      of Equity Securities by the Issuer and Affiliated
      Purchasers.....................
              73Item
      16F.
              Change
      in Registrant's Certifying Accountant.................................................
              74Item
      16G.
              Corporate
      Governance..............................................................................
              74PART
      IIIItem
      17.
              Financial
      Statements...............................................................................
              75Item
      18.
              Financial
      Statements...............................................................................
              75Item
      19.
              Exhibits...............................................................................................
              76
  3





CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS





Matters
discussed in this report may constitute forward-looking statements. The Private
Securities Litigation Reform Act of 1995 provides safe harbor protections for
forward-looking statements in order to encourage companies to provide
prospective information about their business. Forward-looking statements include
statements concerning plans, objectives, goals, strategies, future events or
performance, and underlying assumptions and other statements, which are other
than statements of historical facts.





Frontline
Ltd., or the Company, desires to take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and is including this
cautionary statement in connection with this safe harbor legislation. This
report and any other written or oral statements made by us or on our behalf may
include forward-looking statements, which reflect our current views with respect
to future events and financial performance. When used in this report, the words
"believe," "anticipate," "intend," "estimate," "forecast," "project," "plan,"
"potential," "will," "may," "should," "expect" and similar expressions identify
forward-looking statements.





The
forward-looking statements in this report are based upon various assumptions,
many of which are based, in turn, upon further assumptions, including without
limitation, management's examination of historical operating trends, data
contained in our records and other data available from third parties. Although
we believe that these assumptions were reasonable when made, because these
assumptions are inherently subject to significant uncertainties and
contingencies which are difficult or impossible to predict and are beyond our
control, we cannot assure you that we will achieve or accomplish these
expectations, beliefs or projections.





In
addition to these important factors and matters discussed elsewhere herein and
in the documents incorporated by reference herein, important factors that, in
our view, could cause actual results to differ materially from those discussed
in the forward-looking statements include the strength of world economies,
fluctuations in currencies and interest rates, general market conditions,
including fluctuations in charterhire rates and vessel values, changes in demand
in the tanker market, changes in world wide oil production and consumption and
storage, changes in the Company's operating expenses, including bunker prices,
drydocking and insurance costs, changes in governmental rules and regulations or
actions taken by regulatory authorities, potential liability from pending or
future litigation, general domestic and international political conditions,
potential disruption of shipping routes due to accidents, political events or
acts by terrorists, and other important factors described from time to time
in the reports filed by the Company with the Securities and Exchange Commission
or Commission.




4








PART
I





ITEM
      1.
            IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS





Not
applicable.





ITEM
      2.
            OFFER
      STATISTICS AND EXPECTED TIMETABLE





Not
applicable.





ITEM
      3.
            KEY
      INFORMATION





Throughout
this report, the "Company," "we," "us" and "our" all refer
to Frontline Ltd. and its subsidiaries. We use the term deadweight ton, or dwt,
in describing the size of vessels. Dwt, expressed in metric tons, each of which
is equivalent to 1,000 kilograms, refers to the maximum weight of cargo and
supplies that a vessel can carry. The Company operates tankers of two sizes:
very large crude carriers, or VLCCs, which are between 200,000 and 320,000
deadweight tons, or dwt, and Suezmaxes, which are vessels between 120,000 and
170,000 dwt. We also operate oil/bulk/ore or OBO carriers, which are currently
classified to carry dry cargo. Unless otherwise indicated, all references to
"USD,""US$" and "$" in this report are U.S. dollars.





A.
SELECTED FINANCIAL DATA





The
selected statement of operations data of the Company with respect to the fiscal
years ended December 31, 2008, 2007 and 2006 and the selected balance sheet data
of the Company with respect to the fiscal years ended December 31, 2008 and
2007, respectively, have been derived from the Company's consolidated financial
statements included herein and should be read in conjunction with such
statements and the notes thereto. The selected statement of operations data with
respect to the fiscal years ended December 31, 2005 and 2004 and the selected
balance sheet data with respect to the fiscal years ended December 31, 2006,
2005 and 2004 have been derived from consolidated financial statements of the
Company not included herein. The following table should also be read in
conjunction with Item 5. "Operating and Financial Review and Prospects" and the
Company's consolidated financial statements and notes thereto included herein.
The Company's accounts are maintained in U.S. dollars.





Fiscal
      year ended December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(in
      thousands of $, except ordinary shares, per share data and
      ratios)Statement of Operations Data1:Total
      operating revenues
                
                
                2,104,018
                
                
                
                1,299,927
                
                
                
                1,558,369
                
                
                
                1,495,975
                
                
                
                1,842,923Total
      operating expenses
                
                
                1,395,831
                
                
                
                898,904
                
                
                
                850,623
                
                
                
                713,919
                
                
                
                737,389Net
      operating income
                
                
                850,480
                
                
                
                519,191
                
                
                
                803,401
                
                
                
                858,137
                
                
                
                1,125,108Net
      income from continuing operations before income taxes and minority
      interest
                
                
                701,264
                
                
                
                503,991
                
                
                
                661,330
                
                
                
                761,078
                
                
                
                970,936Net
      income from continuing operations
                
                
                698,770
                
                
                
                564,976
                
                
                
                502,486
                
                
                
                592,743
                
                
                
                905,763Discontinued
      operations 2
                
                
                -
                
                
                
                5,442
                
                
                
                13,514
                
                
                
                14,096
                
                
                
                117,619Net
      income
                
                
                698,770
                
                
                
                570,418
                
                
                
                516,000
                
                
                
                606,839
                
                
                
                1,023,382Earnings
      from continuing operations per ordinary share-
      basic
                
                $
                9.15
                
                
                $
                7.55
                
                
                $
                6.72
                
                
                $
                7.92
                
                
                $
                12.21-
      diluted
                
                $
                9.14
                
                
                $
                7.55
                
                
                $
                6.72
                
                
                $
                7.92
                
                
                $
                12.21Net
      income per ordinary share-
      basic
                
                $
                9.15
                
                
                $
                7.62
                
                
                $
                6.90
                
                
                $
                8.11
                
                
                $
                13.79-
      diluted
                
                $
                9.14
                
                
                $
                7.62
                
                
                $
                6.90
                
                
                $
                8.11
                
                
                $
                13.79Cash
      dividends declared per share
                
                $
                8.25
                
                
                $
                8.30
                
                
                $
                7.00
                
                
                $
                10.10
                
                
                $
                13.60








5








Fiscal
      year ended December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(in
      thousands of $, except ordinary shares and ratios)Balance Sheet Data (at end of
      year)1:Cash
      and cash equivalents
                
                
                190,819
                
                
                
                168,432
                
                
                
                197,181
                
                
                
                92,782
                
                
                
                96,879Newbuildings
                
                
                454,227
                
                
                
                160,298
                
                
                
                166,851
                
                
                
                15,927
                
                
                
                24,231Vessels
      and equipment, net
                
                
                438,161
                
                
                
                208,516
                
                
                
                2,446,278
                
                
                
                2,584,847
                
                
                
                2,254,361Vessels
      and equipment under capital lease, net
                
                
                2,100,717
                
                
                
                2,324,789
                
                
                
                626,374
                
                
                
                672,608
                
                
                
                718,842Investments
      in unconsolidated subsidiaries and associated
    companies
                
                
                4,467
                
                
                
                5,633
                
                
                
                17,825
                
                
                
                15,783
                
                
                
                28,881Total
      assets
                
                
                4,027,728
                
                
                
                3,762,091
                
                
                
                4,589,937
                
                
                
                4,454,817
                
                
                
                4,211,160Short-term
      debt and current portion of long-term debt
                
                
                293,471
                
                
                
                96,811
                
                
                
                281,409
                
                
                
                228,135
                
                
                
                137,332Current
      portion of obligations under capital lease
                
                
                243,293
                
                
                
                179,604
                
                
                
                28,857
                
                
                
                25,142
                
                
                
                21,498Long-term
      debt
                
                
                614,676
                
                
                
                376,723
                
                
                
                2,181,885
                
                
                
                2,101,061
                
                
                
                1,879,598Obligations
      under capital leases
                
                
                1,969,919
                
                
                
                2,318,794
                
                
                
                723,073
                
                
                
                706,279
                
                
                
                732,153Share
      capital
                
                
                194,646
                
                
                
                187,063
                
                
                
                187,063
                
                
                
                187,063
                
                
                
                187,063Stockholders'
      equity
                
                
                702,217
                
                
                
                445,969
                
                
                
                668,560
                
                
                
                715,166
                
                
                
                917,968Ordinary
      shares outstanding
                
                
                77,858,502
                
                
                
                74,825,169
                
                
                
                74,825,169
                
                
                
                74,825,169
                
                
                
                74,825,169Weighted
      average ordinary shares outstanding
                
                
                76,352,673
                
                
                
                74,825,169
                
                
                
                74,825,169
                
                
                
                74,825,169
                
                
                
                74,192,939Other
      Financial Data:Equity
      to assets ratio (percentage) 3
                
                
                17.4
                %
                
                
                11.8
                %
                
                
                14.6
                %
                
                
                16.1
                %
                
                
                21.8
                %Debt
      to equity ratio 4
                
                
                4.4
                
                
                
                6.7
                
                
                
                4.8
                
                
                
                4.3
                
                
                
                3.0Price
      earnings ratio 5
                
                
                3.2
                
                
                
                6.3
                
                
                
                4.6
                
                
                
                4.7
                
                
                
                3.2Time
      charter equivalent revenue 6
                
                
                1,493,912
                
                
                
                938,960
                
                
                
                1,154,029
                
                
                
                1,155,135
                
                
                
                1,477,537





Notes:


1.
            The
      Company distributed the majority of its remaining shareholding in Ship
      Finance International Limited ("Ship Finance") in March 2007 and no longer
      consolidates Ship Finance as of March 31, 2007. A summary of the major
      changes to the financial statements is as
  follows;


a.
            Vessels
      leased from Ship Finance, which were previously reported as wholly owned
      are reported as vessels held under capital
  lease.


b.
            Capital
      lease obligations with Ship Finance, which were previously eliminated on
      consolidation are reported as liabilities with the related interest
      recorded in the income statement.


c.
            Debt
      incurred by Ship Finance, which was previously reported as debt of the
      Company is no longer reported.


d.
            Derivative
      instruments held by Ship Finance are no longer
  reported.


e.
            Minority
      interest expense relating to Ship Finance is no longer
      reported.


f.
            Profit
      share expense relating to amounts due to Ship Finance is shown in the
      income statement.


g.
            Results
      from Ship Finance's container ships, jack-up rigs and Panamax vessels are
      no longer reported in the Company's consolidated
  results.





2.
            The
      Company disposed of the container vessel and rig operations of Ship
      Finance in the first quarter of 2007 as a result of the spin off of Ship
      Finance. These operations have been recorded as discontinued operations in
      2007 and 2006. The results from container vessels have also been
      recorded in discontinued operations in 2005. These operations have been
      recorded as discontinued operations for all applicable years presented,
      which are 2007, 2006 and 2005. During the years ended December 31, 2005
      and 2004 the Company disposed of portions of its dry-bulk operations,
      which have been recorded as discontinued operations in the years ended
      December 31, 2005 and 2004.





3.
            Equity
      to assets ratio is calculated as total stockholders' equity divided by
      total assets.





4.
            Debt
      to equity ratio is calculated as total interest bearing current and
      long-term liabilities, including obligations under capital leases, divided
      by stockholders' equity.





5.
            Price
      earnings ratio is calculated by dividing the closing year end share price
      by basic earnings per share.





6.
            A
      reconciliation of time charter equivalent revenues to total operating
      revenues as reflected in the consolidated statements of operations is as
      follows:





6








2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(in
      thousands of $)Total
      operating revenues
                
                
                2,104,018
                
                
                
                1,299,927
                
                
                
                1,558,369
                
                
                
                1,495,975
                
                
                
                1,842,923Less:Other
      revenue
                
                
                (17,918
                )
                
                
                (8,516
                )
                
                
                (5,294
                )
                
                
                (3,877
                )
                
                
                (3,777
                )Voyage
      expense
                
                
                (592,188
                )
                
                
                (352,451
                )
                
                
                (399,046
                )
                
                
                (336,963
                )
                
                
                (361,609
                )Time
      charter equivalent revenue
                
                
                1,493,912
                
                
                
                938,960
                
                
                
                1,154,029
                
                
                
                1,155,135
                
                
                
                1,477,537





Our
vessels are operated under time charters, bareboat charters, voyage charters,
pool arrangements and contracts of affreightment, or COAs. Under a time charter,
the charterer pays substantially all of the vessel voyage costs which are
primarily fuel and port charges. Under a bareboat charter the charterer pays
substantially all of the vessel voyage and operating costs. Under a voyage
charter, the vessel owner pays such costs. Under contracts of affreightment, the
owner carries an agreed upon quantity of cargo over a specified route and time
period. In order to compare vessels trading under different types of charters,
it is standard industry practice to measure the revenue performance of a vessel
in terms of time charter equivalent revenue, or TCE. Total TCE is the sum of
time charter, voyage charter and bareboat charter revenues, less voyage
expenses. Total TCE, which is not covered by U.S. generally accepted accounting
principles, or GAAP, provides more meaningful information to us than total
operating revenues, the most directly comparable GAAP measure. Average daily
TCEs are also widely used by investors and analysts in the shipping industry for
comparing financial performance between companies and to industry averages.
Other companies may calculate TCE using a different method.





B.
CAPITALIZATION AND INDEBTEDNESS





Not
applicable.





C.
REASONS FOR THE OFFER AND USE OF PROCEEDS





Not
applicable.





D. RISK
FACTORS





We are
engaged primarily in transporting crude oil and oil products. The following
summarizes some of the risks that may materially affect our business, financial
condition or results of operations.





Risks
Related to Our Industry





The
cyclical nature of the tanker industry may lead to volatile changes in charter
rates and vessel values which may adversely affect our earnings





Historically,
the tanker industry has been highly cyclical, with volatility in profitability
and asset values resulting from changes in the supply of, and demand for, tanker
capacity. When the tanker market is depressed our earnings and available cash
flow may decrease. Our ability to re-charter our vessels on the expiration or
termination of their current spot and time and bareboat charters and the charter
rates payable under any renewal or replacement charters will depend upon, among
other things, economic conditions in the tanker market. Fluctuations in
charter rates and vessel values result from changes in the supply and demand for
tanker capacity and changes in the supply and demand for oil and oil
products.





The
factors affecting the supply and demand for oil tankers are outside of our
control, and the nature, timing and degree of changes in industry conditions are
unpredictable. The factors that influence demand for tanker capacity
include:





·
            demand
      for oil and oil products;


·
            global
      and regional economic and political
conditions;


·
            changes
      in oil production and refining
capacity;


·
            environmental
      and other regulatory developments;


·
            the
      distance oil and oil products are to be moved by sea;
  and


·
            changes
      in seaborne and other transportation
patterns.





The
factors that influence the supply of tanker capacity include:





·
            the
      number of newbuilding deliveries;


·
            the
      scrapping rate of older vessels;


·
            port
      or canal congestion; ·
              vessel
      casualties;
 ·
              price
      of steel;


·
            potential
      conversion of vessels to alternative
use;




7

















·
            the
      number of vessels that are out of service;
and


·
            changes
      in environmental and other regulations that may effectively cause
      reductions in the carrying capacity of vessels or early obsolescence of
      tonnage.





The
international tanker industry has experienced high charter rates and vessel
values and there can be no assurance that these high charter rates and vessel
values will be sustained





Charter
rates in the tanker industry are volatile. We anticipate that future demand for
our vessels, and in turn our future charter rates, will be dependent upon
continued economic growth in the world's economy as well as seasonal and
regional changes in demand and changes in the capacity of the world's fleet. We
believe that these charter rates are the result of economic growth in the world
economy that exceeds growth in global vessel capacity. There can be no assurance
that economic growth will not stagnate or decline leading to a decrease in
vessel values and charter rates. A decline in charter rates could have an
adverse effect on our business, financial condition, results of operation and
ability to pay dividends.





Any
decrease in shipments of crude oil may adversely affect our financial
performance





The
demand for our oil tankers derives primarily from demand for Arabian Gulf and
West African crude oil, along with crude oil from the former Soviet Union, or
the FSU, which, in turn, primarily depends on the economies of the world's
industrial countries and competition from alternative energy sources. A wide
range of economic, social and other factors can significantly affect the
strength of the world's industrial economies and their demand for crude oil from
the mentioned geographical areas. One such factor is the price of worldwide
crude oil. The world's oil markets have experienced high levels of volatility in
the last 25 years. In July 2008, oil prices rose to a high of approximately $143
per barrel before decreasing to approximately $38 per barrel by the end of
December 2008.





Any
decrease in shipments of crude oil from the above mentioned geographical areas
would have a material adverse effect on our financial performance. Among the
factors which could lead to such a decrease are:





·
            increased
      crude oil production from other
areas;


·
            increased
      refining capacity in the Arabian Gulf, West Africa or the
    FSU;


·
            increased
      use of existing and future crude oil pipelines in the Arabian Gulf, West
      Africa and FSU;


·
            a
      decision by Arabian Gulf, West African and FSU oil-producing nations to
      increase their crude oil prices or to further decrease or limit their
      crude oil production;


·
            armed
      conflict in the Arabian Gulf and West Africa and political or other
      factors; and


·
            the
      development and the relative costs of nuclear power, natural gas, coal and
      other alternative sources of
energy.





An
over-supply of tanker capacity may lead to reductions in charter rates, vessel
values and profitability





If the
capacity of new vessels delivered exceeds the capacity of tankers being scrapped
and converted to non-trading tankers, tanker capacity will increase. If the
supply of tanker capacity increases and the demand for tanker capacity does not
increase correspondingly, charter rates could materially decline. A reduction in
charter rates and the value of our vessels may have a material adverse effect on
our results of operations, our ability to pay dividends and our compliance with
loan covenants.





Disruptions
in world financial markets and the resulting governmental action in the United
States and in other parts of the world could have a material adverse impact on
our results of operations, financial condition and cash flows, and could cause
the market price of our ordinary shares to decline





Over the
last year, global financial markets have experienced extraordinary disruption
and volatility following adverse changes in the global credit markets. The
credit markets in the United States have experienced significant contraction,
deleveraging and reduced liquidity, and governments around the world have taken
highly significant measures in response to such events, including the enactment
of the Emergency Economic Stabilization Act of 2008 in the United States, and
may implement other significant responses in the future.




Securities and futures markets and the credit markets are subject to
comprehensive statutes, regulations and other requirements. The Commission,
other regulators, self-regulatory organizations and exchanges have enacted
temporary emergency regulations and may take other extraordinary actions in the
event of market emergencies and may effect permanent changes in law or
interpretations of existing laws. Recently, a number of financial institutions
have experienced serious financial difficulties and, in some cases, have entered
into bankruptcy proceedings or are in regulatory
enforcement actions. These difficulties have resulted, in part, from declining
markets for assets held by such institutions, particularly the reduction in the
value of their mortgage and asset-backed securities portfolios. These
difficulties have been compounded by a general decline in the willingness by
banks and other financial institutions to extend credit. In addition, these
difficulties may adversely affect the financial institutions that provide our
credit facilities and may impair their ability to continue to perform under
their financing obligations to us, which could have an impact on our ability to
fund current and future obligations, including our ability to take delivery of
our newbuildings.




8





We face
risks attendant to changes in economic environments, changes in interest rates
and instability in securities markets around the world, among other factors.
Major market disruptions and the current adverse changes in market conditions
and regulatory climate in the United States and worldwide may adversely affect
our business or impair our ability to borrow amounts under our credit facilities
or any future financial arrangements. We cannot predict how long the current
market conditions will last. However, these recent and developing economic and
governmental factors may have a material adverse effect on our results of
operations, financial condition or cash flows and could cause the price of our
ordinary shares to decline significantly or impair our ability to make
distributions to our shareholders.





A
continued downturn in the dry bulk charter market may have a material adverse
impact on our results of operations, financial condition and cash
flows





The
abrupt and dramatic downturn in the drybulk charter market, from which we derive
revenue from the employment of our eight Suezmax OBO carriers, which are
currently fixed on medium to long-term charters, has severely affected the
drybulk shipping industry. The BDI, a daily average of charter rates in 26
shipping routes measured on a time charter and voyage basis and covering various
drybulk carriers, declined from a high of 11,793 in May 2008 to a low of 663 in
December 2008, which represents a decline of 94%, before recovering somewhat
during the first quarter of 2009, although still remaining approximately 87%
below its record highs. The decline in charter rates is due to various factors,
including the reduced availability of trade financing for purchases of
commodities carried by sea, which has resulted in a significant decline in cargo
shipments, and the excess supply of iron ore in China, which has resulted in
falling iron ore prices and increased stockpiles in Chinese
ports.  The decline in charter rates in the drybulk market also
affects the value of drybulk vessels, including our OBO carrriers, which follow
the trends of drybulk charter rates. The decline in the drybulk carrier charter
market has had, and may continue to have, additional adverse consequences for
our industry, and may adversely impact our results of operations and cash
flows.





World
events could affect our results of operations and financial
condition





Terrorist
attacks in New York on September 11, 2001, in London on July 7, 2005 and in
Mumbai on November 26, 2008 and the continuing response of the United States and
others to these attacks, as well as the threat of future terrorist attacks in
the United States or elsewhere, continues to cause uncertainty in the world's
financial markets and may affect our business, operating results and financial
condition. The continuing presence of United States and other armed forces in
Iraq and Afghanistan may lead to additional acts of terrorism and armed conflict
around the world, which may contribute to further economic instability in the
global financial markets. These uncertainties could also adversely affect our
ability to obtain additional financing on terms acceptable to us or at all. In
the past, political conflicts have also resulted in attacks on vessels, mining
of waterways and other efforts to disrupt international shipping, particularly
in the Arabian Gulf region. Acts of terrorism and piracy have also affected
vessels trading in regions such as the South China Sea and the Gulf of Aden off
the coast of Somalia. Any of these occurrences could have a material adverse
impact on our operating results, revenues and costs.





Terrorist
attacks on vessels, such as the October 2002 attack on the M.V. Limburg, a very large
crude carrier not related to us, may in the future also negatively affect our
operations and financial condition and directly impact our vessels or our
customers. Future terrorist attacks could result in increased volatility and
turmoil of the financial markets in the United States and globally. Any of these
occurrences could have a material adverse impact on our revenues and
costs.





Acts
of piracy on ocean-going vessels have recently increased in frequency, which
could adversely affect our business





Acts of
piracy have historically affected ocean-going vessels trading in regions of the
world such as the South China Sea and in the Gulf of Aden off the coast of
Somalia. Throughout 2008, the frequency of piracy incidents against commercial
shipping vessels increased significantly, particularly in the Gulf of Aden off
the coast of Somalia. For example, in November 2008, the M/V Sirius Star, a tanker vessel
not affiliated with us, was captured by pirates in the Indian Ocean while
carrying crude oil estimated to be worth $100 million. If these pirate attacks
result in regions in which our vessels are deployed being characterized as "war
risk" zones by insurers, as the Gulf of Aden temporarily was in May 2008,
premiums payable for such coverage could increase significantly and such
insurance coverage may be more difficult to obtain. In addition, crew costs,
including due to employing onboard security guards, could increase in such
circumstances. We may not be adequately insured to cover losses from these
incidents, which could have a material adverse effect on us. In addition, any of
these events may result in loss of revenues, increased costs and decreased cash
flows to our customers, which could impair their ability to make payments to us
under our charters.





9








Risks
involved with operating ocean-going vessels could affect our business and
reputation, which could have a material adverse effect on our results of
operations and financial condition





The
operation of an ocean-going vessel carries inherent risks. These risks include
the possibility of:





·
            a
      marine disaster;


·
            piracy;


·
            environmental
      accidents;


·
            cargo
      and property losses or damage; and


·
            business
      interruptions caused by mechanical failure, human error, war, terrorism,
      piracy, political action in various countries, labor  strikes,
      or adverse weather conditions.





Any of
these circumstances or events could increase our costs or lower our revenues.
The involvement of our vessels in an oil spill or other environmental disaster
may harm our reputation as a safe and reliable tanker operator.





Safety,
environmental and other governmental requirements expose us to liability, and
compliance with current and future regulations could require significant
additional expenditures, which could have a material adverse affect on our
business and financial results





Our
operations are affected by extensive and changing international, national, state
and local laws, regulations, treaties, conventions and standards in force in
international waters, the jurisdictions in which our tankers and other vessels
operate and the country or countries in which such vessels are registered,
including those governing the management and disposal of hazardous substances
and wastes, the cleanup of oil spills and other contamination, air emissions,
and water discharges and ballast water management. These regulations include the
United States Oil Pollution Act of 1990, or OPA, the United States Clean Air Act
and United States Clean Water Act, the United States Marine Transportation
Security Act of 2002, the International Convention on Civil Liability for Oil
Pollution Damage of 1969, as amended, or CLC, the International Convention for
the Prevention of Pollution from Ships, of 1975, the International Convention
for the Safety of Life at Sea of 1974, or SOLAS, the International Convention on
Load Lines of 1966 or LL Convention, and implementing regulations adopted by the
International Maritime Organization, or the IMO (the United Nations agency for
maritime safety and the prevention of pollution by vessels), the European Union,
or the EU, and other international, national and local regulatory
bodies.





In
addition, vessel classification societies also impose significant safety and
other requirements on our vessels. In complying with current and future
environmental requirements, vessel owners and operators such as ourselves may
also incur significant additional costs in meeting new maintenance and
inspection requirements, in developing contingency arrangements for potential
spills and in obtaining insurance coverage. Government regulation of vessels,
particularly in the areas of safety and environmental requirements, can be
expected to become stricter in the future and require us to incur significant
capital expenditures on our vessels to keep them in compliance, or even to scrap
or sell certain vessels altogether. For example, various jurisdictions,
including the United States, are considering or have enacted legislation
imposing more stringent requirements on air emissions and ballast water
discharges from vessels.





Many of
these requirements are designed to reduce the risk of oil spills and other
pollution, and our compliance with these requirements can be costly. These
requirements can also affect the resale value or useful lives of our vessels,
require a reduction in cargo-capacity, ship modifications or operational changes
or restrictions, lead to decreased availability of insurance coverage for
environmental matters or result in the denial of access to certain
jurisdictional waters or ports, or detention in, certain ports.





Under
local, national and foreign laws, as well as international treaties and
conventions, we could incur material liabilities, including cleanup obligations,
natural resource damages and third-party claims for personal injury or property
damages, in the event that there is a release of petroleum or other hazardous
substances from our vessels or otherwise in connection with our current or
historic operations. We could also incur substantial penalties, fines and other
civil or criminal sanctions, including in certain instances seizure or detention
of our vessels, as a result of violations of or liabilities under environmental
laws, regulations and other requirements. For example, OPA affects all vessel
owners shipping oil to, from or within the United States. OPA allows for
potentially unlimited liability without regard to fault for owners, operators
and bareboat charterers of vessels for oil pollution in United States waters.
Similarly, the CLC, which has been adopted by most countries outside of the
United States, imposes liability for oil pollution in international waters. OPA
expressly permits individual states to impose their own liability regimes with
regard to hazardous materials and oil pollution incidents occurring within their
boundaries. Coastal states in the United States have enacted pollution
prevention liability and response laws, many providing for unlimited
liability.





10








OPA also
provides for the scheduled phase-out of all non-double-hull tankers that carry
oil in bulk in United States waters. The IMO and the EU, have adopted separate
phase-out schedules applicable to single-hull tankers operating in international
and EU waters, respectively. These regulations could reduce the demand for
single-hull tankers, force the remaining single-hull vessels into less desirable
trading routes, increase the number of vessels trading in routes open to
single-hull vessels and could increase demands for further restrictions in the
remaining jurisdictions that permit the operation of these vessels. As a result,
single-hull vessels are likely to be chartered less frequently and at lower
rates.





In recent
years, the IMO and EU have both accelerated their existing non-double-hull
phase-out schedules in response to highly publicized oil spills and other
shipping incidents involving companies unrelated to us. Future accidents may be
expected in the industry, and such accidents or other events may be expected to
result in the adoption of even stricter laws and regulations, which could limit
our operations or our ability to do business and which could have a material
adverse effect on our business and financial results.





Maritime
claimants could arrest one or more of our vessels, which could interrupt our
cash flow





Crew
members, suppliers of goods and services to a vessel, shippers of cargo and
other parties may be entitled to a maritime lien against a vessel for
unsatisfied debts, claims or damages. In many jurisdictions a claimant may seek
to obtain security for its claim by arresting a vessel through foreclosure
proceedings. The arrest or attachment of one or more of our vessels could
interrupt our cash flow and require us to pay large sums of money to have the
arrest or attachment lifted. In addition, in some jurisdictions, such as South
Africa, under the "sister ship" theory of liability, a claimant may arrest both
the vessel which is subject to the claimant's maritime lien and any "associated"
vessel, which is any vessel owned or controlled by the same owner. Claimants
could attempt to assert "sister ship" liability against one vessel in our fleet
for claims relating to another of our vessels.





Governments
could requisition our vessels during a period of war or emergency resulting in a
loss of earnings





A
government could requisition for title or seize one of more of our vessels.
Requisition for title occurs when a government takes control of a vessel and
becomes her owner. Also, a government could requisition one or more of our
vessels for hire. Requisition for hire occurs when a government takes control of
a vessel and effectively becomes her charterer at dictated charter rates. This
amount could be materially less than the charterhire that would have been
payable otherwise. In addition, we would bear all risk of loss or damage to a
vessel under requisition for hire. Government requisition of one or more of our
vessels would negatively impact our revenues and therefore impact our ability to
service our debt.





Our
vessels may call on ports located in countries that are subject to restrictions
imposed by the United States government





From time
to time, vessels in our fleet may call on ports located in countries subject to
sanctions and embargoes imposed by the United States government and countries
identified by the United States government as state sponsors of terrorism.
Although these sanctions and embargoes do not prevent our vessels from making
calls to ports in these countries, potential investors could view such port
calls negatively, which could adversely affect our reputation and the market for
our ordinary shares. Investor perception of the value of our ordinary shares may
be adversely affected by the consequences of war, the effects of terrorism,
civil unrest and governmental actions in these and surrounding
countries.





Risks
Related to Our Business





We
are highly dependent on spot voyage charters. Any decrease in spot charter rates
in the future may adversely affect our earnings





A
significant portion of our vessels currently operate on a spot charter basis or
under contracts of affreightment under which we carry an agreed upon quantity of
cargo over a specified route and time period. Although spot chartering is common
in the tanker industry, the spot charter market is highly competitive and spot
charter rates may fluctuate significantly based upon tanker and oil supply and
demand. The successful operation of our vessels in the spot charter market
depends upon, among other things, obtaining profitable spot charters and
minimizing, to the extent possible, time spent waiting for charters and time
spent traveling unladen to pick up cargo. We cannot assure you that future spot
charters will be available at rates sufficient to enable our vessels trading in
the spot market to operate profitably. In addition, bunkering or fuel charges,
which account for a substantial portion of the operating costs, and
generally reflect prevailing oil prices, are subject to sharp
fluctuations.





11








Our
revenues experience seasonal variations that may affect our income





We
operate our tankers in markets that have historically exhibited seasonal
variations in demand and, therefore, charter rates. Historically, oil trade and
therefore charter rates increased in the winter months and eased in the summer
months as demand for oil in the Northern Hemisphere rose in colder weather and
fell in warmer weather. In addition, unpredictable weather patterns in the
winter months tend to disrupt vessel scheduling. The tanker industry in general
is less dependent on the seasonal transport of heating oil than a decade ago as
new uses for oil and oil products have developed, spreading consumption more
evenly over the year. Most apparent is a higher seasonal demand during the
summer months due to energy requirements for air conditioning and motor
vehicles. The oil price volatility resulting from these factors has historically
led to increased oil trading activities and demand for vessels. The change in
demand for vessels may affect the charter rates that we receive.





As
of February 28, 2009, we charter 39 vessels from Ship Finance at fixed rates on
long-term charters. In addition, we charter 17 vessels under fixed rate medium
term charters from third parties. We are obliged to make fixed rate charterhire
payments even though our income may decrease to levels that make these charters
unprofitable





Our long
term time charters with Ship Finance extend for various periods depending on the
age of the vessels, ranging from approximately 2010 to 2027. The daily base
charter rates, which are payable by us for very large crude carriers, or VLCCs,
range from approximately $18,300 to $33,800 and from approximately $15,300 to
$20,700 for Suezmaxes. Our third party medium-term charters expire from 2010 to
2015. The daily base charter rates, which are payable by us for Suezmaxes range
from approximately $14,500 to $47,600 and from approximately $20,000 to $37,800
for VLCCs.





If our
earnings from these vessels fall below these rates we will incur
losses.





Because
the market value of our vessels may fluctuate significantly, we may incur losses
when we sell vessels which may adversely affect our earnings





The fair
market value of vessels may increase and decrease depending on but not limited
to the following factors:





·
            general
      economic and market conditions affecting the
      shipping  industry;


·
            competition
      from other shipping companies;


·
            types
      and sizes of vessels;


·
            other
      modes of transportation;


·
            cost
      of newbuildings;


·
            shipyard
      capacity;


·
            governmental
      or other regulations;


·
            age
      of vessels;


·
            prevailing
      level of charter rates; and


·
            technological
      advances.





If we
sell a vessel at a time when ship prices have fallen, the sale may be at less
than the vessel's carrying amount on our financial statements, with the result
that we could incur a loss and a reduction in earnings. In addition, if we
determine at any time that a vessel's future limited useful life and earnings
require us to impair its value on our financial statements, that could result in
a charge against our earnings and a reduction of our shareholders' equity. It is
possible that the market value of our vessels will decline in the future and
this will also have an adverse effect on some of the financial covenants in our
loan agreements.





An
acceleration of the current prohibition to trade deadlines for our non-double
hull tankers could adversely affect our operations





As at
February 28, 2009 our tanker fleet includes eight non-double hull tankers. The
United States, the European Union and the IMO have all imposed limits or
prohibitions on the use of these types of tankers in specified markets after
certain target dates, depending on certain factors such as the size of the
vessel and the type of cargo. In the case of our non-double hull tankers, these
phase out dates range from 2010 to 2015. In 2005, the Marine Environmental
Protection Committee of the IMO has amended the International Convention for the
Prevention of Pollution from Ships to accelerate the phase out of certain
categories of single hull tankers, including the types of vessels in our fleet,
from 2015 to 2010 unless the relevant flag states extend the date. This change
could result in a number of our vessels being unable to trade in many markets
after 2010. The phase out of single hull tankers may therefore reduce the demand
for single hull tankers, and force the remaining single hull tankers into
employment on less desirable trading routes and increase the number of tankers
trading on those routes. As a result, single hull tankers may be chartered
less frequently and at lower rates. Moreover, additional regulations may be
adopted in the future that could further adversely affect the useful lives of
our non-double hull tankers, as well as our ability to generate income from
them.





12


We
may be unable to successfully compete with other tanker operators for
charters





The
operation of tankers and transportation of crude and petroleum products and the
other businesses in which we operate are extremely competitive. Through our
operating subsidiaries we compete with other oil tanker owners (including major
oil companies as well as independent companies), and, to a lesser extent, owners
of other size vessels. The tanker market is highly fragmented. It is possible
that our competitive position will erode in the future.





Our
revenues may be adversely affected if we do not successfully employ our
tankers





As of
February 28, 2009, 43 of our vessels were contractually committed to time or
bareboat charters, with the charters for four vessels expiring in 2009 and the
remaining 39 vessel charters expiring between 2010 and 2014. Additionally, we
have two vessels on time charters and four vessels on bareboat charters, all of
which are based on spot market rates rather than fixed rate. Although these time
charters generally provide reliable revenues, they also limit the portion of our
fleet available for spot market voyages during an upswing in the tanker industry
cycle, when spot market voyages might be more profitable. We also cannot assure
you that we will be able to successfully employ our tankers in the future or
renew our existing charters at rates sufficient to allow us to operate our
business profitably or meet our obligations.  A decline in charter or
spot rates or a failure to successfully charter our tankers could have an
adverse effect on our business, financial condition, results of operation and
ability to pay dividends.





The spot
charter market is highly competitive, and spot market voyage charter rates may
fluctuate dramatically based on tanker and oil supply and demand and other
factors. We cannot assure you that future spot market voyage charters will be
available at rates that will allow us to operate our tankers
profitably.





Delays
or defaults by the shipyards in the construction of our newbuildings could
increase our expenses and diminish our net income and cash flows





We have
newbuilding contracts for the construction of a total of nine VLCC and eight
Suezmax vessels with three shipyards in China: Shanghai Waigaoqiao Shipbuilding
Company Ltd, or Waigaoqiao, Jiangsu Rongsheng Heavy Industries Group Co. Ltd.,
or Rongsheng, and Zhoushan Jinhaiwan Shipyard Co. Ltd, or Jinhaiwan. These
projects are subject to the risk of delay or defaults by the shipyards caused
by, among other things, unforeseen quality or engineering problems, work
stoppages, weather interference, unanticipated cost increases, delays in receipt
of necessary equipment, and inability to obtain the requisite permits or
approvals. For example, Rongsheng was unable to deliver to us three Suezmax
newbuildings (hulls 1017, 1018 and 1019) by their contractual delivery dates. In
accordance with industry practice, in the event the shipyards are unable or
unwilling to deliver the vessels, we may not have substantial remedies. Failure
to construct or deliver the ships by the shipyards or any significant delays
could increase our expenses and diminish our net income and cash
flows.





We
cannot assure you that we will be able to refinance indebtedness incurred under
our current credit facilities





We cannot
assure you that we will be able to refinance our indebtedness on terms that are
acceptable to us or at all. If we are not able to refinance our indebtedness, we
will have to dedicate a portion of our cash flow from operations to pay the
principal and interest of this indebtedness. We cannot assure you that we will
be able to generate cash flow in amounts that are sufficient for these purposes.
If we are not able to satisfy these obligations, we may have to undertake
alternative financing plans or sell our assets. In addition, debt service
payments under our credit facilities may limit funds otherwise available for
working capital, capital expenditures, payment of dividends and other purposes.
If we are unable to meet our debt obligations, or if we otherwise default under
our credit facilities, our lenders could declare the debt, together with accrued
interest and fees, to be immediately due and payable and foreclose on our fleet,
which could result in the acceleration of other indebtedness that we may have at
such time and the commencement of similar foreclosure proceedings by other
lenders.





As
we expand our fleet, we may not be able to recruit suitable employees and crew
for our vessels which may limit our growth and cause our financial performance
to suffer





As we
expand our fleet, we will need to recruit suitable crew, shoreside,
administrative and management personnel.  We may not be able to
continue to hire suitable employees as we expand our fleet of
vessels.  If we are unable to recruit suitable employees and crews, we
may not be able to provide our services to customers, our growth may be limited
and our financial performance may suffer.








13








We
may not be able to renew time charters when they expire or enter into new time
charters for newbuildings





There can
be no assurance that any of our existing time charters will be renewed or that
we will be successful in entering into new time charters on  the
newbuildings that will be delivered to the Company or if renewed or entered
into, that they will be at favorable rates. If, upon expiration of the existing
time charters or delivery of newbuildings, we are unable to obtain time charters
or voyage charters at desirable rates, the Company's profitability may be
adversely affected.





We
are subject to certain risks with respect to our counterparties on contracts,
and failure of such counterparties to meet their obligations could cause us to
suffer losses or otherwise adversely affect our business





We have
entered into various contracts, including charter parties with our customers,
newbuilding contracts with shipyards and our credit facilities. Such agreements
subject us to counterparty risks. The ability of each of our counterparties to
perform its obligations under a contract with us will depend on a number of
factors that are beyond our control and may include, among other things, general
economic conditions, the condition of the maritime and offshore industries, the
overall financial condition of the counterparty, charter rates received for
specific types of vessels, and various expenses. In addition, in depressed
market conditions, our charterers and customers may no longer need a vessel that
is currently under charter or contract or may be able to obtain a comparable
vessel at lower rates. As a result, charterers and customers may seek to
renegotiate the terms of their existing charter parties or avoid their
obligations under those contracts. Should a counterparty fail to honor its
obligations under agreements with us, we could sustain significant losses which
could have a material adverse effect on our business, financial condition,
results of operations and cash flows.





Declines
in charter rates and other market deterioration could cause us to incur
impairment charges





The
carrying values of our vessels are reviewed whenever events or changes in
circumstances indicate that the carrying amount of the vessel may no longer be
recoverable. We assess recoverability of the carrying value by estimating the
future net cash flows expected to result from the vessel, including eventual
disposal If the future net undiscounted cash flows are less than the carrying
value an impairment loss is recorded equal to the difference between the
vessel's carrying value and fair value. Any impairment charges incurred as a
result of declines in charter rates and other market deterioration could
negatively affect our business, financial condition, operating results or the
trading price of our ordinary shares.





Fuel
or bunker prices, may adversely affect our profits





Fuel or
bunkers, is a significant, if not the largest, expense in our shipping
operations. Changes in the price of fuel may adversely affect our profitability.
The price and supply of fuel is unpredictable and fluctuates based on events
outside our control, including geopolitical developments, supply and demand for
oil and gas, actions by OPEC and other oil and gas producers, war and unrest in
oil producing countries and regions, regional production patterns and
environmental concerns. Further, fuel may become much more expensive in the
future, which may reduce the profitability and competitiveness of our business
versus other forms of transportation, such as truck or rail.





If
our vessels suffer damage due to inherent operational risks of the tanker
business, we may experience unexpected drydocking costs and delays or total loss
of our vessels, which may adversely affect our business and financial
condition





Our
vessels and their cargoes will be at risk of being damaged or lost because of
events such as marine disasters, bad weather, business interruptions caused by
mechanical failures, grounding, fire, explosions and collisions, human error,
war, terrorism, piracy and other circumstances or events. These hazards may
result in death or injury to persons, loss of revenues or property,
environmental damage, higher insurance rates, damage to our customer
relationships, delay or rerouting.





In
addition, the operation of tankers has unique operational risks associated with
the transportation of oil. An oil spill may cause significant environmental
damage, and the costs associated with a catastrophic spill could exceed the
insurance coverage available to us.  Compared to other types of
vessels, tankers are exposed to a higher risk of damage and loss by fire,
whether ignited by a terrorist attack, collision, or other cause, due to the
high flammability and high volume of the oil transported in
tankers.





14








If our
vessels suffer damage, they may need to be repaired at a drydocking facility.
The costs of drydock repairs are unpredictable and may be substantial. We may
have to pay drydocking costs that our insurance does not cover in full. The loss
of earnings while these vessels are being repaired and repositioned, as well as
the actual cost of these repairs, may adversely affect our business and
financial condition. In addition, space at drydocking facilities is sometimes
limited and not all drydocking facilities are conveniently located. We may be
unable to find space at a suitable drydocking facility or our vessels may be
forced to travel to a drydocking facility that is not conveniently located to
our vessels' positions. The loss of earnings while these vessels are forced to
wait for space or to travel to more distant drydocking facilities may adversely
affect our business and financial condition. Further, the total loss of any of
our vessels could harm our reputation as a safe and reliable vessel owner and
operator.  If we are unable to adequately maintain or safeguard our
vessels, we may be unable to prevent any such damage, costs or loss which could
negatively impact our business, financial condition, results of operations and
ability to pay dividends.





Increased
inspection procedures and tighter import and export controls could increase
costs and disrupt our business





International
shipping is subject to various security and customs inspection and related
procedures in countries of origin and destination. Inspection procedures can
result in the seizure of contents of our vessels, delays in the loading,
offloading or delivery and the levying of customs duties, fines or other
penalties against us.





It is
possible that changes to inspection procedures could impose additional financial
and legal obligations on us. Furthermore, changes to inspection procedures could
also impose additional costs and obligations on our customers and may, in
certain cases, render the shipment of certain types of cargo uneconomical or
impractical. Any such changes or developments may have an adverse effect on our
business, financial condition, results of operations and ability to pay
dividends.





An
increase in operating costs would decrease earnings and dividends per
share





Under the
spot charters for our vessels, we are responsible for vessel operating expenses
and voyage costs. Our vessel operating expenses include the costs of crew, fuel
(for spot chartered vessels), provisions, deck and engine stores, insurance and
maintenance and repairs, many of which are beyond our control. Some of these
costs, primarily relating to insurance and enhanced security measures
implemented after September 11, 2001, have been increasing. The price of fuel is
near historical high levels and may increase in the future. If our vessels
suffer damage, they may need to be repaired at a drydocking facility. The costs
of drydock repairs are unpredictable and can be substantial. Increases in any of
these expenses would decrease earnings and dividends per share.





Our
financing obligations could affect our ability to incur additional indebtedness
or engage in certain transactions





Our
existing and future financing agreements impose operational and financing
restrictions on us which may significantly limit or prohibit, among other
things, our ability to incur additional indebtedness, create liens, sell capital
shares of subsidiaries, make certain investments, engage in mergers and
acquisitions, purchase and sell vessels, enter into time or consecutive voyage
charters or pay dividends without the consent of our lenders. In addition, our
lenders may accelerate the maturity of indebtedness under our financing
agreements and foreclose on the collateral securing the indebtedness upon the
occurrence of certain events of default, including our failure to comply with
any of the covenants contained in our financing agreements, not rectified within
the permitted time. For instance, declining vessel values could lead to a breach
of covenants under our financing agreements. If we are unable to pledge
additional collateral or obtain waivers from our lenders, our lenders could
accelerate our debt and foreclose on our vessels. In addition, if the lenders
accelerate the debt outstanding under one facility in default, it could result
in a default on our other facilities.





If
the recent volatility in LIBOR continues, it could affect our profitability,
earnings and cash flow





The
London Interbank Offered Rate, or LIBOR, has recently been volatile, with the
spread between LIBOR and the prime lending rate widening significantly at times.
These conditions are the result of the recent disruptions in the international
credit markets. Because the interest rates borne by our outstanding indebtedness
fluctuate with changes in LIBOR, if this volatility were to continue, it would
affect the amount of interest payable on our debt, which in turn, could have an
adverse effect on our profitability, earnings and cash flow.





15








We
may have difficulty in financing our newbuilding program





As of
December 31, 2008, we had a newbuilding program with an aggregate contract cost
of approximately $1.8 billion and had outstanding commitments of approximately
$1,366 million with respect to our contracted newbuildings at that date.
Following installments paid in 2009, we currently have outstanding commitments
of approximately $1,298 million. We intend to partially fund our newbuilding
commitments with borrowings under new credit facilities, which may contain terms
and covenants that restrict our financial and operating flexibility. Our
liquidity position may be adversely affected if we are unable to attract
financing for our newbuilding program.





If
we do not set aside funds and are unable to borrow or raise funds for vessel
replacement at the end of a vessel's useful life our revenue will decline, which
would adversely affect our business, results of operations, financial condition
and ability to pay dividends





If we do
not set aside funds and are unable to borrow or raise funds for vessel
replacement, we will be unable to replace the vessels in our fleet upon the
expiration of their remaining useful lives. Our cash flows and income are
dependent on the revenues earned by the chartering of our vessels. If we are
unable to replace the vessels in our fleet upon the expiration of their useful
lives, our business, results of operations, financial condition and ability to
pay dividends would be adversely affected. Any funds set aside for vessel
replacement will not be available for dividends.





We
may be unable to attract and retain key management personnel in the tanker
industry, which may negatively impact the effectiveness of our management and
our results of operation





Our
success depends to a significant extent upon the abilities and efforts of our
senior executives, and particularly John Fredriksen, our Chairman and Chief
Executive Officer, for the management of our activities and strategic guidance.
While we believe that we have an experienced management team, the loss or
unavailability of one or more of our senior executives, and particularly Mr.
Fredriksen, for any extended period of time could have an adverse effect on our
business and results of operations.





We
may not have adequate insurance to compensate us if our vessels are damaged or
lost





We
procure insurance for our fleet against those risks that we believe the shipping
industry commonly insures against. These insurances include hull and machinery
insurance, protection and indemnity insurance, which include environmental
damage and pollution insurance coverage, and war risk insurance. We can give no
assurance that we are adequately insured against all risks. We may not be able
to obtain adequate insurance coverage at reasonable rates for our fleet in the
future. Additionally, our insurers may not pay particular claims. Our insurance
policies contain deductibles for which we will be responsible, limitations and
exclusions which, although we believe are standard in the shipping industry, may
nevertheless increase our costs or lower our revenue.





