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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date
of event requiring this shell company report _________
 For the transition period from  to
 COMMISSION FILE NUMBER 333-124825
 FREESEAS INC.
  Republic of the Marshall Islands
 89 Akti Miaouli & 4 Mavrokordatou Street, Piraeus, Greece
 Fax: 30-210-42-91-010
  Title of each class
    
    Name of each exchange on which registeredNone
    
    None
  
      o þ
  o þ
  þ o
  Large accelerated filer
o
    
    Accelerated filer o
    
    Non-accelerated filer
þ
  þ o o
  o o
  o þ




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TABLE OF CONTENTS
 PART I
    
    
    
    
    1ITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    1ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    1ITEM 3.
    
    KEY INFORMATION
    
    
    1ITEM 4.
    
    INFORMATION ON THE COMPANY
    
    
    23ITEM 4A.
    
    UNRESOLVED STAFF COMMENTS
    
    
    40ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    40ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    59ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    64ITEM 8.
    
    FINANCIAL INFORMATION
    
    
    67ITEM 9.
    
    THE OFFER AND LISTING
    
    
    67ITEM 10.
    
    ADDITIONAL INFORMATION
    
    
    68ITEM 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    82ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    83PART II
    
    
    
    
    84ITEM 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    84ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    84ITEM 15.
    
    CONTROLS AND PROCEDURES
    
    
    84ITEM 16A.
    
    AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    85ITEM 16B.
    
    CODE OF ETHICS
    
    
    85ITEM 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    85ITEM 16D.
    
    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    85ITEM 16E.
    
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    86PART III
    
    
    
    
    87ITEM 17.
    
    FINANCIAL STATEMENTS
    
    
    87ITEM 18.
    
    FINANCIAL STATEMENTS
    
    
    87ITEM 19.
    
    EXHIBITS
    
    
    87EX-4.34 Supplemental AgreementEX-4.35 Memorandum of AgreementEX-4.36 Memorandum of AgreementEX-4.37 Supplemental AgreementEX-4.38 Memorandum AgreementEX-4.39 Facility AgreementEX-4.40 First Preferred MortgageEX-4.41 First Preferred MortgageEX-4.42 First Preferred MortgageEX-4.43 Loan AgreementEX-4.44 First Preferred MortgageEX-4.45 Deed of CovenantsEX-4.46 Credit AgreementEX-4.47 Short Term Loan AgreementEX-4.48 Rollover Loan AgreementEX-4.49 First Preferred MortgageEX-4.50 Deed of CovenantsEX-4.51 Second Preferred MortgageEX-4.52 Second Preferred MortgageEX-8.1 Subsidiaries of the RegistrantEX-12.1 Section 302 CEO CertificationEX-12.2 Section 302 CFO CertificationEX-13.1 Section 906 CEO CertificationEX-13.2 Section 906 CFO CertificationEX-15.2 Consent of PriceWaterhouseCoopers LLP




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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
  
    
    our future operating or financial results;
    
    future, pending or recent acquisitions, business strategy, areas of possible expansion,
and expected capital spending or operating expenses;
    
    drybulk shipping industry trends, including charter rates and factors affecting vessel
supply and demand;
    
    our financial condition and liquidity, including our ability to obtain additional
financing in the future to fund capital expenditures, acquisitions and other general
corporate activities;
    
    our ability to pay dividends in the future;
    
    availability of crew, number of off-hire days, dry-docking requirements and insurance
costs;
    
    our expectations about the availability of vessels to purchase or the useful lives of
our vessels;
    
    our ability to leverage to our advantage our managers relationships and reputation in
the drybulk shipping industry;
    
    changes in seaborne and other transportation patterns;
    
    changes in governmental rules and regulations or actions taken by regulatory
authorities;
    
    potential liability from future litigation and incidents involving our vessels;
    
    global and regional political conditions;
    
    acts of terrorism and other hostilities; and
    
    other factors discussed in the section titled Risk Factors.




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PART I
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
 A. Selected Consolidated Financial Data
  From InceptionYear Ended December 31,
    
    (April 23, 2004) to2007
    
    2006
    
    2005
    
    December 31, 2004Statement of Operations Data:Operating revenues
    
    $
    20,147,000
    
    
    $
    11,727,000
    
    
    $
    10,326,000
    
    
    $
    2,830,000Income (loss) from operations
    
    
    5,761,000
    
    
    
    (2,281,000
    )
    
    
    1,205,000
    
    
    
    706,000Other expense
    
    
    (5,917,000
    )
    
    
    (1,043,000
    )
    
    
    (1,053,000
    )
    
    
    (236,000
    )Net (loss) income
    
    
    (156,000
    )
    
    
    (3,324,000
    )
    
    
    152,000
    
    
    
    470,000Earnings Per Share Data:Net (loss) income per share:Basic (loss) earnings per share
    
    $
    (0.02
    )
    
    $
    (0.53
    )
    
    $
    0.03
    
    
    $
    0.10Diluted (loss) earnings per share
    
    $
    (0.02
    )
    
    $
    (0.53
    )
    
    $
    0.03
    
    
    $
    0.10Weighted average number of shares:Basic weighted average number of share
    
    
    8,786,287
    
    
    
    6,290,100
    
    
    
    4,574,588
    
    
    
    4,500,000Diluted weighted average number of
shares
    
    
    8,786,287
    
    
    
    6,290,100
    
    
    
    4,600,444
    
    
    
    4,500,000
 December 31,2007
    
    2006
    
    2005
    
    2004Selected Balance Sheet Data:Cash in hand and at bank
    
    $
    63,394,000
    
    
    $
    372,000
    
    
    $
    3,285,000
    
    
    $
    461,000Net working capital (deficiency)
    
    
    47,343,000
    
    
    
    (8,843,000
    )
    
    
    (4,945,000
    )
    
    
    (3,528,000
    )Total assets
    
    
    191,972,000
    
    
    
    23,086,000
    
    
    
    29,840,000
    
    
    
    18,335,000Long-term debt, including current portion
    
    
    56,300,000
    
    
    
    7,830,000
    
    
    
    13,000,000
    
    
    
    10,150,000Shareholders loan and advance
    
    
    
    
    
    
    2,552,000
    
    
    
    3,200,00
    
    
    
    3,828,000Total shareholders equity
    
    
    112,626,000
    
    
    
    7,007,000
    
    
    
    9,705,000
    
    
    
    3,386,000
 B. Capitalization and Indebtedness
  
    
    on a historical basis without any adjustment to reflect subsequent events;
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
    
    as adjusted as of April 14, 2008 to reflect (i) regularly scheduled repayments
of our existing debt, (ii) the incurrence of debt in connection with the purchase of
the M/V Free Knightand the M/V Free Impala, (iii) the deposit on the M/V Free Lady,
and (