Our
operations outside the United States expose us to global risks that may
interfere with the operation of our vessels





We are an
international company and primarily conduct our operations outside of the United
States. Changing economic, regulatory, political and governmental conditions in
the countries where we are engaged in business or where our vessels are
registered affect us. Hostilities or other political instability in regions
where our vessels trade could affect our trade patterns and adversely affect our
operations and performance. The terrorist attacks against targets in the United
States on September 11, 2001 and the military response by the United States has
increased the likelihood of acts of terrorism worldwide. Acts of terrorism,
regional hostilities or other political instability, as shown by the attack on
the Limburg in Yemen in
October 2002, attacks on oil pipelines during and subsequent to the Iraq war in
2003 and attacks on expatriate workers in the Middle East could adversely affect
the oil trade and reduce our revenue or increase our expenses.





Because
we are a foreign corporation, you may not have the same rights that a
shareholder in a United States corporation may have





We are a
Bermuda company. Our memorandum of association and bye-laws and the Bermuda
Companies Act 1981, as amended, govern our affairs. Investors may have more
difficulty in protecting their interests in the face of actions by management,
directors or controlling shareholders than would shareholders of a corporation
incorporated in a United States jurisdiction. Under Bermuda law a director
generally owes a fiduciary duty only to the company; not to the company's
shareholder. Our shareholders may not have a direct course of action against our
directors. In addition, Bermuda law does not provide a mechanism for our
shareholders to bring a class action lawsuit under Bermuda law. Further, our
Bye-laws provide for the indemnification of our directors or officers against
any liability arising out of any act or omission except for an act or omission
constituting fraud, dishonesty or illegality.





16








United
States tax authorities could treat us as a "passive foreign investment company,"
which could have adverse United States federal income tax consequences to United
States holders





A foreign
corporation will be treated as a "passive foreign investment company," or PFIC,
for United States federal income tax purposes if either (1) at least 75% of its
gross income for any taxable year consists of certain types of "passive income"
or (2) at least 50% of the average value of the corporation's assets produce or
are held for the production of those types of "passive income."  For
purposes of these tests, "passive income" includes dividends, interest, and
gains from the sale or exchange of investment property and rents and royalties
other than rents and royalties which are received from unrelated parties in
connection with the active conduct of a trade or business.  For
purposes of these tests, income derived from the performance of services does
not constitute "passive income."  United States shareholders of a PFIC
are subject to a disadvantageous United States federal income tax regime with
respect to the income derived by the PFIC, the distributions they receive from
the PFIC and the gain, if any, they derive from the sale or other disposition of
their shares in the PFIC.





Based on
our current and proposed method of operation, we do not believe that we are,
have been or will be a PFIC with respect to any taxable year. In this regard, we
intend to treat the gross income we derive or are deemed to derive from our time
chartering activities as services income, rather than rental
income.  Accordingly, we believe that our income from our time
chartering activities does not constitute "passive income," and the assets that
we own and operate in connection with the production of that income do not
constitute passive assets.





There is,
however, no direct legal authority under the PFIC rules addressing our method of
operation. Accordingly, no assurance can be given that the United States
Internal Revenue Service, or IRS, or a court of law will accept our position,
and there is a risk that the IRS or a court of law could determine that we are a
PFIC.  Moreover, no assurance can be given that we would not
constitute a PFIC for any future taxable year if there were to be changes in the
nature and extent of our operations.





If the
IRS were to find that we are or have been a PFIC for any taxable year, our
United States shareholders will face adverse United States tax
consequences.  Under the PFIC rules, unless those shareholders make an
election available under the Code (which election could itself have adverse
consequences for such shareholders, as discussed below under "Taxation"), such
shareholders would be liable to pay United States federal income tax at the then
prevailing income tax rates on ordinary income plus interest upon excess
distributions and upon any gain from the disposition of our common shares, as if
the excess distribution or gain had been recognized ratably over the
shareholder's holding period of our common shares.  See "Taxation" for
a more comprehensive discussion of the United States federal income tax
consequences to United States shareholders if we are treated as a
PFIC.





Because
our offices and most of our assets are outside the United States, you may not be
able to bring suit against us, or enforce a judgment obtained against us in the
United States





Our
executive offices, administrative activities and assets are located outside the
United States. As a result, it may be more difficult for investors to effect
service of process within the United States upon us, or to enforce both in the
United States and outside the United States judgments against us in any action,
including actions predicated upon the civil liability provisions of the federal
securities laws of the United States.





We
may have to pay tax on United States source income, which would reduce our
earnings





Under the
United States Internal Revenue Code of 1986, or the Code, 50% of the gross
shipping income of a vessel owning or chartering corporation, such as ourselves
and our subsidiaries, that is attributable to transportation that begins or
ends, but that does not both begin and end, in the United States, may be subject
to a 4% United States federal income tax without allowance for deduction, unless
that corporation qualifies for exemption from tax under Section 883 of the
Code and the applicable Treasury Regulations recently promulgated
thereunder.





We expect
that we and each of our subsidiaries will qualify for this statutory tax
exemption and we will take this position for United States federal income tax
return reporting purposes. However, there are factual circumstances beyond our
control that could cause us to lose the benefit of this tax exemption and
thereby become subject to United States federal income tax on our United States
source income. Therefore, we can give no assurances on our tax-exempt status or
that of any of our subsidiaries.





17





If we or
our subsidiaries are not entitled to exemption under Section 883 of the Code for
any taxable year, we, or our subsidiaries, could be subject for those years to
an effective 4% United States federal income tax on the gross shipping income
these companies derive during the year that are attributable to the transport or
cargoes to or from the United States. The imposition of this tax would have a
negative effect on our business and would result in decreased earnings available
for distribution to our shareholders.





Our
Liberian subsidiaries may not be exempt from Liberian taxation, which would
materially reduce our Liberian subsidiaries', and consequently our, net income
and cash flow by the amount of the applicable tax





The
Republic of Liberia enacted an income tax law generally effective as of January
1, 2001, or the New Act, which repealed, in its entirety, the prior income tax
law in effect since 1977, pursuant to which our Liberian subsidiaries, as
non-resident domestic corporations, were wholly exempt from Liberian
tax.





In 2004,
the Liberian Ministry of Finance issued regulations, or the New Regulations,
pursuant to which a non-resident domestic corporation engaged in international
shipping, such as our Liberian subsidiaries, will not be subject to tax under
the New Act retroactive to January 1, 2001. In addition, the Liberian Ministry
of Justice issued an opinion that the New Regulations were a valid exercise of
the regulatory authority of the Ministry of Finance. Therefore, assuming that
the New Regulations are valid, our Liberian subsidiaries will be wholly exempt
from tax as under prior law.





If our
Liberian subsidiaries were subject to Liberian income tax under the New Act, our
Liberian subsidiaries would be subject to tax at a rate of 35% on their
worldwide income. As a result, their, and subsequently our, net income and cash
flow would be materially reduced by the amount of the applicable tax.
In addition, we, as a shareholder of the Liberian subsidiaries, would be
subject to Liberian withholding tax on dividends paid by the Liberian
subsidiaries at rates ranging from 15% to 20%.





Investor
confidence and the market price of our ordinary shares may be adversely impacted
if we are unable to comply with Section 404 of the Sarbanes-Oxley Act of
2002





We are
subject to Section 404 of the Sarbanes-Oxley Act of 2002, which requires us to
include in our annual report on Form 20-F our management's report on, and
assessment of the effectiveness of, our internal controls over financial
reporting. In addition, our independent registered public accounting firm is
required to attest to and report on management's assessment of the effectiveness
of our internal controls over financial reporting. If we fail to achieve and
maintain the adequacy of our internal controls over financial reporting, we will
not be in compliance with all of the requirements imposed by Section 404. Any
failure to comply with Section 404 could result in an adverse reaction in the
financial marketplace due to a loss of investor confidence in the reliability of
our financial statements, which ultimately could harm our business and could
negatively impact the market price of our common stock.





ITEM
      4.
            INFORMATION
      ON THE COMPANY





A. 
HISTORY AND DEVELOPMENT OF THE COMPANY





The
Company





We are
Frontline Ltd., a Bermuda based shipping company and we were incorporated in
Bermuda on June 12, 1992 (Company No. EC-17460). Our registered and principal
executive offices are located at Par-la-Ville Place, 14 Par-la-Ville Road,
Hamilton, HM 08, Bermuda, and our telephone number is +(1) 441 295
6935.





We are
engaged primarily in the ownership and operation of oil tankers, including
oil/bulk/ore, or OBO carriers. We operate tankers of two sizes: VLCCs, which are
between 200,000 and 320,000 dwt, and Suezmaxes, which are vessels between
120,000 and 170,000 dwt. We operate through subsidiaries and partnerships
located in the Bahamas, Bermuda, the Cayman Islands, the Isle of Man, Liberia,
Norway, the United Kingdom and Singapore. We are also involved in the charter,
purchase and sale of vessels. Since 1996, we have emerged as a leading tanker
company within the VLCC and Suezmax size sectors of the market.





We have
our origin in Frontline AB, which was founded in 1985, and which was listed on
the Stockholm Stock Exchange from 1989 to 1997. In May 1997, Frontline AB was
redomiciled from Sweden to Bermuda and its shares were listed on the Oslo Stock
Exchange. The change of domicile was executed through a share for share exchange
offer from the then newly formed Bermuda company, Frontline Ltd, or Old
Frontline. In September 1997, Old Frontline initiated an amalgamation with
London & Overseas Freighters Limited, or LOF, also a Bermuda company. This
process was completed in May 1998. As a result of this transaction, Frontline
became listed on the London Stock Exchange and on the NASDAQ National Market (in
the form of American Depositary Shares, or ADSs, represented by American
Depositary Receipts, or ADRs) in addition to its listing on the Oslo Stock
Exchange.





The ADR
program was terminated on October 5, 2001 and the ADSs were delisted from the
NASDAQ National Market on August 3, 2001. The Company's Ordinary Shares began
trading on the New York Stock Exchange on August 6, 2001.




18






Vessel
Acquisitions, Disposals and Other Significant Transactions





We
entered into the following acquisitions and disposals in 2006, 2007 and
2008:





Newbuilding
and Option Contracts





In
February and March 2006, we entered into newbuilding contracts with Waigaoqiao
to purchase four VLCCs and subsequently sold two of these newbuilding contracts
in June 2006 for a net gain of $9.8 million. In June 2006, we entered into two
newbuilding contracts with Waigaoqiao for the purchase of two VLCCs with an
option to purchase two additional VLCC newbuildings. In September 2006, we
exercised our option for the two VLCC newbuilding contracts and simultaneously
sold these newbuilding contracts to a third party for a net gain of $6.2
million.





In July
2006, we entered into newbuilding contracts with Rongsheng, in China for the
delivery of two Suezmaxes and simultaneously entered into options for four
further similar Suezmax newbuildings. In August 2006, we entered into
newbuilding contracts for four Suezmaxes at Rongsheng and sold two of these
Suezmax newbuilding contracts to Ship Finance.





In March
and April 2007, we exercised our options with Rongsheng for four Suezmax
newbuildings with contracted delivery dates between the end of 2008 and 2010.
Rongsheng was unable to deliver the first three Suezmax newbuildings (hulls
1017, 1018 and 1019) by their contractual delivery dates. We are currently
discussing the delays with the shipyard and considering any remedies that may be
available to us.





In April
2008, we entered into a contract with Jinhaiwan in China for the delivery of
four VLCC newbuildings. These vessels are scheduled for delivery in the second
half of 2011. In April 2008, we also secured fixed price options, which were
exercised in May 2008, for two similar VLCC newbuildings to be delivered in the
first half of 2012. At December 31, 2008, we had newbuilding contracts for
eight Suezmaxes and ten VLCCs. One of the VLCCs, Front Kathrine, was delivered
to us on January 8, 2009. In 2008, we paid $323.7 million in newbuilding
installments and had future commitments of approximately $1,366 million as of
December 31, 2008. Following installments paid of $68.7 million in 2009, we
currently have outstanding commitments of approximately $1,298
million.





Acquisitions
and Disposals





In March
2006, we purchased the Aframax tanker Gerrita (renamed Front Puffin) for $35.9
million. This vessel was converted to a Floating, Production, Storage and
Offloading vessel, or FPSO, and was sold as part of the spin off of the Sea
Production Ltd, or Sea Production. Also in March 2006, we sold the VLCC Golden
Stream for gross proceeds of $53.1 million.





In July
2006, we took delivery of the VLCC Front Beijing, which we subsequently sold for
gross proceeds of $141.5 million. We also purchased and took delivery of the
VLCC Front Shanghai for approximately $81.0 million in September
2006.





Consistent
with our strategy to reduce our exposure to chartering single hull vessels, we
have entered into a number of transactions to reduce the number of single hull
vessels in our fleet;





·
            In
      September 2006, Ship Finance announced the sale of the VLCC Front Tobago
      to a third party for gross proceeds of $45.0 million and Frontline
      received a compensation payment of $9.6 million from Ship Finance, which
      was eliminated on consolidation, in connection with the
    sale.





·
            In
      January 2007, Ship Finance sold its single hull Suezmax tanker Front
      Transporter to an unrelated third party for a gross sales price of $38.0
      million. We received a compensation payment of $14.8 million from Ship
      Finance, which was eliminated on consolidation, on termination of the
      charter. The vessel was delivered to her new owner in March
      2007.





·
            In
      March 2007, the single hull VLCC Front Vanadis was sold and delivered to
      an unrelated third party in May 2007. Upon delivery, our long-term charter
      party contract with Ship Finance was terminated early, and Frontline
      received a compensation payment in the amount of $13.2
      million.





·
            In
      August 2007, we sold the single hull Suezmax tanker Front Horizon to a
      subsidiary of Farahead Holdings Limited, a company subject to significant
      influence or indirect control of our Chairman, John Fredriksen for net
      proceeds of $28.0 million resulting in a net gain of $6.2
      million.





19








·
            In
      October 2007, we mutually agreed with Ship Finance to terminate the
      long-term charter party contract for the single hull VLCC Front Duchess.
      This termination was cancelled in March
2008.





·
            In
      December 2007, we agreed with Ship Finance to terminate the long term
      charter parties between the companies for the double sided, single bottom
      Suezmax vessels Front Birch and Front Maple. Ship Finance simultaneously
      sold the vessels. Delivery of the Front Birch and Front Maple took place
      in December 2007 and January 2008, respectively. We received compensation
      payments of approximately $32.8 million for the early termination of the
      current charter parties, which was recognized at the time of delivery to
      the new owners.





·
            Additionally,
      in March 2008, we agreed with Ship Finance to terminate the long term
      charter party between the companies for the single hull VLCC Front Sabang.
      Ship Finance simultaneously sold the vessel. We received a compensation
      payment of approximately $25 million for the early termination of the
      current charter party, which was recognized in the second quarter of 2008
      at the time of delivery to the new
owners.





·
            In
      June 2008, we acquired en bloc five secondhand double hull Suezmax tankers
      built between 1992 and 1996 from Top Ships Inc. for an aggregate purchase
      price of $240 million. We took delivery of these vessels between June 2008
      and September 2008 and took over existing time charters on three of the
      vessels. We allocated $247.3 million and a negative value of $7.3 million
      to the vessels and time charters,
respectively.





Spin-Off
of Ship Finance





In
October 2003, we formed Ship Finance as our wholly-owned subsidiary for the
purpose of acquiring certain of our shipping assets. In December 2003, Ship
Finance issued $580.0 million of 8.5% Senior Notes due 2013, which we refer to
as the Notes. In the first quarter of 2004, Ship Finance used the proceeds of
the Notes, together with a refinancing of existing debt, to fund the acquisition
from us of a fleet of 46 crude oil tankers and an option to purchase one
additional tanker from a third party.  We have chartered each of the
vessels back from Ship Finance for most of their remaining lives through our
wholly owned subsidiary Frontline Shipping Limited which we refer to as
Frontline Shipping. We also entered into fixed rate management and
administrative services agreements with Ship Finance to provide for the
operation and maintenance of the Company's vessels and administrative support
services. The charters and the management agreements were each given economic
effect as of January 1, 2004.





In May
2004, we announced the distribution of 25% of Ship Finance's Ordinary Shares to
our Ordinary Shareholders in a partial spin off.  In June 2004, each
Frontline shareholder received one share of Ship Finance for every four
Frontline shares held. In June 2004, the Ship Finance common shares commenced
trading on the New York Stock Exchange under the ticker symbol "SFL". Two
further dividends of shares of Ship Finance were distributed in 2004. In
September 2004, every Frontline shareholder received one share of Ship Finance
for every 10 shares of ours that they held and in December 2004, every Frontline
shareholder received two shares of Ship Finance for every 15 shares of ours that
they held. At December 31, 2004, our remaining shareholding in Ship Finance was
approximately 50.8%.





In
January 2005 and February 2005 our board of directors, or Board, approved
further spin offs of the shares of Ship Finance. In February 2005, each
shareholder of Frontline received one share of Ship Finance for every four
shares of ours held and in March 2005 each shareholder of Frontline received one
share of Ship Finance for every ten shares of ours held. Following these
transactions our shareholding in Ship Finance was approximately 16.2% at
December 31, 2005.





In
February 2006, our Board approved a further spin off of the shares of Ship
Finance. In March 2006, each shareholder of Frontline received one share of Ship
Finance for every twenty shares of ours held. Following these transactions our
shareholding in Ship Finance was approximately 11.1% at December 31, 2006 and
Ship Finance remained consolidated under the provisions of FASB Interpretation
46(R) "Consolidation of Variable Interest Entities".





In
February 2007, our Board approved a further spin off of our remaining interest
in the shares of Ship Finance and this occurred in March 2007. As a result of
this spin off, we currently hold 73,383 shares in Ship Finance, which represents
0.01% of Ship Finance's total outstanding shares and as of March 31, 2007, we no
longer consolidate Ship Finance and its subsidiaries in our financial
statements.





20





Establishment
and Spin-Off of Sealift Ltd





In
January 2007, we established a separate entity named Sealift Ltd, or Sealift, to
develop our heavy lift business. Sealift completed a private placement in the
amount of $180.0 million and its shares were listed on the Norwegian
over-the-counter (OTC) market in January 2007. We invested $60.0 million in the
company and following the initial private placement in January and we became a
33.3% shareholder. Sealift acquired four single-hull Suezmax vessels from us,
which we were obligated to convert to heavy lift vessels for $100.0 million
each. Sealift also acquired two Suezmax vessels from us for $38.0 million each
and option contracts with a shipyard to convert these two additional Suezmax
vessels into heavy lift vessels.  The total consideration for all six
vessels acquired by Sealift is $476.0 million, of which $396.0 million was
received in cash and $80.0 million in an interest free seller's
credit.  $40.0 million of the interest free seller's credit was
payable on the delivery of each of the final two converted
vessels.  Five of the vessels sold to Sealift were first acquired by
Frontline from Ship Finance. We delivered the converted heavy lift vessels to
Sealift in May and December 2007 and May and July 2008. The $80.0 million
interest free seller's credit was paid in July 2008 and we recorded a gain of
$91.0 million in 2008 relating to the delivery of the converted heavylift
vessels. We incurred net damages of $1.2 million with respect to the late
delivery of the fourth and final converted heavylift vessel.





In May
2007, Sealift completed a reorganization with the Dockwise group of companies.
As part of the transaction, Sealift completed a private placement of 39.8
million shares of which we purchased five million shares. Sealift also issued
94.1 million shares to the former Dockwise Ltd, or Dockwise, shareholders.
Sealift was renamed Dockwise Ltd in July 2007. In October 2007, we sold our
entire shareholding of 34,976,500 shares in Dockwise.





Establishment
and Spin-Off of Sea Production Ltd





In
February 2007, the Company's wholly owned subsidiary, Frontline Floating
Production Ltd, or FFP, sold its assets to Sea Production.  The assets
of FFP included a 70% investment in Puffin Ltd, the entity who ultimately owns
the vessel Front Puffin.  Sea Production was incorporated in January
2007 as a wholly owned subsidiary of the Company. Also in February 2007, Sea
Production raised $180.0 million in equity in a private placement. The shares
have been listed on the Norwegian OTC market.  We held 28.33% of the
shares in Sea Production following the private placement. In June 2007, we sold
our entire holding in Sea Production in line with our strategy to remain a pure
crude oil transportation company and our previously announced strategy to either
sell or spin off the Sea Production shares.





Establishment
and spin-off of Independent Tankers Corporation Limited





In
January 2008, we established Independent Tankers Corporation Limited, or ITCL, a
Bermuda company and our wholly owned subsidiary for the purpose of holding, by
way of contribution, our interests in Independent Tankers Corporation, or ITC.
ITC owns or leases six VLCC and four Suezmax tankers, which are financed through
bonds in the U.S. market and financial lease arrangements. On February 20,
2008, our Board declared the distribution of a special dividend of 17.53% of the
capital stock of ITCL to our shareholders. On February 28, 2008, we distributed
to our shareholders one share of ITCL for every five shares of
Frontline.  Certain of our U.S. shareholders were excluded from the
distribution and received a cash payment in lieu of shares equal to $0.34 per
Frontline share. ITCL listed its shares on the Oslo OTC Market on March 7,
2008.





B. 
BUSINESS OVERVIEW





As of
February 28, 2009, we operate a tanker fleet consisting of 83 vessels, which is
one of the largest in the world.  The fleet consists of 41 VLCCs which
are either owned or chartered in, 30 Suezmax tankers which are either owned or
chartered in, eight Suezmax OBOs which are chartered in, and four VLCCs under
our commercial management. We also had nine VLCC newbuildings and eight
Suezmax newbuildings on order.





As of
February 28, 2009, the fleet that we operate has a total tonnage of
approximately 19.4 million dwt, including the 1.2 million dwt under commercial
management. Our tanker vessels have an average age of approximately 11 years
compared with an estimated industry average of approximately 8.9 years. We
believe that our vessels comply with the most stringent of generally applicable
environmental regulations for tankers.





We own
various vessel owning and operating subsidiaries. Our operations take place
substantially outside of the United States. Our subsidiaries, therefore, own and
operate vessels which may be affected by changes in foreign governments and
other economic and political conditions. We are engaged primarily in
transporting crude oil and, in addition, raw materials like coal and iron ore
and our vessels operate in the spot and time charter markets.  Our
VLCCs are specifically designed for the transportation of crude oil and, due to
their size, are primarily used to transport crude oil from the Middle
East Gulf to the Far East, Northern Europe, the Caribbean and the
Louisiana Offshore Oil Port, or LOOP. Our Suezmax tankers are
similarly designed for worldwide trading, but the trade for these vessels is
mainly in the Atlantic Basin and Middle East to South East
Asia.





21





In
December 2008, Teekay Corporation, or Teekay, and the Company announced an
agreement to commercially combine their Suezmax vessels within the Gemini Pool,
a global Suezmax tanker pool. Effective from January 1, 2009, we placed our
Suezmax vessels within the Gemini Pool bringing the total number of vessels in
the pool to 36. Gemini Tankers LLC, a wholly-owned subsidiary of Teekay, has
established an office in Oslo, Norway to, among other things, manage the larger
fleet and establish a chartering presence in Europe to supplement its existing
operations in Stamford, Connecticut. We expect to improve the utilization on our
fleet and to reduce the cost basis by entering a large pool. In addition to the
Company and Teekay, König & Cie and Hyundai Merchant Marine also participate
in the Gemini Pool.





Historically,
the tanker industry has been highly cyclical, with attendant volatility in
profitability and asset values resulting from changes in the supply of and
demand for tanker capacity. Our OBO carriers are specifically designed to carry
oil or dry cargo and may be used to transport either oil or dry cargo on any
voyage. Currently, our eight Suezmax OBOs are configured to carry dry bulk
cargo and are fixed on medium to long-term charters.





The
supply of tanker and OBO capacity is influenced by the number of new vessels
built, the number of older vessels scrapped, converted, laid up and lost, the
efficiency of the world tanker or OBO fleet and government and industry
regulation of maritime transportation practices. The demand for tanker and OBO
capacity is influenced by global and regional economic conditions, increases and
decreases in industrial production and demand for crude oil and petroleum
products, the proportion of world oil output supplied by Middle Eastern and
other producers, political changes and armed conflicts (including wars in the
Middle East) and changes in seaborne and other transportation patterns. The
demand for OBO capacity is, in addition, influenced by increases and decreases
in the production and demand for raw materials such as iron ore and coal. In
particular, demand for our tankers and our services in transporting crude oil
and petroleum productsand dry cargoes has been
dependent upon world and regional markets. Any decrease in shipments of crude
oil or raw materials in world markets could have a material adverse effect on
our earnings. Historically, these markets have been volatile as a result
of, among other things, general economic conditions, prices, environmental
concerns, weather and competition from alternative energy sources. Because many
factors influencing the supply of and demand for tankers and OBO carriers are
unpredictable, the nature, timing and degree of changes in industry
conditions are also unpredictable.





We are
committed to providing quality transportation services to all of our customers
and to developing and maintaining long-term relationships with the major
charterers of tankers. Increasing global environmental concerns have created a
demand in the petroleum products/crude oil seaborne transportation industry for
vessels that are able to conform to the stringent environmental standards
currently being imposed throughout the world.





The
tanker industry is highly cyclical, experiencing volatility in profitability,
vessel values and freight rates. Freight rates are strongly influenced by the
supply of tanker vessels and the demand for oil transportation. Refer to Item 5
"Operating and Financial Review and Prospects" for a discussion of the tanker
market in 2008 and 2009.





Similar
to structures commonly used by other shipping companies, our vessels are all
owned by, or chartered to, separate subsidiaries or associated companies.
Frontline Management AS, and Frontline Management (Bermuda) Limited which we
refer to as Frontline Management, both wholly-owned subsidiaries, support us in
the implementation of our decisions. Frontline Management is responsible for the
commercial management of our shipowning subsidiaries, including chartering and
insurance. Each of our vessels is registered under the Bahamas, French,
Liberian, Panamanian, Cypriot, Singaporean, Norwegian, Isle of Man, Marshall
Islands, Hong Kong or Maltese flag.





Frontline
has a strategy of extensive outsourcing. Ship management, crewing and accounting
services are provided by a number of independent and competing suppliers. Our
vessels are managed by independent ship management companies. Pursuant to
management agreements, each of the independent ship management companies
provides operations, ship maintenance, crewing, technical support, shipyard
supervision and related services to Frontline. A central part of our strategy is
to benchmark operational performance and cost level amongst our ship managers.
Independent ship managers provide crewing for our vessels. Currently, our
vessels are crewed with Russian, Ukrainian, Croatian, Romanian, Indian and
Filipino officers and crews, or combinations of these nationalities. Accounting
services for each of our shipowning subsidiaries are also provided by the ship
managers.





Strategy





Our
strategy is to maintain and expand our position as a world leading operator and
charterer of modern, high quality oil tankers. Our principal focus is the
transportation of crude oil and its related refined dirty petroleum cargoes for
major oil companies and major oil trading companies. We seek to optimize our
income and adjust our exposure through actively pursuing charter opportunities
be it via time charters, bareboat charters, sale and leasebacks, straight sales
and purchases of vessels, newbuilding contracts and acquisitions.





22





We
presently operate VLCC and Suezmax vessels in the tanker market and OBO vessels
in the dry cargo market. Our strategy is to have at least 30% fixed charter
income coverage for our fleet, predominantly through time charters and trade the
balance of the fleet on the spot market. We focus on minimizing time spent on
ballast by "cross trading" our vessels, typically with voyages loading in the
Persian Gulf discharging in Northern Europe, followed by a trans-Atlantic voyage
to the U.S. Gulf of Mexico and finally a voyage from either the Caribbean or
West Africa to the Far East/Indian Ocean. We believe that operating a certain
number of vessels in the spot market, enables us to capitalize on a potential
stronger spot market as well as to serve our main customers on a regular non
term basis. We believe that the size of our fleet is important in negotiating
terms with our major clients and charterers. We also believe that our large,
high-quality VLCC and Suezmax fleet enhances our ability to obtain competitive
terms from suppliers and ship repairers and builders and to produce cost savings
in chartering and operations.





Our
business strategy is primarily based upon the following principles:





·
            emphasizing
      operational safety and quality maintenance for all of our
      vessels;





·
            complying
      with all current and proposed environmental
  regulations;





·
            outsourcing
      technical operations and crewing;





·
            continuing
      to achieve competitive operational
costs;





·
            operating
      a modern and homogeneous fleet of
tankers;





·
            achieving
      high utilization of our vessels;





·
            achieving
      competitive financing arrangements;





·
            achieving
      a satisfactory mix of term charters, contracts of affreightment and spot
      voyages; and





·
            developing
      and maintaining relationships with major oil companies and industrial
      charterers.








We
currently have newbuilding contracts for nine VLCCs and eight Suezmaxes. Our
order book reaffirms our position as a leading operator of modern, quality
Suezmax and VLCC tonnage.





All but
two of our remaining single hull VLCCs and one Suezmax have been fixed out on
long term charter, with redelivery coinciding with the vessels phase out date.
We continue to evaluate opportunities in the time charter market. On the
basis of the strength of the drybulk market, all of our eight OBO carriers have
been fixed on medium to long term charters at an average daily rate of
approximately $44,000 and $43,200 in 2008 and 2009, respectively. As of February
28, 2009 approximately 52% of our remaining operating days for our total fleet
for 2009 were on fixed time charter and bareboat charter.





23





Although
there has been a trend towards consolidation over the past 15 years, the tanker
market remains highly fragmented. We estimate, based on available industry data
that we currently own or operate approximately 8.9% of the world VLCC fleet and
8.4% of the world Suezmax tanker fleet.  We intend to use our strong
operational cash flow together with our available financing to continue the
consolidation of the tanker market.  We always look opportunistically
for attractive investments and acquisitions and will finance such investments
through a combination of debt and equity. Our role in the consolidation of the
tanker market may include the acquisition of new vessels and second-hand vessels
and we may also engage in business acquisitions and strategic transactions such
as marketing joint ventures. In the ordinary course of our business, we engage
in the evaluation of potential candidates for acquisitions and strategic
transactions.





In
February 2008, we invested $20.0 million in exchange for a 15.8% interest in
NAVIG8 LIMITED ("Navig8"), a company that controls approximately 30 tankers,
including newbuildings on order. Navig8 actively trades a time-charter fleet,
owns and invests in tonnage, commercially and technically manages vessels for
third parties and trades in the freight-derivatives market.  Although
this investment is purely financial, it gives us a foothold in the Clean
Petroleum Product market.





Our goal
is to generate competitive returns for our shareholders with quarterly dividend
payments. Our dividend payments are based on present earnings, market prospects,
current capital expenditure programs as well as investment
opportunities.





Seasonality





Historically,
oil trade and therefore charter rates increased in the winter months and eased
in the summer months as demand for oil in the Northern Hemisphere rose in colder
weather and fell in warmer weather. The tanker industry in general is less
dependent on the seasonal transport of heating oil than a decade ago as new uses
for oil and oil products have developed, spreading consumption more evenly over
the year. Most apparent is a higher seasonal demand during the summer months due
to energy requirements for air conditioning and motor vehicles.





Customers





Our
customers include major oil companies, petroleum products traders, government
agencies and various other entities. During the year ended December 31, 2008,
one customer (2007: one customer) accounted for more than 10% of our
consolidated operating revenues.





Competition





The
market for international seaborne crude oil transportation services is highly
fragmented and competitive. Seaborne crude oil transportation services generally
are provided by two main types of operators: major oil company captive fleets
(both private and state-owned) and independent ship-owner fleets. In addition,
several owners and operators pool their vessels together on an ongoing basis,
and such pools are available to customers to the same extent as independently
owned and operated fleets. Many major oil companies and other oil trading
companies, the primary charterers of the vessels owned or controlled by us, also
operate their own vessels and use such vessels not only to transport their own
crude oil but also to transport crude oil for third party charterers in direct
competition with independent owners and operators in the tanker charter market.
Competition for charters is intense and is based upon price, location, size,
age, condition and acceptability of the vessel and its manager. Competition is
also affected by the availability of other size vessels to compete in the trades
in which the Company engages.Charters are
to a large extent brokered through international independent brokerage houses
that specialize in finding the optimal ship for any particular cargo based on
the aforementioned criteria. Brokers may be appointed by the cargo shipper or
the ship owner.





Environmental
Regulation and Other Regulations





Government
regulations and laws significantly affect the ownership and operation of our
tankers. We are subject to international conventions, national, state and local
laws and regulations in force in the countries in which our vessels may operate
or are registered. Compliance with such laws, regulations and other requirements
entails significant expense, including vessel modifications and implementation
of certain operating procedures.





Our
tankers are subject to both scheduled and unscheduled inspections by a variety
of government, quasi-governmental and private organizations each of which may
have unique requirements. These organizations include the local port
authorities, national authorities, harbor masters or equivalent, classification
societies, flag state administrations (countries of registry) and charterers,
particularly terminal operators and oil companies. Some of these entities
require us to obtain permits, licenses and certificates for the operation of our
tankers. Our failure to maintain necessary permits, certificates or approvals
could require us to incur substantial costs or temporarily suspend operation of
one or more of the vessels in our fleet.





24





We
believe that the heightened levels of environmental and quality concerns among
insurance underwriters, regulators and charterers have led to greater inspection
and safety requirements on all tankers and may accelerate the scrapping of older
vessels throughout the industry. Increasing environmental concerns have
created a demand for tankers that conform to the stricter environmental
standards. We are required to maintain operating standards for all of our
vessels that emphasize operational safety, quality maintenance, continuous
training of our officers and crews and compliance with applicable local,
national and international environmental laws and regulations. We believe
that the operation of our vessels is in substantial compliance with applicable
environmental laws and regulations and that our vessels have all material
permits, licenses, certificates or other authorizations necessary for the
conduct of our operations; however, because such laws and regulations are
frequently changed and may impose increasingly stricter requirements, we cannot
predict the ultimate cost of complying with these requirements, or the impact of
these requirements on the resale value or useful lives of our tankers. In
addition, a future serious marine incident that results in significant oil
pollution or otherwise causes significant adverse environmental impact could
result in additional legislation or regulation that could negatively affect our
profitability.





International
Maritime Organization





The
International Maritime Organization, or IMO (the United Nations agency for
maritime safety and the prevention of pollution by ships), has adopted the
International Convention for the Prevention of Marine Pollution from Ships,
1973, as modified by the Protocol of 1978 relating thereto, which has been
updated through various amendments, or the MARPOL Convention. The MARPOL
Convention implements environmental standards including oil leakage or spilling,
garbage management, as well as the handling and disposal of noxious liquids,
harmful substances in packaged forms, sewage and air emissions. Under IMO
regulations, in order to trade in ports of IMO member nations, a newbuild tanker
of 5,000 dwt or above must be of double hull construction or a mid-deck design
with double-sided construction or be of another approved design ensuring the
same level of protection against oil pollution if the tanker:





·
            is
      the subject of a contract for a major conversion or original construction
      on or after July 6, 1993;





·
            commences
      a major conversion or has its keel laid on or after January 6, 1994;
      or





·
            completes
      a major conversion or is a newbuilding delivered on or after July 6,
      1996.





Since the
enactment of these regulations, the IMO has accelerated the timetable for the
phase-out of single hull oil tankers.





In
December 2003, the Marine Environmental Protection Committee of the IMO, or
MEPC, adopted an amendment to the MARPOL Convention, which became effective in
April 2005. The amendment revised an existing regulation 13G accelerating the
phase-out of single hull oil tankers and adopted a new regulation 13H on the
prevention of oil pollution from oil tankers when carrying heavy grade oil.
Under the revised regulation, single hull oil tankers were required to be phased
out no later than April 5, 2005 or the anniversary of the date of delivery of
the ship on the date or in the year specified in the following
table:





Category
      of Oil Tankers
            
            Date
      or Year for Phase OutCategory
      1 oil tankers of 20,000 dwt and above carrying crude oil, fuel oil, heavy
      diesel oil or lubricating oil as cargo, and of 30,000 dwt and above
      carrying other oils, which do not comply with the requirements for
      protectively located segregated ballast tanks
            
            April
      5, 2005 for ships delivered on April 5, 1982 or earlier; or
              2005
      for ships delivered after April 5, 1982Category
      2 - oil tankers of 20,000 dwt and above carrying crude oil, fuel oil,
      heavy diesel oil or lubricating oil as cargo, and of 30,000 dwt and above
      carrying other oils, which do comply with the protectively located
      segregated ballast tank requirements
              and
              Category
      3 - oil tankers of 5,000 dwt and above but less than the tonnage specified
      for Category 1 and 2 tankers.
            
            April
      5, 2005 for ships delivered on April 5, 1977 or earlier
              2005
      for ships delivered after April 5, 1977 but before
              January
      1, 1978
              2006
      for ships delivered in 1978 and 1979
              2007
      for ships delivered in 1980 and 1981
              2008
      for ships delivered in 1982
              2009
      for ships delivered in 1983
              2010
      for ships delivered in 1984 or
later





Under the
revised regulations, a flag state may permit continued operation of certain
Category 2 or 3 tankers beyond their phase-out date in accordance with the above
schedule. Under regulation 13G, the flag state may allow for some newer
single hull oil tankers registered in its country that conform to certain
technical specifications to continue operating until the earlier of the
anniversary of the date of delivery of the vessel in 2015 or the 25th
anniversary of their delivery. Under regulations 13G and 13H, as described
below, certain Category 2 and 3 tankers fitted only with double bottoms or
double sides may be allowed by the flag state to continue operations until their
25th anniversary of delivery. Any port state, however, may deny entry of
those single hull oil tankers that are allowed to operate under any of the flag
state exemptions.





25










The
following table summarizes the impact of such regulations on the Company's
single hull (SH) and double sided (DS) tankers:


Vessel
      Name
              
              Vessel
      type
              
              Vessel
                Category
              
              Year
                Built
              
              IMO
      phase out
              
              Flag
      state
                ExemptionFront
      Voyager
              
              Suezmax
              
              SH
              
              1992
              
              2010
              
              2015Edinburgh(*)
              
              VLCC
              
              DS
              
              1993
              
              2018
              
              n/aFront
      Ace(*)
              
              VLCC
              
              SH
              
              1993
              
              2010
              
              2015Front
      Duchess(*)
              
              VLCC
              
              SH
              
              1993
              
              2010
              
              2015Front
      Duke(*)
              
              VLCC
              
              SH
              
              1992
              
              2010
              
              2015Front
      Highness(*)
              
              VLCC
              
              SH
              
              1991
              
              2010
              
              2015Front
      Lady(*)
              
              VLCC
              
              SH
              
              1991
              
              2010
              
              2015Golden River
      (*)
              
              VLCC
              
              SH
              
              1991
              
              2010
              
              2015





(*)
Vessel chartered in from Ship Finance and not consolidated after March 31,
2007.





The MEPC,
in October 2004, adopted a unified interpretation of regulation 13G that
clarified the date of delivery for tankers that have been converted. Under the
interpretation, where an oil tanker has undergone a major conversion that has
resulted in the replacement of the fore-body, including the entire cargo
carrying section, the major conversion completion date of the oil tanker shall
be deemed to be the date of delivery of the ship, provided
that:





·
            the
      oil tanker conversion was completed before July 6,
  1996;





·
            the
      conversion included the replacement of the entire cargo section and
      fore-body and the tanker complies with all the relevant provisions of
      MARPOL Convention applicable at the date of completion of the major
      conversion; and





·
            the
      original delivery date of the oil tanker will apply when considering the
      15 years of age threshold relating to the first technical specifications
      survey to be completed in accordance with MARPOL
    Convention.





In
December 2003, the MEPC adopted a new regulation 13H on the prevention of
oil pollution from oil tankers when carrying heavy grade oil, or HGO, which
includes most of the grades of marine fuel. The new regulation bans the
carriage of HGO in single hull oil tankers of 5,000 dwt and above after April 5,
2005, and in single hull oil tankers of 600 dwt and above but less than 5,000
dwt, no later than the anniversary of their delivery in 2008.





Under
regulation 13H, HGO means any of the following:





·
            crude
      oils having a density at 15єC higher than 900
  kg/m3;





·
            fuel
      oils having either a density at 15єC higher than 900 kg/m3 or a kinematic
      viscosity at 50oC higher than 180
      mm2/s; or





·
            bitumen,
      tar and their emulsions.





Under the
regulation 13H, theflag state may allow continued operation of oil tankers of 5,000 dwt and above,
carrying crude oil with a density at 15єC higher than 900 kg/m3
but lower than 945 kg/m3, that conform to certain technical specifications and,
in the opinion of the such flag state, the ship
is fit to continue such operation, having regard to the size, age, operational
area and structural conditions of the ship and provided that the continued
operation shall not go beyond the date on which the ship reaches 25 years after
the date of its delivery. The flag state may also allow continued operation
of a single hull oil tanker of 600 dwt and above but less than 5,000 dwt,
carrying HGO as cargo, if, in the opinion of the such flag state, the ship is
fit to continue such operation, having regard to the size, age, operational area
and structural conditions of the ship, provided that the operation shall not go
beyond the date on which the ship reaches 25 years after the date of its
delivery.





The flag
state may also exempt an oil tanker of 600 dwt and above carrying HGO as cargo
if the ship is either engaged in voyages exclusively within an area under the
its jurisdiction, or is engaged in voyages exclusively within an area under the
jurisdiction of another party, provided the party within whose jurisdiction the
ship will be operating agrees. The same applies to vessels operating as
floating storage units of HGO.





26





Any port
state, however, can deny entry of single hull tankers carrying HGO which have
been allowed to continue operation under the exemptions mentioned above,
into the ports or offshore terminals under its jurisdiction, or deny
ship-to-ship transfer of HGO in areas under its jurisdiction except when this is
necessary for the purpose of securing the safety of a ship or saving life
at sea.





Revised
Annex I to the MARPOL Convention entered into force in January
2007. Revised Annex I incorporates various amendments adopted since the
MARPOL Convention entered into force in 1983, including the amendments to
regulation 13G (regulation 20 in the revised Annex) and regulation 13H
(regulation 21 in the revised Annex). Revised Annex I also imposes
construction requirements for oil tankers delivered on or after January 1,
2010. A further amendment to revised Annex I includes an amendment to the
definition of heavy grade oil that will broaden the scope of regulation 21. On
August 1, 2007, regulation 12A (an amendment to Annex I) came into force
requiring oil fuel tanks to be located inside the double hull in all ships with
an aggregate oil fuel capacity of 600 cubic meters and above, which are
delivered on or after August 1, 2010 including ships for which the building
contract is entered into on or after August 1, 2007, or, in the absence of a
contract, for which the keel is laid on or after February 1, 2008.





Air
Emissions





In
September 1997, the IMO adopted Annex VI to the MARPOL Convention, Regulations
for the Prevention of Pollution from Ships, to address air pollution from ships.
Effective May 2005, Annex VI sets limits on sulfur oxide and nitrogen oxide
emissions from all commercial vessel exhausts and prohibits deliberate emissions
of ozone depleting substances (such as halons and chlorofluorocarbons),
emissions of volatile compounds from cargo tanks, and the shipboard incineration
of specific substances. Annex VI also includes a global cap on the sulfur
content of fuel oil and allows for special areas to be established with more
stringent controls on sulfur emissions. We believe that all our vessels are
currently compliant in all material respects with current Annex VI regulations.
Additional or new conventions, laws and regulations may be adopted that could
require the installation of expensive emission control systems and could
adversely affect our business, results of operations, cash flows and financial
condition. In October 2008, the IMO adopted amendments to Annex VI regarding
nitrogen oxide and sulfur oxide emissions standards that will enter into force
on July 1, 2010. The amended Annex VI would reduce air pollution from vessels
by, among other things, (i) implementing a progressive reduction of sulfur
oxide, emissions from ships, with the global sulfur oxide emission cap reduced
initially from 4.50% to 3.50% beginning January 1, 2012 and then reduced
progressively to 0.50%, by January 1, 2020, subject to a feasibility review to
be completed no later than 2018; and (ii) establishing new tiers of stringent
nitrogen oxide emissions standards for new marine engines, depending on their
date of installation. Once these amendments become effective, we may incur costs
to comply with these revised standards. The United States ratified the Annex VI
amendments in October 2008, thereby rendering U.S. air emissions standards
equivalent to IMO requirements. The directive 2005/33/EU, which is effective
from January 1, 2010, bans the use of fuel oils containing more than 0.1%
sulphur by mass by any merchant vessel whilst at berth in any EU country and
this will result in extra costs and some minor modification of the fuel supply
systems in our vessels. Our initial investigation suggests that compliance can
be achieved by modest investment, purchase of LS fuel and alteration of
operating procedures.





Safety
Requirements





The IMO
has also adopted the International Convention for the Safety of Life at Sea, or
SOLAS Convention, and the International Convention on Load Lines, 1966, or LL
Convention, which impose a variety of standards to regulate design and
operational features of ships. SOLAS Convention and LL Convention standards are
revised periodically. We believe that all our vessels are in material compliance
with SOLAS Convention and LL Convention standards.





Under
Chapter IX of SOLAS, the requirements contained in the International Safety
Management Code for the Safe Operation of Ships and for Pollution Prevention, or
ISM Code, promulgated by the IMO, also affect our operations. The ISM Code
requires the party with operational control of a vessel to develop an extensive
safety management system that includes, among other things, the adoption of
a safety and environmental protection policy setting forth instructions and
procedures for operating its vessels safely and describing procedures for
responding to emergencies. We intend to rely upon the safety management system
that our appointed ship managers have developed.





The ISM
Code requires that vessel operators obtain a safety management certificate for
each vessel they operate. This certificate evidences compliance by a vessel's
management with the ISM Code requirements for a safety management system. No
vessel can obtain a safety management certificate unless its manager has been
awarded a document of compliance, issued by each flag state, under the ISM Code.
Our appointed ship managers have obtained documents of compliance for their
offices and safety management certificates for all of our vessels for which
the certificates are required by the IMO. The document of compliance, or DOC,
and ship management certificate, or SMC, are renewed every five years but DOC is
subject to audit verification annually and the SMC every 2.5 years.





27





Noncompliance
with the ISM Code and other IMO regulations may subject the shipowner or
bareboat charterer to increased liability, may lead to decreases in available
insurance coverage for affected vessels and may result in the denial of access
to, or detention in, some ports. The U.S. Coast Guard and European Union
authorities have indicated that vessels not in compliance with the ISM Code by
the applicable deadlines will be prohibited from trading in U.S. and European
Union ports, as the case may be.





The IMO
has negotiated international conventions that impose liability for oil pollution
in international waters and a signatory's territorial waters. Additional or new
conventions, laws and regulations may be adopted which could limit our ability
to do business and which could have a material adverse effect on our business
and results of operations.





Ballast
Water Requirements





The IMO
adopted an International Convention for the Control and Management of Ships'
Ballast Water and Sediments, or the BWM Convention, in February 2004. The BWM
Convention's implementing regulations call for a phased introduction of
mandatory ballast water exchange requirements to be replaced in time with
mandatory concentration limits. The BWM Convention will not enter into force
until 12 months after it has been adopted by 30 states, the combined merchant
fleets of which represent not less than 35% of the gross tonnage of the world's
merchant shipping. To date there has not been sufficient adoption of this
standard for it to take force.





The flag
state, as defined by the United Nations Convention on Law of the Sea, has
overall responsibility for the implementation and enforcement of international
maritime regulations for all ships granted the right to fly its flag. The
"Shipping Industry Guidelines on Flag State Performance" evaluates flag states
based on factors such as sufficiency of infrastructure, ratification of
international maritime treaties, implementation and enforcement of international
maritime regulations, supervision of surveys, casualty investigations and
participation at IMO meetings.





Anti-Fouling
Requirements





In 2001,
the IMO adopted the International Convention on the Control of Harmful
Anti-fouling Systems on Ships, or the Anti-fouling Convention.  The
Anti-fouling Convention prohibits the use of organotin compound coatings to
prevent the attachment of mollusks and other sea life to the hulls of vessels
after September 1, 2003.  The exteriors of vessels constructed prior
to January 1, 2003 that have not been in dry-dock must, as of September 17,
2008, either not contain the prohibited compounds or have coatings applied to
the vessel exterior that act as a barrier to the leaching of the prohibited
compounds.  Vessels of over 400 gross tons engaged in international
voyages must obtain an International Anti-fouling System Certificate and undergo
a survey before the vessel is put into service or when the antifouling systems
are altered or replaced. We are in compliance with the Anti-fouling
Convention.





Oil
Pollution Liability





Although
the United States is not a
party to these conventions, many countries have ratified and follow the
liability plan adopted by the IMO and set out in the International Convention on
Civil Liability for Oil Pollution Damage of 1969, as amended in 2000, or the
CLC. Under this convention and depending on whether the country in which the
damage results is a party to the 1992 Protocol to the CLC, a vessel's registered
owner is strictly liable for pollution damage caused in the territorial waters
of a contracting state by discharge of persistent oil, subject to certain
complete defenses. The limits on liability outlined in the 1992 Protocol use the
International Monetary Fund currency unit of Special Drawing Rights, or SDR.
Under an amendment to the 1992 Protocol that became effective on November 1,
2003, for vessels of 5,000 to 140,000 gross tons (a unit of measurement for the
total enclosed spaces within a vessel), liability will be limited to
approximately 4.51 million SDR plus 631 SDR for each additional gross ton over
5,000. For vessels of over 140,000 gross tons, liability will be limited to
89.77 million SDR. The exchange rate between SDRs and U.S. dollars was 0.632000
SDR per U.S. dollar on April 7, 2009. The right to limit liability is forfeited
under the International Convention on Civil Liability for Oil Pollution Damage
where the spill is caused by the owner's actual fault and under the 1992
Protocol where the spill is caused by the owner's intentional or reckless
conduct. Vessels trading to states that are parties to these conventions must
provide evidence of insurance covering the liability of the owner. In
jurisdictions where the International Convention on Civil Liability for Oil
Pollution Damage has not been adopted, various legislative schemes or common
laws govern, and liability is imposed either on the basis of fault or in a
manner similar to that convention. We believe that our P&I insurance will
cover the liability under the plan adopted by the IMO.





28





The IMO
adopted the International Convention on Civil Liability for Bunker Oil Pollution
Damage, or the Bunker Convention, to impose strict liability on ship owners for
pollution damage in jurisdictional waters of ratifying states caused by
discharges of bunker fuel. The Bunker Convention, which became effective on
November 21, 2008, requires registered owners of ships over 1,000 gross tons to
maintain insurance for pollution damage in an amount equal to the limits of
liability under the applicable national or international limitation regime (but
not exceeding the amount calculated in accordance with the Convention on
Limitation of Liability for Maritime Claims of 1976, as
amended).  With respect to non-ratifying states, liability for spills
or releases of oil carried as fuel in ship's bunkers typically is determined by
the national or other domestic laws in the jurisdiction where the events or
damages occur.





IMO
regulations also require owners and operators of vessels to adopt Ship Oil
Pollution Emergency Plans or SOPEPs. Periodic training and drills for response
personnel and for vessels and their crews are required.





The IMO
continues to review and introduce new regulations. It is impossible to predict
what additional regulations, if any, may be passed by the IMO and what effect,
if any, such regulations might have on our operations.





United
States Requirements





In 1990,
the United States Congress enacted the U.S. Oil Pollution Act of 1990, or OPA,
to establish an extensive regulatory and liability regime for environmental
protection and cleanup of oil spills. OPA affects all owners and operators whose
vessels trade with the United States or its territories or possessions, or whose
vessels operate in the waters of the United States, which include the U.S.
territorial sea and the 200 nautical mile exclusive economic zone around the
United States. The Comprehensive Environmental Response, Compensation and
Liability Act, or CERCLA, imposes liability for cleanup and natural resource
damage from the release of hazardous substances (other than oil) whether on land
or at sea. Both OPA and CERCLA impact our operations.





Under
OPA, vessel owners, operators and bareboat charterers are responsible parties
who are jointly, severally and strictly liable (unless the spill results solely
from the act or omission of a third party, an act of God or an act of war) for
all containment and clean-up costs and other damages arising from oil spills
from their vessels. These other damages are defined broadly to
include:





·
            natural
      resource damages and related assessment
costs;





·
            real
      and personal property damages;





·
            net
      loss of taxes, royalties, rents, profits and earnings capacity;
      and





·
            net
      cost of public services necessitated by a spill response, such as
      protection from fire, safety or health hazards; and loss of subsistence
      use of natural resources.





OPA
previously limited the liability of responsible parties to the greater of $1,200
per gross ton or $10.0 million per tanker that is over 3,000 gross tons (subject
to possible adjustment for inflation). Amendments to OPA signed into law in July
2006 increased these limits on the liability of responsible parties with respect
to tankers over 3,000 gross tons to the greater of $3,000 per gross tons or
$22.0 million per single hull tanker, and $1,900 per gross ton or $16.0 million
per double hull tanker, respectively. The act specifically permits
individual states to impose their own liability regimes with regard to oil
pollution incidents occurring within their boundaries, and some states have
enacted legislation providing for unlimited liability for discharge of
pollutants within their waters. In some cases, states which have enacted this
type of legislation have not yet issued implementing regulations defining tanker
owners' responsibilities under these laws. CERCLA, which applies to owners and
operators of vessels, contains a similar liability regime and provides for
cleanup, removal and natural resource damages. Liability under CERCLA is limited
to the greater of $300 per gross ton or $5.0 million for vessels carrying a
hazardous substance as cargo and the greater of $300 per gross ton or $0.5
million for any other vessel.





These
limits of liability do not apply, however, where the incident is caused by
violation of applicable U.S. federal safety, construction or operating
regulations, or by the responsible party's gross negligence or willful
misconduct. These limits also do not apply if the responsible party fails or
refuses to report the incident or to cooperate and assist in connection with the
substance removal activities. OPA and CERCLA each preserve the right to recover
damages under existing law, including maritime tort law. We believe that we are
in substantial compliance with OPA, CERCLA and all applicable
state regulations in the ports where our vessels call.





29





OPA also
requires owners and operators of vessels to establish and maintain with the U.S.
Coast Guard evidence of financial responsibility sufficient to meet the limit of
their potential strict liability under the act. On October 17, 2008, the U.S.
Coast Guard regulatory requirements under OPA and CERCLA were amended to require
evidence of financial responsibility in amounts that reflect the higher limits
of liability imposed by the July 2006 amendments to OPA, as described above. The
increased amounts became effective on January 15, 2009. U.S. Coast Guard
regulations currently require evidence of financial responsibility in the amount
of $3,300 per gross ton for a single hull tanker or $2,200 per gross ton for a
double hull tanker, coupling the OPA limitation on liability of $3,000 per gross
ton for a single hull tanker, or $1,900 per gross ton for a double hull tanker,
respectively, with the CERCLA liability limit of $300 per gross ton. Under the
regulations, evidence of financial responsibility may be demonstrated by
insurance, surety bond, self-insurance or guaranty. Under OPA regulations, an
owner or operator of more than one tanker is required to demonstrate evidence of
financial responsibility for the entire fleet in an amount equal only to the
financial responsibility requirement of the tanker having the greatest maximum
strict liability under OPA and CERCLA. We have provided such evidence and
received certificates of financial responsibility from the U.S. Coast Guard for
each of our vessels required to have one.





We insure
each of our vessels with pollution liability insurance in the maximum
commercially available amount of $1.0 billion. A catastrophic spill could exceed
the insurance coverage available, which could have a material adverse effect
on our business.





Under
OPA, with certain limited exceptions, all newly-built or converted vessels
operating in U.S. waters must be built with double hulls, and existing vessels
that do not comply with the double hull requirement will be prohibited from
trading in U.S. waters over a 20-year period (1995-2015) based on size, age and
place of discharge, unless retrofitted with double hulls. Notwithstanding the
prohibition to trade schedule, the act currently permits existing single hull
and double-sided tankers to operate until the year 2015 if their operations
within U.S. waters are limited to discharging at the
Louisiana Offshore Oil Port or off-loading by lightering within
authorized lightering zones more than 60 miles off-shore. Lightering is the
process by which vessels at sea off-load their cargo to smaller vessels for
ultimate delivery to the discharge port.





OPA also
amended the Federal Water Pollution Control Act to require owners or operators
of tankers operating in the waters of the United States to file vessel response
plans with the U.S. Coast Guard, and their tankers are required to operate in
compliance with their U.S. Coast Guard approved plans. These response plans
must, among other things:





·
            address
      a "worst case" scenario and identify and ensure, through contract or other
      approved means, the availability of necessary private response resources
      to respond to a "worst case"
discharge;





·
            describe
      crew training and drills; and





·
            identify
      a qualified individual with full authority to implement removal
      actions.





We have
obtained vessel response plans approved by the U.S. Coast Guard for our vessels
operating in the waters of the United States.





In
addition, the U.S. Clean Water Act, or CWA, prohibits the discharge of oil or
hazardous substances in U.S. navigable waters unless
authorized by a duly-issued permit or exemption, and imposes strict liability in
the form of penalties for any unauthorized discharges. The CWA also imposes
substantial liability for the costs of removal, remediation and damages and
complements the remedies available under OPA and CERCLA. Furthermore, most U.S. states that border a
navigable waterway have enacted environmental pollution laws that impose strict
liability on a person for removal costs and damages resulting from a discharge
of oil or a release of a hazardous substance. These laws may be more stringent
than U.S. federal
law.





The U.S.
Environmental Protection Agency, or EPA, historically exempted the discharge of
ballast water and other substances incidental to the normal operation of vessels
in U.S. waters from CWA permitting requirements. However, on March 31, 2005, a
U.S. District Court ruled that the EPA exceeded its authority in creating an
exemption for ballast water. On September 18, 2006, the court issued an order
invalidating the exemption in the EPA's regulations for all discharges
incidental to the normal operation of a vessel as of September 30, 2008, and
directed the EPA to develop a system for regulating all discharges from vessels
by that date. The District Court's decision was affirmed by the Ninth Circuit
Court of Appeals on July 23, 2008.





In
response to the invalidation and removal of the EPA's vessel exemption by the
Ninth Circuit, the EPA has enacted rules governing the regulation of ballast
water discharges and other discharges incidental to the normal operation of
vessels within U.S. waters. Under the new rules, which took effect February 6,
2009, commercial vessels 79 feet in length or longer (other than commercial
fishing vessels), which we refer to as Regulated Vessels, are required to obtain
a CWA permit regulating and authorizing such normal discharges. This permit,
which the EPA has designated as the Vessel General Permit for Discharges
Incidental to the Normal Operation of Vessels, or VGP, incorporates the current
U.S. Coast Guard requirements for ballast water management as well as
supplemental ballast water requirements, and includes limits applicable to 26
specific discharge streams, such as deck runoff, bilge water and gray
water.





30





For each
discharge type, among other things, the VGP establishes effluent limits
pertaining to the constituents found in the effluent, including best management
practices, or BMPs, designed to decrease the amount of constituents entering the
waste stream. Unlike land-based discharges, which are deemed acceptable by
meeting certain EPA-imposed numerical effluent limits, each of the 26 VGP
discharge limits is deemed to be met when a Regulated Vessel carries out the
BMPs pertinent to that specific discharge stream. The VGP imposes additional
requirements on certain Regulated Vessel types, including tankers, that emit
discharges unique to those vessels. Administrative provisions, such as
inspection, monitoring, recordkeeping and reporting requirements are also
included for all Regulated Vessels.





On August
31, 2008, the District Court ordered that the date for implementation of the VGP
be postponed from September 30, 2008 until December 19, 2008. This date was
further postponed until February 6, 2009 by the District Court. Although the VGP
became effective on February 6, 2009, the VGP application procedure, known as
the Notice of Intent, or NOI, has yet to be finalized. Accordingly, Regulated
Vessels will effectively be covered under the VGP from February 6, 2009 until
June 19, 2009, at which time the "eNOI" electronic filing interface will become
operational.





Thereafter,
owners and operators of Regulated Vessels must file their NOIs prior to
September 19, 2009, or the Deadline. Any Regulated Vessel that does not file an
NOI by the Deadline will, as of that date, no longer be covered by the VGP and
will not be allowed to discharge into U.S. navigable waters until it has
obtained a VGP. Any Regulated Vessel that was delivered on or before the
Deadline will receive final VGP permit coverage on the date that the EPA
receives such Regulated Vessel's complete NOI. Regulated Vessels delivered after
the Deadline will not receive VGP permit coverage until 30 days after their NOI
submission. Our fleet is composed entirely of Regulated Vessels, and we intend
to submit NOIs for each vessel in our fleet as soon after June 19, 2009 as
practicable.





Owners
and operators of vessels visiting U.S. waters will be required to comply with
this VGP program or face penalties.  This could require the
installation of equipment on our vessels to treat ballast water before it is
discharged or the implementation of other port facility disposal arrangements or
procedures at potentially substantial cost, and/or otherwise restrict our
vessels from entering U.S. waters. In addition, pursuant to Section 401 of the
CWA which requires each state to certify federal discharge permits such as the
VGP, certain states have enacted additional discharge standards as conditions to
their certification of the VGP. These local standards bring the VGP into
compliance with more stringent state requirements, such as those further
restricting ballast water discharges and preventing the introduction of
non-indigenous species considered to be invasive. The VGP and its state-specific
regulations and any similar restrictions enacted in the future will increase the
costs of operating in the relevant waters.





The U.S.
Clean Air Act of 1970, as amended by the Clean Air Act Amendments of 1977 and
1990, or the CAA, requires the EPA to promulgate standards applicable to
emissions of volatile organic compounds and other air contaminants. Our vessels
are subject to vapor control and recovery requirements for certain cargoes when
loading, unloading, ballasting, cleaning and conducting other operations in
regulated port areas. Our vessels that operate in such port areas with
restricted cargoes are equipped with vapor recovery systems that satisfy these
requirements. The CAA also requires states to draft State Implementation Plans,
or SIPs, designed to attain national health-based air quality standards in
primarily major metropolitan and/or industrial areas. Several SIPs regulate
emissions resulting from vessel loading and unloading operations by requiring
the installation of vapor control equipment. As indicated above, our vessels
operating in covered port areas are already equipped with vapor recovery systems
that satisfy these existing requirements. As referenced above, the amended Annex
VI to the IMO's MARPOL Convention, which addresses air pollution from ships, was
ratified by the United States on October 9, 2008 and entered into force
domestically on January 8, 2009. Previously, the state of California had adopted
stringent air emissions requirements for ocean-going vessels that were held by a
federal court in February 2008 to be preempted by the Clean Air Act and thus
invalidated. In response, on July 24, 2008, the California Air Resources Board
of the State of California, or CARB, then adopted clean-fuel regulations
applicable to all vessels sailing within 24 miles of the California coastline
whose itineraries call for them to enter any California ports, terminal
facilities, or internal or estuarine waters. The new CARB regulations, while
avoiding explicit regulation of emissions, require such vessels to use low
sulfur marine fuels rather than bunker fuel. By July 1, 2009, such vessels are
required to switch either to marine gas oil with a sulfur content of no more
than 1.5% or marine diesel oil with a sulfur content of no more than 0.5%. By
2012, only marine gas oil and marine diesel oil fuels with 0.1% sulfur will be
allowed. California is also requesting EPA to grant it a waiver under the Clean
Air Act to enforce the California vessel emission standards that were
invalidated. More legal challenges are expected to follow. If EPA grants the
California waiver request or if CARB prevails and the new fuel content
regulations go into effect as scheduled on July 1, 2009, our vessels would be
subject to the CARB requirements if they were to travel within such waters. The
new California regulations would require significant expenditures on low-sulfur
fuel and would increase our operating costs. Finally, although the more
stringent CARB regime was technically superseded when the United States ratified
and implemented the amended Annex VI, the United States and Canada jointly
requested IMO on March 27, 2009 to designate the area extending 200 miles from
their territorial sea baseline adjacent to the Atlantic/Gulf and Pacific coasts
and the eight main Hawaiian Islands as Emissions Control Areas under the Annex
VI amendments. If approved by IMO, more stringent emissions standards similar to
the new CARB regulations would apply in the Emissions Control Areas that would
cause us to incur further costs.





31





The U.S.
National Invasive Species Act, or NISA, was enacted in 1996 in response to
growing reports of harmful organisms being released into U.S. ports through ballast water
taken on by ships in foreign ports. The U.S. Coast Guard adopted regulations
under NISA in July 2004 that impose mandatory ballast water management practices
for all vessels equipped with ballast water tanks entering U.S. waters. These
requirements can be met by performing mid-ocean ballast exchange, by retaining
ballast water on board the ship, or by using environmentally sound alternative
ballast water management methods approved by the U.S. Coast Guard. (However,
mid-ocean ballast exchange is mandatory for ships heading to the Great Lakes or
Hudson Bay, or vessels
engaged in the foreign export of Alaskan North Slope crude oil). Mid-ocean
ballast exchange is the primary method for compliance with the U.S. Coast Guard
regulations, since holding ballast water can prevent ships from performing cargo
operations upon arrival in the United States, and alternative
methods are still under development. Vessels that are unable to conduct
mid-ocean ballast exchange due to voyage or safety concerns may discharge
minimum amounts of ballast water (in areas other than the Great Lakes and the
Hudson River), provided
that they comply with recordkeeping requirements and document the reasons they
could not follow the required ballast water management requirements. The U.S.
Coast Guard is developing a proposal to establish ballast water discharge
standards, which could set maximum acceptable discharge limits for various
invasive species, and/or lead to requirements for active treatment of ballast
water. In April 2008, the U.S. House of Representatives passed a bill that
amends NISA by prohibiting the discharge of ballast water unless it has been
treated with specified methods or acceptable alternatives. Similar bills have
been introduced in the U.S. Senate, but we cannot predict which bill, if any,
will be enacted into law. In the absence of federal standards, states have
enacted legislation or regulations to address invasive species through ballast
water and hull cleaning management and permitting requirements. For instance,
the state of California
has recently enacted legislation extending its ballast water management program
to regulate the management of "hull fouling" organisms attached to vessels and
adopted regulations limiting the number of organisms in ballast water
discharges. Michigan's
ballast water management legislation mandating the use of various techniques for
ballast water treatment was upheld by the federal courts. Other states may
proceed with the enactment of similar requirements that could increase the costs
of operating in state waters.





Our
operations occasionally generate and require the transportation, treatment and
disposal of both hazardous and non-hazardous solid wastes that are subject to
the requirements of the U.S. Resource Conservation and Recovery Act, or RCRA, or
comparable state, local or foreign requirements. In addition, from time to time
we arrange for the disposal of hazardous waste or hazardous substances at
offsite disposal facilities. If such materials are improperly disposed of by
third parties, we may still be held liable for clean up costs under applicable
laws.





Other
Regulations





European
      Union Tanker Regulations





In July
2003, in response to the MT Prestige oil spill in
November 2002, the European Union adopted legislation, which was amended in
October 2003 that prohibits all single hull tankers from entering into its ports
or offshore terminals by 2010 or earlier, depending on their age. The European
Union has also already banned all single hull tankers carrying heavy grades of
oil from entering or leaving its ports or offshore terminals or anchoring in
areas under its jurisdiction. Commencing in 2005, certain single hull tankers
above 15 years of age will also be restricted from entering or leaving European
Union ports or offshore terminals and anchoring in areas under European Union
jurisdiction. The European Union has also adopted legislation that would: (1)
ban manifestly sub-standard vessels (defined as those over 15 years old that
have been detained by port authorities at least twice in a six month period)
from European waters and create an obligation of port states to inspect vessels
posing a high risk to maritime safety or the marine environment; and (2) provide
the European Union with greater authority and control over classification
societies, including the ability to seek to suspend or revoke the authority of
negligent societies. The sinking of the MT Prestige and resulting oil
spill in November 2002 has led to the adoption of other environmental
regulations by certain European Union nations, which could adversely affect the
remaining useful lives of all of our vessels and our ability to generate income
from them. It is impossible to predict what legislation or additional
regulations, if any, may be promulgated by the European Union or any other
country or authority.





In 2005,
the European Union adopted a directive on ship-source pollution, imposing
criminal sanctions for intentional, reckless or negligent pollution discharges
by ships. The directive could result in criminal liability for pollution
from vessels in waters of European countries that adopt implementing
legislation. Criminal liability for pollution may result in substantial
penalties or fines and increased civil liability claims.





32








Greenhouse
Gas Regulation





In
February 2005, the Kyoto Protocol to the United Nations Framework Convention on
Climate Change, or the Kyoto Protocol, entered into force. Pursuant to the Kyoto
Protocol, adopting countries are required to implement national programs to
reduce emissions of certain gases, generally referred to as greenhouse gases,
which are suspected of contributing to global warming. Currently, the emissions
of greenhouse gases from international shipping are not subject to the Kyoto
Protocol. However, the European Union has indicated that it intends to propose
an expansion of the existing European Union emissions trading scheme to include
emissions of greenhouse gases from vessels. In the United States, the Attorneys
General from 16 states and a coalition of environmental groups in April 2008
filed a petition for a writ of mandamus, or petition, with the DC Circuit Court
of Appeals, or the DC Circuit, to request an order requiring the EPA to regulate
greenhouse gas emissions from ocean-going vessels under the Clean Air Act.
Although the DC Circuit denied the petition in June 2008, EPA then published an
Advanced Notice of Proposed Rulemaking soliciting comments on whether greenhouse
gas emissions should be regulated under the Clean Air Act. Climate change
initiatives will also be considered by the U.S. Congress in this session. Any
future passage of climate control legislation or other regulatory initiatives by
the IMO, European Union or individual countries where we operate that restrict
emissions of greenhouse gases could entail financial impacts on our operations
that we cannot predict with certainty at this time.





Vessel
Security Regulations





Since the
terrorist attacks of September 11, 2001, there have been a variety of
initiatives intended to enhance vessel security. On November 25, 2002, the U.S.
Maritime Transportation Security Act of 2002, or MTSA, came into effect. To
implement certain portions of the MTSA, in July 2003, the U.S. Coast Guard
issued regulations requiring the implementation of certain security requirements
aboard vessels operating in waters subject to the jurisdiction of
the United States. Similarly, in December 2002, amendments to SOLAS created
a new chapter of the convention dealing specifically with maritime security. The
new chapter became effective in July 2004 and imposes various detailed security
obligations on vessels and port authorities, most of which are contained in the
International Ship and Port Facility Security Code, or the ISPS Code. The ISPS
Code is designed to protect ports and international shipping against terrorism.
After July 1, 2004, to trade internationally, a vessel must attain an
International Ship Security Certificate, or ISSC, from a recognized security
organization approved by the vessel's flag state. Among the various requirements
are:





·
            on-board
      installation of automatic identification systems to provide a means for
      the automatic transmission of safety-related information from among
      similarly equipped ships and shore stations, including information on a
      ship's identity, position, course, speed and navigational
      status;





·
            on-board
      installation of ship security alert systems, which do not sound on the
      vessel but only alert the authorities on
shore;





·
            the
      development of vessel security
plans;





·
            ship
      identification number to be permanently marked on a ship's
      hull;





·
            a
      continuous synopsis record kept onboard showing a vessel's history
      including the name of the ship and of the state whose flag the ship is
      entitled to fly, the date on which the ship was registered with that
      state, the ship's identification number, the port at which the ship is
      registered and the name of the registered owner(s) and their registered
      address; and





·
            compliance
      with flag state security certification
  requirements.





The U.S.
Coast Guard regulations, intended to align with international maritime security
standards, exempt from MTSA vessel security measures non-U.S. vessels that have
on board, as of July 1, 2004, a valid ISSC attesting to the vessel's compliance
with SOLAS security requirements and the ISPS Code. We have implemented the
various security measures addressed by MTSA, SOLAS and the ISPS Code, and our
fleet is in compliance with applicable security requirements.





33





Inspection
by Classification Societies





Every
oceangoing vessel must be "classed" by a classification society. The
classification society certifies that the vessel is "in-class," signifying that
the vessel has been built and maintained in accordance with the rules of the
classification society and complies with applicable rules and regulations of the
vessel's country of registry and the international conventions of which that
country is a member. In addition, where surveys are required by international
conventions and corresponding laws and ordinances of a flag state, the
classification society will undertake them on application or by official order,
acting on behalf of the authorities concerned.





The
classification society also undertakes on request other surveys and checks that
are required by regulations and requirements of the flag state. These surveys
are subject to agreements made in each individual case and/or to the regulations
of the country concerned.





For
maintenance of the class, regular and extraordinary surveys of hull and
machinery, including the electrical plant, and any special equipment classed are
required to be performed as follows:





·
            Annual
      Surveys. For seagoing ships, annual surveys are conducted for the hull and
      the machinery, including the electrical plant and where applicable for
      special equipment classed, at intervals of 12 months from the date of
      commencement of the class period indicated in the
    certificate.





·
            Intermediate
      Surveys. Extended annual surveys are referred to as intermediate surveys
      and typically are conducted two and one-half years after commissioning and
      each class renewal. Intermediate surveys may be carried out on the
      occasion of the second or third annual
survey.





·
            Class
      Renewal Surveys. Class renewal surveys, also known as special surveys, are
      carried out for the ship's hull, machinery, including the electrical plant
      and for any special equipment classed, at the intervals indicated by the
      character of classification for the hull. At the special survey the vessel
      is thoroughly examined, including audio-gauging to determine the thickness
      of the steel structures. Should the thickness be found to be less than
      class requirements, the classification society would prescribe steel
      renewals. The classification society may grant a one year grace period for
      completion of the special survey. Substantial amounts of money may have to
      be spent for steel renewals to pass a special survey if the vessel
      experiences excessive wear and tear. In lieu of the special survey every
      four or five years, depending on whether a grace period was granted, a
      ship owner has the option of arranging with the classification society for
      the vessel's hull or machinery to be on a continuous survey cycle, in
      which every part of the vessel would be surveyed within a five year cycle.
      At an owner's application, the surveys required for class renewal may be
      split according to an agreed schedule to extend over the entire period of
      class. This process is referred to as continuous class
      renewal.





All areas
subject to survey as defined by the classification society are required to be
surveyed at least once per class period, unless shorter intervals between
surveys are prescribed elsewhere. The period between two subsequent surveys of
each area must not exceed five years.





Our
vessels which are less than 15 years old are drydocked every 60 months, while
vessels which are more than 15 years old are drydocked every 30-36 months for
inspection of the underwater parts and for repairs related to the inspection. If
any defects are found, the classification surveyor will issue a recommendation
which must be rectified by the ship owner within prescribed time
limits.





Most
insurance underwriters make it a condition for insurance coverage that a vessel
be certified as "in-class" by a classification society which is a member of the
International Association of Classification Societies. All our vessels are
certified as being "in-class" by a recognized classification
society.





In
addition to the classification inspections, many of our customers regularly
inspect our vessels as a precondition to chartering them for voyages. We believe
that our well-maintained, high-quality vessels provide us with a competitive
advantage in the current environment of increasing regulation and customer
emphasis on quality.





34





Risk
of Loss and Insurance





The
operation of any ocean-going vessel carries an inherent risk of catastrophic
marine disasters and property losses caused by adverse weather conditions,
mechanical failures, human error, war, terrorism and other circumstances or
events. In addition, the transportation of crude oil is subject to the risk of
spills, and business interruptions due to political circumstances in foreign
countries, hostilities, labor strikes and boycotts. OPA has made liability
insurance more expensive for ship owners and operators imposing potentially
unlimited liability upon owners, operators and bareboat charterers for oil
pollution incidents in the territorial waters of the United States. We believe
that our current insurance coverage is adequate to protect us against the
principal accident-related risks that we face in the conduct of our
business.





Our
protection and indemnity insurance, or P&I insurance, covers third-party
liabilities and other related expenses from, among other things, injury or death
of crew, passengers and other third parties, claims arising from collisions,
damage to cargo and other third-party property and pollution arising from oil or
other substances. Our current P&I insurance coverage for pollution is the
maximum commercially available amount of $1.05 billion per tanker per incident
and is provided by mutual protection and indemnity associations. Each of the
vessels currently in our fleet is entered in a protection and indemnity
association which is a member of the International Group of Protection and
Indemnity Mutual Assurance Associations. The 13 protection and indemnity
associations that comprise the International Group insure approximately 90%
of the world's commercial tonnage and have entered into a pooling agreement to
reinsure each association's liabilities. Each protection and indemnity
association has capped its exposure to this pooling agreement at $4.3 billion.
As a member of protection and indemnity associations, which are, in turn,
members of the International Group, we are subject to calls payable to the
associations based on its claim records as well as the claim records of
all other members of the individual associations and members of the pool of
protection and indemnity associations comprising the International
Group.





Our hull
and machinery insurance covers actual or constructive total loss from covered
risks of collision, fire, heavy weather, grounding and engine failure or damages
from same. Our war risk insurance covers risks of confiscation, seizure,
capture, vandalism, sabotage and other war-related risks. Our loss-of-hire
insurance covers loss of revenue at $23,000 per day for Suezmaxes and $30,000
per day for VLCCs for not less than 90 days resulting from an accident covered
by the terms of our hull and machinery insurance for each of our vessels, with a
fourteen day deductible for OBO vessels, a fourteen day deductible for the
Golden Victory and a 60 day deductible for all other Suexmaxes and
VLCCs.





C.
ORGANIZATIONAL STRUCTURE





See
Exhibit 8.1 for a list of our significant subsidiaries.





35





D.
PROPERTY, PLANTS AND EQUIPMENT





The
Company's Vessels





The
following table sets forth the fleet that we operate as of February 28, 2009
(including contracted newbuildings not yet delivered):





Vessel
                            Built
                            Approximate
      Dwt.
                            Construction
                            Flag
                            Type
      of EmploymentTonnage
      Owned DirectlyVLCCsAntares
      Voyager
                            1998
                            310,000
                            Double-hull
                            BA
                            Bareboat
      charterPhoenix
      Voyager
                            1999
                            308,500
                            Double-hull
                            BA
                            Bareboat
      charterBritish
      Pioneer
                            1999
                            307,000
                            Double-hull
                            IoM
                            Bareboat
      charterFront
      Shanghai
                            2006
                            298,500
                            Double-hull
                            HK
                            Spot
      marketFront
      Kathrine
                            2009
                            297,974
                            Double-hull
                            MI
                            Spot
      marketHull
      2397 (Newbuilding)
                            2009
                            297,000
                            Double-hull
                            n/a
                            n/aHull
      2419 (Newbuilding)
                            2010
                            297,000
                            Double-hull
                            n/a
                            n/aHull
      2420 (Newbuilding)
                            2010
                            297,000
                            Double-hull
                            n/a
                            n/aHull
      J0023 (Newbuilding)
                            2011
                            320,000
                            Double-hull
                            n/a
                            n/aHull
      J0024 (Newbuilding)
                            2011
                            320,000
                            Double-hull
                            n/a
                            n/aHull
      J0025 (Newbuilding)
                            2011
                            320,000
                            Double-hull
                            n/a
                            n/aHull
      J0026 (Newbuilding)
                            2011
                            320,000
                            Double-hull
                            n/a
                            n/aHull
      J0027 (Newbuilding)
                            2012
                            320,000
                            Double-hull
                            n/a
                            n/aHull
      J0028 (Newbuilding)
                            2012
                            320,000
                            Double-hull
                            n/a
                            n/a
  Tonnage
      Owned DirectlySuezmax
      TankersFront
      Voyager
                                1992
                                155,000
                                Single-hull
                                BA
                                Spot
      marketFront
      Fighter
                                1994
                                147,048
                                Double-hull
                                MI
                                Spot
      marketFront
      Hunter
                                1996
                                146,286
                                Double-hull
                                MI
                                Spot
      marketFront
      Alfa
                                1993
                                150,038
                                Double-hull
                                MI
                                Time
      charterFront
      Beta
                                1992
                                135,915
                                Double-hull
                                MI
                                Time
      charterFront
      Delta
                                1993
                                136,055
                                Double-hull
                                MI
                                Time
      charterCygnus
      Voyager
                                1993
                                157,000
                                Double-hull
                                BA
                                Bareboat
      charterAltair
      Voyager
                                1993
                                136,000
                                Double-hull
                                BA
                                Bareboat
      charterSirius
      Voyager
                                1994
                                156,000
                                Double-hull
                                BA
                                Bareboat
      charterHull
      1017 (Newbuilding)
                                2009
                                156,000
                                Double-hull
                                n/a
                                n/aHull
      1018 (Newbuilding)
                                2009
                                156,000
                                Double-hull
                                n/a
                                n/aHull
      1019 (Newbuilding)
                                2009
                                156,000
                                Double-hull
                                n/a
                                n/aHull
      1026 (Newbuilding)
                                2010
                                156,000
                                Double-hull
                                n/a
                                n/aHull
      1056 (Newbuilding)
                                2010
                                156,000
                                Double-hull
                                n/a
                                n/aHull
      1057 (Newbuilding)
                                2011
                                156,000
                                Double-hull
                                n/a
                                n/aHull
      1060 (Newbuilding)
                                2011
                                156,000
                                Double-hull
                                n/a
                                n/aHull
      1061 (Newbuilding)
                                2011
                                156,000
                                Double-hull
                                n/a
                                n/a










36







Tonnage
      Chartered in from Ship FinanceVLCCsFront
      Highness
            1991
            284,000
            Single-hull
            SG
            Time
      charterFront
      Lady
            1991
            284,000
            Single-hull
            SG
            Time
      charterGolden River
            1991
            284,000
            Single-hull
            SG
            Time
      charterFront
      Duke
            1992
            284,000
            Single-hull
            SG
            Time
      charterFront
      Duchess
            1993
            284,000
            Single-hull
            SG
            Spot
      marketEdinburgh
            1993
            302,000
            Double-side
            LIB
            Spot
      marketFront
      Ace
            1993
            276,000
            Single-hull
            LIB
            Time
      charterFront
      Vanguard
            1998
            300,000
            Double-hull
            MI
            Spot
      marketFront
      Century
            1998
            311,000
            Double-hull
            MI
            Time
      charterFront
      Champion
            1998
            311,000
            Double-hull
            BA
            Time
      charter Front
      Vista
            1998
            300,000
            Double-hull
            MI
            Spot
      marketFront
      Comanche
            1999
            300,000
            Double-hull
            FRA
            Time
      charterGolden
      Victory
            1999
            300,000
            Double-hull
            MI
            Time
      charterFront
      Circassia
            1999
            306,000
            Double-hull
            MI
            Spot
      marketFront
      Opalia
            1999
            302,000
            Double-hull
            MI
            Spot
      marketOcana
            1999
            300,000
            Double-hull
            IoM
            Bareboat
      charterFront
      Scilla
            2000
            303,000
            Double-hull
            MI
            Spot
      marketOliva
            2001
            299,000
            Double-hull
            IoM
            Bareboat
      charterFront
      Serenade
            2002
            299,000
            Double-hull
            LIB
            Time
      charterOtina
            2002
            298,000
            Double-hull
            IoM
            Bareboat
      charterOndina
            2002
            299,000
            Double-hull
            IoM
            Bareboat
      charterFront
      Falcon
            2002
            309,000
            Double-hull
            BA
            Spot
      marketFront
      Page
            2002
            299,000
            Double-hull
            LIB
            Time
      charterFront
      Energy
            2004
            305,000
            Double-hull
            CYP
            Time
      charterFront
      Force
            2004
            305,000
            Double-hull
            CYP
            Spot
      market  Suezmax
      OBO CarriersFront
      Breaker
            1991
            169,000
            Double-hull
            MI
            Time
      charterFront
      Climber
            1991
            169,000
            Double-hull
            SG
            Time
      charterFront
      Driver
            1991
            169,000
            Double-hull
            MI
            Time
      charterFront
      Guider
            1991
            169,000
            Double-hull
            SG
            Time
      charterFront
      Leader
            1991
            169,000
            Double-hull
            SG
            Time
      charterFront
      Rider
            1992
            169,000
            Double-hull
            SG
            Time
      charterFront
      Striver
            1992
            169,000
            Double-hull
            SG
            Time
      charterFront
      Viewer
            1992
            169,000
            Double-hull
            SG
            Time
      charter  Tonnage
      Chartered in from Ship FinanceSuezmax
      TankersFront
      Pride
            1993
            150,000
            Double-hull
            NIS
            Spot
      marketFront
      Glory
            1995
            150,000
            Double-hull
            NIS
            Spot
      marketFront
      Splendour
            1995
            150,000
            Double-hull
            NIS
            Spot
      market


Front
      Ardenne
            1997
            150,000
            Double-hull
            NIS
            Spot
      marketFront
      Brabant
            1998
            150,000
            Double-hull
            NIS
            Time
      charterMindanao
            1998
            150,000
            Double-hull
            SG
            Spot
      market








37






Vessel
            Built
            Approximate
      Dwt.
            Construction
            Flag
            Type
      of Employment





Tonnage
      Chartered in from Third PartiesVLCCsFront
      Chief
            1999
            311,000
            Double-hull
            BA
            Spot
      marketFront
      Commander
            1999
            311,000
            Double-hull
            BA
            Spot
      marketFront
      Crown
            1999
            311,000
            Double-hull
            BA
            Spot
      marketBritish
      Pride
            2000
            307,000
            Double-hull
            IoM
            Bareboat
      charterBritish
      Progress
            2000
            307,000
            Double-hull
            IoM
            Bareboat
      charterBritish
      Purpose
            2000
            307,000
            Double-hull
            IoM
            Bareboat
      charterFront
      Tina
            2000
            299,000
            Double-hull
            LIB
            Spot
      marketFront
      Commodore
            2000
            299,000
            Double-hull
            LIB
            Time
      charterFront
      Eagle
            2002
            309,000
            Double-hull
            BA
            Spot
      marketHampstead
            1996
            298,000
            Double-hull
            IoM
            Time
      charterKensington
            1995
            298,000
            Double-hull
            IoM
            Time
      charter  Suezmax
      TankersFront
      Warrior
            1998
            153,000
            Double-hull
            BA
            Spot
      marketFront
      Melody
            2001
            150,000
            Double-hull
            LIB
            Spot
      marketFront
      Symphony
            2001
            150,000
            Double-hull
            LIB
            Time
      charter Nordic
      Apollo (*)
            2003
            149,997
            Double-hull
            MI
            Spot
      marketNordic
      Discovery (*)
            1998
            149,999
            Double-hull
            NIS
            Spot
      marketNordic
      Fighter (*)
            1998
            149,999
            Double-hull
            NIS
            Spot
      marketNordic
      Hawk (*)
            1997
            151,475
            Double-hull
            BA
            Spot
      marketNordic
      Hunter (*)
            1997
            151,400
            Double-hull
            BA
            Spot
      marketNordic
      Saturn (*)
            1998
            157,332
            Double-hull
            MI
            Spot
      marketNordic
      Sprite (*)
            1999
            147,188
            Double-hull
            NIS
            Spot
      marketGenmar
      Argus
            2000
            149,999
            Double-hull
            MI
            Spot
      marketGenmar
      Horn
            1999
            159,475
            Double-hull
            MI
            Spot
      marketGenmar
      Spyridon
            2000
            149,999
            Double-hull
            MI
            Spot
      marketGenmar
      Harriet G
            2006
            149,999
            Double-hull
            MI
            Spot
      marketGenmar
      Phoenix
            1999
            153,015
            Double-hull
            MI
            Spot
      market  Tonnage
      under Commercial ManagementVLCCsMayfair
            1995
            298,405
            Double-hull
            MI
            Time
      charterCamden
            1995
            298,306
            Double-hull
            MI
            Time
      charterSonga
      Chelsea
            1995
            298,432
            Double-hull
            MI
            Spot
      marketUniversal
      Queen
            2005
            309,373
            Double-hull
            PAN
            Spot
      market





(*)           Vessel
is chartered in on a floating time charter.





Our
chartered in fleet is contracted to us under leasing arrangements with fixed
terms of between seven and twenty three years. Lessors have options to extend
nine of these leases by up to an additional five years from expiry of the
initial fixed term.  We have fixed purchase price options to buy nine
of these vessels at certain future dates and the lessors have fixed options to
sell nine of these vessels to us at the end of the lease period.  Four
of the lease agreements may not be terminated by us without the agreement of the
end-user of the vessel.





Key to
Flags:





BA –
Bahamas, IoM – Isle of Man, LIB - Liberia, MAL – Malta, NIS - Norwegian
International Ship Register, PAN – Panama,  SG - Singapore, FRA –
France, MI – Marshall Islands, CYP – Cyprus, HK – Hong Kong.





Other
than our interests in the vessels described above, we do not own any material
physical properties. We lease office space in Hamilton, Bermuda from an
unaffiliated third party. Frontline Management AS leases office space, at market
rates, in Oslo, Norway from Bryggegata AS, a company indirectly affiliated
with Hemen, our principal shareholder.







38





ITEM
4A.               UNRESOLVED
STAFF COMMENTS
 
 None.




ITEM
5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS





Overview





The
following discussion should be read in conjunction with Item 3 "Selected
Financial Data", Item 4 "Information on the Company" and our audited
Consolidated Financial Statements and Notes thereto included
herein.





Our
principal focus and expertise is the transportation of crude oil and oil product
cargoes for major integrated oil companies and other customers. As of December
31, 2008, our tanker fleet consisted of 28 VLCCs, 10 VLCC newbuilding contracts,
15 Suezmax tankers, eight Suezmax OBOs and eight Suezmax newbuilding contracts.
We also charter in 12 modern VLCCs and 14 Suezmaxes from third parties. A full
fleet list is provided in Item 4.D. "Information on the Company" showing the
vessels that we currently own and charter in.





Fleet
Changes





Refer to
Item 4 for discussion on acquisitions and disposals of vessels. A summary of our
fleet changes for the years ended December 31, 2008, 2007 and 2006 is as
follows:


2008
                
                
                2007
                
                
                2006VLCCsAt
      start of period
                
                
                42
                
                
                
                41
                
                
                
                43Acquisitions
                
                
                —
                
                
                
                2
                
                
                
                2Dispositions
                
                
                (2
                )
                
                
                (1
                )
                
                
                (4
                )At
      end of period
                
                
                40
                
                
                
                42
                
                
                
                41





SuezmaxAt
      start of period
                    
                    
                    16
                    
                    
                    
                    23
                    
                    
                    
                    23Acquisitions
                    
                    
                    5
                    
                    
                    
                    —
                    
                    
                    
                    —Dispositions
                    
                    
                    (3
                    )
                    
                    
                    (7
                    )
                    
                    
                    —Chartered
      In
                    
                    
                    11
                    
                    
                    
                    —
                    
                    
                    
                    —At
      end of period
                    
                    
                    29
                    
                    
                    
                    16
                    
                    
                    
                    23Suezmax
      OBOsAt
      start and end of period
                    
                    
                    8
                    
                    
                    
                    8
                    
                    
                    
                    8AframaxAt
      start of period
                    
                    
                    —
                    
                    
                    
                    1
                    
                    
                    
                    —Acquisitions
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1Dispositions
                    
                    
                    —
                    
                    
                    
                    (1
                    )
                    
                    
                    —At
      end of period
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1Total
      fleetAt
      start of period
                    
                    
                    66
                    
                    
                    
                    73
                    
                    
                    
                    74Acquisitions
                    
                    
                    5
                    
                    
                    
                    2
                    
                    
                    
                    3Dispositions
                    
                    
                    (5
                    )
                    
                    
                    (9
                    )
                    
                    
                    (4
                    )Chartered
      In
                    
                    
                    11
                    
                    
                    
                    —
                    
                    
                    
                    —At
      end of period
                    
                    
                    77
                    
                    
                    
                    66
                    
                    
                    
                    73








39





Summary
of Fleet Employment





As
discussed below, our vessels are operated under time charters, bareboat
charters, voyage charters, pool arrangements and COAs.





As
      of December 31,2008
                    
                    
                    2007
                    
                    
                    2006Number
      of vessels
                    
                    
                    Percentage
      of fleet
                    
                    
                    Number
      of vessels
                    
                    
                    Percentage
      of fleet
                    
                    
                    Number
      of vessels
                    
                    
                    Percentage
      of fleetVLCCsSpot
      or pool
                    
                    
                    15
                    
                    
                    
                    38
                    %
                    
                    
                    17
                    
                    
                    
                    40
                    %
                    
                    
                    18
                    
                    
                    
                    44
                    %Time
      charter
                    
                    
                    15
                    
                    
                    
                    38
                    %
                    
                    
                    15
                    
                    
                    
                    36
                    %
                    
                    
                    13
                    
                    
                    
                    32
                    %Bareboat
      charter
                    
                    
                    10
                    
                    
                    
                    25
                    %
                    
                    
                    10
                    
                    
                    
                    24
                    %
                    
                    
                    10
                    
                    
                    
                    24
                    %Total
                    
                    
                    40
                    
                    
                    
                    100
                    %
                    
                    
                    42
                    
                    
                    
                    100
                    %
                    
                    
                    41
                    
                    
                    
                    100
                    %SuezmaxSpot
      or pool
                    
                    
                    21
                    
                    
                    
                    73
                    %
                    
                    
                    12
                    
                    
                    
                    75
                    %
                    
                    
                    16
                    
                    
                    
                    70
                    %Time
      charter
                    
                    
                    5
                    
                    
                    
                    17
                    %
                    
                    
                    1
                    
                    
                    
                    6
                    %
                    
                    
                    3
                    
                    
                    
                    13
                    %Bareboat
      charter
                    
                    
                    3
                    
                    
                    
                    10
                    %
                    
                    
                    3
                    
                    
                    
                    19
                    %
                    
                    
                    3
                    
                    
                    
                    13
                    %Under
      Conversion
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1
                    
                    
                    
                    4
                    %Total
                    
                    
                    29
                    
                    
                    
                    100
                    %
                    
                    
                    16
                    
                    
                    
                    100
                    %
                    
                    
                    23
                    
                    
                    
                    100
                    %AframaxUnder
      Conversion
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1
                    
                    
                    
                    100
                    %Total
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1
                    
                    
                    
                    100
                    %


Suezmax
      OBOsTime
      charter
                    
                    
                    8
                    
                    
                    
                    100
                    %
                    
                    
                    8
                    
                    
                    
                    100
                    %
                    
                    
                    8
                    
                    
                    
                    100
                    %Total
                    
                    
                    8
                    
                    
                    
                    100
                    %
                    
                    
                    8
                    
                    
                    
                    100
                    %
                    
                    
                    8
                    
                    
                    
                    100
                    %Total
      fleetSpot
      or pool
                    
                    
                    36
                    
                    
                    
                    47
                    %
                    
                    
                    29
                    
                    
                    
                    44
                    %
                    
                    
                    34
                    
                    
                    
                    47
                    %Time
      charter
                    
                    
                    28
                    
                    
                    
                    36
                    %
                    
                    
                    24
                    
                    
                    
                    36
                    %
                    
                    
                    24
                    
                    
                    
                    32
                    %Bareboat
      charter
                    
                    
                    13
                    
                    
                    
                    17
                    %
                    
                    
                    13
                    
                    
                    
                    20
                    %
                    
                    
                    13
                    
                    
                    
                    18
                    %Under
      Conversion
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2
                    
                    
                    
                    3
                    %Total
                    
                    
                    77
                    
                    
                    
                    100
                    %
                    
                    
                    66
                    
                    
                    
                    100
                    %
                    
                    
                    73
                    
                    
                    
                    100
                    %





Market
Overview and Trend Information





In early
2008, the daily TCE for VLCCs reached a high of approximately $195,000. Despite
the volatility experienced in the tanker market throughout the year, the daily
TCE was approximately $100,000 during the second and third quarters of 2008 and
approximately $50,000 to $70,000 during the fourth quarter of 2008. Average
earnings for double hull VLCCs in 2008 was in excess of $95,000 per day
according to industry sources. The recent adverse changes in world financial
markets have not materially affected our business in 2008.





In the
first half of 2008, the tanker market benefited from the following
factors:





·
            The
      National Iranian Tanker Company tied up an estimated 12 to 14 VLCCs for
      storage as there was low demand for Iranian crude
  oil;





·
            Strong
      demand from the Chinese in connection with the 2008 Olympic
      Games;





·
            Number
      of port strikes during 2008, including in France, contributed to a tighter
      tonnage list;





·
            Total
      ton-mile growth for the US, China, Japan and Korea was, according to
      industry sources, approximately 7.3%, increasing from just below 14,000
      miles in the first quarter of 2007 to approximately 15,000 miles in the
      first quarter of 2008.





During
the second half of 2008, the decreased production of crude oil by OPEC was one
of the major factors impacting the tanker market. The oil price in 2008 averaged
at $98.70 per barrel, peaking at a record high of $143 per barrel on July 11 and
a low of approximately $38 per barrel by the end of December. As crude oil
prices and world demand for petroleum products decreased throughout the second
half of 2008, OPEC production was reduced.





40










Average
OPEC production is estimated at 31.24 million barrels per day in 2008 according
to IEA's April 2009 report. The expected 2009 OPEC production output figure has
not yet been published by the IEA, however, they reported a first quarter 2009
OPEC production of 28.33 million barrels per day, which is a decrease of
approximately four million barrels per day year-on-year.





The IEA
further estimates that average world oil demand was 85.8 million barrels per day
in 2008, a 0.3% decrease from 2007. For 2009, a decrease in world oil demand of
2.8% or 2.4 million barrels per day is forecast.





The
tanker market benefited from 'contango' in the oil price during 2008. This is a
market condition where the future oil price is higher than the current price. At
the end of October 2008, the spread between the current and future oil price
widened making it profitable for oil companies and traders to store crude oil.
Consequently, the demand for storage services increased, predominantly in the
Atlantic basin but also in the Arabian Gulf. The spot market at that time was
approximately $50,000 per day. Since then approximately 40 ships were
charterered either for straight storage or voyages followed by storage, with
rates ranging from $55,000 to $85,000 per day.





Throughout
2008, there was a continued trend among oil companies to discriminate against
single hull tankers due to their decreasing territory allowance and increasing
probability of inspection.





Bunkers
followed the movements in the oil market closely in 2008. The lowest bunker
price in Fujairah was quoted at the end of December at $206.50 per metric ton
while the highest bunker price in Fujairah was quoted at $756.5 per metric ton
in mid-July. The average bunker price in 2008 was approximately $508 per metric
ton.





According
to figures released in April 2009 by The International Monetary Fund, or 'IMF',
the World Trade Volume had a 3.3% increase in 2008. However, the IMF forecast
that the World Trade Volume will see a decline of 11% in 2009. Furthermore,
world GDP increased by 3.2% in 2008 and is forecast to decline by 1.3%
throughout 2009. In 2008, the U.S had a 1.1% growth in the GDP, which is
estimated to decline by 2.8% throughout 2009. China's 2008 GDP increased by 9%
year-on-year, and is forecast to have a 6.5% increase in 2009. Negative growth
is expected in Europe and Japan while emerging markets and developing countries
will experience a continued decrease in their growth figures.





In 2008,
the total Suezmax fleet increased with 3.7% to 351 vessels. 13 new vessels were
delivered to owners and 36 new orders were made. The total orderbook amounted to
168 vessels at the end of the year, which represented approximately 48% of the
existing fleet.





In 2008,
the total VLCC fleet increased by 7.6% to 500 vessels. Throughout the year a
total of 38 new vessels were delivered to owners and 82 new orders were made.
The total order book amounted to 230 vessels at the end of the year, which
represented approximately 46% of the existing fleet.





Throughout
2009 it is estimated that 68 new VLCCs and 72 Suezmaxes will enter the market
including 18 and 10 in the first quarter, respectively. This substantial amount
of new tonnage will be partially offset by the expected phase out program of
single hull vessels. Further cancellations of orders and delays in deliveries of
newbuildings are also expected.





Accounting
Changes





Following
the dividend of most of our remaining interest in Ship Finance on March 22,
2007, we re-evaluated the basis of our consolidation of Ship Finance under FIN
46(R) and determined that consolidation of Ship Finance and its subsidiaries was
no longer appropriate and that the vessels chartered in from Ship Finance should
be accounted for as assets held under capital leases. A summary of the major
changes to the financial statements is as follows;





·
            Vessels
      leased from Ship Finance, which were previously reported as wholly owned
      are reported as vessels held under capital
  lease.





·
            Capital
      lease obligations with Ship Finance, which were previously eliminated on
      consolidation are reported as liabilities with the related interest
      recorded in the income statement.





·
            Debt
      incurred by Ship Finance, which was previously reported as debt of the
      Company is no longer reported.





·
            Derivative
      instruments held by Ship Finance are no longer
  reported.





·
            Minority
      interest expense relating to Ship Finance is no longer
      reported.





·
            Profit
      share expense relating to amounts due to Ship Finance is shown in the
      income statement.





41








·
            Results
      from Ship Finance's container ships, jack-up rigs and Panamax vessels are
      no longer reported in the Company's consolidated
  results.





Discontinued
Operations





As a
result of the spin off of Ship Finance in March 2007, we disposed of the
container vessel and rig operations of Ship Finance. These operations have been
recorded as discontinued operations in 2007 and 2006. The results of the
container vessels have also been recorded as discontinued operations in
2005.





Critical
Accounting Policies and Estimates





The
preparation of our financial statements in accordance with accounting principles
generally accepted in the United States requires that management make estimates
and assumptions affecting the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.





Management
believes that the following accounting policies are the most critical in fully
understanding and evaluating our reported financial results as they require a
higher degree of judgment in their application resulting from the need to make
estimates about the effect of matters that are inherently uncertain. See Note 2
to our audited Consolidated Financial Statements included herein for details of
all of our material accounting policies.





Revenue
and expense recognition





Revenues
and expenses are recognized on the accruals basis. Revenues are generated from
freight billings, time charter and bareboat charter hires. Voyage revenues and
expenses are recognized ratably over the estimated length of each voyage and,
therefore, are allocated between reporting periods based on the relative transit
time in each period. The impact of recognizing voyage expenses ratably over the
length of each voyage is not materially different on a quarterly and annual
basis from a method of recognizing such costs as incurred. Probable losses on
voyages are provided for in full at the time such losses can be estimated. Time
charter and bareboat charter revenues are recorded over the term of the charter
as service is provided. The Company uses a discharge-to-discharge basis in
determining percentage of completion for all spot voyages and voyages servicing
contracts of affreightment whereby it recognizes revenue ratably from when
product is discharged (unloaded) at the end of one voyage to when it is
discharged after the next voyage. However, the Company does not recognize
revenue if a charter has not been contractually committed to by a customer and
the Company, even if the vessel has discharged its cargo and is sailing to the
anticipated load port on its next voyage.





Amounts
receivable or payable arising from profit sharing arrangements are accrued based
on amounts earned as of the reporting date. Profit share income represents
vessel earnings earned by the Company's customers in excess of market rates.
Profit share expense represents amounts due to Ship Finance based on 20% of the
excess of vessel revenues earned by the Company over the base hire paid to Ship
Finance for chartering in the vessels.





Revenues
and voyage expenses of the vessels operating in pool arrangements are pooled and
the resulting net pool revenues, calculated on a time charter equivalent basis,
are allocated to the pool participants according to an agreed
formula.  Formulae used to allocate net pool revenues vary among
different pools but generally allocate revenues to pool participants on the
basis of the number of days a vessel operates in the pool with weighting
adjustments made to reflect vessels' differing capacities and performance
capabilities.  The same revenue and expense principles stated above
are applied in determining the pool's net pool revenues.  Certain
pools are responsible for paying voyage expenses and distribute net pool
revenues to the participants.  Certain pools require the participants
to pay and account for voyage expenses, and distribute gross pool revenues to
the participants such that the participants' resulting net pool revenues are
equal to net pool revenues calculated according to the agreed
formula.  The Company accounts for gross pool revenues allocated by
these pools as "pool revenues" which are included in voyage revenues in its
consolidated statements of operations.





Vessels
and equipment





The cost
of the vessels less estimated residual value is depreciated on a straight-line
basis over the vessels' estimated remaining economic useful lives. The estimated
economic useful life of the Company's double hull vessels is 25 years and for
single hull vessels is either 25 years or the vessel's anniversary date in 2015,
whichever comes first. Other equipment is depreciated over its estimated
remaining useful life, which approximates five years.








42





Vessels
and equipment under capital lease





The
Company charters in certain vessels and equipment under leasing agreements.
Leases of vessels and equipment, where the Company has substantially all the
risks and rewards of ownership, are classified as capital leases. Capital leases
are capitalized at the inception of the lease at the lower of the fair value of
the leased assets and the present value of the minimum lease
payments.





Each
lease payment is allocated between liability and finance charges to achieve a
constant rate on the finance balance outstanding. The interest element of the
finance cost is charged to the income statement over the lease
period.





Depreciation
of vessels and equipment under capital lease is included within "depreciation
and amortization expense" in the consolidated statement of operations. Vessels
and equipment under capital lease are depreciated on a straight-line basis over
the vessels' remaining economic useful lives or on a straight-line basis over
the term of the lease. The method applied is determined by the criteria by which
the lease has been assessed to be a capital lease.





Factors
Affecting our Results





The
principal factors which affect our results of operations and financial position
include:





·
            the
      earnings of our vessels in the charter
market;





·
            gains
      from the sale of assets;





·
            vessel
      operating expenses;





·
            profit
      share expense;





·
            administrative
      expenses;





·
            depreciation;





·
            interest
      expense;





·
            impairment
      of securities.





We have
derived our earnings from bareboat charters, time charters, voyage charters,
pool arrangements and contracts of affreightment.





As of
December 31, 2008, 2007 and 2006, 36, 29 and 34, respectively, of our vessels
operated in the voyage charter market. The tanker industry has historically been
highly cyclical, experiencing volatility in profitability, vessel values and
freight rates. In particular, freight and charter rates are strongly influenced
by the supply of tanker vessels and the demand for oil
transportation services.





Gains
from the sale of assets relates to gains from the sale of vessels and marketable
securities and payments received on the termination of leases.





Operating
costs are the direct costs associated with running a vessel and include crew
costs, vessel supplies, repairs and maintenance, drydockings, lubricating oils
and insurance.





Profit
share expense relates to the vessels amounts due to Ship Finance based on 20% of
the excess of vessel revenues earned by the Company over the base hire paid to
Ship Finance for chartering in the vessels.





Administrative
expenses are composed of general corporate overhead expenses, including
personnel costs, property costs, legal and professional fees and other general
administrative expenses. Personnel costs include, among other things, salaries,
pension costs, fringe benefits, travel costs and health insurance.





Depreciation,
or the periodic cost charged to our income for the reduction in usefulness and
long-term value of our vessels, is also related to the number of vessels we own
or lease. We depreciate the cost of vessels we own, less their estimated
residual value, over their estimated useful life on a straight-line basis. We
depreciate the cost of vessels held under capital lease over the term of the
lease. No charge is made for depreciation of vessels under construction until
they are delivered.





Interest
expense relates to vessel specific debt facilities, corporate debt and capital
leases. Interest expense depends on our overall borrowing levels and may
significantly increase when we acquire vessels or on the delivery of
newbuildings.  Interest
incurred during the construction of a newbuilding is capitalized in the cost of
the newbuilding. Interest expense may also change with prevailing interest
rates, although the effect of these changes may be reduced by interest rate
swaps or other derivative instruments.





43








An
other-than-temporary impairment regarding our available-for-sale marketable
securities will be recorded as an impairment of securities.





Inflation





Although
inflation has had a moderate impact on our vessel operating expenses and
corporate overheads, management does not consider inflation to be a significant
risk to direct costs in the current and foreseeable economic environment other
than potentially in relation to insurance costs and crew costs. It is
anticipated that insurance costs, which have risen considerably over the last
three years, may well continue to rise over the next few years. Oil
transportation is a specialized area and the number of vessels is increasing.
There will therefore be an increased demand for qualified crew and this has and
will continue to put inflationary pressure on crew costs. However, in a shipping
downturn, costs subject to inflation can usually be controlled because shipping
companies typically monitor costs to preserve liquidity and encourage suppliers
and service providers to lower rates and prices in the event of a
downturn.





Year
ended December 31, 2008 compared with the year ended December 31,
2007





Total
operating revenues and voyage expenses and commission


Change(in
      thousands of $)
                
                2008
                
                
                2007
                
                
                $
                
                
                
                %Voyage
      charter revenues
                
                
                1,425,968
                
                
                
                801,546
                
                
                
                624,422
                
                
                
                77.9Time
      charter revenues
                
                
                602,980
                
                
                
                432,813
                
                
                
                170,167
                
                
                
                39.3Bareboat
      charter revenues
                
                
                57,152
                
                
                
                57,052
                
                
                
                100
                
                
                
                -Other
      income
                
                
                17,918
                
                
                
                8,516
                
                
                
                9,402
                
                
                
                110.4Total
      operating revenues
                
                
                2,104,018
                
                
                
                1,299,927
                
                
                
                804,091
                
                
                
                61.9





Total
operating revenues increased in 2008, as compared to 2007, primarily due to
significant increases in voyage and time charter revenues. Voyage charter
revenues increased mainly due to the following reasons:





·
            An
      increase in trading days due to the charter in of 11 Suezmax vessels,
      which resulted in an increase of $213.3
million.





·
            The
      purchase of five Suezmax vessels, which were delivered in the period from
      June to August 2008, two of which traded in the spot market and increased
      revenue by $33.9 million.





·
            TCE
      rates increased in 2008 compared to 2007 resulting in a rise in income
      across all revenue categories in the period. In voyage charter earnings,
      TCE for double hull VLCCs and double hull Suezmaxes was approximately
      $90,000 and $58,400, respectively, in 2008 compared with approximately
      $48,200 and $41,100, respectively, in
2007.





·
            The
      average TCE voyage charter rates earned on single hull Suezmaxes and
      single hull VLCCs were approximately $39,900 and $40,500, respectively, in
      2008. This compares with rates of approximately $23,000 for single hull
      Suezmaxes and $37,600 for single hull VLCCs in 2007. As has been the case
      in prior years the rates earned underline a continuing variance in market
      rates for single and double hull
vessels.





·
            The
      leases on two single hull vessels were terminated in the January and April
      2008 resulting in a decrease in voyage charter revenue of $24.7 million in
      the year.





Time
charter revenues increased mainly due to the following reasons:





·
            The
      OBO's were fixed on new charters throughout 2007 at higher rates and
      consequently the current year results reflect a full trading period on
      these charters, generating increased revenues of $12.9
      million.





·
            Our
      Suezmax vessels increased revenues by $1.6 million in 2008 as compared to
      2007. The delivery of three new vessels in 2008 resulted in increased
      revenues of $20.5 million, which was partially offset by the shift in
      employment of two vessels to the spot market, resulting in a $13.9 million
      decrease in revenues and a further decrease of $7.6 million as there were
      no single hull Suezmaxes traded on time charter during 2008 as compared to
      2007.





44







·
              Single
      hull VLCC time charter earnings were increased due to higher market linked
      charter rates. Four single hulled vessels were chartered out at rates
      linked to the Baltic Exchange Index which continued to increase in 2008,
      resulting in a $39.3 million increase in revenues, which was partially
      offset by a $7.6 million loss of revenue from the Front Sabang which was
      sold in the second quarter of 2008. The remaining $3.2 million increase
      represents receipts from old insurance
claims.  ·
              The
      double hull VLCC revenues were augmented by a full year of trading two
      vessels that were chartered in during 2007. These vessels increased
      earnings by $15.4 million, assisted by a market linked charter out
      rate.





·
            The
      most significant increase was realized by six other VLCC vessels chartered
      out under floating time charters. In 2008, these vessels posted a $99.3
      million increase on earnings compared to
2007.





Other
income has increased due to an increase in income earned from supervising the
newbuilding projects of related parties and an increase in commissions earned on
the commercial management of vessels chartered in from Nordic American Tankers
and the Songa Chelsea. These vessels were not managed by us in
2007.





In order
to compare vessels trading under different types of charters, it is standard
industry practice to measure the revenue performance of a vessel in terms of
time charter equivalent revenue, or TCE. Total TCE is the sum of time charter,
voyage charter and bareboat charter revenues, less voyage expenses. Total TCE,
which is not covered by generally accepted accounting principles, or GAAP,
provides more meaningful information to us than total operating revenues, the
most directly comparable GAAP measure. Average daily TCEs are also widely used
by investors and analysts in the shipping industry for comparing financial
performance between companies and to industry averages. Other companies may
calculate TCE using a different method. A summary of average time charter
equivalent earnings per day for our fleet is as follows:





(in
      $ per day)
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004VLCC
                
                
                74,500
                
                
                
                45,700
                
                
                
                56,800
                
                
                
                57,400
                
                
                
                78,000Suezmax
                
                
                55,200
                
                
                
                33,000
                
                
                
                37,800
                
                
                
                40,300
                
                
                
                57,900Suezmax
      OBO
                
                
                43,500
                
                
                
                39,700
                
                
                
                31,700
                
                
                
                34,900
                
                
                
                27,900





Gain on sale of
assets


Change(in
      thousands of $)
                
                2008
                
                
                2007
                
                
                $
                
                
                
                %Gain
      on sale of assets
                
                
                142,293
                
                
                
                118,168
                
                
                
                24,125
                
                
                
                20.4





The gain
on sale of assets in 2008 comprises gains of $17.1 million and $24.8 million
resulting from the termination of the long-term charter party agreements for
Front Maple and Front Sabang respectively. Also included in the gain on sale of
assets are gains of $26.0 million and $26.4 million relating to the delivery of
two completed heavy lift conversions, the Front Comor and Front Traveller,
respectively. Upon delivery of these final two vessels a further $38.6 million
was recognized on the gain on sale of the heavylift vessels. A further gain of
$9.4 million was recognized on sale of the Front Comor and Front Traveller
mid-sections.





The gain
on sale of assets in 2007 comprises gains of $21.3 million and $6.2 million from
the sale of the single hull vessels Front Transporter and Front Horizon,
respectively, a gain of $60.7 million from the delivery of two converted
heavylift vessels and gains of $13.3 million and $16.6 million resulting from
the termination of the long-term charter party agreements for Front Vanadis and
Front Birch, respectively.





Ship
operating expenses


Change(in
      thousands of $)
                          
                          2008
                          
                          
                          2007
                          
                          
                          $
                          
                          
                          
                          %VLCC
                          
                          
                          141,565
                          
                          
                          
                          119,552
                          
                          
                          
                          22,013
                          
                          
                          
                          18.4Suezmax
                          
                          
                          45,210
                          
                          
                          
                          52,642
                          
                          
                          
                          (7,432)
                          
                          
                          
                          (14.1)Suezmax
      OBO
                          
                          
                          26,991
                          
                          
                          
                          24,064
                          
                          
                          
                          2,927
                          
                          
                          
                          12.2Total
      ship operating expenses
                          
                          
                          213,766
                          
                          
                          
                          196,258
                          
                          
                          
                          17,508
                          
                          
                          
                          8.9





Ship
operating expenses are the direct costs associated with running a vessel and
include crew costs, vessel supplies, repairs and maintenance, drydockings,
lubricating oils and insurance.





VLCC
operating costs have increased mainly due to the following:





·
            Nine
      VLCCs (six double hull and three single hull) were drydocked in both 2008
      and 2007. The cost of vessels drydocked in 2008 was $16.1 million higher
      than in 2007.





45







·
              In
      May 2008, the long term charter for the Front Sabang was terminated
      resulting in a decrease in ship operating expenditure of $6.0 million in
      2008 as compared to 2007.  ·
              Increased
      crew costs contributed to $6.0 million of the higher operating costs
      reported in 2008.





Suezmax
operating costs have decreased mainly due to the following:





·
            In
      2008, three double hull Suezmaxes were drydocked as compared with five
      Suezmaxes (two single hull and three double hull) in 2007, which resulted
      in a decrease of $2.9 million in drydocking
  expenses.





·
            A
      single hull Suezmax vessel was sold in January 2008 which had previously
      reported an entire year's operating expenditure resulting in a $2.5
      million decrease in 2008 operating
expenditures.





·
            The
      Front Birch was sold in December 2007 and, therefore, reported close to a
      full year's operating expenditure. The impact in 2008 was to decrease
      operating expenditure by $2.5
million.





·
            The
      Front Granite and Marble were sold to Dockwise in 2007 and time chartered
      back. In 2007 the vessels reported $4.7 million more operating expenditure
      as a result.





·
            Five
      other single hull Suezmaxes were sold in 2007 that reported $7.3 million
      of expenses compared with $0.3 million in
2008.





·
            Five
      newly acquired double hull Suezmax vessels were delivered during the
      period from June to August 2008 resulting in an increase in operating
      expenditure of $10.7 million in
2008.





·
            There
      have also been general costs increases across the Suezmax
      fleet.





OBO
operating costs have increased slightly due to increased cost associated with
spare parts purchases, higher crew costs, as well as hull and machinery claim
costs.





Profit
share expense


Change(in
      thousands of $)
                
                2008
                
                
                2007
                
                
                $
                
                
                
                %Profit
      share expense
                
                
                110,962
                
                
                
                37,279
                
                
                
                73,683
                
                
                
                197.7





Profit
share expense relates to the vessels leased from Ship Finance and is calculated
as 20% of TCE in excess of daily base charter hire. Profit share expense of
$37.3 million recorded in the income statement in 2007 excludes $15.2 million
relating to the first quarter, which was eliminated on consolidation of Ship
Finance.





Charterhire
expenses


Change(in
      thousands of $)
                
                2008
                
                
                2007
                
                
                $
                
                
                
                %Charterhire
      expenses
                
                
                220,170
                
                
                
                56,868
                
                
                
                163,302
                
                
                
                287.2Number
      of vessels chartered in and accounted for
                  as
      operating leases:
                
                
                2008
                
                
                
                2007VLCC
                
                
                4
                
                
                
                3Suezmax
                
                
                14
                
                
                
                618
                
                
                
                9





The
increase in charterhire expense in 2008 relates to 18 vessels under operating
lease in 2008 as compared to nine vessels under operating lease in 2007. Six of
the chartered in Suezmax vessels operated under floating charters in
2008.











Administrative
expenses


Change(in
      thousands of $)
                
                2008
                
                
                2007
                
                
                $
                
                
                
                %Administrative
      expenses
                
                
                35,226
                
                
                
                36,410
                
                
                
                (1,184)
                
                
                
                (3.3)








46





The
decrease in administrative expenses during 2008 was mainly due to the
strengthening of the U.S. dollar against theNorwegian Kroner and the
British Pound as most of our administrative expenses are denominated in
Norwegian Kroner and the British Pound. In addition, administrative expenses in
2007 included $2.0 million with respect to Ship Finance for the first quarter.
These items were partially offset by a $3.3 million increase in stock
compensation and a $2.1 million increase in newbuilding supervision expenses as
a result of additional projects being supervised in 2008.





Interest
income


Change(in
      thousands of $)
                
                2008
                
                
                2007
                
                
                $
                
                
                
                %Interest
      income
                
                
                41,204
                
                
                
                54,316
                
                
                
                (13,112)
                
                
                
                (24.1)





Interest
income has decreased primarily as a result of a decrease in average cash
balances held during the year resulting from increased investments in fixed
assets and non trading financial instruments, which has been coupled with
significant decrease in interest rates.





Interest
expense


Change(in
      thousands of $)
                
                2008
                
                
                2007
                
                
                $
                
                
                
                %Interest
      expense
                
                
                183,925
                
                
                
                204,535
                
                
                
                (20,610)
                
                
                
                (10.1)





The
decrease in interest expense is primarily due to the fact that the Company no
longer consolidates the results of Ship Finance from the end of March 2007 and
as a result the bank interest expense incurred by Ship Finance has significantly
decreased. This decrease in bank interest has been offset by an increase in
lease interest expense. This lease interest expense was eliminated in the first
quarter of 2007.





Equity
earnings of unconsolidated subsidiaries and associated companies


Change(in
      thousands of $)
                
                2008
                
                
                2007
                
                
                $
                
                
                
                %Share
      of results of associated companies
                
                
                (901)
                
                
                
                573
                
                
                
                (1,474)
                
                
                
                -





As of
December 31, 2008, we account for five investees (2007: five) under the equity
method.  The decrease in share of results of associated companies is
primarily due to the disposal of International Maritime Exchange ASA, or IMAREX,
in 2007 and a write-down of the investment in Front Tobago Shipping
Corporation.





Other


Change(in
      thousands of $)
                
                2008
                
                
                2007
                
                
                $
                
                
                
                %Foreign
      currency exchange gains
                
                
                1,565
                
                
                
                3,312
                
                
                
                (1,747)
                
                
                
                (52.8)Mark
      to market of derivatives
                
                
                (17,399)
                
                
                
                3,530
                
                
                
                (20,929)
                
                
                
                -Impairment
      of securities
                
                
                (25,134)
                
                
                
                -
                
                
                
                (25,134)
                
                
                
                -Dividends
      received
                
                
                1,522
                
                
                
                533
                
                
                
                989
                
                
                
                185.6(Loss)
      gain on sale of securities
                
                
                (221)
                
                
                
                122,120
                
                
                
                (122,341)
                
                
                
                -Other
      non-operating items, net
                
                
                34,043
                
                
                
                4,951
                
                
                
                29,092
                
                
                
                -





The unfavorable
movement in mark to market of derivatives relates primarily to the forward
contracts and total return swap in relation to the purchase and sale of
securities in Overseas Shipholding Group Inc. ("OSG") totaling $15.0 million.
The remaining loss in 2008 relates to losses on forward freight
contracts.




Impairment
of securities relates to the other-than-temporary impairment recorded against
securities held in OSG. The securities were written down to fair value of $59.3
million as of December 31, 2008 resulting in an impairment loss of $25.1
million.




The loss
on sale of securities in 2008 relates to the disposal of securities in OSG. The
gain on sale of securities in 2007 comprises the gains arising on the sale of
our remaining shares in Dockwise, IMAREX, and Sea Production of $48.7 million,
$41.9 million and $31.2 million, respectively.




Other non
operating items, net in 2008 is primarily due to a gain of $16.6 million
following settlement by Bocimar of a legal case and a $18.0 million gain on the
partial spin-off of ITCL.





Minority
interest


Change(in
      thousands of $)
                
                2008
                
                
                2007
                
                
                $
                
                
                
                %Minority
      interest expense
                
                
                2,184
                
                
                
                22,162
                
                
                
                (19,978)
                
                
                
                (90.2)





In 2008,
minority interest represents the minority investors' 17.53% interests in the net
income of ITCL from February





47





2008. The
minority interest in 2007 represents majority investors' 88.9% interests in the
net income of Ship Finance for the first quarter. There is no minority interest
expense after March 31, 2007 as we no longer consolidate the results of Ship
Finance.





Gain
on issuance of shares by associate


Change(in
      thousands of $)
                
                2008
                
                
                2007
                
                
                $
                
                
                
                %Gain
      on issuance of shares by associate
                
                
                —
                
                
                
                83,566
                
                
                
                (83,566
                )
                
                
                —





The gain
on issuance of shares in 2007 comprises a gain on the issuance of shares in Sea
Production of $39.8 million and a gain on the issuance of shares in Sealift of
$43.7 million in connection with the business combination with Dockwise. Based
on the information currently available to us, we do not expect to record any
gains on the issuance of shares by associates in 2009.





Discontinued
operations


Change(in
      thousands of $)
                
                2008
                
                
                2007
                
                
                $
                
                
                
                %Discontinued
      operations
                
                
                —
                
                
                
                5,442
                
                
                
                (5,442
                )
                
                
                —





Discontinued
operations in 2007 are the results of the containerships and jack up rig of Ship
Finance. We no longer consolidate the results of Ship Finance following the spin
off in March 2007.





Year
ended December 31, 2007 compared with the year ended December 31,
2006





Total operating
revenues and voyage expenses and commission


Change(in
      thousands of $)
                
                2007
                
                
                2006
                
                
                $
                
                
                
                %Voyage
      charter revenues
                
                
                801,546
                
                
                
                1,114,531
                
                
                
                (312,985
                )
                
                
                (28
                )Time
      charter revenues
                
                
                432,813
                
                
                
                352,575
                
                
                
                80,238
                
                
                
                23Bareboat
      charter revenues
                
                
                57,052
                
                
                
                85,969
                
                
                
                (28,917
                )
                
                
                (34
                )Other
      income
                
                
                8,516
                
                
                
                5,294
                
                
                
                3,222
                
                
                
                61Total
      operating revenues
                
                
                1,299,927
                
                
                
                1,558,369
                
                
                
                (258,442
                )
                
                
                (17
                )





Our
vessels are operated under time charters, bareboat charters, voyage charters,
pool arrangements and contracts of affreightment, or COAs. Under a time charter,
the charterer pays substantially all of the vessel voyage costs which are
primarily fuel and port charges. Under a bareboat charter the charterer pays
substantially all of the vessel voyage and operating costs. Under a voyage
charter, the vessel owner pays such costs. Under contracts of affreightment, the
owner carries an agreed upon quantity of cargo over a specified route and time
period.





Total
operating revenues decreased in 2007 primarily because of a decrease in voyage
charter revenues. Voyage charter revenues decreased primarily due to the
following reasons:





·
            A
      reduction in trading days due to the sale of three vessels in 2006 and
      three vessels in 2007, which resulted in a decrease of $68.4 million in
      2007.





·
            Switching
      the employment of four VLCCs from the spot voyage market to time charters
      in the second quarter of 2006 resulted in a decrease of $49.2 million in
      2007.





·
            The
      Aframax Front Puffin stopped trading at the end of 2006 when conversion
      into an FPSO commenced. Front Puffin spot voyage revenue in 2006 was $2.8
      million.





·
            The
      sale of a single hull Suezmax in March 2007 and the delivery of three
      single hull Suezmaxes to shipyards for conversion to heavy lift vessels
      during 2007. The single hull Suezmax Front Sunda was delivered for
      conversion in 2006. These transactions resulted in a decrease in spot
      voyage revenues of $33.0 million.





·
            During
      2007, seven vessels (three Suezmax double hulls, one Suezmax single hull
      and three VLCC double hulls) changed employment from spot voyage to time
      charter resulting in a decrease in voyage charter revenues of $71.2
      million.




·
            TCE
      rates decreased in 2007 compared to 2006 contributing to a general
      decrease in voyage charter revenues.  The TCE earned in 2007 for
      our double hull Suezmaxes was approximately $41,100 compared to $49,900 in
      2006 and single hull Suezmax average daily rate earned in 2007 was $22,900
      compared to $29,100 in 2006.  The
      average daily rate earned for our double hull VLCCs in 2007 was $48,200
      compared to $67,600 in 2006 and the single hull VLCC average daily rate
      earned in 2007 was $37,600 compared to $54,100 in 2006. The rates earned
      highlight a continuing differential in market rates for single and double
      hull vessels.





48











Time
charter revenues have increased primarily due to the following
reasons:





·
            Our
      OBO's were fixed on new time charters with higher prevailing rates
      resulting in an increase in revenues of $25.0
  million.





·
            During
      2007, we chartered in two VLCCs and subsequently chartered these vessels
      out on time charters which contributed to an increase in revenues of $17.6
      million.





·
            Two
      VLCCs which were previously employed on bareboat charters and four VLCCs
      which were previously employed on spot voyages began time charters during
      the first six months of 2006 resulting in an increase in time charter
      revenues of $20.4 million.  The earnings on these time charters
      are based on the vessels' actual earnings by the
  charterer.





·
            During
      the year, seven vessels changed employment from spot voyage to time
      charter resulting in an increase in time charter revenues of $25.2
      million.





Bareboat
charter revenues have decreased primarily due to the change in employment of
four vessels during 2006 to voyage and time charter. We also sold a vessel in
2006 that was previously employed on a bareboat charter.





Voyage
charter revenues include pool revenues. Certain pools are responsible for paying
voyage expenses and distribute net pool revenues to the participants while other
pools require the participants to pay and account for voyage expenses, and
distribute gross pool revenues to the participants such that the participants'
resulting net pool revenues are equal to net pool revenues calculated according
to the agreed formula. Our pool earnings in 2007 allocated on a gross basis were
$34.4 million (2006: $131.1 million).





Gain on sale of
assets


Change(in
      thousands of $)
                
                2007
                
                
                2006
                
                
                $
                
                
                
                %Gain
      on sale of assets
                
                
                118,168
                
                
                
                95,655
                
                
                
                22,513
                
                
                
                24








The gain
on sale of assets in 2007 comprises gains of $21.3 million and $6.2 million from
the sale of the single hull vessels Front Transporter and Front Horizon,
respectively, a gain of $60.7 million from the delivery of two converted
heavylift vessels and gains of $13.3 million and $16.6 million resulting from
the termination of the long-term charter party agreements for Front Vanadis and
Front Birch, respectively.





The gain
on sale of assets in 2006 includes gains of $11.0 million, $58.9 million and
$14.3 million relating to the sales of Golden Stream, Front Beijing and Front
Tobago, respectively. In addition, the Company sold two newbuilding contracts
for a profit of $9.8 million.





Ship operating
expenses


Change(in
      thousands of $)
                
                2007
                
                
                2006
                
                
                $
                
                
                
                %Suezmax
      OBO
                
                
                24,064
                
                
                
                32,111
                
                
                
                (8,047
                )
                
                
                (25
                )Suezmax
                
                
                52,642
                
                
                
                63,068
                
                
                
                (10,426
                )
                
                
                (17
                )VLCC
                
                
                119,552
                
                
                
                97,274
                
                
                
                22,278
                
                
                
                23Aframax
                
                
                -
                
                
                
                2,182
                
                
                
                (2,182
                )
                
                
                (100
                )Total
      ship operating expenses
                
                
                196,258
                
                
                
                194,635
                
                
                
                1,623
                
                
                
                1





Ship
operating expenses are the direct costs associated with running a vessel and
include crew costs, vessel supplies, repairs and maintenance, drydockings,
lubricating oils and insurance.




OBO
operating costs have decreased primarily as a result of drydocking related
costs. In 2007, one OBO was drydocked compared with six OBOs in 2006 resulting
in an overall decrease in drydocking, repairs and maintenance and spares of $8.2
million.





49




Suezmax
operating costs have decreased primarily as a result of the
following:





·
            In
      2007, five Suezmaxes (two single hull and three double hull) were
      drydocked compared with seven Suezmaxes (five single hulls and two
      double hulls) in 2006 which resulted in a decrease of $7.5 million in
      drydock related expenses.





·
            We
      sold a single hull Suezmax in March 2007 and delivered three single hull
      Suezmaxes to shipyards for conversion to heavy lift vessels during 2007.
      All of these vessels reported a full year's operating expenses in 2006
      which resulted in a decrease of $4.0 million in 2007. The single hull
      Suezmax Front Sunda was delivered for conversion in 2006 resulting in a
      decrease in operating costs of $2.1 million in
  2007.





VLCC
operating costs have increased primarily as a result of the
following:





·
            In
      2007, nine VLCCs were drydocked (six double hulls and three single hulls)
      compared to six in 2006 (three double hulls and three single hulls).
      Operating costs for the vessels drydocked in 2007 increased by $22.7
      million of which, $15.1 million relates to single hull vessels and $7.6
      million relates to double hull vessels. This increase is partially offset
      by a decrease in operating costs of $9.5 million for vessels drydocked in
      2006.





·
            In
      early 2006, four vessels that were on bareboat charters were redelivered
      and subsequently chartered out on time charters which contributed to an
      increase in operating expenses of $3.3 million in
  2007.





·
            One
      VLCC was delivered in the third quarter of 2006 resulting in an increase
      in costs of $1.5 million in 2007.





·
            We
      sold three VLCCs during 2006 which has resulted in a decrease in operating
      costs of $5.3 million. We sold another VLCC in June 2007 which has
      resulted in only six months of operating costs being reported in 2007
      compared to a full year in 2006 which contributed to a $1.3 million
      decrease in operating costs.





In 2006,
we purchased an Aframax vessel, Front Puffin, which commenced conversion to an
FPSO vessel in the fourth quarter of 2006. We subsequently sold our FPSO
activities in 2007 and therefore no longer report any associated operating
costs.





Profit share
expense


Change(in
      thousands of $)
                
                2007
                
                
                2006
                
                
                $
                
                
                
                %Profit
      share expense
                
                
                37,279
                
                
                
                —
                
                
                
                37,279
                
                
                
                —





Profit
share expense of $37.3 million recorded in the income statement excludes $15.2
million relating to the first quarter, which was eliminated on consolidation of
Ship Finance. The full amount of profit share expense in 2006 of $78.9 million
was eliminated on consolidation. The decrease compared in 2007 compared with
2006 was due to the lower TCE rates as described above.





Charterhire
expenses


Change(in
      thousands of $)
                
                2007
                
                
                2006
                
                
                $
                
                
                
                %Charterhire
      expenses
                
                
                56,868
                
                
                
                24,923
                
                
                
                31,945
                
                
                
                128Number
      of vessels chartered in and accounted for
                  as
      operating leases:
                
                
                2007
                
                
                
                2006VLCC
                
                
                3
                
                
                
                1Suezmax
                
                
                6
                
                
                
                19
                
                
                
                2





The
increase in charterhire expense in 2007 is due to nine vessels under operating
lease in 2007 compared to two vessels under operating lease in
2006.





Administrative
expenses


Change(in
      thousands of $)
                
                2007
                
                
                2006
                
                
                $
                
                
                
                %Administrative
      expenses
                
                
                36,410
                
                
                
                32,143
                
                
                
                4,267
                
                
                
                13





The
increase in administrative expenses in 2007 compared to 2006 is primarily due to
an increase of $6.4 million in salary costs as the result of an increase in
total employees and performance related bonuses, which has been offset by a
reduction in audit costs and other professional fees following the
implementation of the requirements of the Sarbanes-Oxley Act of 2002 in
2006.




50





Interest
income


Change(in
      thousands of $)
                
                2007
                
                
                2006
                
                
                $
                
                
                
                %Interest
      income
                
                
                54,316
                
                
                
                47,612
                
                
                
                6,704
                
                
                
                14





Interest
income has increased primarily as a result of an increase in average cash
balances held during the year resulting from the sale of investments and
vessels, which has been offset by a decrease in interest rates.





Interest
expense


Change(in
      thousands of $)
                
                2007
                
                
                2006
                
                
                $
                
                
                
                %Interest
      expense
                
                
                204,535
                
                
                
                200,396
                
                
                
                4,139
                
                
                
                2





The
Company no longer consolidates the results of Ship Finance from the end of March
2007 and as a result the bank interest expense incurred by Ship Finance has
significantly decreased. This decrease in bank interest has been offset by an
increase in lease interest expense. This lease interest expense was eliminated
in the first quarter of 2007.





Equity earnings
of unconsolidated subsidiaries and associated companies


Change(in
      thousands of $)
                
                2007
                
                
                2006
                
                
                $
                
                
                
                %Share
      of results of associated companies
                
                
                573
                
                
                
                1,118
                
                
                
                (545
                )
                
                
                (49
                )





As of
December 31, 2007, we account for five investees (2006: seven) under the equity
method. During 2007, we sold our entire investment in IMAREX resulting in a gain
of $41.9 million, which has been reported in gain on sale of securities. As a
result of the deconsolidation of Ship Finance, Front Shadow is no longer
reported by the Company.





Other


Change(in
      thousands of $)
                
                2007
                
                
                2006
                
                
                $
                
                
                
                %Foreign
      currency exchange gains
                
                
                3,312
                
                
                
                1,056
                
                
                
                2,256
                
                
                
                214Mark
      to market adjustments for financial derivatives
                
                
                3,541
                
                
                
                (2,735
                )
                
                
                6,276
                
                
                
                —Losses
      from freight forward agreements
                
                
                (11
                )
                
                
                (8,162
                )
                
                
                (8,151
                )
                
                
                —Dividends
      received
                
                
                533
                
                
                
                13,317
                
                
                
                (12,784
                )
                
                
                —Gain
      on sale of securities
                
                
                122,120
                
                
                
                9,782
                
                
                
                112,338
                
                
                
                —Other
      financial items, net
                
                
                4,951
                
                
                
                (3,663
                )
                
                
                8,614
                
                
                
                —





The
favorable movement in mark to market adjustments relates primarily to interest
rate swaps held by Ship Finance.





Dividend
income in 2006 was primarily dividends received on the shares of General
Maritime Corporation, or Genmar, that we held.





The gain
on sale of securities in 2007 comprises the gains arising on the sale of our
remaining shares in Dockwise, IMAREX and Sea Production of $48.7 million, $41.9
million and $31.2 million, respectively. The 2006 gain on sale of securities
represents the gain on sale of the remainder of our holding in General Maritime
shares.





Minority
interest





Minority
interest represents minority investors' interests in the net income of Ship
Finance for the first quarter of 2007 based on the 88.9% of the shares of Ship
Finance held by the minority investors. There is no minority interest expense
after March 31, 2007 as we no longer consolidate the results of Ship Finance.
The minority interest expense in 2006 is also based on 88.9% but is for the full
year.








51





Gain on issuance of shares by
associate
 Change(in
      thousands of $)
                  
                  2007
                  
                  
                  2006
                  
                  
                  $
                  
                  
                  
                  %Gain
      on issuance of shares by associate
                  
                  
                  83,566
                  
                  
                  
                  —
                  
                  
                  
                  83,566
                  
                  
                  
                  —
 The
gain on issuance of shares comprises a gain on the issuance of shares in Sea
Production of $39.8 million and a gain on the issuance of shares in Sealift of
$43.7 million in connection with the business combination with Dockwise. Based
on the information currently available to us, we do not expect to record any
gains on the issuance of shares by associates in 2008.
  Discontinued
operations


Change(in
      thousands of $)
                
                2007
                
                
                2006
                
                
                $
                
                
                
                %Discontinued
      operations
                
                
                5,442
                
                
                
                13,514
                
                
                
                (8,072)
                
                
                
                (60)





Discontinued
operations in 2007 and 2006 are the results of the containerships and jack up
rig of Ship Finance. We no longer consolidate the results of Ship Finance
following the spin off in March 2007.





Recent
accounting pronouncements





In
September 2006, the Financial Accounting Standards Board ('FASB') issued
Financial Accounting Standard No. 157, Fair Value Measurements, ('FAS 157'),and is effective for fiscal years beginning after November 15, 2007.This statement defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. The statement establishes a fair value hierarchy that
distinguishes between market participant assumptions developed based on market
data obtained from sources independent of the reported entity and the reported
entities own assumptions about market participant assumptions developed based on
the best information available in the circumstances. In February 2008, the FASB
issued a staff position that delays the effective date of FAS 157 for certain
nonfinancial assets and liabilities to fiscal years beginning on or after
November 15, 2008. The Company's adoption of FAS 157 did not have a material
effect on the consolidated financial statements. Adoption of the delayed
provisions of FAS 157 is not expected to have a material effect on the Company's
consolidated financial statements.





In
February 2007, the FASB issued Statement of Financial Accounting Standard
No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities Including an Amendment of
FASB Statement No.115 ("FAS 159"). FAS 159
allows  entities to choose to measure many financial instruments and
certain other items at fair value, with unrealized gains and losses related to
these financial instruments being reported in earnings at each subsequent
reporting date. FAS 159 is effective for fiscal years beginning after
November 15, 2007. The Company's adoption of this statement did not have a
material effect on the consolidated financial statements.





In
December 2007, the FASB issued Statements No. 141(R), Business Combinations,('FAS
141(R)'), and No. 160 Noncontrolling Interests in
Consolidated Financial Statements,('FAS 160'). Together these statements
can affect the way companies account for future business combinations and
noncontrolling interests. FAS 141(R) requires, amongst other changes,
recognition of subsequent changes in the fair value of contingent consideration
in the Statement of Operations rather than against Goodwill, and transaction
costs to be recognized immediately in the Statement of Operations. FAS 160
clarifies the classification of non controlling interests (i.e. minority owners'
interests in subsidiaries) in consolidated balance sheets and the accounting for
and reporting of transactions between the reporting entity and holders of such
non controlling interests. In particular the minority owners' interest in
subsidiaries should be presented in the consolidated balance sheet within
equity, but separate from the parent's equity. Similarly the amount of net
income attributable to the parent and to the minority interest be clearly
identified and presented on the consolidated statement of income. Both FAS
141(R) and FAS 160 are effective for transactions completed in fiscal years
beginning after December 15, 2008. Adoption of FAS 141(R) and FAS 160 by the
Company in the financial statements beginning January 1, 2009 is not expected to
have a material effect on the Company's consolidated financial statements except
that non-controlling interests will be classified as a component of
equity.





In March
2008, the FASB issued Statement of Financial Accounting Standard No. 161,
Disclosures about Derivative
Instruments and Hedging Activities ('FAS 161'). This standard amends and
expands the disclosure requirements of FASB Statement 133, Accounting for Derivative Instruments and Hedging
Activities, and is effective for fiscal years beginning after November
15, 2008. FAS 161 requires enhanced disclosures that better convey the purpose
of an entity's derivative and hedging activities in terms of the risk it intends
to manage. In addition to other disclosure requirements, the statement requires
disclosure of the reasons for holding or issuing derivative instruments in the
context of its overall risk exposure. The Company's adoption of FAS 161 is not
expected to have a material effect on the Company's consolidated financial
statements.








52




In May
2008, the FASB issued Statement of Financial Accounting Standard No. 162,
The Hierarchy of Generally
Accepted Accounting Principles,('FAS 162'). This Statement identifies
the sources of accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements in conformity
with generally accepted accounting principles in the United States. Adoption of
FAS 162 is not expected to have a material effect on the Company's consolidated
financial statements.


Liquidity
and Capital Resources





Liquidity





We
operate in a capital intensive industry and have historically financed our
purchase of tankers and other capital expenditures through a combination of cash
generated from operations, equity capital and borrowings from commercial banks.
Our ability to generate adequate cash flows on a short and medium term basis
depends substantially on the trading performance of our vessels in the
market.  Market rates for charters of our vessels have been volatile
historically.  Periodic adjustments to the supply of and demand for
oil tankers causes the industry to be cyclical in nature.  We expect
continued volatility in market rates for our vessels in the foreseeable future
with a consequent effect on our short and medium term liquidity.





Our
funding and treasury activities are conducted within corporate policies to
maximize investment returns while maintaining appropriate liquidity for our
requirements. Cash and cash equivalents are held primarily in U.S. dollars with
some balances held in British Pounds and Norwegian Kroner.





Our
short-term liquidity requirements relate to servicing our debt, payment of
operating costs (including drydocking), lease payments for our chartered in
fleet, funding working capital requirements and maintaining cash reserves
against fluctuations in operating cash flows. Sources of short-term liquidity
include cash balances, restricted cash balances, short-term investments and
receipts from our customers. Revenues from time charters and bareboat charters
are generally received monthly or fortnightly in advance while revenues from
voyage charters are received upon completion of the voyage.





As of
February 28, 2009, we estimated cash breakeven average daily TCE rates of
approximately $25,200 for our Suezmax tankers and approximately $32,100 for our
VLCCs. These are
the daily rates our vessels must earn to cover budgeted operating costs,
estimated interest expenses and scheduled loan principal
repayments, bareboat hire and corporate overhead costs.  These rates
do not take into account capital expenditures or loan balloon repayments at
maturity which we expect to refinance with new loans.  Furthermore,
M/T Kensington, M/T Hampstead and the five Genmar vessels chartered in are not
included in the breakeven rates.


Our
medium and long-term liquidity requirements include funding the equity portion
of investments in new or replacement vessels, repayment of long-term debt
balances and funding any payments we may be required to make due to lessor put
options on certain vessels we charter in.  Sources of funding our
long-term liquidity requirements include new loans or equity issues, vessel
sales and sale and leaseback arrangements. We believe our working capital is
sufficient for the Company's present requirements; however, we may not be able
to refinance our current borrowings or enter into future borrowings at an
interest rate or on terms that are acceptable to us or at all and we are
reviewing our capital commitments in order to enhance our liquidity. See "Risk
Factors – We cannot assure you that we will be able to refinance indebtedness
incurred under our current credit facilities."





As of
December 31, 2008, 2007 and 2006, we had cash and cash equivalents of $190.8
million, $168.4 million and $197.2 million, respectively. As of December 31,
2008, 2007 and 2006, we had restricted cash balances of $554.8 million, $651.4
million and $677.5 million, respectively. Our restricted cash balances
contribute to our total short and medium term liquidity as they are used to fund
payment of certain loans and lease payments which would otherwise be paid out of
our cash balances.  $216.1 million of our restricted cash as of
December 31, 2008 serves to support our obligations to make charterhire payments
to Ship Finance, and is subject to adjustment based on the number of charters
that we are a party to.  We are entitled to use these funds only (1)
to make charterhire payments (including profit sharing payments) to Ship Finance
and (2) for reasonable working capital purposes to meet short term voyage
expenses.





At
December 31, 2008, ITCL's assets included $336.7 million (2007: $422.8 million)
of restricted cash deposits which are held for the benefit of the holders of the
Notes issued on behalf of ITCL subsidiaries. This restricted cash also included
deposits, which can only be used to meet liabilities under the lease
agreements.





We
currently have nine VLCC and eight Suezmax vessels under construction with an
aggregate contract cost of approximately $1.7 billion. We paid $323.7 million in
newbuilding installments in 2008 in respect of these newbuilding contracts and
have paid $68.6 million so far in 2009. The remaining installments of
approximately $1,298 million will be financed through a combination of bank
loans, other financing sources and existing liquidity.







53




We
delivered the third and fourth heavy lift vessels in May and June 2008,
respectively, generating net cash proceeds of approximately $28.0 million (the
net of an $80.0 million seller's credit and the remaining heavy lift conversion
commitments).
 In
January 2008 and May 2008, Ship Finance sold the single hull vessels Front Maple
and Front Sabang, respectively, and terminated our long-term leases for the
vessels. We received termination payments of $16.7 million and $26.8 million,
respectively.





In April
2008, we received a $16.6 million settlement from Bocimar NV following
judgement in January 2008 of a court case in our favor.


In March
2009, Frontline Shipping III Limited ("FSL III"), our wholly owned
subsidiary, and Ship Finance amended their charter ancillary agreement
whereby the charter service reserve totaling $26.5 million relating to vessels
on charter from Ship Finance may be in the form of a loan to Ship Finance.
 In March 2009, a loan in the amount of $26.5 million was drawn down by
Ship Finance. The loan bears interest at LIBOR plus a margin and is due for
repayment within 364 days of the loan being provided, or earlier in accordance
with the agreement.


In
January 2009, the lease agreement between Buckingham Shipping plc, a
majority-owned subsidiary, and Dresdner Kleinwort Leasing was terminated and the
outstanding lease obligation was settled in full using restricted cash. At
December 31, 2008, the outstanding lease obligation was $69.3
million.





During
the year ended December 31, 2008, we paid total cash dividends of $641.9
million.  In the first quarter of 2009, we declared a cash dividend of
$0.25 per share for the fourth quarter of 2008 representing a total cash payment
of $19.5 million.





Borrowing
activities





In June
2006, we entered into an $80.0 million secured term loan facility. The proceeds
were used to finance the acquisition of a 2006 built VLCC tanker. The facility
bears interest at LIBOR plus a margin. The facility was refinanced in June 2008
and matures in June 2009. We are currently in discussion with the lender
regarding refinancing of this facility. At December 31, 2008, the outstanding
amount on this facility was $80.0 million, and the available undrawn amount was
$nil. The facility contains a minimum value covenant and covenants that require
the Company to maintain a minimum level of free cash and positive working
capital.





In
September 2006, we entered into a $24.0 million secured term loan facility. The
proceeds were used to finance the acquisition of a 1990 built Aframax tanker.
The facility bore interest at LIBOR plus a margin. The facility was repaid in
April 2007.





In June
2008, we entered into a $129.6 million pre-delivery secured term loan facility.
This loan is due in June 2009 and bears interest at LIBOR plus a margin. We are
currently in discussion with the lenders regarding refinancing of this facility.
At December 31, 2008, the outstanding amount on this facility was $129.6
million, and the available undrawn amount was $nil. In June 2008, we also
entered into a $420.0 million pre and post delivery secured term loan facility
due in 2017. This facility bears interest at LIBOR plus a margin. At December
31, 2008, the Company had drawn down $137.8 million. Both facilities were used
to part finance our newbuilding program and are secured with the newbuildings.
The facilities contain a minimum value covenant and covenants that require us to
maintain a minimum level of free cash, a certain level of market adjusted net
worth and positive working capital.





In July
2008, ITCL entered into a $21.6 million secured term loan facility. At December
31, 2008, the outstanding amount on this facility was $21.6 million, and the
available undrawn amount was $nil. In August 2008, ITCL entered into a $50.0
million secured term loan facility with $19.0 million drawn down at December 31,
2008 and the undrawn amount of $31.0 million being cancelled. Both facilities
bear interest at LIBOR plus a margin, have been guaranteed by a related party,
and are due in July 2009. Both facilities contain a covenant that requires ITCL
to maintain a positive working capital balance and covenants concerning minimum
free cash and equity in guarantor. These facilities were used to purchase
three tranches of Windsor Petroleum Transport Corporation 7.84% term notes with
a par value of $38.0 million





In
September 2008, we entered into a $180.0 million secured term loan facility
repayable over five years, which was used to part finance the acquisition of
five second hand Suezmax vessels with a cost of $240.0 million. The facility
bears interest at LIBOR plus a margin and is secured on the acquired vessels. At
December 31, 2008, the outstanding amount on this facility was $180.0 million,
and the available undrawn amount was $nil. The facility contains a minimum value
covenant and covenants that require us to maintain a minimum level of free cash,
a certain level of market adjusted net worth and positive working
capital.





As of
December 31, 2008, we were in compliance with all loan covenants except for the
minimum value clause in the $180.0 million secured term loan facility. In March
2009, upon the lenders' request, we deposited $3.8 million as security into a
restricted bank account in order to regain compliance with the minimum value
covenant.








54





Acquisitions
and Disposals





Independent
Tankers Corporation





Chevron
redelivered the Suezmax vessel Front Voyager to us in April 2006 and pursuant to
the terms of the charter paid us a termination fee in the amount of $5.05
million.





In
February 2008, we divested 17.53% of our holding in ITCL through a stock and
cash dividend of $11.4 million and $14.0 million, respectively. We recorded a
gain of $18.0 million in the first quarter of 2008 as a result of this
spin-off.





General
Maritime





As of January 1, 2005 we held
a total of 1,584,700 shares in Genmar. During 2005 we acquired atotal of 5,209,000 Genmar
shares and sold 2,933,700 Genmar shares and as of December 31, 2005 held
3,860,000 Genmar shares which was equivalent to 9.98% of their total shares
outstanding.In August 2006, we sold our entire holding of 3,860,000
shares in Genmar for $40 per share.





Tsakos
Shipping and Trading SA





In March
2007, we sold our entire holding of 32,000 shares in Tsakos for approximately
$1.5 million.





Sealift





In
January 2007, we subscribed for 30.0 million shares issued by Sealift in a
private placement at a cost of $60.0 million.  In May 2007, Sealift
completed the combination of its businesses with the Dockwise group of
companies. As part of the transaction, Sealift completed another private
placement of 39.8 million shares and Frontline subscribed for five million of
these additional shares.  Sealift also issued 94.1 million shares to
the former Dockwise shareholders.  After completion of this
transaction Frontline owned 17.1% of Sealift. In October 2007, we sold our
entire holdings of 34,976,500 shares in Dockwise for a gross price of NOK 25 per
share, generating net proceeds of approximately $157.0 million.





Sea
Production





In
February 2007, we subscribed for approximately 28% of the equity issued in a
private placement by Sea Production at a cost of $51 million. In June 2007, we
sold our entire holding of 25,500,000 shares in Sea Production for a net price
of NOK 15.75 per share, equivalent to approximately $67.0 million.





International
Maritime Exchange ASA





In
November 2007, we sold our entire holdings of 1,714,544 shares in IMAREX for a
price of NOK 160 per share, generating proceeds of $50.5 million.





Navig8
Limited





In
February 2008, we invested $20.0 million in Navig8 against the issue of new
share capital representing approximately 15.8% of the company.





Overseas
Shipholding Group, Inc.





In March
2008, we purchased a forward contract for 1,366,600 shares in OSG, corresponding
to 4.4% of the total outstanding shares in OSG, for $92.2 million. This contract
was settled in October 2008. Also in October 2008, we sold 100,000 shares in OSG
at a price of $64.50 per share.





Equity





In June
2008, we completed a private placement of three million shares at a subscription
price of NOK 357 per share resulting in net proceeds of $207.2 million. We used
these proceeds to part finance the acquisition of the five Suezmax vessels from
Top Ships Inc. and the purchase of OSG shares.





55








Derivative
Activities





As of
December 31, 2008 and 2007, we did not hold any financial instruments for
speculative or trading purposes. In 2008, we have entered a limited number of
Forward Freight Agreements, or FFAs, with an objective to utilize them
as economic hedging instruments that reduce our exposure to changes in the
spot market rates earned by some of our vessels or for trading purposes to take
advantage of short term fluctuations in the market. All of the FFAs were settled
as of December 31, 2008. In 2008, realized losses of $1.2 million have been
recorded in the income statement.





Tabular
disclosure of contractual obligations





At
December 31, 2008, we had the following contractual obligations and
commitments:





Payment
      due by period(In
      thousands of $)
                              
                              Less
      than
                                1
      year
                              
                              
                              1
      – 3 years
                              
                              
                              3
      – 5 years
                              
                              
                              After
      5 years
                              
                              
                              TotalFixed
      rate long-term debt
                              
                              
                              12,928
                              
                              
                              
                              28,294
                              
                              
                              
                              41,617
                              
                              
                              
                              255,886
                              
                              
                              
                              338,725Floating
      rate long-term debt
                              
                              
                              280,543
                              
                              
                              
                              68,785
                              
                              
                              
                              119,231
                              
                              
                              
                              100,863
                              
                              
                              
                              569,422Fixed
      rate long-term debt in unconsolidated
                                subsidiaries
                              
                              
                              9,526
                              
                              
                              
                              19,052
                              
                              
                              
                              19,052
                              
                              
                              
                              19,051
                              
                              
                              
                              66,681Operating
      lease obligations
                              
                              
                              114,020
                              
                              
                              
                              63,673
                              
                              
                              
                              9,581
                              
                              
                              
                              2,522
                              
                              
                              
                              189,796Capital
      lease obligations
                              
                              
                              242,911
                              
                              
                              
                              501,613
                              
                              
                              
                              304,904
                              
                              
                              
                              1,163,784
                              
                              
                              
                              2,213,212Newbuilding
      commitments
                              
                              
                              350,128
                              
                              
                              
                              962,320
                              
                              
                              
                              54,000
                              
                              
                              
                              -
                              
                              
                              
                              1,366,448Interest
      on fixed rate long-term debt
                              
                              
                              29,634
                              
                              
                              
                              55,981
                              
                              
                              
                              50,067
                              
                              
                              
                              104,225
                              
                              
                              
                              239,907Interest
      on floating rate long-term debt
                              
                              
                              20,545
                              
                              
                              
                              19,982
                              
                              
                              
                              14,892
                              
                              
                              
                              12,839
                              
                              
                              
                              68,258Interest
      on fixed rate long-term debt in unconsolidated
      subsidiaries
                              
                              
                              5,275
                              
                              
                              
                              8,116
                              
                              
                              
                              4,870
                              
                              
                              
                              1,623
                              
                              
                              
                              19,884Interest
      on capital lease obligations
                              
                              
                              145,478
                              
                              
                              
                              236,622
                              
                              
                              
                              176,002
                              
                              
                              
                              324,566
                              
                              
                              
                              882,668Total
                              
                              
                              1,210,988
                              
                              
                              
                              1,964,438
                              
                              
                              
                              794,216
                              
                              
                              
                              1,985,359
                              
                              
                              
                              5,955,001





Interest
payments are based on the existing borrowings of both consolidated and
unconsolidated subsidiaries. It is assumed that no refinancing of existing loans
takes place. Interest on floating rate debt has been calculated using the five
year U.S. dollar swap rate as of April 27, 2009, of 2.45% plus agreed margins.
Interest on fixed rate loans is calculated using the contracted interest
rates.





The
newbuilding commitments as of December 31, 2008 consist of ten VLCC and eight
Suezmax vessels.





As of
December 31, 2008, the Company leased in 55 vessels on long-term time charters
and bareboat charters from third parties and related parties.  Four of
these leases are classified as operating leases and 51 as capital
leases.   In addition, six vessels were chartered in on floating
rates and can be terminated by giving one month notice and a further four are
leased on short-term fixed rate charters. With the exception of the Company's
long-term leases with Ship Finance, the Company's long-term leases of vessels
generally contain optional renewal periods and purchase and put
options.





Off
balance sheet financing





Charter
hire payments to third parties for certain contracted in vessels are accounted
for as operating leases. We are also committed to make rental payments under
operating leases for office premises. The future minimum rental payments under
our non-cancellable operating leases are disclosed above in "Tabular disclosure
of contractual obligations".





Forward-looking
information discussed in this Item 5 includes assumptions, expectations,
projections, intentions and beliefs about future events. These statements are
intended as "forward-looking statements." We caution that assumptions,
expectations, projections, intentions and beliefs about future events may and
often do vary from actual results and the differences can be material. Please
see "Cautionary Statement Regarding Forward-Looking Statements" in this
report.





Safe
harbor





Forward-looking
information discussed in this Item 5 includes assumptions, expectations,
projections, intentions and beliefs about future events. These statements are
intended as "forward-looking statements." We caution that assumptions,
expectations, projections, intentions and beliefs about future events may and
often do vary from actual results and the differences can be material. Please
see "Cautionary Statement Regarding Forward-Looking Statements" in this
report.








56





ITEM
6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES





A. 
DIRECTORS AND SENIOR MANAGEMENT





The
following table sets forth information regarding our executive officers and
directors and certain key officers of our wholly owned subsidiary, Frontline
Management AS, who are responsible for overseeing our management.





Name
              Age
              PositionJohn
      Fredriksen
              64
              Chairman,
      Chief Executive Officer, President
  and  DirectorKathrine
      Fredriksen
              25
              DirectorKate
      Blankenship
              44
              Director
      and Audit Committee ChairmanFrixos
      Savvides
              57
              Director
      and Audit Committee memberJens
      Martin Jensen
              45
              Acting
      Chief Executive Officer of Frontline Management ASInger
      M. Klemp
              46
              Chief
      Financial Officer of Frontline Management
AS





Tor Olav
Trøim resigned as a director in February 2008 and acts as an alternate director
for Kathrine Fredriksen.





Certain
biographical information about each of our directors and executive officers is
set forth below.





John Fredriksen has been the
Chairman of the Board, Chief Executive Officer, President and a director of the
Company since November 3, 1997. He was previously the Chairman and Chief
Executive Officer of Old Frontline. Mr. Fredriksen has served for over nine
years as a director of Seatankers Management Co. Ltd, or Seatankers, a ship
operating company and an affiliate of the Company's principal shareholder. Mr.
Fredriksen indirectly controls Hemen. Mr. Fredriksen is a director of and
indirectly controls Golar LNG Limited, a Bermuda company listed on the Oslo
Stock Exchange and the NASDAQ National Market and has been a director of
Golden Ocean, a Bermuda company on the Oslo Stock Exchange, since November
2004. Mr. Fredriksen has served as a director and the chairman of Seadrill
Limited, a Bermuda company listed on the Oslo Stock Exchange, since May
2005.





Kathrine Fredriksen has been a
director since February, 2008. Ms. Fredriksen is employed at the oil trading
company, Arcadia Petroleum Limited, and is a graduate of the Wang Handels Gymnas
in Norway and has studied at the European Business School in London.
Ms. Fredriksen is the daughter of Mr. John Fredriksen, the Chairman, CEO
and a principal shareholder of Frontline. Ms. Fredriksen is also a director of
Golar LNG Limited and Seadrill Limited.





Kate Blankenship has been a
director since August, 2003. Mrs. Blankenship joined the Company in 1994 and
served as the Company's Chief Accounting Officer and Company Secretary until
October 2005. Mrs. Blankenship served as Chief Financial Officer of
Knightsbridge Tankers Limited from April 2000 to September 2007 and Secretary of
Knightsbridge from December 2000 to March 2007. Mrs. Blankenship has been a
Director of Ship Finance since October 2003.  Mrs. Blankenship has
served as a director of ITCL since February 2008, Golar LNG Limited since July
2003 and Golden Ocean since November 2004. Mrs. Blankenship has served
as a director of Seadrill Limited since May 2005 and. She is a member of the
Institute of Chartered Accountants in England and Wales.





Frixos Savvides a Chartered
Accountant, is a Fellow of the Institute of Chartered Accountants of England and
Wales. He was the founder of the audit firm PKF Savvides and Partners in Cyprus
and held the position of Managing Partner until 1999 when he became Minister of
Health of the Republic of Cyprus. He held this office until 2003. Mr.
Savvides is currently a senior independent business consultant and holds
several Board positions. Mr. Savvides was appointed to the Board of Directors of
Frontline in July 2005.





Jens Martin Jensen has served
as the Acting Chief Executive Officer of Frontline Management AS since April
2008. Mr. Jensen joined Frontline in September 2004 as Commercial Director. From
August 1996 to September 2004, Mr. Jensen was a partner in Island Shipbrokers in
Singapore. From April 1985 to August 1996, Mr. Jensen worked in the A.P. Moller
Group with postings to Singapore, Tokyo, Mexico and Denmark. Mr. Jensen
completed the A.P. Moller training program in 1987.





Inger M. Klemp has served as
Chief Financial Officer of Frontline Management AS since June 1, 2006. Mrs.
Klemp has served as a director of ITCL since February 2008 and has served as
Chief Financial Officer of Knightsbridge Tankers Limited since September 2007.
Mrs. Klemp served as Vice President Finance from August 2001 until she was
promoted in May 2006. Mrs. Klemp graduated as MSc in Business and Economics from
the Norwegian School of Management (BI) in 1986. Mrs. Klemp served as
Assistant Director Finance in Color Group ASA from 1998 to 2001 and as Group
Financial Manager in Color Line ASA from 1992 to 1998, a Norwegian based cruise
operator which was stock listed up to October 1999. From 1989 to 1992 Mrs. Klemp
served as Assistant Vice President in Nordea Bank Norge ASA handling structuring
and syndication of loan facilities in the international banking market. From
1986 to 1989, Mrs. Klemp served as a lending officer of Fokus Bank
ASA.





57








B. 
COMPENSATION





During
the year ended December 31, 2008, we paid to our directors and executive
officers (six persons) aggregate cash compensation of $1,906,116 and an
aggregate amount of $48,624 for pension and retirement benefits. In
addition to cash compensation, during 2008 we also recognized stock compensation
expense of $1,819,985.





C. 
BOARD PRACTICES





In
accordance with our Bye-laws the number of Directors shall be such number not
less than two as our shareholders by Ordinary Resolution may from time to time
determine and each Director shall hold office until the next annual general
meeting following his election or until his successor is elected. We currently
have four Directors.





We
currently have an audit committee, which is responsible for overseeing the
quality and integrity of our financial statements and its accounting, auditing
and financial reporting practices, our compliance with legal and regulatory
requirements, the independent auditor's qualifications, independence and
performance and our internal audit function. Our audit committee consists of two
members, Mr. Savvides and Mrs. Blankenship.





In lieu
of a compensation committee comprised of independent directors, our Board of
Directors is responsible for establishing the executive officers' compensation
and benefits.  In lieu of a nomination committee comprised of
independent directors, our Board of Directors is responsible for identifying and
recommending potential candidates to become board members and recommending
directors for appointment to board committees.





Our
officers are elected by the Board of Directors as soon as possible following
each Annual General Meeting and shall hold office for such period and on such
terms as the Board may determine.





There are
no service contracts between us and any of our Directors providing for benefits
upon termination of their employment or service.





As a
foreign private issuer we are exempt from certain requirements of the New York
Stock Exchange that are applicable to U.S. listed companies.  For a
listing and further discussion of how our corporate governance practices differ
from those required of U.S. companies listed on the New York Stock Exchange,
please see Item 16G or visit the corporate governance section of our
website at www.frontline.bm.





D. 
EMPLOYEES





As of
December 31, 2008, Frontline and its subsidiaries employed approximately 48
people in their respective offices in Bermuda, London, Oslo and Singapore. We
contract with independent ship managers to manage and operate our
vessels.





E. 
SHARE OWNERSHIP





The
beneficial interests of our Directors and officers in the Ordinary Shares of
Frontline as of February 28, 2009, were as follows:





Director
      or Officer
              
              Ordinary
      Shares of $2.50 each
              
              
              %
      of
                Ordinary
                Shares
                Outstanding
              
              
              Options
      for Ordinary Shares of $2.50 eachJohn
      Fredriksen*
              
              
              26,304,053
              
              
              
              33.78%
              
              
              
              100,000Katherine
      Fredriksen
              
              
              -
              
              
              
              -
              
              
              
              30,000Kate
      Blankenship
              
              
              2,000
              
              
              
              **
              
              
              
              30,000Frixos
      Savvides
              
              
              -
              
              
              
              -
              
              
              
              30,000Jens
      Martin Jensen
              
              
              -
              
              
              
              -
              
              
              
              50,000Inger
      M. Klemp
              
              
              16,000
              
              
              
              **
              
              
              
              50,000





*
            Includes
      Ordinary Shares held by Hemen Holding Ltd. and other companies indirectly
      controlled by Mr. John Fredriksen.**
            Less
      than one per cent.





The
options were granted in February 2008 under the Frontline Ltd. Share Option
Scheme, which was approved by the board on November 16, 2006. All options vest
over a three year period beginning in February 2009 and expire in February 2013.
The initial exercise price of these options is NOK 243.00, which is reduced by
the amount of dividends paid
after the date of grant. The exercise price of these options as of February 28,
2009 is NOK 208.78.





58








ITEM
7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS





A. 
MAJOR SHAREHOLDERS





Frontline
is indirectly controlled by another corporation (see below). The following table
presents certain information as of December 31, 2008 regarding the ownership of
our Ordinary Shares with respect to each shareholder, who we know to
beneficially own more than five percent of our outstanding Ordinary
Shares.





Owner
                Ordinary
      SharesAmount
                
                
                %Hemen
      Holding Ltd. and associated companies (1)
                26,304,053
                
                
                33.78
                %





(1)
            Hemen
      Holding Ltd is a Cyprus holding company indirectly controlled by Mr. John
      Fredriksen, who is our Chairman and Chief Executive
    Officer.





As of
February 27, 2009, 45,375,182 of our Ordinary Shares were held on the New York
Stock Exchange.





Our major
shareholders have the same voting rights as our other shareholders. No
corporation or foreign government owns more than 50% of our outstanding Ordinary
Shares. We are not aware of any arrangements, the operation of which may at a
subsequent date result in a change in control of Frontline.





B. 
RELATED PARTY TRANSACTIONS





As of
March 31, 2007, the Company is no longer consolidating the results of Ship
Finance. The majority of the Company's leased vessels are leased from Ship
Finance and under a Charter Ancillary Agreement; Ship Finance is entitled to a
share of the Company's earnings on these leased vessels. A summary of leasing
transactions with Ship Finance during the years ended December 31, 2008 and 2007
(excluding amounts prior to deconsolidation) is as follows:





(in
      thousands of $)
                
                2008
                
                
                2007Charterhire
      paid (principal and interest)
                
                
                345,551
                
                
                
                273,239Payments
      received for termination of leases
                
                
                43,510
                
                
                
                29,343Profit
      share expense
                
                
                110,962
                
                
                
                37,279Remaining
      lease obligation
                
                
                1,609,987
                
                
                
                1,767,758





A summary
of net amounts earned (incurred) from related parties excluding the Ship Finance
lease related balances above for the year ended December 31, is as
follows:





(in
      thousands of $)
                
                2008
                
                
                2007
                
                
                2006Seatankers
      Management Co. Ltd
                
                
                1,175
                
                
                
                582
                
                
                
                432Golar
      LNG Limited
                
                
                17
                
                
                
                284
                
                
                
                180Ship
      Finance International Limited
                
                
                3,430
                
                
                
                1,525
                
                
                
                -Golden
      Ocean Group Limited
                
                
                6,714
                
                
                
                2,099
                
                
                
                597Individual
      related to John Fredriksen
                
                
                -
                
                
                
                -
                
                
                
                12Geveran
      Trading Co. Ltd
                
                
                (366
                )
                
                
                -
                
                
                
                -Greenwich
      Holdings Ltd
                
                
                -
                
                
                
                69
                
                
                
                -Bryggegata AS
                
                
                (1,395
                )
                
                
                (1,430
                )
                
                
                (1,021
                )Arcadia
      Petroleum Limited
                
                
                64,784
                
                
                
                17,443
                
                
                
                -Seadrill
      Limited
                
                
                25
                
                
                
                (52
                )
                
                
                545CalPetro
      Tankers (Bahamas I) Limited
                
                
                43
                
                
                
                40
                
                
                
                40CalPetro
      Tankers (Bahamas II) Limited
                
                
                43
                
                
                
                40
                
                
                
                40CalPetro
      Tankers (IOM) Limited
                
                
                43
                
                
                
                40
                
                
                
                40





Net
amounts earned from related parties comprise office rental income and
management, technical and commercial advisory, newbuilding supervision,
corporate and administrative service income and interest income. Net expenses
paid to related parties comprise primarily of rental for office
space.





59








A summary
of balances with related parties as at the year ended December 31, is as
follows:





(in
      thousands of $)
                      
                      2008
                      
                      
                      2007ReceivablesShip
      Finance International Limited
                      
                      
                      8,351
                      
                      
                      
                      12,990Seatankers  Management
      Co. Ltd
                      
                      
                      370
                      
                      
                      
                      270Golar
      LNG Limited
                      
                      
                      381
                      
                      
                      
                      192Northern
      Offshore Ltd
                      
                      
                      13
                      
                      
                      
                      13Golden
      Ocean Group Limited
                      
                      
                      2,012
                      
                      
                      
                      1,160Seadrill
      Limited
                      
                      
                      106
                      
                      
                      
                      89Greenwich
      Holdings Ltd
                      
                      
                      -
                      
                      
                      
                      51CalPetro
      Tankers (Bahamas I) Limited
                      
                      
                      35
                      
                      
                      
                      13CalPetro
      Tankers (Bahamas II) Limited
                      
                      
                      35
                      
                      
                      
                      13CalPetro
      Tankers (IOM) Limited
                      
                      
                      35
                      
                      
                      
                      1311,338
                      
                      
                      
                      14,804








(in
      thousands of $)
                  
                  2008
                  
                  
                  2007PayablesShip
      Finance International Limited
                  
                  
                  (46,540
                  )
                  
                  
                  (49,708
                  )Seatankers
      Management Co. Ltd
                  
                  
                  (119
                  )
                  
                  
                  (1,170
                  )Golar
      LNG Limited
                  
                  
                  (242
                  )
                  
                  
                  (94
                  )Golden
      Ocean Group Limited
                  
                  
                  (155
                  )
                  
                  
                  -Geveran
      Trading Co. Ltd
                  
                  
                  (366
                  )
                  
                  
                  -Seadrill
      Limited
                  
                  
                  -
                  
                  
                  
                  (16
                  )(47,422
                  )
                  
                  
                  (50,988
                  )





Receivables
and payables with related parties comprise unpaid management, technical
advisory, newbuilding supervision, administrative service and rental charges. In
addition, certain payables and receivables arise when the Company pays an
invoice on behalf of a related party and vice versa. The payable with Ship
Finance also includes unpaid profit share due to Ship Finance. Receivables and
payables with related parties are generally settled quarterly in arrears with
the exception of profit share due to Ship Finance which is settled
annually.





Ship
Finance International Limited, Golar LNG Limited, Northern Offshore Ltd, Norse
Energy Group ASA, Seadrill Limited, Bryggegata AS, Golden Ocean Group Limited,
Greenwich Holdings Ltd, Arcadia Petroleum Limited ("Arcadia"), Geveran Trading
Co Ltd ("Geveran") and Seatankers Management Co. Ltd are each subject to the
significant influence or indirect control of John Fredriksen. CalPetro Tankers
(Bahamas I) Limited, CalPetro Tankers (Bahamas II) Limited, CalPetro Tankers
(Bahamas III) Limited and CalPetro Tankers (IOM) Limited were all equity
accounted until March 31, 2006 at which point, the Company began consolidating
CalPetro Tankers (Bahamas III) Limited.





During
2008, the Company engaged in the trading of forward freight agreement through
Arcadia, a related party, for which Arcadia was paid commission on each trade.
The total amount of commissions paid to Arcadia was $12,500. We did not engage
in forward freight agreement trading through Arcadia in 2007. In addition, the
Company earned freights on chartering vessels to Arcadia in the amount of
$64.8 million (2007: $17.4 million).





In
November 2008, the Company advanced $60.0 million of the profit share balance,
which was due to Ship Finance in March 2009. The advance bore interest at LIBOR
plus a margin.





Geveran
has acted as a guarantor for two loan facilities totaling $71.6 million, entered
into by ITCL. $40.6 million of these loan facilities were drawn down at December
31, 2008 and the balance has been cancelled. These loan facilities expire in
July and August of 2009. Geveran receives an annual fee of 2% of the drawdown
facility for acting as guarantor.





During
the year ended December 31, 2007, the Company held investments in Sea Production
and Dockwise and earned income from these companies in the form of rental income
and income earned from the provision of accounting services totalling $1.0
million. During the year, the Company disposed of its entire investments in
these companies and they are no longer considered to be related
parties.





60





C. 
INTERESTS OF EXPERTS AND COUNSEL





Not
applicable.





ITEM
8.   FINANCIAL INFORMATION





A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION





See Item
18.





Legal
Proceedings





We are a
party, as plaintiff or defendant, to several lawsuits in various jurisdictions
for demurrage, damages, off-hire and other claims and commercial disputes
arising from the operation of its vessels, in the ordinary course of business or
in connection with its acquisition activities. We believe that the resolution of
such claims will not have a material adverse effect on the Company's operations
or financial condition.





In
January 2008, Golden President Shipping Corporation, a wholly-owned subsidiary
of Golden Ocean,  had a full and final win in the court case against
Bocimar N.V., or Bocimar, on the Channel Alliance Time Charter Party and was
awarded $14.7 million plus interest thereon in an amount of $2.3 million. The
amount of $14.7 million was originally guaranteed by Frontline to
Golden Ocean in connection with the spin-off in December 2004, and was
later paid to Golden Ocean as it became due according to the charter
party.  The full settlement from Bocimar is, therefore, due to
Frontline. $16.6 million was received from Bocimar on April 30, 2008. These
proceeds were recognized in the second quarter of 2008.




Dividend
Policy





The
timing and amount of dividends, if any, is at the discretion of our Board of
Directors. The level of dividend will be guided by present earnings, market
prospects, current capital expenditure programs as well as investment
opportunities. We have paid the following cash dividends in 2006, 2007 and
2008.





Payment
      Date
                
                Amount
      per Share2006March
      20, 2006
                
                $
                1.50June
      26, 2006
                
                $
                1.50September
      18, 2006
                
                $
                1.50December
      21, 2006
                
                $
                2.502007March
      22, 2007
                
                $
                2.05June
      22, 2007
                
                $
                1.50October
      24, 2007
                
                $
                1.50October
      24, 2007
                
                $
                1.75December
      12, 2007
                
                $
                1.502008March
      10, 2008
                
                $
                2.00June
      25, 2008
                
                $
                2.75September
      19, 2008
                
                $
                3.00December
      22, 2008
                
                $
                0.50





On
February 25, 2009 the Board declared a cash dividend of $0.25 per share for the
fourth quarter of 2008 which was paid on March 27, 2009.





B.
SIGNIFICANT CHANGES





None.





61





ITEM
9.    THE OFFER AND LISTING





The
Company's Ordinary Shares are traded on the New York Stock Exchange, or NYSE,
the Oslo Stock Exchange, or  OSE, and on the London Stock Exchange, or
LSE, under the symbol "FRO".





The New
York Stock Exchange is the Company's "primary listing". As an overseas company
with a secondary listing on the LSE, the Company is not required to comply with
certain listing rules applicable to companies with a primary listing on the LSE.
The listing on the OSE is also a secondary listing. The Company's Ordinary
Shares have been thinly traded on the London Stock Exchange since
1999.





The
following table sets forth, for the five most recent fiscal years, the high and
low prices for the Ordinary Shares on the NYSE and OSE.





NYSE
                        
                        OSEHigh
                        
                        
                        Low
                        
                        High
                        LowFiscal
      year ended December 31,2008
                        
                        $
                        72.36
                        
                        
                        $
                        25.00
                        
                        NOK
      376.50
                        NOK
      165.252007
                        
                        $
                        53.09
                        
                        
                        $
                        29.35
                        
                        NOK
      306.00
                        NOK
      183.752006
                        
                        $
                        44.65
                        
                        
                        $
                        28.80
                        
                        NOK
      280.00
                        NOK
      184.002005
                        
                        $
                        57.97
                        
                        
                        $
                        35.89
                        
                        NOK
      355.00
                        NOK
      230.002004
                        
                        $
                        62.33
                        
                        
                        $
                        24.36
                        
                        NOK
      367.81
                        NOK
      158.06





The
following table sets forth, for each full financial quarter for the two most
recent fiscal years, the high and low prices of the Ordinary Shares on the NYSE
and the OSE.





NYSE
                      
                      OSEHigh
                      
                      Low
                      
                      High
                      LowFiscal
      year ended December 31, 2008First
      quarter
                      
                      $
                      49.66
                      
                      
                      $
                      34.00
                      
                      NOK
      268.00
                      NOK
      180.00Second
      quarter
                      
                      $
                      72.36
                      
                      
                      $
                      46.34
                      
                      NOK
      376.50
                      NOK
      231.50Third
      quarter
                      
                      $
                      69.09
                      
                      
                      $
                      43.25
                      
                      NOK
      358.00
                      NOK
      256.50Fourth
      quarter
                      
                      $
                      47.50
                      
                      
                      $
                      25.00
                      
                      NOK
      279.50
                      NOK
      165.25
  Fiscal
      year ended December 31, 2007First
      quarter
                    
                    $
                    36.55
                    
                    
                    $
                    29.35
                    
                    NOK
      224.75
                    NOK
      183.75Second
      quarter
                    
                    $
                    47.94
                    
                    
                    $
                    34.26
                    
                    NOK
      286.00
                    NOK
      205.75Third
      quarter
                    
                    $
                    53.09
                    
                    
                    $
                    38.25
                    
                    NOK
      306.00
                    NOK
      232.00Fourth
      quarter
                    
                    $
                    51.06
                    
                    
                    $
                    37.49
                    
                    NOK
      278.00
                    NOK
      204.00





The
following table sets forth, for the most recent six months, the high and low
prices for the Ordinary Shares on the NYSE and OSE.





NYSE
                    
                    OSEHigh
                    
                    
                    Low
                    
                    High
                    LowMarch
      2009
                    
                    $
                    20.75
                    
                    
                    $
                    15.78
                    
                    NOK
      145.25
                    NOK
      112.00February
      2009
                    
                    $
                    30.00
                    
                    
                    $
                    19.69
                    
                    NOK
      202.75
                    NOK
      147.50January
      2009
                    
                    $
                    33.29
                    
                    
                    $
                    27.16
                    
                    NOK
      235.00
                    NOK
      187.00December
      2008
                    
                    $
                    32.50
                    
                    
                    $
                    25.10
                    
                    NOK
      227.25
                    NOK
      176.00November
      2008
                    
                    $
                    38.50
                    
                    
                    $
                    25.00
                    
                    NOK
      259.00
                    NOK
      177.50October
      2008
                    
                    $
                    47.50
                    
                    
                    $
                    25.00
                    
                    NOK
      279.50
                    NOK
      165.25








62





ITEM
10.    ADDITIONAL INFORMATION





A. 
SHARE CAPITAL





Not
applicable.





B. 
MEMORANDUM AND ARTICLES OF ASSOCIATION





The
Memorandum of Association of the Company has previously been filed as Exhibit
3.1 to the Company's Registration Statement on Form F-1, (Registration No.
33-70158) filed with the Securities and Exchange Commission on October 13, 1993,
and is hereby incorporated by reference into this Annual Report.





At the
2007 Annual General Meeting of the Company, our shareholders voted to amend the
Company's Bye-laws to ensure conformity with recent revisions to the Bermuda
Companies Act 1981, as amended.  These amended Bye-laws of the Company
as adopted on September 28, 2007, are filed as Exhibit 1.2 to this Annual
Report.





The
purposes and powers of the Company are set forth in Items 6(1) and 7(a) through
(h) of our Memorandum of Association and in the Second Schedule of the Bermuda
Companies Act of 1981 which is attached as an exhibit to our Memorandum of
Association.  These purposes include exploring, drilling, moving,
transporting and refining petroleum and hydro-carbon products, including oil and
oil products; the acquisition, ownership, chartering, selling, management and
operation of ships and aircraft; the entering into of any guarantee,
contract, indemnity or suretyship and to assure, support, secure, with or
without the consideration or benefit, the performance of any obligations of any
person or persons; and the borrowing and raising of money in any currency or
currencies to secure or discharge any debt or obligation in any
manner.





The
Company's Bye-laws provide that its board of directors shall convene and the
Company shall hold annual general meetings in accordance with the requirements
of the Bermuda Companies Act of 1981 at such times and places (other than
Norway) as the Board shall decide.  The board of directors may call
special meetings at its discretion or as required by the Bermuda Companies Act
of 1981.





Bermuda
law permits the Bye-laws of a Bermuda company to contain provisions excluding
personal liability of a director, alternate director, officer, member of a
committee authorized under Bye-law 104, resident representative or their
respective heirs, executors or administrators to the company for any loss
arising or liability attaching to him by virtue of any rule of law in respect of
any negligence default, breach of duty or breach of trust of which the officer
or person may be guilty.  Bermuda law also grants companies the power
generally to indemnify directors, alternate directors and officers of the
Company and any members of a committee authorized under Bye-law 104, resident
representatives or their respective heirs, executors or administrators if any
such person was or is a party or threatened to be made a party to a threatened,
pending or completed action, suit or proceeding by reason of the fact that he or
she is or was a director, alternate director or officer of the Company or member
of a committee authorized under Bye-law 104, resident representative or their
respective heirs, executors or administrators or was serving in a similar
capacity for another entity at the company's request.





Special
rights attaching to any class of our shares may be altered or abrogated with the
consent in writing of not less than 75% of the issued and shares of that class
or with the sanction of a resolution passed at a separate general meeting of the
holders of such shares voting in person or by proxy.





The
Company's Bye-laws do not prohibit a director from being a party to, or
otherwise having an interest in, any transaction or arrangement with the Company
or in which the Company is otherwise interested.  The Company's
Bye-laws provide that a director who has an interest in any transaction or
arrangement with the Company and who has complied with the provisions of the
Companies Acts and with its Bye-Laws with regard to disclosure of such interest
shall be taken into account in ascertaining whether a quorum is present, and
will be entitled to vote in respect of any transaction or arrangement in which
he is so interested.  The Company's Bye-laws provide its board of
directors the authority to exercise all of the powers of the Company to borrow
money and to mortgage or charge all or any part of our property and assets as
collateral security for any debt, liability or obligation.  The
Company's directors are not required to retire because of their age, and the
directors are not required to be holders of the Company's Ordinary
Shares.  Directors serve for one year terms, and shall serve until
re-elected or until their successors are appointed at the next annual general
meeting.





63





The
Company's Bye-laws provide that no director, alternate director, officer, person
or member of a committee, if any, resident representative, or his heirs,
executors or administrators, which we refer to collectively as an indemnitee, is
liable for the acts, receipts, neglects, or defaults of any other such person or
any person involved in our formation, or for any loss or expense
incurred by us through the insufficiency or deficiency of title to any
property acquired by us, or for the insufficiency of deficiency of any security
in or upon which any of our monies shall be invested, or for any loss or damage
arising from the bankruptcy, insolvency, or tortious act of any person with whom
any monies, securities, or effects shall be deposited, or for any loss
occasioned by any error of judgment, omission, default, or oversight on his
part, or for any other loss, damage or misfortune whatever which shall happen in
relation to the execution of his duties, or supposed duties, to us or otherwise
in relation thereto.  Each indemnitee will be indemnified and held
harmless out of our funds to the fullest extent permitted by Bermuda law against
all liabilities, loss, damage or expense (including but not limited to
liabilities under contract, tort and statute or any applicable foreign law or
regulation and all reasonable legal and other costs and expenses properly
payable) incurred or suffered by him as such director, alternate director,
officer, person or committee member or resident representative (or in his
reasonable belief that he is acting as any of the above).  In
addition, each indemnitee shall be indemnified against all liabilities incurred
in defending any proceedings, whether civil or criminal, in which judgment is
given in such indemnitee's favor, or in which he is acquitted.  The
Company is authorized to purchase insurance to cover any liability it may incur
under the indemnification provisions of its Bye-laws.





There are
no pre-emptive, redemption, conversion or sinking fund rights attached to our
Ordinary Shares.  Holders of Ordinary Shares are entitled to one vote
per share on all matters submitted to a vote of holders of Ordinary
Shares.  Unless a different majority is required by law or by our
bye-laws, resolutions to be approved by holders of Ordinary Shares require
approval by a simple majority of votes cast at a meeting at which a quorum is
present.





In the
event of our liquidation, dissolution or winding up, the holders of Ordinary
Shares are entitled to share in our assets, if any, remaining after the payment
of all of our debts and liabilities, subject to any liquidation preference on
any outstanding preference shares.





The
Company's Bye-laws provide that its board of directors may, from time to time,
declare and pay dividends out of contributed surplus.  Each Ordinary
Share is entitled to dividends if and when dividends are declared by the board
of directors, subject to any preferred dividend right of the holders of any
preference shares.





There are
no limitations on the right of non-Bermudians or non-residents of Bermuda to
hold or vote our Ordinary Shares.





The
Company's Bye-laws provide that any person, other than its registrar, who
acquires or disposes of an interest in shares which triggers a notice
requirement of the Oslo Stock Exchange must notify the Company's registrar
immediately of such acquisition or disposal and the resulting interest of that
person in shares.





The
Company's Bye-laws laws require the Company to provide notice to the Oslo Stock
Exchange if a person resident for tax purposes in Norway (or such other
jurisdiction as the Board may nominate from time to time) is found to hold 50%
or more of the Company's aggregate issued share capital, or holds shares with
50% or more of the outstanding voting power, other than the Company's
registrar.  The Company's Bye-laws also require it to comply with
requirements that the Oslo Stock Exchange may impose from time to time relating
to notification of the Oslo Stock Exchange in the event of specified changes in
the ownership of the Company's Ordinary Shares.





C.
MATERIAL CONTRACTS





Sealift
Ltd.





Purchase
of Vessels and Option Agreements





During
January 2007, we agreed with Ship Finance that we should acquire five single
purpose companies from them, each being the owner of one single hull Suezmax
tanker vessel. All of the five vessels were subject to long-term charters to our
subsidiaries, Frontline Shipping Ltd. and Frontline Shipping II Ltd. Four of the
vessels were furthermore parties to conversion contracts with Cosco Shipyard
Group Co. Ltd., or Cosco, setting out the terms and conditions subject to which
Cosco would convert their respective vessels to specially designed heavy lift
vessels. In addition to the acquisition of the five companies we agreed with
Ship Finance that we would acquire their rights and obligations under an option
agreement with Cosco pursuant to which Ship Finance had a right to conclude
conversion contracts for a further two vessels, or the Option
Agreement.





64





Purchase
Agreement with Sealift





In
January 2007, we also agreed with Sealift that they would purchase six single
purpose companies from us, each being the owner of one single hull Suezmax
tanker vessel together with our rights and obligations under the Option
Agreement. Five of the companies to be sold were the same companies we had
agreed to purchase from Ship Finance while the sixth was an existing subsidiary
owning one single hull Suezmax tanker vessel. The long-term charters with
Frontline Shipping Ltd. and Frontline Shipping II Ltd. were agreed to be
replaced with bareboat charters and time charters with our subsidiary Key
Chartering Inc., covering the period until each vessel was delivered to
Cosco for conversion. The terms of the agreement included an obligation on us to
take responsibility for the completion of the conversion of the four vessels
subject to the conversion contracts with Cosco. This responsibility would
include both the financing and payment of the work to be performed by Cosco and
the supervision thereof throughout the conversion period.  We were
liable for certain damages if the converted vessels were delivered after certain
agreed times and paid damages of $1.2 million regarding the late delivery of the
fourth and final converted vessel.





Sealift's
Financing





Completion
of the purchase agreement between Sealift and us was subject to Sealift being
able to obtain the required financing. This was done by way of the taking up by
Sealift of a senior bank loan of $240 million, a bond issue by Sealift of $110
million and a private placement of shares in Sealift raising in total $180
million. We agreed to subscribe for one third of the shares in Sealift issued at
a cost of $60 million. The transaction between Sealift and ourselves closed in
March, 2007, whereafter we became a minority shareholder in
Sealift.





Sealift
subsequently made an agreement to purchase all of the shares in Delphi
Acquisition Holding (which was the owner of Dockwise Transport B.V., an
established operator in the heavy lift market). This was financed by another
share issue which diluted our ownership share in Sealift to 17.1%. We
subsequently sold all our shares in Sealift and have no financial interest in
the company.





Sea
Production Ltd





On
February 14, 2007 our subsidiary, FFP, entered into an agreement for the sale
and purchase of assets with Sea Production whereby FFP agreed to sell to Sea
Production; (i) 70% of its shares in Puffin Ltd., the company indirectly holding
the ownership of the vessel "Front Puffin" under conversion to an FPSO, (ii) our
outstanding inter-company loans relating to the purchase and conversion of
"Front Puffin", and (iii) all the shares of Sea Production Management AS, a
Norwegian subsidiary where the floating production organization and expertise
are employed. Also on February 14, 2007 Sea Production entered into a share
purchase agreement with KSI Production Ltd. to acquire the remaining 30% of the
shares of Puffin Ltd.





On
February 15, 2007 Sea Production entered into two share purchase agreements with
Greenwich Holdings Limited to acquire all the shares of Langford Shipping
Company Limited and Melrose Shipping Company Limited respectively. Langford
Shipping Company owned the Aframax tanker "Sea Cat", and Melrose Shipping
Company the vessel "Sea Jaguar", also an Aframax tanker. Also on February 15
2007, Sea Production entered into a share purchase agreement with Seadrill Ltd.
to acquire all the shares of Wisdom Shipping (S) Pte. Ltd., the owner of the
FPSO "Crystal Ocean".





Sea
Production financed these acquisitions and the future conversion costs of Front
Puffin through a $180 million equity issue, a $130 million bond issue and a $105
million bank facility. We agreed to subscribe for 28.33% of the shares in Sea
Production in the equity offering at an aggregate cost of $51 million. The
acquisition of the shares and assets, the equity issue and the bond issue where
completed simultaneously on February 15, 2007. We have subsequently sold all our
shares in Sea Production in market transactions and have currently no financial
interest in the company.





Gemini
Pool





Frontline
Chartering Services, Inc., or FCS, a wholly-owned subsidiary, Gemini Tankers
LLC, or Gemini Tankers, Teekay Chartering Ltd., Koenig & Cie GMBH & Co
and Hyundai Merchant Marine (Europe) Ltd entered into an Amended & Restated
Pool Agreement regarding the Gemini Tankers Suezmax Pool, or the Pool, with
effect from January 1, 2009. This agreement amended a pool agreement, which
became effective on December 1, 2003 between the above parties excluding FCS.
The Pool is commercially operated by the Gemini Tankers, or the Pool Manager,
which employs the vessels in the Pool under a contract with a particular
charterer or shipper for a number of voyages, with each single voyage or
contract of carriage being performed by a pool vessel after nomination by the
Pool Manager. Each participant in the Pool shall, in relation to each of its
vessels, maintain the vessel in a seaworthy condition and to defined technical
and operational standards and obtain and maintain the required number of
vettings. Each participant in the Pool shall also keep its vessels in the Pool
insured for its own account and is responsible for the technical management of
its vessels.





65





D. 
EXCHANGE CONTROLS





The
Company is classified by the Bermuda Monetary Authority as a non-resident of
Bermuda for exchange control purposes.





The
transfer of Ordinary Shares between persons regarded as resident outside Bermuda
for exchange control purposes may be effected without specific consent under the
Exchange Control Act of 1972 and regulations there under and the issuance of
Ordinary Shares to persons regarded as resident outside Bermuda for exchange
control purposes may be effected without specific consent under the Exchange
Control Act of 1972 and regulations there under. Issues and transfers of
Ordinary Shares involving any person regarded as resident in Bermuda for
exchange control purposes require specific prior approval under the Exchange
Control Act of 1972.





The
owners of Ordinary Shares who are ordinarily resident outside Bermuda are not
subject to any restrictions on their rights to hold or vote their shares.
Because the Company has been designated as a non-resident for Bermuda exchange
control purposes, there are no restrictions on its ability to transfer funds in
and out of Bermuda or to pay dividends to U.S. residents who are holders of
Ordinary Shares, other than in respect of local Bermuda currency.





E. 
TAXATION





United
States Taxation





The
following discussion is based upon the provisions of the U.S. Internal Revenue
Code of 1986, as amended (the "Code"), existing and proposed U.S. Treasury
Department regulations, administrative rulings, pronouncements and judicial
decisions, all as of the date of this Annual Report.  Unless otherwise
noted, references to the "Company" include the Company's
Subsidiaries.  This discussion assumes that the Company does not have
an office or other fixed place of business in the United States.





Taxation
of the Company's Shipping Income: In General





The
Company anticipates that it will derive substantially all of its gross income
from the use and operation of vessels in international commerce and that this
income will principally consist of freights from the transportation of cargoes,
charterhire or lease from time or voyage charters and the performance of
services directly related thereto, which the Company refers to as "shipping
income."





Shipping
income that is attributable to transportation that begins or ends, but that does
not both begin and end, in the United States will be considered to be 50%
derived from sources within the United States. Shipping income attributable to
transportation that both begins and ends in the United States will be considered
to be 100% derived from sources within the United States. The Company is not
permitted by law to engage in transportation that gives rise to 100% U.S. source
income.





Shipping
income attributable to transportation exclusively between non-U.S. ports will be
considered to be 100% derived from sources outside the United States. Shipping
income derived from sources outside the United States will not be subject to
U.S. federal income tax.





Based
upon the Company's anticipated shipping operations, the Company's vessels will
operate in various parts of the world, including to or from U.S. ports. Unless
exempt from U.S. taxation under Section 883 of the Code, or Section 883, the
Company will be subject to U.S. federal income taxation, in the manner
discussed below, to the extent its shipping income is considered derived from
sources within the United States.





Application
of Code Section 883





Under the
relevant provisions of Section 883, the Company will be exempt from U.S.
taxation on its U.S. source shipping income if:





(i)
            It
      is organized in a qualified foreign country which is one that grants an
      equivalent exemption from tax to corporations organized in the United
      States in respect of the shipping income for which exemption is being
      claimed under Section 883, a "qualified foreign country", and which the
      Company refers to as the "country of organization requirement";
      and





(ii)
            It
      can satisfy any one of the following two stock ownership requirements for
      more than half the days during the taxable
year:





●
            the
      Company's stock is "primarily and regularly" traded on an established
      securities market located in the United States or a qualified foreign
      country, which the Company refers to as the "Publicly-Traded Test";
      or






66






●
            more
      than 50% of the Company's stock, in terms of value, is beneficially owned
      by any combination of one or more individuals who are residents of a
      qualified foreign country or foreign corporations that satisfy the country
      of organization requirement and the Publicly-Traded Test, which the
      Company refers to as the "50% Ownership
Test."




The U.S.
Treasury Department has recognized Bermuda, the country of incorporation of the
Company and certain of its subsidiaries, as a qualified foreign country. In
addition, the U.S. Treasury Department has recognized Liberia, Panama, the Isle
of Man, Singapore and Cyprus, the countries of incorporation of certain of the
Company's subsidiaries, as qualified foreign countries.  Accordingly,
the Company and its vessel owning subsidiaries satisfy the country of
organization requirement.





Therefore,
the Company's eligibility to qualify for exemption under Section 883 is wholly
dependent upon being able to satisfy one of the stock ownership
requirements.





For the
2008 tax year, the Company satisfied the Publicly-Traded Test since, on more
than half the days of the taxable year, the Company's stock was primarily and
regularly traded on the New York Stock Exchange.





Taxation
in Absence of Internal Revenue Code Section 883 Exemption





To the
extent the benefits of Section 883 are unavailable with respect to any item of
U.S. source income, the Company's U.S. source shipping income, would be subject
to a 4% tax imposed by Section 887 of the Code on a gross basis,
without the benefit of deductions. Since under the sourcing rules described
above, no more than 50% of the Company's shipping income would be treated as
being derived from U.S. sources, the maximum effective rate of U.S. federal
income tax on the Company's shipping income would never exceed 2% under the 4%
gross basis tax regime.





Gain
on Sale of Vessels





Regardless
of whether the Company qualifies for exemption under Section 883, the Company
will not be subject to U.S. federal income taxation with respect to gain
realized on a sale of a vessel, provided the sale is considered to occur outside
of the United States under U.S. federal income tax principles.  In
general, a sale of a vessel will be considered to occur outside of the United
States for this purpose if title to the vessel, and risk of loss with respect to
the vessel, pass to the buyer outside of the United States.  It is
expected that any sale of a vessel by the Company will be considered to occur
outside of the United States.





Taxation
of U.S. Holders





The
following is a discussion of the material U.S. federal income tax considerations
relevant to an investment decision by a U.S. Holder, as defined below, with
respect to the Ordinary Shares.  This discussion does not purport to
deal with the tax consequences of owning Ordinary Shares to all categories
of investors, some of which may be subject to special rules.  You are
encouraged to consult your own tax advisors concerning the overall tax
consequences arising in your own particular situation under U.S. federal, state,
local or foreign law of the ownership of Ordinary Shares.





As used
herein, the term "U.S. Holder" means a beneficial owner of Ordinary Shares that
(i) is a U.S. citizen or resident, a U.S. corporation or other U.S. entity
taxable as a corporation, an estate, the income of which is subject to U.S.
federal income taxation regardless of its source, or a trust if a court within
the United States is able to exercise primary jurisdiction over the
administration of the trust and one or more U.S. persons have the authority to
control all substantial decisions of the trust and (ii) owns the Ordinary Shares
as a capital asset, generally, for investment purposes.





If a
partnership holds Ordinary Shares, the tax treatment of a partner will generally
depend upon the status of the partner and upon the activities of the
partnership.  If you are a partner in a partnership holding Ordinary
Shares, you are encouraged to consult your own tax advisor on this
issue.





67





Distributions





Subject
to the discussion of passive foreign investment companies below, any
distributions made by the Company with respect to Ordinary shares to a U.S.
Holder will generally constitute dividends, which may be taxable as ordinary
income or "qualified dividend income" as described in more detail below, to the
extent of the Company's current or accumulated earnings and profits, as
determined under U.S. federal income tax principles.  Distributions in
excess of the Company's earnings and profits will be treated first as a
non-taxable return of capital to the extent of the U.S. Holder's tax basis
in his Ordinary Shares on a dollar-for-dollar basis and thereafter as capital
gain.  Because the Company is not a U.S. corporation, U.S. Holders
that are corporations will not be entitled to claim a dividends-received
deduction with respect to any distributions they receive from the
Company.





Dividends
paid on Ordinary Shares to a U.S. Holder which is an individual, trust or estate
(a "U.S. Non-Corporate Holder") will generally be treated as "qualified dividend
income" that is taxable to such shareholders at preferential U.S. federal income
tax rates (currently through 2010) provided that (1) Ordinary shares are readily
tradable on an established securities market in the United States (such as the
New York Stock Exchange on which the Ordinary shares are listed); (2) the
Company is not a passive foreign investment company for the taxable year during
which the dividend is paid or the immediately preceding taxable year (which the
Company does not believe it is, has been or will be); and (3) the U.S.
Non-Corporate Holder has owned the Ordinary Shares for more than 60 days in the
121-day period beginning 60 days before the date on which the Ordinary Shares
become ex-dividend.





Legislation
has been previously introduced in the U.S. Congress which, if enacted in its
present form, would preclude the  dividends paid by the Company from
qualifying for such preferential rates prospectively from the date of the
enactment. Any dividends paid by the Company which are not eligible for these
preferential rates will be taxed as ordinary income to a U.S.
Holder.





Sale,
Exchange or other Disposition of Common Stock





Assuming
the Company does not constitute a passive foreign investment company for any
taxable year, a U.S. Holder generally will recognize taxable gain or loss upon a
sale, exchange or other disposition of the Company's Ordinary Shares in an
amount equal to the difference between the amount realized by the U.S. Holder
from such sale, exchange or other disposition and the U.S. Holder's tax
basis in such stock.  Such gain or loss will be treated as long-term
capital gain or loss if the U.S. Holder's holding period in the Ordinary Shares
is greater than one year at the time of the sale, exchange or other
disposition.  A U.S. Holder's ability to deduct capital losses is
subject to certain limitations.





Passive
Foreign Investment Company Status and Significant Tax Consequences





Special
U.S. federal income tax rules apply to a U.S. Holder that holds stock in a
foreign corporation classified as a passive foreign investment company, or a
PFIC, for U.S. federal income tax purposes.  In general, the Company
will be treated as a PFIC with respect to a U.S. Holder if, for any taxable year
in which such holder held the Company's Ordinary Shares, either;





·
            at
      least 75% of the Company's gross income for such taxable year consists of
      passive income (e.g., dividends, interest, capital gains and rents derived
      other than in the active conduct of a rental business),
  or





·
            at
      least 50% of the average value of the assets held by the corporation
      during such taxable year produce, or are held for the production of,
      passive income.





For
purposes of determining whether the Company is a PFIC, the Company will be
treated as earning and owning its proportionate share of the income and assets,
respectively, of any of its subsidiary corporations in which it owns at least
25% of the value of the subsidiary's stock.  Income earned, or deemed
earned, by the Company in connection with the performance of services would
not constitute passive income.  By contrast, rental income would
generally constitute "passive income" unless the company is treated under
specific rules as deriving its rental income in the active conduct of a trade or
business.





68





Based on
the Company's current operations and future projections, the company does not
believe that it is, nor does it expect to become, a PFIC with respect to any
taxable year.  Although there is no legal authority directly on point,
the company's belief is based principally on the position that, for purposes of
determining whether the Company is a PFIC, the gross income the Company derives
or is deemed to derive from the time chartering and voyage chartering activities
of its wholly-owned subsidiaries should constitute services income, rather than
rental income.  Correspondingly, the Company believes that such income
does not constitute passive income, and the assets that the Company or its
wholly-owned subsidiaries own and operate in connection with the production of
such income, in particular, the vessels, do not constitute passive assets
for purposes of determining whether the Company is a PFIC.  The
Company believes there is substantial legal authority supporting its position
consisting of case law and Internal Revenue Service pronouncements concerning
the characterization of income derived from time charters and voyage charters as
services income for other tax purposes.  However, in the absence of
any legal authority specifically relating to the statutory provisions governing
passive foreign investment companies, the Internal Revenue Service or a court
could disagree with this position.  In addition, the Company intends
to conduct our affairs in a manner to avoid being classified as a PFIC with
respect to any taxable year, there can be no assurance that the nature of its
operations will not change in the future.





As
discussed more fully below, if the Company were to be treated as a PFIC for any
taxable year, a U.S. Holder would be subject to different taxation rules
depending on whether the U.S. Holder makes an election to treat the Company as a
"Qualified Electing Fund," which election is referred to as a "QEF election." As
an alternative to making a QEF election, a U.S. Holder should be able to make a
"mark-to-market" election with respect to the Ordinary Shares, as discussed
below.





Taxation
of U.S. Holders Making a Timely QEF Election





If a U.S.
Holder makes a timely QEF election, which U.S. Holder is referred to as an
"Electing Holder," the Electing Holder must report each year for U.S. federal
income tax purposes his pro rata share of the Company's ordinary earnings and
its net capital gain, if any, for the Company's taxable year that ends with or
within the taxable year of the Electing Holder, regardless of whether or not
distributions were received from the Company by the Electing
Holder.  The Electing Holder's adjusted tax basis in the Ordinary
Shares will be increased to reflect taxed but undistributed earnings and
profits.  Distributions of earnings and profits that had been
previously taxed will result in a corresponding reduction in the adjusted tax
basis in the Ordinary Shares and will not be taxed again once
distributed.  An Electing Holder would generally recognize capital
gain or loss on the sale, exchange or other disposition of the Ordinary
Shares.





Taxation
of U.S. Holders Making a "Mark-to-Market" Election





Alternatively,
if the Company were to be treated as a PFIC for any taxable year and, as
anticipated, the Ordinary Shares are treated as "marketable stock," a U.S.
Holder would be allowed to make a "mark-to-market" election with respect to the
Company's Ordinary Shares.  If that election is made, the U.S. Holder
generally would include as ordinary income in each taxable year the excess, if
any, of the fair market value of the Ordinary Shares at the end of the taxable
year over such holder's adjusted tax basis in the Ordinary
Shares.  The U.S. Holder would also be permitted an ordinary loss in
respect of the excess, if any, of the U.S. Holder's adjusted tax basis in the
Ordinary Shares over its fair market value at the end of the taxable year, but
only to the extent of the net amount previously included in income as a result
of the mark-to-market election.  A U.S. Holder's tax basis in his
Ordinary Shares would be adjusted to reflect any such income or loss
amount.  Gain realized on the sale, exchange or other disposition of
the Ordinary shares would be treated as ordinary income, and any loss realized
on the sale, exchange or other disposition of the Ordinary Shares would be
treated as ordinary loss to the extent that such loss does not exceed the net
mark-to-market gains previously included by the U.S. Holder.





Taxation
of U.S. Holders Not Making a Timely QEF or "Mark-to-Market"
Election





Finally,
if the Company were to be treated as a PFIC for any taxable year, a U.S. Holder
who does not make either a QEF election or a "mark-to-market" election for that
year, whom is referred to as a "Non-Electing Holder," would be subject to
special rules with respect to (1) any excess distribution (i.e., the portion of
any distributions received by the Non-Electing Holder on the Ordinary Shares in
a taxable year in excess of 125% of the average annual distributions received by
the Non-Electing Holder in the three preceding taxable years, or, if
shorter, the Non-Electing Holder's holding period for the Ordinary Shares), and
(2) any gain realized on the sale, exchange or other disposition of the Ordinary
Shares.  Under these special rules:





·
            the
      excess distribution or gain would be allocated ratably over the
      Non-Electing Holders' aggregate holding period for the Ordinary
      Shares;





·
            the
      amount allocated to the current taxable year and any taxable years before
      the Company became a PFIC would be taxed as ordinary income;
      and





69








·
            the
      amount allocated to each of the other taxable years would be subject to
      tax at the highest rate of tax in effect for the applicable class of
      taxpayer for that year, and an interest charge for the deemed deferral
      benefit would be imposed with respect to the resulting tax attributable to
      each such other taxable year.





These
penalties would not apply to a pension or profit sharing trust or other
tax-exempt organization that did not borrow funds or otherwise utilize leverage
in connection with its acquisition of the Ordinary Shares.  If a
Non-Electing Holder who is an individual dies while owning the Ordinary Shares,
such holder's successor generally would not receive a step-up in tax basis with
respect to such stock.





Backup
Withholding and Information Reporting





In
general, dividend payments, or other taxable distributions, made within the
United States to a holder will be subject to information reporting
requirements.  Such payments will also be subject to "backup
withholding" if paid to a non-corporate U.S. Holder who:





·
            fails
      to provide an accurate taxpayer identification
  number;





·
            is
      notified by the Internal Revenue Service that he has failed to report all
      interest or dividends required to be shown on his federal income tax
      returns; or





·
            in
      certain circumstances, fails to comply with applicable certification
      requirements.





If a
holder sells his Ordinary Shares to or through a U.S. office or broker, the
payment of the proceeds is subject to both U.S. backup withholding and
information reporting unless the holder establishes an exemption.  If
a holders sells his Ordinary Shares through a non-U.S. office of a non-U.S.
broker and the sales proceeds are paid to the holder outside the United States
then information reporting and backup withholding generally will not apply to
that payment.  However, U.S. information reporting requirements, but
not backup withholding, will apply to a payment of sales proceeds, including a
payment made to a holder outside the United States, if the holder sells his
Ordinary Shares through a non-U.S. office of a broker that is a U.S. person or
has some other contacts with the United States.





Backup
withholding is not an additional tax.  Rather, a tax payer generally
may obtain a refund of any amounts withheld under backup withholding rules that
exceed then taxpayer's income tax liability by filing a refund claim with the
U.S. Internal Revenue Service.





Bermuda
Taxation





Bermuda
currently imposes no tax  (including a tax in the nature of an income,
estate  duty,  inheritance,  capital  transfer
or  withholding  tax) on profits,
income,  capital  gains
or  appreciations  derived  by,  or  dividends  or
other distributions paid to U.S. Shareholders of Ordinary Shares. Bermuda has
undertaken not to impose any such Bermuda taxes on U.S. Shareholders of Ordinary
Shares prior to the year 2016 except in so far as such tax applies
to  persons  ordinarily resident in Bermuda. The Company is
not eligible for the benefits of any tax treaty between the United States
and Bermuda.





Liberian
Taxation





The
Republic of Liberia enacted a new income tax act effective as of January 1,
2001, or the New Act.  In contrast to the income tax law previously in
effect since 1977, or the Prior Law, which the New Act repealed in its entirety,
the New Act does not distinguish between the taxation of a non-resident Liberian
corporation, such as the Company's Liberian subsidiaries, which conduct no
business in Liberia and were wholly exempted from tax under the Prior Law, and
the taxation of ordinary resident Liberian corporations.





In 2004,
the Liberian Ministry of Finance issued regulations pursuant to which a
non-resident domestic corporation engaged in international shipping, such as the
Company's Liberian subsidiaries, will not be subject to tax under the New Act
retroactive to January 1, 2001, or the New Regulations.  In addition,
the Liberian Ministry of Justice issued an opinion that the New Regulations were
a valid exercise of the regulatory authority of the Ministry of
Finance.  Therefore, assuming that the New Regulations are valid, the
Company's Liberian subsidiaries will be wholly exempt from Liberian income tax
as under the Prior Law.





70





If the
Company's Liberian subsidiaries were subject to Liberian income tax under the
New Act, the Company's Liberian subsidiaries would be subject to tax at a rate
of 35% on their worldwide income.  As a result, their, and
subsequently the Company's, net income and cash flow would be materially reduced
by the amount of the applicable tax.  In addition, the Company, as
shareholder of the Liberian subsidiaries, would be subject to Liberian
withholding tax on dividends paid by the Liberian subsidiaries at rates ranging
from 15% to 20%.





F.
DIVIDENDS AND PAYING AGENTS





Not
applicable.





G.
STATEMENT BY EXPERTS





Not
applicable.





H.
DOCUMENTS ON DISPLAY





We are
subject to the informational requirements of the Securities Exchange Act of
1934, as amended. In accordance with these requirements, we file reports and
other information with the Securities and Exchange Commission. These materials,
including this annual report and the accompanying exhibits, may be inspected and
copied at the public reference facilities maintained by the Commission 100 F
Street, N.E., Room 1580 Washington, D.C. 20549.  You may obtain
information on the operation of the public reference room by calling 1
(800) SEC-0330, and you may obtain copies at prescribed rates from the public
reference facilities maintained by the Commission at its principal office in
Washington, D.C. 20549.  The SEC maintains a website
(http://www.sec.gov.) that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
SEC. In addition, documents referred to in this annual report may be inspected
at our principal executive offices at Par-la-Ville Place, 14 Par-la-Ville Road,
Hamilton, Bermuda HM 08.





I. 
SUBSIDIARY INFORMATION





Not
applicable.





ITEM
11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





We are
exposed to various market risks, including interest rates, spot market rates for
vessels and foreign currency fluctuations. We may enter into forward freight
agreements and futures for trading purposes in order to manage our exposure to
the risk of movements in the spot market for certain trade routes and,
to some extent, for speculative purposes but currently we have not entered
into any such agreements. We may also enter into other derivative instruments
from time to time for speculative purposes but currently we have not entered
into any such agreement.





Our
exposure to interest rate risk relates to our floating rate debt, which totaled
$568.1 million as of December 31, 2008 (2007: $80.0 million). A one per cent
change in interest rates would increase or decrease interest expense by $5.7
million per year as of December 31, 2008.





As of
December 31, 2008, the fair market value of our fixed rate debt was $352.9
million (2007: $435.5 million). If interest rates were to increase or decrease
by one per cent with all other variables remaining constant, we estimate
that the market value of our fixed rate debt would have decreased or
increased by approximately $21.5 million and $23.5 million respectively (2007:
decrease by $26.7 million and increase by $29.3 million).





The
majority of our transactions, assets and liabilities are denominated in U.S.
dollars, our functional currency. Certain of our subsidiaries report in Sterling
or Norwegian Kroner and risks of two kinds arise as a result: a transaction
risk, that is, the risk that currency fluctuations will have an effect on the
value of our cash flows; and a translation risk, which is the impact of currency
fluctuations in the translation of foreign operations and foreign assets and
liabilities into U.S. dollars in our consolidated financial
statements.





ITEM
12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES





Not
applicable.








71





PART
II





ITEM
13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES





None.





ITEM
14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND


USE OF PROCEEDS





None.





ITEM
15.   CONTROLS AND PROCEDURES





a)   Disclosure
Controls and Procedures





Management
assessed the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-15(e) of the Securities
Exchange Act of 1934, as of the end of the period covered by this annual report
as of December 31, 2008. Based upon that evaluation, the principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective as of the evaluation date.





b)   Management's
annual report on internal controls over financial reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) promulgated under
the Securities Exchange Act of 1934.





Internal
control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Securities Exchange Act of 1934 as a process designed by,
or under the supervision of, the Company's principal executive and principal
financial officers 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 and
includes those policies and procedures that:





·
            Pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;





·
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being
      made only in accordance with authorizations of Company's management and
      directors; and





·
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree or compliance
with the policies or procedures may deteriorate.





Management
conducted the evaluation of the effectiveness of the internal controls over
financial reporting using the control criteria framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) published in its
report entitled Internal Control-Integrated Framework.





Our
management with the participation of our principal executive officer and
principal financial officer assessed the effectiveness of the design and
operation of the Company's internal controls over financial reporting pursuant
to Rule
13a-15 of the Securities Exchange Act of 1934, as of December 31, 2008. Based
upon that evaluation, the principal executive officer and principal financial
officer concluded that the Company's internal controls over financial reporting
are effective as of December 31, 2008.





The
effectiveness of the Company's internal control over financial reporting as of
December 31, 2008 has been audited by PricewaterhouseCoopers AS., an independent
registered public accounting firm, as stated in their report which appears
herein.





72





c)   Changes
in internal control over financial reporting





There
were no changes in our internal controls over financial reporting that occurred
during the period covered by this annual report that have materially effected or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.





ITEM
16.  RESERVED





ITEM
16A.  AUDIT COMMITTEE FINANCIAL EXPERT





Our board
of directors has determined that both Mr. Frixos Savvides and Mrs. Kate
Blankenship are independent directors and audit committee financial
experts.





ITEM
16B.  CODE OF ETHICS





We have
adopted a code of ethics that applies to all entities controlled by us and all
employees, directors, officers and agents of the Company. We have posted a copy
of our code of ethics on our website at www.frontline.bm.We
will provide any person, free of charge, a copy of our code of ethics upon
written request to our registered office.





ITEM
16C.  PRINCIPAL ACCOUNTANT FEES AND SERVICES





Our
principal accountant for 2008 and 2007 was PricewaterhouseCoopers AS. The
following table sets forth for the two most recent fiscal years the fees paid or
accrued for audit and services provided by
PricewaterhouseCoopers AS.





(in
      thousands of $)
                
                2008
                
                
                2007Audit
      Fees (a)
                
                
                1,664
                
                
                
                1,166Audit-Related
      Fees (b)
                
                
                —
                
                
                
                —Tax
      Fees (c)
                
                
                —
                
                
                
                —All
      Other Fees (d)
                
                
                —
                
                
                
                —Total
                
                
                1,664
                
                
                
                1,166





(a)           Audit
Fees


Audit
fees represent professional services rendered for the audit of our annual
financial statements and services provided by the principal accountant in
connection with statutory and regulatory filings or engagements.





(b)           Audit–Related
Fees


Audit-related
fees consisted of assurance and related services rendered by the principal
accountant related to the performance of the audit or review of our financial
statements which have not been reported under Audit Fees above.





(c)           Tax
Fees


Tax fees
represent fees for professional services rendered by the principal accountant
for tax compliance, tax advice and tax planning.





(d)           All
Other Fees


All other
fees include services other than audit fees, audit-related fees and tax fees set
forth above.





Our Board
of Directors has adopted pre-approval policies and procedures in compliance with
paragraph (c) (7)(i) of Rule 2-01 of Regulation S-X that require the Board to
approve the appointment of the independent auditor of the Company before such
auditor is engaged and approve each of the audit and non-audit related services
to be provided by such auditor under such engagement by the Company. All
services provided by the principal auditor in 2008 were approved by the Board
pursuant to the pre-approval policy.





ITEM
16D.  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES





Not
applicable.





ITEM
16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS





None.








73








ITEM
16F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT





Not
applicable.





ITEM
16G. CORPORATE GOVERNANCE




Pursuant
to an exception under the NYSE listing standards available to foreign private
issuers, we are not required to comply with all of the corporate governance
practices followed by U.S. companies under the NYSE listing standards. The
significant differences between our corporate governance practices and the NYSE
standards applicable to listed U.S. companies are set forth below:




·
              Executive
      Sessions.The NYSErequires that
      non-management directors meet regularly in executive sessions without
      management. The NYSEalso requires that
      all independent directors meet in an executive session at least once a
      year. As permitted under Bermuda law and our bye-laws, our non-management
      directors do not regularly hold executive sessions without management and
      we do not expect them to do so in the
future.
  ·
              Nominating/Corporate
      Governance Committee.  The NYSErequires that a
      listed U.S. company have a nominating/corporate governance committee of
      independent directors and a committee charter specifying the purpose,
      duties and evaluation procedures of the committee. As permitted under
      Bermuda law and our bye-laws, we do not currently have a nominating or
      corporate governance committee.
  ·
              Audit
      Committee.  The NYSErequires, among
      other things, that a listed U.S. company have an audit committee with a
      minimum of three members. As permitted by Rule 10A-3 under the Securities
      Exchange Act of 1934, our audit committee consists of two independent
      members of our Board.
  ·
              Corporate Governance
      Guidelines.  The NYSErequires U.S.
      companies to adopt and disclose corporate governance guidelines. The
      guidelines must address, among other things: director qualification
      standards, director responsibilities, director access to management and
      independent advisers, director compensation, director orientation and
      continuing education, management succession and an annual performance
      evaluation. We are not required to adopt such guidelines under Bermuda law
      and we have not adopted such
guidelines.





74





PART
III





ITEM
17.     FINANCIAL STATEMENTS





Not
applicable.





ITEM
18.     FINANCIAL STATEMENTS





The
following financial statements listed below and set forth on pages F-1 through
F-33 are filed as part of this annual report:





Consolidated
      Financial Statements of Frontline Ltd.Index
      to Consolidated Financial Statements of Frontline Ltd.
              F-1Report
      of Independent Registered Public Accounting Firm
      – PricewaterhouseCoopers AS
              F-2Report
      of Independent Registered Public Accounting Firm – Grant Thornton
      LLP
              F-4Consolidated
      Statements of Operations for the years ended December 31, 2008, 2007 and
      2006
              F-5Consolidated
      Balance Sheets as of December 31, 2008 and 2007
              F-6Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007 and
      2006
              F-7Consolidated
      Statements of Changes in Stockholders' Equity for the years ended December
      31, 2008, 2007 and 2006
              F-8Notes
      to Consolidated Financial Statements
              F-9








75





ITEM
19.                      EXHIBITS





Number
              Description
      of Exhibit1.1
              Memorandum
      of Association of the Company, incorporated by reference to Exhibit 3.1 of
      the Company's Registration Statement on Form F-1, Registration No.
      33-70158 filed on October 12, 1993 (the "Original Registration
      Statement").1.2
              Amended
      and Restated Bye-Laws of the Company as adopted by shareholders on
      September 28, 2007 incorporated by reference to Exhibit 1.2 of the
      Company's annual Report on form 20-F for the fiscal year ended December
      31, 2007.2.1
              Form
      of Ordinary Share Certificate, incorporated by reference to Exhibit 4.1 of
      the Original Registration Statement.2.2
              Form
      of Deposit Agreement dated as of November 24, 1993, among Frontline Ltd.
      (F/K/A London & Overseas Freighters Limited), The Bank of New York as
      Depositary, and all Holders from time to time of American Depositary
      Receipts issued there under, including form of ADR, incorporated by
      reference to Exhibit 4.2 of the Original Registration
      Statement.2.3
              Form
      of Deposit Agreement dated as of November 24, 1993, as amended and
      restated as of May 29, 2001, among Frontline Ltd. (F/K/A London &
      Overseas Freighters Limited), The Bank of New York as Depositary, and all
      Holders from time to time of American Depositary Receipts issued there
      under, including form of ADR, incorporated by reference to Exhibit 2 of
      the Company's Annual Report on Form 20-F, filed on June 13, 2001 for the
      fiscal year ended December 31, 2000.2.4
              Amendment
      No. 1 to the Rights Agreement incorporated by reference to Exhibit 4.3 of
      the Amalgamation Registration Statement.2.5
              The
      Subregistrar Agreement related to the registration of certain securities
      issued by Frontline Ltd. in the Norwegian Registry of Securities between
      Frontline Ltd. and Christiania Bank og Kreditkasse ASA together with the
      Form of Warrant Certificate and Conditions attaching thereto, incorporated
      by reference to Exhibit 1.1 of the Company's Annual Report on Form 20-F
      for the fiscal year ended December 31, 1998.4.4
              Master
      Agreement, dated September 22, 1999, among Frontline AB and Frontline Ltd
      (collectively "FL"), Acol Tankers Ltd. ("Tankers"), ICB Shipping AB
      ("ICB"), and Ola Lorentzon (the "Agent"), incorporated by reference to
      Exhibit 3.1 of the Company's Annual Report on Form 20-F for the fiscal
      year ended December 31, 1999.4.6
              Charter
      Ancillary Agreement between Frontline Ltd and Ship Finance International
      Limited dated January 1, 2004 incorporated by reference to Exhibit 10.2 of
      the Company's Annual Report on Form 20-F for the fiscal year ended
      December 31, 2004.4.7
              Addendum
      to Charter Ancillary Agreement between Frontline Ltd and Ship Finance
      International Limited dated June 15, 2004 incorporated by reference to
      Exhibit 10.3 of the Company's Annual Report on Form 20-F for the fiscal
      year ended December 31, 2004.4.8
              Form
      of Performance Guarantee issued by the Company incorporated by reference
      to Exhibit 10.4 of the Company's Annual Report on Form 20-F for the fiscal
      year ended December 31, 2004.4.9
              Form
      of Time Charter incorporated by reference to Exhibit 10.5 of the Company's
      Annual Report on Form 20-F for the fiscal year ended December 31,
      2004.4.10
              Form
      of Vessel Management Agreements incorporated by reference to Exhibit 10.6
      of the Company's Annual Report on Form 20-F for the fiscal year ended
      December 31, 2004.4.11
              Administrative
      Services Agreement incorporated by reference to Exhibit 10.7 of the
      Company's Annual Report on Form 20-F for the fiscal year ended December
      31, 2004.4.12
              Contribution
      Agreement between Frontline Ltd and Golden Ocean Group Limited dated
      November 29, 2004 incorporated by reference to Exhibit 10.8 of the
      Company's Annual Report on Form 20-F for the fiscal year ended December
      31, 2004.








76







4.13
                Second
      Supplemental Purchase Agreement between Sealift Ltd., Southwest Tankers
      Inc., Front Target Inc., Front Traveller Inc., West Tankers Inc., Granite
      Shipping Ltd., Quadrant Marine Inc. and Frontline Ltd. dated April 27,
      2007 incorporated by reference to Exhibit 4.13 of the Company's Annual
      Report on Form 20-F for the fiscal year ended December
      31,  2007.4.14
                Shareholder's
      Agreement Relating to Sealift Ltd dated April 27, 2007 incorporated by
      reference to Exhibit 4.14 of the Company's Annual Report on Form 20-F for
      the fiscal year ended December 31, 2007.4.15
                Merger
      Agreement between Dockwise Limited and Sealift Ltd dated April 27, 2007
      incorporated by reference to Exhibit 4.15 of the Company's Annual Report
      on Form 20-F for the fiscal year ended December 31,
  2007.4.16
                Frontline
      Ltd Share Option Scheme dated November 16, 2006 incorporated by reference
      to Exhibit 4.16 of the Company's Annual Report on Form 20-F for the fiscal
      year ended December 31, 2007.4.17
                Management
      Agreement between Ship Finance International Limited and its subsidiaries
      and Frontline Management (Bermuda) Ltd, dated November 29, 2007. (Replaces
      Administrative Services Agreement dated December 31, 2004) incorporated by
      reference to Exhibit 4.17 of the Company's Annual Report on Form 20-F for
      the fiscal year ended December 31, 2007.4.18
                Addendum
      No. 3 to Charter Ancillary Agreement between Frontline Ltd, Ship Finance
      International Limited and Frontline Shipping Ltd, dated August 21, 2007
      incorporated by reference to Exhibit 4.18 of the Company's Annual Report
      on Form 20-F for the fiscal year ended December 31,
  2007.4.19
                Addendum
      No. 1 to Charter Ancillary Agreement between Frontline Ltd., Ship Finance
      International Limited and Frontline Shipping II Ltd., dated August 21,
      2007 incorporated by reference to Exhibit 4.19 of the Company's Annual
      Report on Form 20-F for the fiscal year ended December 31,
      2007.4.20
                Amended
      and Restated Gemini Suezmax Pool Agreement dated January 1,
      2009.8.1
                Subsidiaries
      of the Company.12.1
                Certification
      of the Principal Executive Officer pursuant to Rule 13a-14(a) and Rule
      15d-14(a) of the Securities Exchange Act, as amended.12.2
                Certification
      of the Principal Financial Officer pursuant to Rule 13a-14(a) and Rule
      15d-14(a) of the Securities Exchange Act, as amended.13.1
                Certification
      of the Principal Executive Officer pursuant to 18 USC Section 1350, as
      adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.13.2
                Certification
      of the Principal Financial Officer pursuant to 18 USC Section 1350, as
      adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.








77








SIGNATURES





Pursuant
to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all
of the requirements for filing on Form 20-F and has duly caused this annual
report to be signed on its behalf by the undersigned, thereunto duly
authorized.





Frontline
      Ltd(Registrant)Date:
      April 30, 2009
            
            By:
            /s/  Inger
      M. KlempName:
            Inger
      M. KlempTitle:
            Chief
      Financial Officer




















78








Index
to Consolidated Financial Statements of Frontline Ltd.




Report
      of Independent Registered Public Accounting Firm -PricewaterhouseCoopersAS
            F-2Report
      of Independent Registered Public Accounting Firm - Grant Thornton
      LLP
            F-4Consolidated
      Statements of Operations for the years ended December 31, 2008, 2007 and
      2006
            F-5Consolidated
      Balance Sheets as of December 31, 2008 and
    2007
            F-6Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007 and
      2006
            F-7Consolidated
      Statements of Changes in Stockholders' Equity for the years ended December
      31, 2008,2007
      and 2006
            F-8Notes
      to Consolidated Financial Statements
            F-9















































F-1














Report
of Independent Registered Public Accounting Firm






To
the Board of Directors and Shareholders of Frontline
Ltd




In
our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, of cash flows and the changes in stockholders' equity present
fairly, in all material respects, the financial position of Frontline Ltd and
its subsidiariesat
December 31, 2008 and December 31, 2007, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
2008in
conformity with accounting principles generally accepted in the United States of
America.  Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2008, based on criteria established inInternal
Control - Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for these financial statements, for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in Management's Report on Internal Control Over Financial Reporting
appearing under item 15(b) of Frontline Ltd's Annual Report on Form 20-F. Our
responsibility is to express opinions on these financial statements and on the
Company's internal control over financial reporting based on our audits, which
were integrated audits in 2008 and 2007.




We
did not audit the financial statements ofIndependent
Tankers Corporation, Buckingham Shipping PLC, Caernarfon Shipping PLC, Holyrood
Shipping PLC, Sandringham Shipping Plc, Golden State Petro (IOM I-A) PLC, Golden
State Petro (IOM I-B) PLC and, from April 1, 2006, CalPetro Tankers (Bahamas
III) Limited,
wholly owned subsidiaries, whose statements reflect total assets of $808.1
million as of December 31, 2007 and total revenues of $60.1 million and $58.1
million for each of the two years in the period ended December 31,
2007.  The financial statements ofIndependent
Tankers Corporation, Buckingham Shipping PLC, Caernarfon Shipping PLC, Holyrood
Shipping PLC, Sandringham Shipping Plc, Golden State Petro (IOM I-A) PLC, Golden
State Petro (IOM I-B) PLC and, from April 1, 2006, CalPetro Tankers (Bahamas
III) Limited,were
audited by other auditors whose report thereon has been furnished to us, and our
opinion on the financial statements expressed herein, insofar as it relates to
the amounts included forIndependent
Tankers Corporation, Buckingham Shipping PLC, Caernarfon Shipping PLC, Holyrood
Shipping PLC, Sandringham Shipping Plc, Golden State Petro (IOM I-A) PLC, Golden
State Petro (IOM I-B) PLC and, from April 1, 2006, CalPetro Tankers (Bahamas
III) Limited,
is based solely on the report of the other auditors.




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 audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects.  Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation.  Our audit of internal control over
financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk.  Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinions.




A
company's internal control over financial reporting is a process designed 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
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) 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 are being made only in accordance with authorizations of
management and directors of the company; and (iii) 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.






F-2








Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may
deteriorate.






/s/PricewaterhouseCoopersAS




PricewaterhouseCoopersAS


Oslo,Norway


April
30,
2009








F-3





Report
of Independent Registered Public Accounting Firm




To
the Board of Directors and Stockholders of


Independent
Tankers Corporation








We have
audited the combined balance sheet of Independent Tankers Corporation (a Cayman
Islands Company and wholly owned subsidiary of Frontline Ltd.), and Buckingham
Shipping PLC, Caernarforn Shipping PLC, Holyrood Shipping PLC, Sandringham
Shipping PLC, Golden State Petro (IOM I-A) PLC, Golden State Petro (IOM I-B) PLC
and CalPetro Tankers (Bahamas III) Limited (the "Affiliates"), (collectively the
"Company") as of December 31, 2007 and the related combined statements of
operations, cash flows and changes in stockholders' equity for the years ended
December 31, 2007 and 2006 (not presented separately herein).  These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting.  Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, 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, the combined financial statements referred to above present fairly, in
all material respects, the financial position of Independent Tankers Corporation
and Affiliates as of December 31, 2007 and the results of their operations and
their cash flows for the years ended December 31, 2007 and 2006, in conformity
with accounting principles generally accepted in the United States of
America.








/s/ Grant
Thornton LLP




New York,
New York


April 9,
2008





F-4





Frontline
Ltd.


Consolidated Statements of Operations
for the years endedDecember 31, 2008, 2007 and 2006


(in
thousands of $, except per share data)


2008
                                                  
                                                  
                                                  2007
                                                  
                                                  
                                                  2006Operating
      revenuesTime
      charter revenues
                                                  
                                                  
                                                  602,980
                                                  
                                                  
                                                  
                                                  432,813
                                                  
                                                  
                                                  
                                                  352,575Bareboat
      charter revenues
                                                  
                                                  
                                                  57,152
                                                  
                                                  
                                                  
                                                  57,052
                                                  
                                                  
                                                  
                                                  85,969Voyage
      charter revenues
                                                  
                                                  
                                                  1,425,968
                                                  
                                                  
                                                  
                                                  801,546
                                                  
                                                  
                                                  
                                                  1,114,531Other
      income
                                                  
                                                  
                                                  17,918
                                                  
                                                  
                                                  
                                                  8,516
                                                  
                                                  
                                                  
                                                  5,294Total operating
      revenues
                                                  
                                                  
                                                  2,104,018
                                                  
                                                  
                                                  
                                                  1,299,927
                                                  
                                                  
                                                  
                                                  1,558,369Gain on sale of
      assets
                                                  
                                                  
                                                  142,293
                                                  
                                                  
                                                  
                                                  118,168
                                                  
                                                  
                                                  
                                                  95,655Operating
      expensesVoyage
      expenses and commission
                                                  
                                                  
                                                  592,188
                                                  
                                                  
                                                  
                                                  352,451
                                                  
                                                  
                                                  
                                                  399,046Ship
      operating expenses
                                                  
                                                  
                                                  213,766
                                                  
                                                  
                                                  
                                                  196,258
                                                  
                                                  
                                                  
                                                  194,635Profit
      share expense
                                                  
                                                  
                                                  110,962
                                                  
                                                  
                                                  
                                                  37,279
                                                  
                                                  
                                                  
                                                  -Charterhire
      expenses
                                                  
                                                  
                                                  220,170
                                                  
                                                  
                                                  
                                                  56,868
                                                  
                                                  
                                                  
                                                  24,923Administrative
      expenses
                                                  
                                                  
                                                  35,226
                                                  
                                                  
                                                  
                                                  36,410
                                                  
                                                  
                                                  
                                                  32,143Depreciation
                                                  
                                                  
                                                  223,519
                                                  
                                                  
                                                  
                                                  219,638
                                                  
                                                  
                                                  
                                                  199,876Total operating
      expenses
                                                  
                                                  
                                                  1,395,831
                                                  
                                                  
                                                  
                                                  898,904
                                                  
                                                  
                                                  
                                                  850,623Net operating
      income
                                                  
                                                  
                                                  850,480
                                                  
                                                  
                                                  
                                                  519,191
                                                  
                                                  
                                                  
                                                  803,401Other income
      (expenses)Interest
      income
                                                  
                                                  
                                                  41,204
                                                  
                                                  
                                                  
                                                  54,316
                                                  
                                                  
                                                  
                                                  47,612Interest
      expense
                                                  
                                                  
                                                  (183,925
                                                  )
                                                  
                                                  
                                                  (204,535
                                                  )
                                                  
                                                  
                                                  (200,396
                                                  )Equity
      (losses) earnings of unconsolidated subsidiaries and associated
      companies
                                                  
                                                  
                                                  (901
                                                  )
                                                  
                                                  
                                                  573
                                                  
                                                  
                                                  
                                                  1,118Foreign
      currency exchange gain
                                                  
                                                  
                                                  1,565
                                                  
                                                  
                                                  
                                                  3,312
                                                  
                                                  
                                                  
                                                  1,056Mark
      to market of derivatives
                                                  
                                                  
                                                  (17,399
                                                  )
                                                  
                                                  
                                                  3,530
                                                  
                                                  
                                                  
                                                  (10,897
                                                  )Impairment
      of securities
                                                  
                                                  
                                                  (25,134
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -(Loss)
      gain on sale of securities
                                                  
                                                  
                                                  (221
                                                  )
                                                  
                                                  
                                                  122,120
                                                  
                                                  
                                                  
                                                  9,782Dividends
      received
                                                  
                                                  
                                                  1,552
                                                  
                                                  
                                                  
                                                  533
                                                  
                                                  
                                                  
                                                  13,317Other
      non-operating items, net
                                                  
                                                  
                                                  34,043
                                                  
                                                  
                                                  
                                                  4,951
                                                  
                                                  
                                                  
                                                  (3,663
                                                  )Net other
      expenses
                                                  
                                                  
                                                  (149,216
                                                  )
                                                  
                                                  
                                                  (15,200
                                                  )
                                                  
                                                  
                                                  (142,071
                                                  )Net income from continuing
      operations before income taxes and minority
interest
                                                  
                                                  
                                                  701,264
                                                  
                                                  
                                                  
                                                  503,991
                                                  
                                                  
                                                  
                                                  661,330Minority
      interest
                                                  
                                                  
                                                  (2,184
                                                  )
                                                  
                                                  
                                                  (22,162
                                                  )
                                                  
                                                  
                                                  (158,682
                                                  )Income tax
      expense
                                                  
                                                  
                                                  (310
                                                  )
                                                  
                                                  
                                                  (419
                                                  )
                                                  
                                                  
                                                  (162
                                                  )Gain on issuance of shares by
      subsidiaries and associates
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  83,566
                                                  
                                                  
                                                  
                                                  -Net income from continuing
      operations
                                                  
                                                  
                                                  698,770
                                                  
                                                  
                                                  
                                                  564,976
                                                  
                                                  
                                                  
                                                  502,486Discontinued
      operations
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  5,442
                                                  
                                                  
                                                  
                                                  13,514Net income
                                                  
                                                  
                                                  698,770
                                                  
                                                  
                                                  
                                                  570,418
                                                  
                                                  
                                                  
                                                  516,000Earnings per
      share:Basic earnings per share from
      continuing operations
                                                  
                                                  $
                                                  9.15
                                                  
                                                  
                                                  $
                                                  7.55
                                                  
                                                  
                                                  $
                                                  6.72Diluted
      earnings per share from continuing operations
                                                  
                                                  $
                                                  9.14
                                                  
                                                  
                                                  $
                                                  7.55
                                                  
                                                  
                                                  $
                                                  6.72Basic
      and diluted earnings per share from discontinued
operations
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  0.07
                                                  
                                                  
                                                  $
                                                  0.18Basic
      earnings per share
                                                  
                                                  $
                                                  9.15
                                                  
                                                  
                                                  $
                                                  7.62
                                                  
                                                  
                                                  $
                                                  6.90Diluted
      earnings per share
                                                  
                                                  $
                                                  9.14
                                                  
                                                  
                                                  $
                                                  7.62
                                                  
                                                  
                                                  $
                                                  6.90Weighted
      average shares outstanding, basic
                                                  
                                                  
                                                  76,353
                                                  
                                                  
                                                  
                                                  74,825
                                                  
                                                  
                                                  
                                                  74,825Weighted
      average shares outstanding, diluted
                                                  
                                                  
                                                  76,442
                                                  
                                                  
                                                  
                                                  74,867
                                                  
                                                  
                                                  
                                                  74,825Cash
      dividends declared per share
                                                  
                                                  $
                                                  8.25
                                                  
                                                  
                                                  $
                                                  8.30
                                                  
                                                  
                                                  $
                                                  7.00





See
accompanying Notes that are an integral part of these Consolidated Financial
Statements.





F-5





Frontline Ltd.


Consolidated Balance Sheets as of
December 31, 2008 and 2007


(in thousands of $)


2008
                                      
                                      
                                      2007ASSETSCurrent
      assetsCash
      and cash equivalents
                                      
                                      
                                      190,819
                                      
                                      
                                      
                                      168,432Restricted
      cash
                                      
                                      
                                      370,078
                                      
                                      
                                      
                                      308,054Marketable
      securities
                                      
                                      
                                      60,138
                                      
                                      
                                      
                                      15,684Trade
      accounts receivable, net
                                      
                                      
                                      60,287
                                      
                                      
                                      
                                      59,523Related
      party receivables
                                      
                                      
                                      11,338
                                      
                                      
                                      
                                      14,804Other
      receivables
                                      
                                      
                                      17,498
                                      
                                      
                                      
                                      28,564Inventories
                                      
                                      
                                      42,223
                                      
                                      
                                      
                                      55,435Voyages
      in progress
                                      
                                      
                                      58,032
                                      
                                      
                                      
                                      60,479Prepaid
      expenses and accrued income
                                      
                                      
                                      10,832
                                      
                                      
                                      
                                      8,424Other
      current assets
                                      
                                      
                                      117
                                      
                                      
                                      
                                      64Total
      current assets
                                      
                                      
                                      821,362
                                      
                                      
                                      
                                      719,463Long-term
      assetsRestricted
      cash
                                      
                                      
                                      184,673
                                      
                                      
                                      
                                      343,323Newbuildings
                                      
                                      
                                      454,227
                                      
                                      
                                      
                                      160,298Vessels
      and equipment, net
                                      
                                      
                                      438,161
                                      
                                      
                                      
                                      208,516Vessels
      and equipment under capital lease, net
                                      
                                      
                                      2,100,717
                                      
                                      
                                      
                                      2,324,789Investment
      in unconsolidated subsidiaries and associated companies
                                      
                                      
                                      4,467
                                      
                                      
                                      
                                      5,633Deferred
      charges
                                      
                                      
                                      4,081
                                      
                                      
                                      
                                      49Long-term
      investments
                                      
                                      
                                      20,020
                                      
                                      
                                      
                                      -Other
      long-term assets
                                      
                                      
                                      20
                                      
                                      
                                      
                                      20Total
      assets
                                      
                                      
                                      4,027,728
                                      
                                      
                                      
                                      3,762,091LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesShort-term
      debt and current portion of long-term debt
                                      
                                      
                                      293,471
                                      
                                      
                                      
                                      96,811Current
      portion of obligations under capital leases
                                      
                                      
                                      243,293
                                      
                                      
                                      
                                      179,604Related
      party payables
                                      
                                      
                                      47,422
                                      
                                      
                                      
                                      50,988Trade
      accounts payable
                                      
                                      
                                      27,034
                                      
                                      
                                      
                                      16,043Accrued
      expenses
                                      
                                      
                                      71,670
                                      
                                      
                                      
                                      101,128Deferred
      charter revenue
                                      
                                      
                                      16,130
                                      
                                      
                                      
                                      13,342Other
      current liabilities
                                      
                                      
                                      11,910
                                      
                                      
                                      
                                      132,310Total
      current liabilities
                                      
                                      
                                      710,930
                                      
                                      
                                      
                                      590,226Long-term
      liabilitiesLong-term
      debt
                                      
                                      
                                      614,676
                                      
                                      
                                      
                                      376,723Obligations
      under capital leases
                                      
                                      
                                      1,969,919
                                      
                                      
                                      
                                      2,318,794Deferred
      gains on sales of vessels
                                      
                                      
                                      17,954
                                      
                                      
                                      
                                      19,810Other
      long-term liabilities
                                      
                                      
                                      5,395
                                      
                                      
                                      
                                      10,569Total
      liabilities
                                      
                                      
                                      3,318,874
                                      
                                      
                                      
                                      3,316,122Commitments
      and contingenciesMinority
      interest
                                      
                                      
                                      6,637
                                      
                                      
                                      
                                      -Stockholders'
      equityShare
      capital (77,858,502 (2007:
      74,825,169)shares outstanding, par value $2.50)
                                      
                                      
                                      194,646
                                      
                                      
                                      
                                      187,063Additional
      paid in capital
                                      
                                      
                                      219,036
                                      
                                      
                                      
                                      14,242Contributed
      surplus
                                      
                                      
                                      248,360
                                      
                                      
                                      
                                      248,360Accumulated
      other comprehensive loss
                                      
                                      
                                      (5,227
                                      )
                                      
                                      
                                      (3,696
                                      )Retained
      earnings
                                      
                                      
                                      45,402
                                      
                                      
                                      
                                      -Total
      stockholders' equity
                                      
                                      
                                      702,217
                                      
                                      
                                      
                                      445,969Total
      liabilities and stockholders' equity
                                      
                                      
                                      4,027,728
                                      
                                      
                                      
                                      3,762,091





See accompanying Notes that are an
integral part of these Consolidated Financial Statements.











F-6





Frontline Ltd.


Consolidated Statements of Cash Flows
for the years ended December 31, 2008, 2007 and 2006


(in thousands of $)


2008
                                                                                                            
                                                                                                            
                                                                                                            2007
                                                                                                            
                                                                                                            
                                                                                                            2006Net
      income
                                                                                                            
                                                                                                            
                                                                                                            698,770
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            570,418
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            516,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                                                                                                            
                                                                                                            
                                                                                                            223,519
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            221,246
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            203,849Amortization
      of deferred charges
                                                                                                            
                                                                                                            
                                                                                                            550
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            810
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            3,346Gain
      from sale of assets (including securities)
                                                                                                            
                                                                                                            
                                                                                                            (160,031
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (323,860
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (105,439
                                                                                                            )Equity
      (losses) earnings of unconsolidated subsidiaries and associated
      companies
                                                                                                            
                                                                                                            
                                                                                                            901
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (573
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (1,118
                                                                                                            )Unrealized
      foreign exchange (gain) loss
                                                                                                            
                                                                                                            
                                                                                                            (2,172
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            689
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            75Adjustment
      of derivatives and securities to market value
                                                                                                            
                                                                                                            
                                                                                                            41,379
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (3,541
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            9,348Minority
      interest
                                                                                                            
                                                                                                            
                                                                                                            2,184
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            22,162
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            158,682Other,
      net
                                                                                                            
                                                                                                            
                                                                                                            (17,325
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (12,324
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (5,326
                                                                                                            )Changes
      in operating assets and liabilities, net of effect of
      acquisitions:Trade
      accounts receivable
                                                                                                            
                                                                                                            
                                                                                                            (764
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (1,208
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            12,991Other
      receivables
                                                                                                            
                                                                                                            
                                                                                                            11,746
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            22,495
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (13,464
                                                                                                            )Inventories
                                                                                                            
                                                                                                            
                                                                                                            13,212
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (11,772
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            1,193Voyages
      in progress
                                                                                                            
                                                                                                            
                                                                                                            2,447
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (17,068
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            51,067Prepaid
      expenses and accrued income
                                                                                                            
                                                                                                            
                                                                                                            (1,683
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            3,341
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (4,231
                                                                                                            )Trade
      accounts payable
                                                                                                            
                                                                                                            
                                                                                                            10,990
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            47,830
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            8,191Accrued
      expenses
                                                                                                            
                                                                                                            
                                                                                                            (12,852
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            17,241
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            4,777Deferred
      charter revenue
                                                                                                            
                                                                                                            
                                                                                                            3,432
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            2,441
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            8,179Other,
      net
                                                                                                            
                                                                                                            
                                                                                                            (7,048
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            7,483
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (16,564
                                                                                                            )Net
      cash provided by operating activities
                                                                                                            
                                                                                                            
                                                                                                            807,255
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            545,810
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            831,556Investing
      activities(Placement)
      maturity of restricted cash
                                                                                                            
                                                                                                            
                                                                                                            (2,579
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            12,674
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            13,730Additions
      to newbuildings, vessels and equipment
                                                                                                            
                                                                                                            
                                                                                                            (637,895
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (337,774
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (569,819
                                                                                                            )Proceeds
      from sale of vessels and equipment
                                                                                                            
                                                                                                            
                                                                                                            128,264
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            503,407
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            275,190Insurance
      proceeds from loss of vessels and equipment
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            12,173Investments
      in associated companies
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (60,510
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (3,431
                                                                                                            )Dividends
      received from associated companies
                                                                                                            
                                                                                                            
                                                                                                            265
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            255
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            1,318Purchase
      of minority interest
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (7,198
                                                                                                            )Proceeds
      from sale of investments in associated companies
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            116,631
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            -Receipts
      from finance leases and loans receivable
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            5,564
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            12,562Purchases
      of other assets
                                                                                                            
                                                                                                            
                                                                                                            (109,360
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (43,375
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (71,067
                                                                                                            )Proceeds
      from sale of other assets
                                                                                                            
                                                                                                            
                                                                                                            3,286
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            162,392
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            154,409Proceeds
      from issuance of shares in subsidiary
                                                                                                            
                                                                                                            
                                                                                                            10,941
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            7,800Proceeds
      from sale of newbuilding contracts
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            9,769Sale
      of subsidiary, net of cash sold
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            38,308
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            -Cash
      effect of deconsolidation of subsidiary
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (146,435
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            -Net
      cash (used in) provided by investing activities
                                                                                                            
                                                                                                            
                                                                                                            (607,078
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            251,137
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (164,564
                                                                                                            )Financing
      activitiesProceeds
      from long-term debt
                                                                                                            
                                                                                                            
                                                                                                            520,178
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            127,188
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            539,748Repayments
      of long-term debt
                                                                                                            
                                                                                                            
                                                                                                            (87,370
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (165,108
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (420,925
                                                                                                            )Payment
      of obligations under capital leases
                                                                                                            
                                                                                                            
                                                                                                            (171,900
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (130,362
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (24,706
                                                                                                            )Debt
      fees paid
                                                                                                            
                                                                                                            
                                                                                                            (4,928
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (1,406
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (2,230
                                                                                                            )Net
      proceeds from share issuances
                                                                                                            
                                                                                                            
                                                                                                            208,123
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            -Cash
      dividends paid including amounts paid to minority interest
                                                                                                            
                                                                                                            
                                                                                                            (641,893
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (656,008
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (654,480
                                                                                                            )Net
      cash used in financing activities
                                                                                                            
                                                                                                            
                                                                                                            (177,790
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (825,696
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (562,593
                                                                                                            )Net
      increase (decrease)  in cash and cash
equivalents
                                                                                                            
                                                                                                            
                                                                                                            22,387
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (28,749
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            104,399Cash
      and cash equivalents at beginning of year
                                                                                                            
                                                                                                            
                                                                                                            168,432
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            197,181
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            92,782Cash
      and cash equivalents at end of year
                                                                                                            
                                                                                                            
                                                                                                            190,819
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            168,432
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            197,181Supplemental
      disclosure of cash flow information:Interest
      paid, net of interest capitalized
                                                                                                            
                                                                                                            
                                                                                                            202,840
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            206,495
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            207,610Income
      taxes paid
                                                                                                            
                                                                                                            
                                                                                                            372
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            215
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            62





See
accompanying Notes that are an integral part of these Consolidated Financial
Statements.





F-7





Frontline Ltd.


Consolidated Statements of Changes in
Stockholders' Equity for the years endedDecember 31, 2008, 2007 and
2006


(in thousands of $, except number of
shares)





2008
                                                                  
                                                                  
                                                                  2007
                                                                  
                                                                  
                                                                  2006NUMBER
      OF SHARES OUTSTANDINGBalance
      at beginning of year
                                                                  
                                                                  
                                                                  74,825,169
                                                                  
                                                                  
                                                                  
                                                                  74,825,169
                                                                  
                                                                  
                                                                  
                                                                  74,825,169Shares
      issued
                                                                  
                                                                  
                                                                  3,033,333
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -Balance
      end of year
                                                                  
                                                                  
                                                                  77,858,502
                                                                  
                                                                  
                                                                  
                                                                  74,825,169
                                                                  
                                                                  
                                                                  
                                                                  74,825,169SHARE
      CAPITALBalance
      at beginning of year
                                                                  
                                                                  
                                                                  187,063
                                                                  
                                                                  
                                                                  
                                                                  187,063
                                                                  
                                                                  
                                                                  
                                                                  187,063Shares
      issued
                                                                  
                                                                  
                                                                  7,583
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -Balance
      at end of year
                                                                  
                                                                  
                                                                  194,646
                                                                  
                                                                  
                                                                  
                                                                  187,063
                                                                  
                                                                  
                                                                  
                                                                  187,063ADDITIONAL
      PAID IN CAPITALBalance
      at beginning of year
                                                                  
                                                                  
                                                                  14,242
                                                                  
                                                                  
                                                                  
                                                                  494,067
                                                                  
                                                                  
                                                                  
                                                                  494,067Shares
      issued
                                                                  
                                                                  
                                                                  200,539
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -Stock
      option expense
                                                                  
                                                                  
                                                                  4,255
                                                                  
                                                                  
                                                                  
                                                                  962
                                                                  
                                                                  
                                                                  
                                                                  -Transfer
      to contributed surplus
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  (480,787
                                                                  )
                                                                  
                                                                  
                                                                  -Balance
      at end of year
                                                                  
                                                                  
                                                                  219,036
                                                                  
                                                                  
                                                                  
                                                                  14,242
                                                                  
                                                                  
                                                                  
                                                                  494,067CONTRIBUTED
      SURPLUSBalance
      at beginning of year
                                                                  
                                                                  
                                                                  248,360
                                                                  
                                                                  
                                                                  
                                                                  (8,145
                                                                  )
                                                                  
                                                                  
                                                                  40,720Cash
      dividends
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  (212,896
                                                                  )
                                                                  
                                                                  
                                                                  (35,634
                                                                  )Minority
      interest in deemed equity contributions and deemed
    dividends
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  (11,386
                                                                  )
                                                                  
                                                                  
                                                                  (13,231
                                                                  )Transfer
      from additional paid in capital
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  480,787
                                                                  
                                                                  
                                                                  
                                                                  -Balance
      at end of year
                                                                  
                                                                  
                                                                  248,360
                                                                  
                                                                  
                                                                  
                                                                  248,360
                                                                  
                                                                  
                                                                  
                                                                  (8,145
                                                                  )ACCUMULATED
      OTHER COMPREHENSIVE LOSSBalance
      at beginning of year
                                                                  
                                                                  
                                                                  (3,696
                                                                  )
                                                                  
                                                                  
                                                                  (4,425
                                                                  )
                                                                  
                                                                  
                                                                  (6,684
                                                                  )Other
      comprehensive (loss) income
                                                                  
                                                                  
                                                                  (1,531
                                                                  )
                                                                  
                                                                  
                                                                  729
                                                                  
                                                                  
                                                                  
                                                                  2,259Balance
      at end of year
                                                                  
                                                                  
                                                                  (5,227
                                                                  )
                                                                  
                                                                  
                                                                  (3,696
                                                                  )
                                                                  
                                                                  
                                                                  (4,425
                                                                  )RETAINED
      EARNINGSBalance
      at beginning of year
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -Net
      income
                                                                  
                                                                  
                                                                  698,770
                                                                  
                                                                  
                                                                  
                                                                  570,418
                                                                  
                                                                  
                                                                  
                                                                  516,000Cash
      dividends
                                                                  
                                                                  
                                                                  (641,893
                                                                  )
                                                                  
                                                                  
                                                                  (408,196
                                                                  )
                                                                  
                                                                  
                                                                  (488,158
                                                                  )Stock
      dividends
                                                                  
                                                                  
                                                                  (11,475
                                                                  )
                                                                  
                                                                  
                                                                  (162,222
                                                                  )
                                                                  
                                                                  
                                                                  (27,842
                                                                  )Balance
      at end of year
                                                                  
                                                                  
                                                                  45,402
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -TOTAL
      STOCKHOLDERS' EQUITY
                                                                  
                                                                  
                                                                  702,217
                                                                  
                                                                  
                                                                  
                                                                  445,969
                                                                  
                                                                  
                                                                  
                                                                  668,560COMPREHENSIVE
      INCOMENet
      income
                                                                  
                                                                  
                                                                  698,770
                                                                  
                                                                  
                                                                  
                                                                  570,418
                                                                  
                                                                  
                                                                  
                                                                  516,000Unrealized
      (losses) gains from marketable securities
                                                                  
                                                                  
                                                                  (219
                                                                  )
                                                                  
                                                                  
                                                                  (595
                                                                  )
                                                                  
                                                                  
                                                                  1,721Foreign
      currency translation
                                                                  
                                                                  
                                                                  (1,312
                                                                  )
                                                                  
                                                                  
                                                                  1,324
                                                                  
                                                                  
                                                                  
                                                                  538Other
      comprehensive (loss) income
                                                                  
                                                                  
                                                                  (1,531
                                                                  )
                                                                  
                                                                  
                                                                  729
                                                                  
                                                                  
                                                                  
                                                                  2,259Comprehensive
      income
                                                                  
                                                                  
                                                                  697,239
                                                                  
                                                                  
                                                                  
                                                                  571,147
                                                                  
                                                                  
                                                                  
                                                                  518,259





See
accompanying Notes that are an integral part of these Consolidated Financial
Statements.





F-8




Notes
to the Consolidated Financial Statements




1.
            GENERAL




Frontline
Ltd. (the "Company" or "Frontline") is aBermudabased
shipping company engaged primarily in the ownership and operation of oil
tankers, including oil/bulk/ore ("OBO") carriers. The Company operates tankers
of two sizes: very large crude carriers ("VLCCs") which are between 200,000 and
320,000 deadweight tons ("dwt"), and Suezmaxes, which are vessels between
120,000 and 170,000 dwt. The Company operates primarily through subsidiaries and
partnerships located in Bermuda,Isle
of Man,Liberia,Norway,Singapore,
Cayman Islands, theUnited
Kingdomand
theBahamas.
The Company is also involved in the charter, purchase and sale of
vessels.




The
Company's ordinary shares are listed on the New York Stock Exchange, the Oslo
Stock Exchange and the London Stock Exchange.




In
October 2003, the Company established Ship Finance International Limited ("Ship
Finance") inBermuda.  Through
transactions executed in January 2004, the Company transferred to Ship Finance
ownership of 46 vessel-owning entities each owning one vessel and its
corresponding financing, and one entity owning an option to acquire a VLCC. The
Company then leased these vessels back on long-term
charters.




Since
May 2004, the Company has distributed its holding of Ship Finance to its
shareholders and in March 2007, the Company distributed the majority of its
remaining 11.1% shareholding to its shareholders. The Company still holds 73,383
shares in Ship Finance which represents 0.01% of Ship Finance's total shares.
Prior to the final distribution of shares in March 2007, the Company
consolidated Ship Finance under the provisions of FASB Interpretation No. 46
(revised December 2003)Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51("FIN
46(R)"). Subsequent to the distribution in March 2007, the Company no longer
consolidates Ship Finance.




In
January 2007, the Company's wholly owned subsidiary Sealift Ltd ("Sealift")
completed a private placement raising $180.0 million in equity. The Company
participated by investing $60.0 million and as a result of the private
placement, its shareholding was reduced to 33.3%. The Company consequently began
accounting for its investment under the equity method. Sealift used the proceeds
from the private placement along with the proceeds from a $110.0 million bond
facility, $120.0 million of a $240.0 million term loan facility and short-term
sellers' credit of $80.0 million from the Company, to acquire from the Company
four single hull vessels to be converted to heavy lift vessels and two Suezmax
vessels. The private placement discussed above was conditional on the
acquisition of the assets described above being effective and the sellers credit
was payable to the Company upon the completion and delivery of each of the last
two converted vessels with $40.0 million allocated to each vessel. In May 2007,
Sealift acquired Dockwise Ltd ("Dockwise") and immediately completed another
private placement for 39.8 million shares, of which the Company subscribed for
five million shares. The Company's investment was reduced to 17.1% as a result
of these transactions. In July 2007, Sealift changed its name to Dockwise. In
October 2007, the Company sold its entire shareholding in
Dockwise.




In
February 2007, the Company's wholly owned subsidiary Sea Production Ltd ("Sea
Production") completed a private placement raising $180.0 million in equity and
simultaneously acquired the Company's floating production activities. The
Company subscribed for 28.3% of the shares and consequently accounted for its
investment under the equity method.  In June 2007, the Company
disposed of its entire shareholding in Sea Production.




In
February 2008, Frontline spun off 17.53% of its holding in its subsidiary
Independent Tankers Corporation Limited ("ITCL") to Frontline shareholders in
conjunction with the listing of ITCL on the Norwegian over-the-counter ("OTC")
market. Frontline has recorded a gain of $18.0 million in the first quarter of
2008 as a result of this spin off. This is reported in other
non-operating  items.






2.
            ACCOUNTING
      POLICIES




Basis
      of accounting


The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in theUnited
States.
The consolidated financial statements include the assets and liabilities of the
Company and its subsidiaries and certain variable interest entities in which the
Company is deemed to be the primary beneficiary.  All intercompany
balances and transactions have been eliminated on
consolidation.






F-9








A
variable interest entity ("VIE") is a legal entity where either (a) equity
interest holders as a group lack the characteristics of a controlling financial
interest, including: decision making ability and an interest in the entity's
residual risks and rewards or (b) the equity holders have not provided
sufficient equity investment to permit the entity to finance its activities
without additional subordinated financial support, or  where (c) the
voting rights of some investors are not proportional to their obligations to
absorb the expected losses of the entity, their rights to receive the expected
residual returns of the entity, or both and substantially all of the entity's
activities either involve or are conducted on behalf of an investor that has
disproportionately few voting rights. FIN 46(R) requires a variable interest
entity to be consolidated if any of its interest holders are entitled to a
majority of the entity's residual return or are exposed to a majority of its
expected losses.




The
Company accounts for all business combinations by the purchase method in
accordance with Financial Accounting Standard No. 141, Business
Combinations. The Company assesses whether it has purchased a business or
a group of assets, in accordance with Emerging Issues Task Force ("EITF") 98-3:
Determining
Whether a Transaction Is an Exchange of Similar Productive Assets or a Business
Combination.The Company ascertains the cost of the asset (or net asset)
group and allocates that cost to the individual assets (or individual assets and
liabilities) that make up the group in accordance with this
guidance.  A portion of the cost of the group of assets is then
assigned to each individual asset (or assets) acquired on the basis of its fair
value.




Investments
in companies over which the Company exercises significant influence but does not
control are accounted for using the equity method. The Company records its
investments in equity-method investees in the consolidated balance sheets as
"Investment in unconsolidated subsidiaries and associated companies" and its
share of the investees' earnings or losses in the consolidated statements of
operations as "Share in results of unconsolidated subsidiaries and associated
companies". The excess, if any, of purchase price over book value of the
Company's investments in equity method investees is included in the accompanying
consolidated balance sheets in "Investment in unconsolidated subsidiaries and
associated companies".




Investments
in which the Company has a majority shareholding but which it does not control,
due to the participating rights of minority shareholders, are accounted for
using the equity method.




The
preparation of financial statements in accordance with generally accepted
accounting principles requires that management make estimates and assumptions
affecting the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.




Cash
      and cash equivalents


For
the purposes of the consolidated statements of cash flows, all demand and time
deposits and highly liquid, low risk investments with original maturities of
three months or less are considered equivalent to
cash.




Restricted
      cash


Restricted
cash consists of bank deposits which may only be used to settle certain
pre-arranged loan or lease payments or minimum deposits which must be maintained
in accordance with contractual arrangements.  Restricted cash is
classified as long-term when it issegregated for the liquidationof long-term obligations.




Marketable
      securities


Marketable
equity securities held by the Company are considered to be available-for-sale
securities and as such are carried at fair value. Any resulting
unrealized
gains and losses, net of deferred taxes if any, are recorded as a separate
component of other comprehensive income in stockholders' equity unless the
securities are considered to be other than temporarily impaired, in which case
unrealized
losses are recorded in the income statement.




Long-term
      investments


Long-term
investments consist of unlisted securities for which fair values are not readily
determinable and for which the investments are not equity method investees.
Long-term investments are recorded at cost less
impairment.




Inventories


Inventories
comprise principally of fuel and lubricating oils and are stated at the lower of
cost and market value. Cost is determined on a first-in, first-out
basis.




Vessels
and equipment


The
cost of the vessels less estimated residual value is depreciated on a
straight-line basis over the vessels' estimated remaining economic useful lives.
The estimated economic useful life of the Company's double hull vessels is 25
years and for single hull vessels is either 25 years or the vessel's anniversary
date in 2015, whichever comes first. Other equipment is depreciated over its
estimated remaining useful life, which approximates five
years.






F-10





Vessels
and equipment under capital lease


The
Company charters in certain vessels and equipment under leasing agreements.
Leases of vessels and equipment, where the Company has substantially all the
risks and rewards of ownership, are classified as capital leases. Capital leases
are capitalized at the inception of the lease at the lower of the fair value of
the leased assets and the present value of the minimum lease
payments.




Each
lease payment is allocated between liability and finance charges to achieve a
constant rate on the finance balance outstanding. The interest element of the
finance cost is charged to the income statement over the lease
period.




Depreciation
of vessels and equipment under capital lease is included within "depreciation
and amortization
expense" in the consolidated statement of operations. Vessels and equipment
under capital lease are depreciated on a straight-line basis over the vessels'
remaining economic useful lives or on a straight-line basis over the term of the
lease. The method applied is determined by the criteria by which the lease has
been assessed to be a capital lease.




Newbuildings


The
carrying value of the vessels under construction ("Newbuildings") represents the
accumulated costs to the balance sheet date which the Company has had to pay by
way of purchase installments
and other capital expenditures together with capitalized
interest and associated finance costs. No charge for depreciation is made until
the vessel is available for use.




Interest
expense


Interest
costs are expensed as incurred except for interest costs that are capitalized.
Interest is capitalized on all qualifying assets that require a period of time
to get them ready for their intended use. Qualifying assets consist of vessels
constructed for the Company's own use.




Impairment
of long-lived assets


The
carrying value of long-lived assets that are held and used by the Company are
reviewed whenever events or changes in circumstances indicate that the carrying
amount of an asset may no longer be recoverable. The Company assesses
recoverability of the carrying value of the asset by estimating the future net
cash flows expected to result from the asset, including eventual disposal. If
the future net undiscounted cash flows are less than the carrying value of the
asset, an impairment loss is recorded equal to the difference between the
asset's carrying value and fair value.  In addition, long-lived assets to
be disposed of are reported at the lower of carrying amount and fair value less
estimated costs to sell.




Deferred
charges


Loan
costs, including debt arrangement fees, are capitalized
and amortized
on a straight-line basis over the term of the relevant loan. The straight line
basis of amortization
approximates the effective interest method in the Company's consolidated
statement of operations. Amortization
of loan costs is included in interest expense.  If a loan is repaid
early, any unamortized
portion of the related deferred charges is charged against income in the period
in which the loan is repaid.




Trade
accounts receivable


Trade
and other receivables are presented net of allowances for doubtful balances. If
amounts become uncollectible, they are charged against income when that
determination is made.




Revenue
and expense recognition


Revenues
and expenses are recognized on the accruals basis. Revenues are generated from
freight billings, time charter and bareboat charter hires. Voyage revenues and
expenses are recognized ratably over the estimated length of each voyage and,
therefore, are allocated between reporting periods based on the relative transit
time in each period. The impact of recognizing
voyage expenses ratably over the length of each voyage is not materially
different on a quarterly and annual basis from a method of recognizing
such costs as incurred. Probable losses on voyages are provided for in full at
the time such losses can be estimated. Time charter and bareboat charter
revenues are recorded over the term of the charter as a service is provided. The
Company uses a discharge-to-discharge basis in determining percentage of
completion for all spot voyages and voyages servicing contracts of affreightment
whereby it recognizes revenue ratably from when product is discharged (unloaded)
at the end of one voyage to when it is discharged after the next voyage.
However, the Company does not recognize revenue if a charter has not been
contractually committed to by a customer and the Company, even if the vessel has
discharged its cargo and is sailing to the anticipated load port on its next
voyage.






F-11




Amounts
receivable or payable arising from profit sharing arrangements are accrued based
on amounts earned as of the reporting date. Profit share income represents
vessel earnings earned by the Company's customers in excess of market rates.
Profit share expense represents amounts due to Ship Finance based on 20% of the
excess of vessel revenues earned by the Company over the base hire paid to Ship
Finance for chartering in the vessels.




Revenues
and voyage expenses of the vessels operating in pool arrangements are pooled and
the resulting net pool revenues, calculated on a time charter equivalent basis,
are allocated to the pool participants according to an agreed
formula.  Formulae used to allocate net pool revenues vary among
different pools but generally allocate revenues to pool participants on the
basis of the number of days a vessel operates in the pool with weighting
adjustments made to reflect vessels' differing capacities and performance
capabilities.  The same revenue and expense principles stated above
are applied in determining the pool's net pool revenues.  Certain
pools are responsible for paying voyage expenses and distribute net pool
revenues to the participants.  Certain pools require the participants
to pay and account for voyage expenses, and distribute gross pool revenues to
the participants such that the participants' resulting net pool revenues are
equal to net pool revenues calculated according to the agreed
formula.  The Company accounts for gross pool revenues allocated by
these pools as "pool revenues"which are
included in voyage revenuesin
its consolidated statements of operations.




Gain
on sale of assets


Gain
on sale of assets includes gains from the sale of vessels, gains from the
termination of leases and gains from the sale of heavy lift conversion projects.
Gains from the sale of assets are recognized when the vessel has been delivered
and all risks have been transferred and are determined by comparing the proceeds
received with the carrying value of the vessel. Gains from the termination of
leases are recognized when the lease is effectively terminated and the vessel
has been redelivered to the owner. Gains from sale of heavy lift conversion
projects are recognized as each converted vessel is delivered.  The
amount recognized is the gain allocated to each vessel that is not contingent
upon future events.  Deferred gains are recorded as Other Current
Liabilities.




Drydocking


Normal
vessel repair and maintenance costs are expensed when incurred. The Company
recognizes the cost of a drydocking at the time the drydocking takes place, that
is, it applies the "expense as incurred" method.




Derivatives


The
Company may enter into interest rate swap transactions to hedge a portion of its
exposure to floating interest rates. These transactions involve the conversion
of floating rates into fixed rates over the life of the transactions without an
exchange of underlying principal. The fair values of the interest rate swap
contracts are recognized as assets or liabilities with changes in fair values
recognized in "interest expense" in the consolidated statements of operations
unless related to discontinued operations, in which case these are shown in
"discontinued operations".




The
Company may enter into forward freight contracts and options in order to hedge
exposure to the spot market for certain trade routes and in some cases, for
speculative purposes. These transactions involve entering into a contract to
swap theoretical market index based voyage revenues for a fixed daily rate. The
fair values of the forward freight contracts are recognized as assets or
liabilities with changes in fair values recognized in "mark to market of
derivatives"in the consolidated statements of operations.




Financial
instruments


In
determining the fair value of its financial instruments, the Company uses a
variety of methods and assumptions that are based on market conditions and risks
existing at each balance sheet date. For the majority of financial instruments,
including most derivatives and long-term debt, standard market conventions and
techniques such as options pricing models are used to determine fair value. All
methods of assessing fair value result in a general approximation of value, and
such value may never actually be realized.




Foreign
currencies


The
functional currency of the Company and the majority of its subsidiaries is the
U.S. dollar as the majority of revenues and expenditures are denominated in U.S.
dollars. The Company's reporting currency is also U.S. dollars. For subsidiaries
that maintain their accounts in currencies other than U.S. dollars, the Company
uses the current method of translation whereby the statements of operations are
translated using the average exchange rate and the assets and liabilities are
translated using the year end exchange rate. Foreign currency translation gains
or losses are recorded as a separate component of other comprehensive income in
stockholders' equity.






F-12





Transactions
in foreign currencies during the year are translated into U.S. dollars at the
rates of exchange in effect at the date of the transaction. Foreign currency
monetary assets and liabilities are translated using rates of exchange at the
balance sheet date. Foreign currency non-monetary assets and liabilities are
translated using historical rates of exchange. Foreign currency transaction
gains or losses are included in the consolidated statements of
operations.




Share-based
payments


The
Company accounts for share based payments in accordance with SFAS 123(R)Share-Based
Payments("FAS
123(R)").  Accordingly, the Company expenses the fair value of stock
options issued to employees over the period in which the options
vest.




Earnings
per share


Basic
earnings per share ("EPS") is computed based on the income available to common
stockholders and the weighted average number of shares outstanding for basic
EPS. Diluted EPS includes the effect of the assumed conversion of potentially
dilutive instruments.




Issuance
of shares by a subsidiary/ associate


The
Company recognizes a profit when its subsidiary or associate issues stock to
third parties at a price per share in excess of its carrying amount if such
profit is realizable.  If
such profit is not realizable,
it is recorded as an increase to contributed surplus.




Reclassifications


The
Company reclassified some ofitsrestricted
cash balances to long-term. These relate to the restricted cash in some of its
ITCL subsidiaries that are segregated for the settlement of long-term lease
obligations. Prior year comparatives have been reclassified to conform with the
current year presentation.  The amount reclassified as of December 31, 2007
was $343.3 million.






3.
            RECENT
      ACCOUNTING
PRONOUNCEMENTS




In
September 2006, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard No. 157, Fair
Value Measurements, ("FAS
157"),effective for fiscal years beginning after November 15,
2007.This
statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about fair
value measurements. The statement establishes a fair value hierarchy that
distinguishes between market participant assumptions developed based on market
data obtained from sources independent of the reported entity and the reported
entities own assumptions about market participant assumptions developed based on
the best information available in the circumstances. In February 2008, the FASB
issued a staff position that delays the effective date of FAS 157 for certain
nonfinancial assets and liabilities to fiscal years beginning on or after
November 15, 2008. The Company's adoption of FAS 157 did not have a material
effect on the consolidated financial statements. Adoption of the delayed
provisions of FAS 157 is not expected to have a material effect on the Company's
consolidated financial statements.




In
February 2007, the FASB issued Statement of Financial Accounting Standard
No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities Including an
Amendment of FASB Statement No. 115 ("FAS 159"). FAS 159
allows  entities to choose to measure many financial instruments and
certain other items at fair value, with unrealized gains and losses related to
these financial instruments being reported in earnings at each subsequent
reporting date. FAS 159 is effective for fiscal years beginning after
November 15, 2007. The Company's adoption of this statement did not have a
material effect on the consolidated financial statements.




In
December 2007, the FASB issued Statements No. 141(R),Business
Combinations,("FAS
141(R)"), and No. 160Noncontrolling
Interests in Consolidated Financial Statements,("FAS
160"). Together these statements can affect the way companies account for future
business combinations and noncontrolling interests. FAS 141(R) requires,
amongst other changes, recognition of subsequent changes in the fair value of
contingent consideration in the Statement of Operations rather than against
Goodwill, and transaction costs to be recognized immediately in the Statement of
Operations. FAS 160 clarifies the classification of non controlling interests
(i.e. minority owners' interests in subsidiaries) in consolidated balance sheets
and the accounting for and reporting of transactions between the reporting
entity and holders of such non controlling interests. In particular the minority
owners' interest in subsidiaries should be presented in the consolidated balance
sheet within equity, but separate from the parent's equity. Similarly the amount
of net income attributable to the parent and to the minority interest be
clearly identified and presented
on the consolidated statement of income. Both
FAS 141(R) and FAS 160 are effective for transactions completed in fiscal years
beginning after December 15, 2008. Adoption of FAS 141(R) and FAS 160 by the
Company in the financial statements beginning January 1, 2009 is not expected to
have a material effect on theCompany's consolidated
financial statements except that non-controlling interests will be classified as
a component of equity.








F-13







In March
2008, the FASB issued Statement of Financial Accounting Standard No. 161,
Disclosures
about Derivative Instruments and Hedging Activities ("FAS 161"). This
standard amends and expands the disclosure requirements of FASB Statement 133,
Accounting
for Derivative Instruments and Hedging Activities, and is effective for
fiscal years beginning after November 15, 2008. FAS 161 requires enhanced
disclosures that better convey the purpose of an entity's derivative and hedging
activities in terms of the risk it intends to manage. In addition to other
disclosure requirements, the statement requires disclosure of the reasons for
holding or issuing derivative instruments in the context of its overall risk
exposure. The Company's adoption of FAS 161 is not expected to have a material
effect on the Company's consolidated financial statements.




In May
2008, the FASB issued Statement of Financial Accounting Standard No. 162,
The
Hierarchy of Generally Accepted Accounting Principles,("FAS 162"). This
Statement identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
in conformity with generally accepted accounting principles in the United
States. Adoption of FAS 162 is not expected to have a material effect on the
Company's consolidated financial statements.




4.
            DECONSOLIDATION
      OF SHIP FINANCE




The Company distributed
the majority of its remaining shareholding of Ship Finance in March 2007 and no
longer consolidates Ship Finance as of March 31, 2007. FIN
46(R) was applied to Ship Finance as a holding company and to each of its
subsidiaries. The Company was determined to be the primary beneficiary of the
holding company Ship Finance as a result of the variable interests held by the
Company and its related parties. Consequently, Ship Finance and its subsidiaries
were consolidated until Frontline distributed the majority of its remaining
shares in Ship Finance.




Under
FIN 46(R), the primary beneficiary should reconsider whether it is still the
primary beneficiary if it sells or otherwise disposes of its variable interests
to unrelated parties. As such, the Company's distribution of shares in March is
a reconsideration event and it was determined that the Company was no longer the
primary beneficiary of Ship Finance. Accordingly, the Company is no longer
consolidating Ship Finance as of March 31, 2007.




Prior to
the deconsolidation of Ship Finance, items of expenditure incurred by Ship
Finance which have been recorded in the Company's consolidated statement of cash
flows for the year ended December 31, 2007 include:




·
            Purchase
      of the container ship Horizon Hawk for $56.8
  million


·
            Payments
      totaling $126.5 million relating to Ship Finance's second jack up rig West
      Prospero


·
            Cash
      from debt draw downs totaling $127.2
million


·
            Debt
      repayments totaling $122.4 million




5.
            SEGMENT
      INFORMATION




The
Company and the chief operating decision maker ("CODM") measure performance
based on the Company's overall return to shareholders based on consolidated net
income. The CODM does not review a measure of operating result at a lower level
than the consolidated group. Consequently, the Company has only one reportable
segment: tankers.  The tankers segment includes crude oil tanker
vessels and OBO or oil/bulk/ore vessels. Both types of vessel are managed as
part of this one segment.




The
Company's management does not evaluate performance by geographical region as
this information is not meaningful.




The
Company operates in two markets, the wet market whereby crude oil is
transported, and the dry market whereby dry cargo is transported. An analysis of
revenues from these services is as follows:





F-14








(in
      thousands of $)
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006Total operating revenues – wet
      market
                        
                        
                        1,955,427
                        
                        
                        
                        1,171,000
                        
                        
                        
                        1,461,901Total operating revenues – dry
      market
                        
                        
                        130,228
                        
                        
                        
                        120,170
                        
                        
                        
                        90,699





During
the year ended December 31, 2008, the Company reported total income from one
customer of $420.6 million which represented approximately 20% of consolidated
operating revenues (2007: one customer which represented approximately 19% and
2006: one customer which represented approximately
13%).




6.
            TAXATION




Bermuda


Under
current Bermuda law, the Company is not required to pay taxes inBermudaon
either income or capital gains. The Company has received written assurance from
the Minister of Finance inBermudathat,
in the event of any such taxes being imposed, the Company will be exempted from
taxation until the year 2016.




United
States


The
Company does not accrueU.S.income
taxes as, in the opinion ofU.S.counsel,
the Company is not engaged in aU.S.trade
or business and is exempted from a gross basis tax under Section 883 of the U.S.
Internal Revenue Code.




A
reconciliation between the income tax expense resulting from applying the U.S.
Federal statutory income tax rate and the reported income tax expense has not
been presented herein as it would not provide additional useful information to
users of the financial statements as the Company's net income is subject to
neither Bermuda norU.S.tax.




Other
Jurisdictions


Certain
of the Company's subsidiaries inSingapore,Norwayand
theUnited
Kingdomare
subject to taxation in their respective jurisdictions. The tax paid by
subsidiaries of the Company that are subject to taxation is not
material.




The
Company adopted FASB Interpretation No. 48Accounting
for Uncertainty in Income Taxes("FIN
48") on January 1, 2007. The Company has not recognized any additional
liabilities or expenses under FIN 48 for 2008 or 2007 and does not have any
unrecognized tax benefits, material accrued interest or penalties relating to
income taxes.




7.
            EARNINGS
      PER SHARE




The
computation of basic earnings per share ("EPS") is based on the weighted average
number of shares outstanding during the year. The computation of diluted EPS
assumes the exercise of stock options using the treasury stock
method.




The
components of the numerator for the calculation of basic EPS and diluted EPS for
net income from continuing operations and net income are as
follows:





(in thousands of
      $)
                            
                            2008
                            
                            
                            2007
                            
                            
                            2006Net income from continuing
      operations
                            
                            
                            698,770
                            
                            
                            
                            564,976
                            
                            
                            
                            502,486Discontinued
      operations
                            
                            
                            -
                            
                            
                            
                            5,442
                            
                            
                            
                            13,514Net income available to
      stockholders
                            
                            
                            698,770
                            
                            
                            
                            570,418
                            
                            
                            
                            516,000








The
components of the denominator for the calculation of basic EPS and diluted EPS
are as follows:





(in
    thousands)
                              
                              2008
                              
                              
                              2007
                              
                              
                              2006Weighted average number of
      ordinary shares outstanding - basic
                              
                              
                              76,353
                              
                              
                              
                              74,825
                              
                              
                              
                              74,825Stock
    options
                              
                              
                              89
                              
                              
                              
                              42
                              
                              
                              
                              -Weighted average number of
      ordinary shares outstanding -  diluted
                              
                              
                              76,442
                              
                              
                              
                              74,867
                              
                              
                              
                              74,825







F-15






There
were 100,000 anti-dilutive options in 2006 and none in 2007 and
2008.




The
effect on EPS related to discontinued operations is as
follows:





(in thousands of
      $)
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006Discontinued operations –
      containers and rigs
                      
                      
                      -
                      
                      
                      
                      5,442
                      
                      
                      
                      13,514Basic and diluted EPS – containers
      and rigs
                      
                      
                      $ -
                      
                      
                      
                      $ 0.07
                      
                      
                      
                      $ 0.18





8.
            LEASES




As
of December 31, 2008, the Company leased in fifty-five vessels on long-term time
charters and bareboat charters from third parties and related parties. Four of
these leases are classified as operating leases and fifty-one as capital leases.In addition to these, six Suezmax vessels were leased in at floating
charter rates and can be terminated by giving one month written notice and a
further four are leased on short-term fixed rate charters.
With the exception of the Company's long-term leases with Ship Finance, the
Company's long-term leases of vessels generally containoptional
renewal periods andpurchaseand
putoptions.




Rental
expense




Charter
hire payments to third parties for certain contracted-in vessels are accounted
for as operating leases. The Company is also committed to make rental payments
under operating leases for office premises. The future minimum rental payments
under the Company's non-cancellable operating leases are as
follows:





(in thousands of
      $)Year ending December
      31,2009
                          
                          
                          114,0202010
                          
                          
                          36,4242011
                          
                          
                          27,2492012
                          
                          
                          8,1442013
                          
                          
                          1,4372014 and
    later
                          
                          
                          2,522Total minimum lease
      payments
                          
                          
                          189,796





Total
rental expense for operating leases was $222.2 million, $59.0 million and $26.5
million for the years ended December 31, 2008, 2007 and 2006,
respectively.




The
following table discloses information about the terms of the Company's long-term
leases for vessels contracted in which are accounted for as operating
leases:





Vessel Type
                            Expiry of Mandatory Lease
      Period
                            Extended Lease Periods at
      Lessor's Option
                            Extended Lease Periods at
      Company's Option
                            Company's Purchase Option
      Periods
                            Lessor's Put Option
      Exercise DateFront Warrior
      (Suezmax)
                            2007
                            2008-2011
                            2010-2011
                            2007- 2011
                            2011Hampstead(VLCC)
                            2012
                            none
                            none
                            none
                            noneKensington
      (VLCC)
                            2011
                            none
                            none
                            none
                            noneGenmar Harriet G
      (Suezmax)
                            2010
                            none
                            none
                            none
                            none





The
lease for Front Warrior was extended for an additional two years at the lessor's
option on January 1, 2008. The lease for Front Warrior was extended for a
further two year period (2010-2011) at the Company's option on December 31,
2008.  The minimum lease payments for these optional periods have been
included in the analysis above.




A
liability for put options on vessels leased on operating leases is recorded at
such time that market conditions make it likely that a put option will be
exercised on the exercise date.  A liability is recognized based on
the amount, if any, by which the put option price exceeds the fair market value
of the related vessel. As of December 31, 2008, no such liability had
arisen.






F-16







Nine
of the vessels leased by the Company are leased from special purpose lessor
entities which were established and are owned by independent third parties who
provide financing through debt and equity participation. Each entity owns one
vessel, which is leased to the Company, and has no other
activities.  Prior to the adoption of FIN 46(R), these special purpose
entities were not consolidated by Frontline. One of these leases is accounted
for as operating leases and eight of these leases are accounted for as capital
leases.  The Company has determined that due
to the existence of certain put and call options over the leased vessels, these
entities are variableinterest
entities.  The determination of the primary beneficiary of a variable
interest entity requires knowledge of the participations in the equity of that
entity by individual and related equity holders.  Our lease agreements
with the leasing entities do not give us any right to obtain this information
and the Company has been unable to obtain this information by other
means.  Accordingly the Company is unable to determine the primary
beneficiary of these leasing entities. As of December 31, 2008, the original
cost to the lessor of the assets under such arrangements was $618.5 million. As
of December 31, 2008 and 2007, the Company's residual value guarantees
associated with these leases, which represent the maximum exposure to loss, are
$85.0 million.




The
following table discloses information about the Company's activity with these
non-consolidated lessor entities in the three year period ended December 31,
2008:




(in thousands of
      $)
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006Repayments
      of principal obligations under capital leases
                        
                        
                        32,599
                        
                        
                        
                        28,857
                        
                        
                        
                        25,142Interest
      expense for capital leases
                        
                        
                        29,807
                        
                        
                        
                        32,605
                        
                        
                        
                        34,867Charterhire
      expense for operating leases
                        
                        
                        6,064
                        
                        
                        
                        5,311
                        
                        
                        
                        5,402






Rental
income




The
minimum future revenues to be received on time and bareboat charters which are
accounted for as operating leases and other contractually committed income as of
December 31, 2008 are as follows:





(in thousandsof $)
                    
                    
                    Total2009
                    
                    
                    
                    420,8682010
                    
                    
                    
                    252,8152011
                    
                    
                    
                    128,8082012
                    
                    
                    
                    66,2862013
                    
                    
                    
                    40,9552014 and
    later
                    
                    
                    
                    6,270Total minimum lease
      revenues
                    
                    
                    
                    916,002





As
of December 31, 2008, the Company leased out 38 of its vessels to third parties
on time and bareboat charters with initial periods ranging betweenthree
months and six years.
All of those leases are classified as operating
leases.




The
cost and accumulated depreciation of the vessels leased to third parties as of
December 31, 2008 were approximately $2,069.6 million and $597.8 million,
respectively, and as of December 31, 2007 were approximately $1,825.2 million
and $513.5 million, respectively. Two of the vessels currently leased to third
parties are leased in on operating leases by the
Company.





9.
            MARKETABLE
      SECURITIES




Marketable securities held
by the Company are equity securities considered to be available-for-sale
securities.





(in thousands of
      $)
                        
                        2008
                        
                        
                        2007Cost
                        
                        
                        85,815
                        
                        
                        
                        16,008Other-than-temporary
      impairment
                        
                        
                        (25,134
                        )
                        
                        
                        -Net unrealized
      loss
                        
                        
                        (543
                        )
                        
                        
                        (324
                        )Fair value
                        
                        
                        60,138
                        
                        
                        
                        15,684





An
other-than-temporary impairment has been recorded against securities held inOverseas Shipholding Group Inc. ("OSG"). The
OSG shares have been written down to fair value of $59.3 million as of December
31, 2008.  The
other-than-temporary impairment is recorded in "Impairment
of securities".Net unrealized loss on marketable securities, including a component of foreign
currency translation, included in comprehensive income is $0.5 million – an
increase of $0.2 million from the year ended December 31, 2007 (2007 – net
unrealized loss of $0.3 million).





F-17








(in thousands of
      $)
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006Proceeds from sale of
      available-for-sale securities
                      
                      
                      3,286
                      
                      
                      
                      162,392
                      
                      
                      
                      154,409Realized gain (including amounts
      classified in discontinued operations)
                      
                      
                      -
                      
                      
                      
                      49,023
                      
                      
                      
                      9,782Realized loss (including amounts
      classified in discontinued operations)
                      
                      
                      (221)
                      
                      
                      
                      (40)
                      
                      
                      
                      -





The
cost of sale of available-for-sale marketable securities is calculated on an
average cost basis. Realized gains and losses are recorded as gain on sale of
securities in the consolidated statement of operations. Refer to Note 26 for
further information on gains recorded in gain on sale of securities resulting
from sales of assets not previously classified as marketable
securities.




10.
            TRADE
      ACCOUNTS RECEIVABLE,
NET




Trade
accounts receivable are presented net of allowances for doubtful accounts
relating to demurrage claims amounting to $3.2 million and $1.3 million as of
December 31, 2008 and 2007, respectively.




11.
            OTHER
      RECEIVABLES





(in
      thousands of $)
                        
                        2008
                        
                        
                        2007Agent
      receivables
                        
                        
                        2,751
                        
                        
                        
                        3,537Claims
      receivables
                        
                        
                        5,098
                        
                        
                        
                        6,355Receivable from sale of
      assets
                        
                        
                        -
                        
                        
                        
                        13,372Other
      receivables
                        
                        
                        9,649
                        
                        
                        
                        5,30017,498
                        
                        
                        
                        28,564





Other
receivables are presented net of allowances for doubtful accounts amounting to
$nil million and $nil million as of December 31, 2008 and 2007
respectively.




12.
            LONG-TERM
      INVESTMENTS





(in thousands of
      $)
                      
                      2008
                      
                      
                      2007Investment in
      Navig8
                      
                      
                      20,020
                      
                      
                      
                      -





The
investment in Navig8 consists of preference shares and ordinary shares shown at
cost. The Company owns 15.8% of issued ordinary share capital of Navig8. Both
the preference shares and ordinary shares are
unlisted.




13.
            NEWBUILDINGS





(in thousands of
      $)
                      
                      2008
                      
                      
                      2007Newbuildings
                      
                      
                      454,227
                      
                      
                      
                      160,298





The
carrying value of newbuildings represents the accumulated costs which the
Company has paid by way of purchase installments
and other capital expenditures together with capitalized loan
interest.Interest capitalized in the cost of newbuildings
amounted to $18.0 million in 2008 (2007: $10.4 million, 2006: $3.6
million).




As
of December 31, 2008, there were eighteen newbuilding contracts representing
costs of $454.2 million. As of December 31, 2007 there were seven contracts
representing costs of $113.1 million and two conversion projects representing
costs of $47.2 million. The conversion projects were for the conversion of two
single hull Suezmax tankers into heavy lift vessels and were completed during
2008.




14.
            VESSELS
      AND EQUIPMENT, NET





(in thousands of
      $)
                        
                        2008
                        
                        
                        2007Cost
                        
                        
                        519,016
                        
                        
                        
                        273,399Accumulated
      depreciation
                        
                        
                        (80,855
                        )
                        
                        
                        (64,883
                        )Net book value at end of
      year
                        
                        
                        438,161
                        
                        
                        
                        208,516








F-18





Included
in the above amounts as of December 31, 2008 and 2007 is equipment with a net
book value of $2.4 million and $3.6 million,
respectively.




During
the year, the Company purchased five second hand Suezmax double hull
vessels at a cost of $247.3 million.




Depreciation
expense for vessels and equipment was $17.1 million, $46.3 million and $157.6
million for the years ended December 31, 2008, 2007 and 2006, respectively,
including amounts recorded in discontinued operations. Depreciation expense for
the year ended December 31, 2007 includes $32.1 million relating to vessels
leased from Ship Finance, which are now accounted for as vessels under capital
leases.




15.
            VESSELS
      UNDER CAPITAL LEASE,
NET





(in thousands of
      $)
                        
                        2008
                        
                        
                        2007Cost
                        
                        
                        3,099,974
                        
                        
                        
                        3,153,602Accumulated
      depreciation
                        
                        
                        (999,257
                        )
                        
                        
                        (828,813
                        )Net book value at end of
      year
                        
                        
                        2,100,717
                        
                        
                        
                        2,324,789





Depreciation
expense for vessels under capital lease was $206.4 million, $174.9 million and
$46.2 million for the years ended December 31, 2008, 2007 and 2006,
respectively.




The
outstanding obligations under capital leases are payable as
follows:





(in thousands of
      $)Year ending December
      31,2009
                            
                            
                            388,3892010
                            
                            
                            420,6652011
                            
                            
                            317,5702012
                            
                            
                            241,9052013
                            
                            
                            239,0012014 and
    later
                            
                            
                            1,488,350Minimum lease
      payments
                            
                            
                            3,095,880Less: imputed
      interest
                            
                            
                            (882,668
                            )Present value of obligations under
      capital leases
                            
                            
                            2,213,212





As
of December 31, 2008, the Company held 51 vessels under capital leases (2007 –
54 vessels), of which 39 (2007 – 41 vessels), are leased from Ship Finance.
These leases are for terms that range from 6 to 22
years.




The
Company has purchase options over eight of these vessels at certain specified
dates and the lessor has options to put these vessels to the Company at the end
of the lease term. Gains arising from the sale and leaseback transactions have
been deferred and are being amortized over the lease
terms.




The
following table discloses information about the terms of the Company's capital
leases for vessels excluding those leased from Ship
Finance:





F-19








Vessel Type
                                Expiry of Mandatory Lease
      Period
                                Extended Lease Periods at
      Lessor's Option
                                Company's Purchase Option
      Periods
                                Lessor's Put Option
                                  Exercise
      DateFront Crown
      (VLCC)
                                2009
                                2010-2014
                                2009 to
2014
                                2014Front Chief
      (VLCC)
                                2009
                                2010-2014
                                2009 to
2014
                                2014Front Commander
      (VLCC)
                                2009
                                2010-2014
                                2009 to
2014
                                2014Front Eagle
      (VLCC)
                                2010
                                2011-2015
                                2010 to
2015
                                2015Front Melody
      (Suezmax)
                                2011
                                2012-2015
                                2011 to
2015
                                2015Front Symphony
      (Suezmax)
                                2011
                                2012-2015
                                2011 to
2015
                                2015Front
      Tina  (VLCC)
                                2011
                                2012-2015
                                2011 to
2015
                                2015Front Commodore
      (VLCC)
                                2011
                                2012-2015
                                2011 to
2015
                                2015British Pioneer
      (VLCC)
                                2024
                                none
                                Note (1)(2)
                                NoneBritish Progress
      (VLCC)
                                2025
                                none
                                Note (1)(3)
                                NoneBritish Purpose
      (VLCC)
                                2025
                                none
                                Note (1)(3)
                                NoneBritish Pride
      (VLCC)
                                2025
                                none
                                Note (1)(3)
                                None





Put
options on vessels leased under leases classified as capital leases are recorded
as part of the lease's minimum lease payments.  Lease liabilities are
amortized so that the remaining balance at the date the put option becomes
exercisable is equal to the put option amount.  An additional
liability is recognized based on the amount, if any, by which the put option
price exceeds the fair market value of the related vessel. As of December 31,
2008 no such additional liability had arisen.





Note 1.
            The Company does not have options
      to purchase the vessel but it has first refusal if the vessel's owner
      offers the vessel for sale.





Note 2.
            The capital lease for British
      Pioneer was terminated by the lessor on January 2,
      2009.





Note 3.
            The lessor has the right to
      terminate the lease at the end of the fixed period being February 2, 2010,
      for the British Progress, July 14, 2010, for the British Purpose and
      August 20, 2011, for the British
Pride.





The
Company's capital leases for vessels leased from Ship Finance are long-term,
fixed rate leases, which extend for various periods depending on the age of the
vessels. The following table discloses information about the terms of these
leases:





Vessel Type
                                    
                                    Expiry of Mandatory Lease
      Period
                                    Company's Optional
      Termination Date
                                    Company's Purchase Option
      Periods
                                    Lessor's Put Option
      Exercise DateOBO (8
    vessels)
                                    
                                    2015
                                    none
                                    none
                                    noneNon double hull Suezmax and VLCC
      (7 vessels)
                                    
                                    2013
                                    2010
                                    none
                                    noneDouble hull Suezmax (6
      vessels)
                                    
                                    2018-2025
                                    none
                                    none
                                    noneDouble hull VLCC (18
      vessels)
                                    
                                    2016-2027
                                    none
                                    none
                                    none





In
conjunction to the leases with Ship Finance, the Company has also entered into
charter ancillary agreements whereby the Company agrees to pay Ship Finance a
profit sharing payment equal to 20% of the charter revenues earned by the
Company in excess of the daily base charterhire paid to Ship Finance. Subsequent
to 2010, non-double hull vessels will be excluded from this profit sharing
calculation. In the year ended December 31, 2008, total profit share due to Ship
Finance was $111.0 million (2007: $52.5 million, of which $15.2 million was
recorded in the quarter ended March 31, 2007 and subsequently eliminated as a
result of the consolidation of Ship Finance).




The
Company is obligated to ensure that a charter service reserve be held which can
only be used to make charter payments to Ship Finance and for reasonable working
capital purposes to meet short-term voyage expenses. The charter reserve is
based on the number of vessels that the Company charters from Ship Finance. As
of December 31, 2008, the total charter service reserve is $216.1 million (2007:
$226.7 million) and the balance is recorded as restricted cash in the Company's
consolidated balance sheet.






F-20





16.
            EQUITY
      METHOD INVESTMENTS




As
of December 31, the Company had the following participation in investments that
are recorded using the equity method:





2008
                        
                        2007Front Tobago Shipping
      Corporation
                        
                        
                        40
                        %
                        
                        
                        40
                        %Golden Fountain
      Corporation
                        
                        
                        -
                        
                        
                        
                        50
                        %CalPetro Tankers (BahamasI) Limited
                        
                        
                        100
                        %
                        
                        
                        100
                        %CalPetro Tankers (BahamasII)
Limited
                        
                        
                        100
                        %
                        
                        
                        100
                        %CalPetro Tankers (IOM)
      Limited
                        
                        
                        100
                        %
                        
                        
                        100
                        %





Golden
Fountain Corporation was liquidated during the year ended December 31,
2008.




Summarized
balance sheet information of investees which the Company accounts for under the
equity method as of December 31, is as follows:





(in thousands of
      $)
                    
                    2008
                    
                    
                    2007Current
    assets
                    
                    
                    18,518
                    
                    
                    
                    19,639Non current
      assets
                    
                    
                    54,712
                    
                    
                    
                    64,558Current
      liabilities
                    
                    
                    11,083
                    
                    
                    
                    11,313Non current
      liabilities
                    
                    
                    57,155
                    
                    
                    
                    66,681





Summarized
statement of operations information of investees which the Company accounts for
under the equity method as for the three years ended December 31, is as
follows:





(in thousands of
      $)
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006Net operating
      revenues
                      
                      
                      5,836
                      
                      
                      
                      35,020
                      
                      
                      
                      28,876Net operating
      income
                      
                      
                      5,493
                      
                      
                      
                      5,197
                      
                      
                      
                      10,461Net (loss)
      income
                      
                      
                      (483
                      )
                      
                      
                      5,232
                      
                      
                      
                      3,691





Dividends
totaling $0.3 million were received from equity method investees in the year
ended December 31, 2008 (2007: $0.3 million)




In
December 2008, Golden Fountain Corporation was liquidated and the Company
received a final dividend on liquidation of $0.1
million.




The
Company has determined that under FIN 46(R), it is not the primary beneficiary
of the VIEs CalPetro Tankers (BahamasI)
Limited ("CalPetro BI"), CalPetro Tankers (Bahamas II) Limited ("CalPetro BII")
and CalPetro Tankers (IOM) Limited ("CalPetro IOM") and as such, these entities
are being accounted forunder
the equity method.
These companies were incorporated in 1994 for the purpose of acquiring three oil
tankers from Chevron Transport Corporation ("Chevron") and concurrently charter
these vessels back to Chevron on long-term charter agreements. The companies
were acquired by Independent Tankers Corporation ("ITC") which in turn is a
majority owned subsidiary of the Company. In April 2006, Chevron cancelled its
bareboat contract with CalPetro Tankers (Bahamas III) Limited ("CalPetro BIII").
Under FIN 46(R) this was considered to be a reconsideration event and the
Company began consolidating the VIE into its accounts from that date. Prior to
this date, CalPetro BIII, was also equity accounted. The Company does not
guarantee the debt of these entities and the net assets of the three entities
that are not consolidated total $3.7 million (2007: $4.1
million).




In
January 2007, the Company had a 33.3% investment in Sealift and accounted for
this investment under the equity method. In May 2007, the Company's investment
was reduced to 17.1% and as a result of the Company's inability to exercise
significant influence, the investment was accounted for as marketable securities
from that date until October 2007, when these securities were
sold.




In
February 2007, the Company had a 28.3% investment in Sea Production and
accounted for this investment under the equity method until it sold its entire
shareholding in June 2007.




In
November 2007, the Company sold its entire investment in International Maritime
Exchange ASA ("IMAREX") for net proceeds of $50.5 million resulting in a gain on
sale of $41.9 million which has been reported in gain from sale of
securities.








F-21





17.
            DEFERRED
      CHARGES




Deferred
charges represent debt arrangement fees that are capitalized.  If a
loan is repaid early, any unamortized portion of the related deferred charges is
charged against income in the period in which the loan is repaid. The deferred
charges are comprised of the following amounts:





(in thousands of
      $)
                        
                        2008
                        
                        
                        2007Debt arrangement
      fees
                        
                        
                        4,966
                        
                        
                        
                        384Accumulated amortization
                        
                        
                        (885
                        )
                        
                        
                        (335
                        )4,081
                        
                        
                        
                        49





18.  
ACCRUED EXPENSES





(in thousands of
      $)
                      
                      2008
                      
                      
                      2007Voyage
    expenses
                      
                      
                      14,353
                      
                      
                      
                      22,707Ship operating
      expenses
                      
                      
                      24,423
                      
                      
                      
                      21,385Administrative
      expenses
                      
                      
                      4,260
                      
                      
                      
                      6,634Interest
      expense
                      
                      
                      25,216
                      
                      
                      
                      31,335Taxes
                      
                      
                      318
                      
                      
                      
                      483Accrued conversion costs for heavy
      lift vessels
                      
                      
                      265
                      
                      
                      
                      15,233Other
                      
                      
                      2,835
                      
                      
                      
                      3,35171,670
                      
                      
                      
                      101,128








19.  
OTHER CURRENT LIABILITIES





(in thousands of
      $)
                      
                      2008
                      
                      
                      2007Accrued
      charterhire
                      
                      
                      718
                      
                      
                      
                      708Proceeds from sale and conversion
      of vessels, deferred
                      
                      
                      -
                      
                      
                      
                      124,597Other
                      
                      
                      11,192
                      
                      
                      
                      7,00511,910
                      
                      
                      
                      132,310





The
Company sold four converted heavy lift vessels and two Suezmax vessels to
Dockwise in March 2007 with the Company being responsible for the conversion of
four Suezmax vessels into heavy lift vessels with delivery staggered between May
2007 and June 2008. The net proceeds were deferred with gains being recognized
in the consolidated statement of operations as each converted vessel was
delivered to Dockwise. Two converted vessels were delivered during 2007 with the
final two vessels delivered in the second quarter of 2008. The proceeds,
previously having been deferred were recognized in
2008.




20.  
DEBT





(in thousands of
      $)
                          
                          2008
                          
                          
                          2007US Dollar denominated floating
      rate debt:-
      LIBOR + 0.50% due through 2008
                          
                          
                          -
                          
                          
                          
                          80,000-
      LIBOR + 0.90%-1.25% due 2009 through 2017
                          
                          
                          568,013
                          
                          
                          
                          -US Dollar denominated fixed rate
      debt:-
      Serial Notes:  6.5% to 6.68% due through
    2010
                          
                          
                          6,300
                          
                          
                          
                          17,100-
      Term Loans:  8.52% due 2015
                          
                          
                          11,328
                          
                          
                          
                          11,328-
      Term Notes:  7.84% to 8.04% due through
    2021
                          
                          
                          321,095
                          
                          
                          
                          364,860906,736
                          
                          
                          
                          473,288Credit
      facilities
                          
                          
                          1,411
                          
                          
                          
                          246Total debt
                          
                          
                          908,147
                          
                          
                          
                          473,534Less current portion of long-term
      debt
                          
                          
                          (293,471
                          )
                          
                          
                          (96,811
                          )614,676
                          
                          
                          
                          376,723





The
outstanding debt asof December 31, 2008 is repayable as
follows:





F-22








(in thousands of
      $)Year ending December
      31,2009
                    293,4712010
                    46,5212011
                    50,5582012
                    54,6022013
                    106,2462014 and
    later
                    356,749908,147





The
weighted average interest rate for floating rate debt denominated in US dollars
was 4.02% as of December 31, 2008 (2007: 5.93%).




In July
and August 2008, ITCL, purchased three tranches of the Windsor Petroleum
Transport Corporation 7.84% term notes on the open market. The bonds that were
repurchased have not been cancelled. The term notes above have been presented
net of the bonds owned by ITCL.




US
DOLLAR DENOMINATED FLOATING RATE DEBT




$80.0
million term loan facility


In June
2006, the Company entered into a $80.0 million secured term loan facility. The
facility bears interest at LIBOR plus a margin. The facility was refinanced in
June 2008 and matures in June 2009. The Company is currently in discussion with
the lender regarding refinancing of this facility. The facility contains a
minimum value covenant and covenants that require the Company to maintain a
minimum level of free cash and positive working capital.




$21.6
million term loan facility


In July
2008, the Company, through ITCL entered into a $21.6 million secured term loan
facility. The facility bears interest at LIBOR plus a margin and falls due in
July 2009. The facility contains a covenant that requires ITCL to maintain
a positive working capital balance. This facility has been guaranteed by Geveran
Trading Co. Ltd, a related party for an annual fee of 2% of the facility drawn
down.




$50.0
million loan facility


In August
2008, the Company, through ITCL entered into a $50 million secured loan facility
with $19.0 million drawn down as at December 31, 2008. The remaining facility
expired in September 2008. The facility bears interest at LIBOR plus a margin
and falls due in July 2009. The facility contains a covenant that requires ITCL
to maintain a positive working capital balance. This facility has been
guaranteed by Geveran Trading Co. Ltd, a related party for an annual fee of 2%
of the facility drawn down.




$129.6
million term loan facility


In June
2008, the Company entered into a $129.6 million pre-delivery secured term loan
facility. This loan falls due in June 2009 and the Company is currently in
discussion with the lenders regarding refinancing of this facility. The loan
bears interest at LIBOR plus a margin. The facility contains a minimum value
covenant and covenants that require the Company to maintain a minimum level of
free cash, a certain level of market adjusted net worth and positive working
capital.




$180.0
million term loan facility


In
September 2008, the Company entered into a $180.0 million secured term loan
facility falling due in September 2013. The loan bears interest at LIBOR plus a
margin. The facility contains a minimum value covenant and covenants that
require the Company to maintain a minimum level of free cash, a certain level of
market adjusted net worth and positive working capital. In March 2009, the
Company paid $3.8 million into a restricted bank account in order to comply with
this minimum value clause as of December 31, 2008.




$420.0
million term loan facility


In June
2008, the Company entered into a $420.0 million pre and post delivery secured
term loan facility falling due in 2017. At the year end, the Company had drawn
down $137.9 million. This facility bears interest at LIBOR plus a margin. The
facility contains a minimum value covenant and covenants that require the
Company to maintain a minimum level of free cash, a certain level of market
adjusted net worth and positive working capital.








F-23





US
DOLLAR DENOMINATED FIXED RATE DEBT




ITCL is
the holding company for three separate structures involved in financing and
leasing transactions. One of these structures has Serial Notes maturing between
2007 and 2010 and two of these structures have Term Notes maturing between 2015
and 2021. The Notes are collateralized by first preferred mortgages on the
vessels owned by the ITCL subsidiaries. As of December 31, 2008, the effective
interest rate for the Term and Serial Notes was 7.90% (2007 -
7.85%).




The 7.84%
First Preferred Mortgage Term Notes due 2021 and the 8.04% First Preferred
Mortgage Term Notes due 2019 are each subject to redemption through the
operation of mandatory sinking funds according to the schedule of sinking fund
redemption payments set forth below.  The sinking fund redemption
price is 100% of the principal amount of Term Notes being redeemed, together
with accrued and unpaid interest to the date fixed for redemption.





(in thousands of
      $)Year ending December
      31,2009
                    7,3842010
                    10,4222011
                    15,1522012
                    19,1342013
                    20,7122014 and
    later
                    248,291321,095





TERM
LOANS




Principal
is repayable on the 8.52% Term Loans due 2015 in accordance with a remainingsevenyear
sinking fund schedule. Of the four entities reporting these term loans, only one
entity, CalPetro BIII is consolidated as the remaining three entities are
accounted for under the equity method under FIN 46(R). As discussed above,
CalPetro BIII's initial charter with Chevron was terminated on April 1, 2006 and
as such, the revised sinking fund redemption amounts and final principal payment
is as follows:





(in thousands of
      $)Year ending December
      31,2009
                    4442010
                    7302011
                    7902012
                    8502013
                    9302014 and
    later
                    7,58411,328


Assets
pledged:


(in thousands of
      $)
                      
                      2008
                      
                      
                      2007Vessels and
      newbuildings
                      
                      
                      783,592
                      
                      
                      
                      204,876Restricted bank deposits
      (excluding amounts held in charter service reserve)
                      
                      
                      365,151
                      
                      
                      
                      424,677





21.  
SHARE CAPITAL





Authorized
share capital:


(in thousands of $, except share
      data)
                    
                    2008
                    
                    
                    2007125,000,000 ordinary shares of
      $2.50 each
                    
                    
                    312,500
                    
                    
                    
                    312,500








Issued
      and fully paid share capital:(in number of
      shares)
                          
                          2008
                          
                          
                          2007At January
1
                          
                          
                          74,825,169
                          
                          
                          
                          74,825,169Issued during the
      year
                          
                          
                          3,033,333
                          
                          
                          
                          -At December
    31
                          
                          
                          77,858,502
                          
                          
                          
                          74,825,169






F-24





(in thousands of
      $)
                        
                        2008
                        
                        
                        2007At January
1
                        
                        
                        187,063
                        
                        
                        
                        187,063Issued for
    cash
                        
                        
                        7,583
                        
                        
                        
                        -At December
    31
                        
                        
                        194,646
                        
                        
                        
                        187,063





The
Company's ordinary shares are listed on the New York Stock Exchange, the Oslo
Stock Exchange and the London Stock Exchange.




In
September 2007, the Company reduced its additional paid in capital account by
$480.8 million and the amount resulting from the reduction was credited to the
Company's contributed surplus account.




In July
2008, the Company generated $211.1 million through a share placement of three
million shares at $70.37 per share. Share issuance costs of $3.9 million have
been deducted from additional paid in capital. In June 2008, 33,333 shares were
issued at
a price of $26.57under the share option plan generating $0.9
million.




In
September 2008, the Company's shareholders at the Annual General Meeting
approved a stock split which would result in authorized share capital of
625,000,000 ordinary shares of $0.50 per share. No record date was set for the
stock split and the stock split had not taken place at December 31,
2008.




22.   ACCUMULATED
OTHER COMPREHENSIVE LOSS




The
activity in Accumulated Other Comprehensive Loss is summarized as
follows:





(in thousands of
      $)
                
                Unrealized investment
      gains (losses)
                
                
                Translation adjustments and
      other
                
                
                TotalBalance at December 31,
      2005
                
                
                (1,450
                )
                
                
                (5,234
                )
                
                
                (6,684
                )Translation adjustment for the
      year
                
                
                -
                
                
                
                538
                
                
                
                538Net unrealized gains and losses
      for the year
                
                
                295
                
                
                
                -
                
                
                
                295Realized gains reclassified to net
      income
                
                
                1,426
                
                
                
                -
                
                
                
                1,426Balance at December 31,
      2006
                
                
                271
                
                
                
                (4,696
                )
                
                
                (4,425
                )Translation adjustment for the
      year
                
                
                -
                
                
                
                1,324
                
                
                
                1,324Net unrealized gains and losses
      for the year
                
                
                (324
                )
                
                
                -
                
                
                
                (324
                )Realized losses reclassified to
      net income
                
                
                (271
                )
                
                
                -
                
                
                
                (271
                )Balance at December 31,
      2007
                
                
                (324
                )
                
                
                (3,372
                )
                
                
                (3,696
                )Translation adjustment for
      year
                
                
                -
                
                
                
                (1,312
                )
                
                
                (1,312
                )Net unrealized gains and losses
      for the year
                
                
                (25,574
                )
                
                
                -
                
                
                
                (25,574
                )Other-than-temporary
      impairment
                
                
                25,134
                
                
                
                -
                
                
                
                25,134Realized losses reclassified to
      net income
                
                
                221
                
                
                
                -
                
                
                
                221Balance at December 31,
      2008
                
                
                (543
                )
                
                
                (4,684
                )
                
                
                (5,227
                )





23.   SHARE
OPTION PLANS




In
November 2006, the Company's board of directors approved the Frontline Ltd Share
Option Scheme (the "Frontline Scheme").  The Frontline Scheme permits
the board of directors, at its discretion, to grant options to acquire shares in
the Company to employees and directors of the Company or its subsidiaries and
will expire in November 2016.  The subscription price for all options
granted under the scheme will be reduced by the amount of all dividends declared
by the Company in the period from the date of grant until the date the option is
exercised, provided the subscription price is never reduced below the par value
of the share.  Options granted under the scheme will vest at a date
determined by the board at the date of the grant.  The options granted
under the plan to date vest over a period of one to three
years.  There is no maximum number of shares authorized for awards of
equity share options and authorized, unissued or treasury shares of the Company
may be used to satisfy exercised options.




During
the years ended December 31, 2008, 2007 and 2006 the Company granted 760,000,
nil and 100,000 share options, respectively, to certain employees and directors
of the Company and its subsidiaries. The options have a five year term and vest
equally over three years from date of grant.






F-25






The
fair value of each option award is estimated on the date of the grant using a
Black Scholes option valuation model with the following
assumptions:





2008
                  2006Risk free interest
      rate
                  2.25%
                  4.74%Expected
    life
                  3.5 years
                  3.5
yearsExpected
      volatility
                  41%
                  44%Expected dividend
      yield
                  0%
                  0%





The
risk-free interest rate was estimated using the interest rate on 3 yearUStreasury
zero coupon issues.  The volatility was estimated using historical
share price data.  The dividend yield has been estimated at 0% as the
exercise price is reduced by all dividends declared by the Company from the date
of grant to the exercise date.   It is assumed that all options
granted in 2006 will vest and 95% of all options granted in 2008 will
vest.




The
following summarizes share option transactions related to the Frontline
Scheme:





(in thousands
      except per share data)
                          Number of
      Options
                          
                          Weighted
      Average Exercise PriceOptions outstanding as of December
      31, 2005
                          -
                          
                          -Granted
                          100
                          
                          NOK
  238.50Exercised
                          -
                          
                          -Forfeited
                          -
                          
                          -Options outstanding as of December
      31, 2006
                          100
                          
                          NOK
  238.50Granted
                          -
                          
                          -Exercised
                          -
                          
                          -Forfeited
                          -
                          
                          -Options outstanding as of December
      31, 2007
                          100
                          
                          NOK
  175.70Granted
                          760
                          
                          NOK
  243.00Exercised
                          (33.3)
                          
                          NOK
  135.90Forfeited
                          (201.7)
                          
                          NOK
  198.49Options outstanding as of December
      31, 2008
                          625
                          
                          NOK
  208.78Exercisable options as
      atDecember 31,
      2008
                          Nil
                          
                          NilDecember 31,
      2007
                          33.3
                          
                          NOK
  162.36December 31,
      2006
                          Nil
                          
                          Nil





The
weighted average exercise price is adjusted for dividends in accordance with the
terms of the plan. The remaining contractual term for the options outstanding at
December 31, 2008, 2007 and 2006, is 4.2 years, 3.8 years and 4.8 years
respectively.




The
total fair value of share options vested in the years ended December 31, 2008,
2007 and 2006 was nil, $0.5 million and nil.




The
weighted average grant-date fair value of options granted during 2008 and 2006
is $15.37 and $15.23 respectively.




As
of December 31, 2008, there was $4.4 million (2007: $0.6 million) in
unrecognized compensation cost related to non-vested options granted under the
Frontline Scheme.  The compensation expense is recognized over a
period of three years in accordance with vesting conditions. Compensation
expense recognized in the years ended December 31, 2008, 2007 and 2006 were $4.3
million, $0.9 million and $nil respectively.




24.   FINANCIAL
INSTRUMENTS





Foreign
currency risk




The
majority of the Company's transactions, assets and liabilities are denominated
in U.S. dollars, the functional currency of the Company. Certain of the
Company's subsidiaries report inSterlingor
Norwegian kroner and risks of two kinds arise as a
result:




●
            a
      transaction risk, that is, the risk that currency fluctuations will have a
      negative effect on the value of the Company's cash
      flows;●
            a translation risk, that is, the impact of adverse currency
      fluctuations in the translation of foreign operations and foreign assets
      and liabilities into U.S. dollars for the Company's consolidated financial
      statements.








F-26








Accordingly,
such risk may have an adverse effect on the Company's financial condition and
results of operations. The Company has not entered into derivative contracts for
either transaction or translation risk.




Forward
freight contracts


The
Company may enter into forward freight contracts, futures and option contracts
in order to manage its exposure to the risk of movements in the spot market for
certain trade routes for speculative purposes. Market risk exists to the extent
that spot market fluctuations have a negative effect on the Company's cash flows
and consolidated statements of operations. As of December 31, 2008 and 2007, the
Company had no such contracts outstanding. The Company incurred a loss on
forward contracts of $2.4 million in 2008 (2007: $nil) included in "mark
to market of derivatives".




Contracts
to purchase and sell securities


During
the year, the Company entered into forward contracts and a total return swap in
relation to the purchase and sale of securities in Overseas Shipholding Group
("OSG"). Market risk exists to the extent that spot market fluctuations have a
negative effect on the Company's cash flows and consolidated statements of
operations. As of December 31, 2008 and 2007, the Company had no such contracts
outstanding. The Company incurred a loss on these contracts of $15.0 million
(2007: $nil) included in "mark to market of derivatives".




Fair
Values


The
carrying value and estimated fair value of the Company's financial instruments
as of December 31, 2008 and 2007 are as follows:





2008
                      
                      
                      2007(in thousands of
      $)
                      
                      Carrying
      Value
                      
                      
                      Fair
                        Value
                      
                      
                      Carrying
      Value
                      
                      
                      Fair
                        ValueNon-Derivatives:Cash and cash
      equivalents
                      
                      
                      190,819
                      
                      
                      
                      190,819
                      
                      
                      
                      168,432
                      
                      
                      
                      168,432Restricted
    cash
                      
                      
                      554,751
                      
                      
                      
                      554,751
                      
                      
                      
                      651,377
                      
                      
                      
                      651,377Marketable
      securities
                      
                      
                      60,138
                      
                      
                      
                      60,138
                      
                      
                      
                      15,684
                      
                      
                      
                      15,684Long-term
      investments
                      
                      
                      20,020
                      
                      
                      
                      20,020
                      
                      
                      
                      -
                      
                      
                      
                      -Floating rate debt and credit
      facilities
                      
                      
                      569,424
                      
                      
                      
                      569,424
                      
                      
                      
                      80,246
                      
                      
                      
                      80,246Serial Notes (6.5% to 6.68%) due
      through 2010
                      
                      
                      6,300
                      
                      
                      
                      6,300
                      
                      
                      
                      17,100
                      
                      
                      
                      17,4058.52% Term Loan, due
      2015
                      
                      
                      11,328
                      
                      
                      
                      12,979
                      
                      
                      
                      11,328
                      
                      
                      
                      12,169Term Notes (7.84% to 8.04%) due
      through 2021
                      
                      
                      321,095
                      
                      
                      
                      333,659
                      
                      
                      
                      364,860
                      
                      
                      
                      405,923





The
carrying value of cash and cash equivalents, which are highly liquid, is a
reasonable estimate of fair value. The restricted cash balance includes
investments in guaranteed investment contracts that are readily convertible into
cash.  Long-term investments consist of unlisted ordinary and
preference shares. The Company estimates that the cost of the long-term
investments equate to fair value.




The
estimated fair value for floating rate long-term debt is considered to be equal
to the carrying value since it bears variable interest rates, which are reset on
a quarterly basis. The estimated fair value of the Term Notes and the Serial
Notes held at December 31, 2007 and the Term Notes held at December 31, 2008 are
based on quoted market prices. Quoted market prices are not available for the
Serial Notes held at December 31, 2008, however the Company evaluates that their
cost approximates to fair value.




Marketable
securities are measured at fair value on a recurring basis. The fair value of
marketable securities is based on the quoted market prices. This falls within
the "Level 1" category of FAS 157 being "measurements using quoted prices in
active markets for identical assets or liabilities".




Concentrations
of risk




There
is a concentration of credit risk with respect to cash and cash equivalents to
the extent that substantially all of the amounts are carried with Skandinaviska
Enskilda Banken ("SEB"), The Bank of New York, DnB Nor Bank ASA and Nordea Bank
Norge ("Nordea"). There is a concentration of credit risk with respect to
restricted cash to the extent that substantially all of the amounts are carried
with SEB, Nordea, Pacific Life, The Bank of New York, HSBC Midland, CIBC World
Markets and JP Morgan Chase. However, the Company believes this risk is
remote.






F-27





The
majority of the vessels' gross earnings are receivable in U.S. dollars. During
the year ended December 31, 2008, one customer accounted for more than 10% of
our consolidated operating revenues (2007 and 2006: one
customer).




25.   RELATED
PARTY TRANSACTIONS




As of
March 31, 2007, the Company is no longer consolidating the results of Ship
Finance. The majority of the Company's leased vessels are leased from Ship
Finance and under a Charter Ancillary Agreement; Ship Finance is entitled to a
share of 20% of the Company's earnings on these leased vessels. A summary of
leasing transactions with Ship Finance during the years ended December 31, 2008
and 2007 (excluding amounts prior to deconsolidation) is as
follows:





(in
      thousands of $)
                    
                    2008
                    
                    
                    2007Charterhire paid (principal and
      interest)
                    
                    
                    345,551
                    
                    
                    
                    273,239Payments received for termination
      of leases
                    
                    
                    43,510
                    
                    
                    
                    29,343Profit share
      expense
                    
                    
                    110,962
                    
                    
                    
                    37,279Remaining lease
      obligation
                    
                    
                    1,609,987
                    
                    
                    
                    1,767,758





A
summary of net amounts earned (incurred) from related parties excluding the Ship
Finance lease related balances above for the year ended December 31, is as
follows:





(in thousands of
      $)
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006Seatankers Management Co.
      Ltd
                    
                    
                    1,175
                    
                    
                    
                    582
                    
                    
                    
                    432Golar LNG
      Limited
                    
                    
                    17
                    
                    
                    
                    284
                    
                    
                    
                    180Ship Finance International
      Limited
                    
                    
                    3,430
                    
                    
                    
                    1,525
                    
                    
                    
                    -Golden Ocean Group
      Limited
                    
                    
                    6,714
                    
                    
                    
                    2,099
                    
                    
                    
                    597Individual related to John
      Fredriksen
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12Geveran Trading Co
      Ltd
                    
                    
                    (366
                    )
                    
                    
                    -
                    
                    
                    
                    -Greenwich
      Holdings Ltd
                    
                    
                    -
                    
                    
                    
                    69
                    
                    
                    
                    -Bryggegata
      AS
                    
                    
                    (1,395
                    )
                    
                    
                    (1,430
                    )
                    
                    
                    (1,021
                    )Arcadia
      Petroleum Limited
                    
                    
                    64,784
                    
                    
                    
                    17,443
                    
                    
                    
                    -Seadrill
      Limited
                    
                    
                    25
                    
                    
                    
                    (52
                    )
                    
                    
                    545CalPetro Tankers (BahamasI) Limited
                    
                    
                    43
                    
                    
                    
                    40
                    
                    
                    
                    40CalPetro Tankers (BahamasII)
Limited
                    
                    
                    43
                    
                    
                    
                    40
                    
                    
                    
                    40CalPetro Tankers (IOM)
      Limited
                    
                    
                    43
                    
                    
                    
                    40
                    
                    
                    
                    40





Net
amounts earned from related parties comprise office rental income and
management, technical and commercial advisory, newbuilding supervision,
corporate and administrative service income and interest income. Net expenses
paid to related parties comprise primarily of rental for office
space.




A
summary of balances with related parties as at the year ended December 31, is as
follows:





(in thousands of
      $)
                        
                        2008
                        
                        
                        2007ReceivablesShip Finance International
      Limited
                        
                        
                        8,351
                        
                        
                        
                        12,990Seatankers  Management
      Co. Ltd
                        
                        
                        370
                        
                        
                        
                        270Golar LNG
      Limited
                        
                        
                        381
                        
                        
                        
                        192Northern Offshore
      Ltd
                        
                        
                        13
                        
                        
                        
                        13Golden Ocean Group
      Limited
                        
                        
                        2,012
                        
                        
                        
                        1,160Seadrill
      Limited
                        
                        
                        106
                        
                        
                        
                        89Greenwich Holdings
      Ltd
                        
                        
                        -
                        
                        
                        
                        51CalPetro Tankers (BahamasI) Limited
                        
                        
                        35
                        
                        
                        
                        13CalPetro Tankers (BahamasII)
Limited
                        
                        
                        35
                        
                        
                        
                        13CalPetro Tankers (IOM)
      Limited
                        
                        
                        35
                        
                        
                        
                        1311,338
                        
                        
                        
                        14,804







F-28





(in thousands of
      $)
                        
                        2008
                        
                        
                        2007PayablesShip
      Finance International Limited
                        
                        
                        (46,540
                        )
                        
                        
                        (49,708
                        )Seatankers
      Management Co. Ltd
                        
                        
                        (119
                        )
                        
                        
                        (1,170
                        )Golar
      LNG Limited
                        
                        
                        (242
                        )
                        
                        
                        (94
                        )Golden
      Ocean Group Limited
                        
                        
                        (155
                        )
                        
                        
                        -Geveran
      Trading Co Ltd
                        
                        
                        (366
                        )
                        
                        
                        -Seadrill
      Limited
                        
                        
                        -
                        
                        
                        
                        (16
                        )(47,422
                        )
                        
                        
                        (50,988
                        )





Receivables
and payables with related parties comprise unpaid management, technical
advisory, newbuilding supervision, administrative service and rental
charges.  In addition, certain payables and receivables arise when the
Company pays an invoice on behalf of a related party and vice
versa.  The payable with Ship Finance also includes unpaid profit
share due to Ship Finance. Receivables and payables with related parties are
generally settled quarterly in arrears with the exception of profit share due to
Ship Finance which is settled annually.




Ship Finance International
Limited, Golar LNG Limited, Northern Offshore Ltd, Norse Energy Group
ASA, Seadrill Limited, Bryggegata AS, Golden Ocean Group
Limited, Greenwich Holdings
Ltd, Arcadia Petroleum Limited ("Arcadia"), Geveran
Trading Co Ltd ("Geveran") and Seatankers Management
Co. Ltd are each subject to the significant influence or indirect control of
John Fredriksen. CalPetro Tankers (Bahamas I) Limited, CalPetroTankers(Bahamas
II) Limited, CalPetroTankers(Bahamas
III) Limited and CalPetroTankers
(IOM)Limited were all equity accounted until March 31, 2006 at which point, the
Company began consolidating CalPetroTankers(Bahamas
III) Limited.




During
2008, the Company engaged in the trading of forward freight agreement trading
through Arcadia, a related party, for which Arcadia was paid commission on each
trade. The total amount of commissions paid to Arcadia was $12,500. The
Company did not engage in forward freight agreement trading through Arcadia
in 2007. In addition, the Company earned freights on chartering vessels to
Arcadia in the amount of $64.8 million (2007: $17.4 million).




In
November 2008, the Company advanced $60.0 million of the profit share balance,
which was due to Ship Finance in March 2009. The advance bore interest at a
fixed rate.




Geveran
has acted as a guarantor for two loan facilities totaling $71.6 million, taken
out by ITCL. $40.6 million of these loan facilities were drawn down at December
31, 2008 and the balance has been cancelled. These loan facilities expire in
July and August of 2009. Geveran receives an annual fee of 2% of the draw down
facility for acting as guarantor.




During
the year ended December 31, 2007, the Company held investments in Sea Production
and Dockwise and earned income from these companies in the form of rental income
and income earned from the provision of accounting services totaling $1.0
million. During the year, the Company disposed of its entire investments in
these companies and they are no longer considered to be related parties. Refer
to Note 26 for further discussion on gains from disposal of assets relating to
Sea Production and Dockwise.




26.   DISPOSAL
OF ASSETS




In
March 2007, Sealift acquired six single hull vessels, of which four were to be
converted to heavy lift vessels, for a total purchase price of $476.0 million
which was based on the estimated market value of the four converted heavy lift
vessels and the two single hull Suezmax vessels. The purchase price included
$80.0 million short-term seller's credit from the Company which was allocated
equally to each of the last two remaining converted heavy lift vessels. This
seller's credit was payable on delivery of each vessel. The sale of vessels to
Sealift included an obligation on the Company to manage, supervise and pay the
conversion costs for the four heavy lift vessels. In addition, the midsections
of the last two vessels were sold for $4.7 million. The gain on sale arising
from this transaction was allocated to each vessel with $60.0 million of the
gain being accounted for as an adjustment against the Company's investment. The
gain was recognizedas
each vessel was delivered. Two Suezmax vessels and two converted vessels were
successfully delivered to Dockwise in 2007 resulting in a net gain of $60.7
million, which was recorded as a gain on sale of assets. The remaining two
converted vessels were delivered in the second quarter of 2008 resulting in a
net gain of $100.4 million.






F-29
 
   The
Company accounted for its 33.3% investment in Sealift under the equity method.
In May 2007, Sealift issued 94.1 million shares to the shareholders of Dockwise
in exchange for all the shares and convertible securities of the entities owned
by Dockwise. Sealift also completed aprivate
placement for 39.8 million shares with the Company subscribing for 5 million
shares. Sealift subsequently changed its name to Dockwise. A gain of $43.7
million was recorded in 2007 as a gain on issuance of shares by associates as a
result. Subsequent to this transaction, the Company accounted for its 17.1%
investment in Dockwise as marketable securities. In October 2007, the Company
sold its entire investment in Dockwise for a net gain of $48.7 million which was
recorded as gain on sale of securities.





In
January 2008, Ship Finance sold the single hull vessel Front Maple to a third
party and as a result, terminated the Company's long-term lease for the vessel.
The Company received a termination payment of $16.7 million and recorded a net
gain of $17.1 million as a gain on sale of assets.




On March 6, 2008 the
Company completed the partial non pro-rata spin off of its subsidiary ITCL and
distributed 17.53% of ITCL to the Company's shareholders.  The
spin-off resulted in a gain on disposal of $18.0 million which
has been recorded within 'other non-operating items, net'. Refer to Note
27.




In May
2008, Ship Finance sold the single hull vessel Front Sabang to a third party and
as a result, terminated the Company's long-term lease for the vessel. The
Company received a termination payment of $26.8 million and recorded a net gain
of $24.8 million as a gain on sale of assets.




27.   MINORITY
INTEREST AND DIVIDEND DISTRIBUTION TO
SHAREHOLDERS




The
Company accounts for pro-rata distributions to owners in a spin-off at the book
value of shares distributed and accounts for non pro-rata distributions to
owners in a spin-off at the fair value of shares distributed.




In
February 2008, as part of the Company's planned spin-off of its investment in
its Bermuda subsidiary ITCL to the Company's shareholders, the Company's Board
of Directors declared a special dividend-in-kind of 17.53%
of the Company's investment in ITCL with the distribution date being March 6,
2008. Qualifying shareholders received one share in ITCL for every five shares
held in the Company. Non qualifying shareholders received a cash equivalent of
$0.34 per Frontline share held, a cash dividend of $14.0 million, representing
8.5% of the fair value of ITCL on the date of distribution.  The value
of the non-cash dividend was established as $11.4 million, representing 9.0% of
the fair value of ITCL on the date of distribution. Fair value was established
by using the average price of ITCL shares over the first five trading days after
the shares were listed on the Norwegian OTC market. As of December 31, 2008 the
Company owned 82.47% of ITCL.




In March
2007, the Company completed its pro-rata partial spin offs of Ship Finance by
the Company as follows:





Distribution
                    Date
                  %
      Frontline holding
                    Distributed
                  Distribution
      Ratio (Ship Finance/ Frontline shares held)
                  Value
      of dividend
                    $
      millionsJune
      16, 2004
                  25.0%
                  1/4
                  $142.5September
      24, 2004
                  9.9%
                  1/10
                  $59.8December
      15, 2004
                  13.3%
                  2/15
                  $85.7February
      18, 2005
                  25.0%
                  1/4
                  $154.9March
      24, 2005
                  10.0%
                  1/10
                  $57.0March
      20, 2006
                  5.14%
                  1/20
                  $27.8March
      22, 2007
                  11.1%
                  3/28
                  $162.2





The value
of the non-cash dividend is valued based on the book value of Ship Finance at
the date of distribution. As a result of the final distribution on March 2007,
the Company no longer consolidates Ship Finance and therefore no longer reports
any related minority interest.




In
November 2006, 30% of shares in Puffin Ltd, a subsidiary of the Company, were
issued to a third party for $7.8 million as part of the proposed spin off of the
Company's FPSO (Floating Production, Storage and Offloading) operations. In
February 2007, the Company sold its entire investment in Puffin Ltd to Sea
Production and no longer reports any related minority interest.








F-30








28.  
COMMITMENTS AND CONTINGENCIES




The
Company insures the legal liability risks for its shipping activities with
Assuranceforeningen SKULD, Assuranceforeningen Gard Gjensidig and Britannia
Steam Ship Insurance Association Limited, all mutual protection and indemnity
associations. As a member of these mutual associations, the Company is subject
to calls payable to the associations based on the Company's claims record in
addition to the claims records of all other members of the associations. A
contingent liability exists to the extent that the claims records of the members
of the associations in the aggregate show significant deterioration, which
result in additional calls on the members.




As
of December 31, 2008, the Company had nine vessels that were sold by the Company
at various times during the period from November 1998 to December 31, 2003, and
leased back on charters that range for periods of eight to twelve and a half
years with options on the lessor's
side to extend the charters for periods that range up to five years. Eight of
these charters are accounted for as capital leases and one is accounted for as
an operating lease. The Company has purchase options at certain specified dates
and the lessor has options to put the vessels on the Company at the end of the
lease terms for all of these nine vessels. The total amount that the Company
would be required to pay under these put options with respect to the operating
lease is $9.5 million.




As
of December 31, 2008 Chevron charters three vessels on long-term bareboat
charters recorded as investments in finance leases.  Chevron holds
options to purchase each vessel for $1 on April 1, 2015 provided no earlier
optional termination of the bareboat charter has occurred. The Company has not
received notice of Chevron's intent to terminate any of these
charters.




As
of December 31, 2008, the Company had eighteen contracts for the construction of
ten VLCC newbuildings scheduled for delivery in 2009, 2010, 2011 and 2012 and
eight Suezmax newbuildings scheduled for delivery in 2009, 2010 and 2011. As of
December 31, 2008, the Company was committed to make further installments
of $1,366.4million as follows:





(in thousands of
      $)
                    
                    
                    TotalYear ending December
      31,2009
                    
                    
                    350,1282010
                    
                    
                    620,8202011
                    
                    
                    341,5002012
                    
                    
                    54,0001,366,448





In
January 2008, Golden President Shipping Corporation, a 100% subsidiary of Golden
Ocean Group Limited ("Golden Ocean"),  had a full and final win in the
court case against Bocimar N.V. on the Channel Alliance Time Charter Party and
was awarded $14.7 million plus interest thereon. This amount was originally
guaranteed by Frontline to Golden Ocean in connection with the spin-off in
December 2004, and was later paid to Golden Ocean as it became due according to
the charter party.  The settlement paid during the year from Bocimar N.V.
was therefore due and paid to Frontline. Proceeds received of $16.6 million are
recognized in "other non-operating items, net".




The
Company is a party, as plaintiff or defendant, to several lawsuits in various
jurisdictions for demurrage, damages, off-hire and other claims and commercial
disputes arising from the operation of its vessels, in the ordinary course of
business or in connection with its acquisition activities.  The
Company believes that the resolution of such claims will not have a material
adverse effect on the Company's operations or financial
condition.








F-31





29.  
SUPPLEMENTAL INFORMATION




Non-cash
      investing and financing activities include the
      following:





(in thousands of
      $)
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006Dividends in
      kind:Spin-off of Ship
      Finance
                    
                    
                    -
                    
                    
                    
                    162,222
                    
                    
                    
                    27,841Spin-off of
      ITCL
                    
                    
                    11,475
                    
                    
                    
                    -
                    
                    
                    
                    -Vessels:Reclassification of vessel under
      conversion to newbuildings
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (55,317
                    )Vessel addition on termination of
      capital lease
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    13,502








30.   DISCONTINUED
OPERATIONS




In
2007, due to the deconsolidation of Ship Finance in March 2007, the Company no
longer reports results of Ship Finance's containerships or jack up
rigs.




The
operations that were disposed of were recorded as discontinued operations in
accordance with the requirements of FAS 144Accounting
for the Impairment or Disposal of Long-Lived Assets("FAS
144") as the operations and cash flows of the operations were eliminated from
the ongoing operations of the Company. The Company does not have any significant
continuing involvement in these dry bulk, containership or jack-up rig
operations in the future.




The
following table presents the information required by FAS 144 in respect of
discontinued operations:





(in thousands of
      $)
                  2008
                  2007
                  2006Carrying amount of assets disposed
      of
                  -
                  524,961
                  -Carrying amount of debt or lease
      retired
                  -
                  317,543
                  -Amounts
      recorded in discontinued operations:Operating
      revenues
                  -
                  11,465
                  25,494Net income
                  -
                  5,442
                  13,514





31.   POOL
REVENUES




Voyage
charter revenues include pool revenues.  In the last three years these
have been allocated on a gross basis whereby participants pay and account for
voyage expenses, and distribute gross pool revenues to the participants. For the
years ended December 31, 2008, 2007 and 2006 pool earnings were $0.4 million,
$34.4 million and $131.1 million respectively.




32.  
GAIN ON ISSUANCE OF SHARES BY SUBSIDIARY AND
ASSOCIATE




In
February 2007, the Company's wholly owned subsidiary Sea Production completed a
private placement for 90.0 million shares at a price of $2 per share, raising a
total of $180.0 million. The Company subscribed for 25.5 million shares which
represented a 28.3% investment. A gain of $39.8 million was recorded in the
statement of operations as a result of the issue of shares by Sea
Production.




In May 2007, Dockwise,
which the Company accounted for under the equity method, completed a private
placement for 39.8 million shares at a price of NOK 30 per share raising a total
of NOK 1,194.0 million. The Company subscribed for five million of these shares
and as the subscription was not sufficient to maintain the Company's
proportionate interest, the Company's shareholding was reduced from 33.3% to
17.1%. A gain of $43.8 million was recorded in the consolidated statement of
operations as a result. The Company subsequently accounted for its 17.1%
investment as marketable securities. In September 2007, Dockwise issued a
further 0.5 million shares. The Company did not participate in this offering and
its shareholding was further reduced to 16.6%. In
October 2007, the Company sold its entire investment in Dockwise for a net gain
of $48.7 million which was recorded as gain on sale of
securities.







F-32





33.   SUBSEQUENT
EVENTS




In
December 2008,Frontline
entered into an agreement with Teekay Corporation to commercially combine their
Suezmax tankers within the Gemini Pool. Operation of the pool began in January
2009.




On
January 2, 2009 the lease agreement between Buckingham Shipping Plc, a
subsidiary of ITCL, and Dresdner Kleinwort Leasing was terminated and the
outstanding lease obligation was settled in full using restricted cash. At
December 31, 2008 the total obligation was $69.3 million. The vessel was sold to
another subsidiary of ITCL which means that Frontline legally owns the vessel as
of January 2, 2009 subsequent to the termination. The termination was cash
neutral for the Company since the net consideration paid for the vessel by the
ITCL subsidiaries was nil.




On
January 8, 2009, the Front Kathrine was delivered to the Company, being the
first newbuilding contract VLCC from Waigaoqiao Shipbuilding Company
Ltd.




In
January 2009, the Ship Finance entered into a purchase option contract granting
a third party the option to purchase the Mindanao.




In
February 2009, the Company's Board of Directors declared a cash dividend of
$0.25 per share which was paid on March 27, 2009.




On
February 20, 2009, the Company advanced Ship Finance a further $25.0 million on
its profit share, which was due in March 2009. The advance bore interest at a
fixed rate.




In March
2009, Frontline Shipping III Limited ("FSL III"), a wholly owned subsidiary of
the Company, and Ship Finance amended their charter ancillary agreement
whereby the charter service reserve totaling $26.5 million relating to vessels
on charter from Ship Finance may be in the form of a loan to Ship Finance.
 In March 2009, a loan in the amount of $26.5 million was drawn down by
Ship Finance.  The loan bears interest at LIBOR plus a margin and is due
for repayment within 364 days of the loan being provided, or earlier in
accordance with the agreement.




In
March 2009, upon the lenders' request, the Company paid $3.8 million into a
restricted bank account in order to comply with a minimum value clause, as of
December 31, 2008, related to the$180.0 million term loan
facility.




The
first three Suezmax newbuildings due for delivery have not met their contractual
delivery dates. The Company is currently discussing the delays with the shipyard
and considering any remedies that may be available to the
Company.

















F-33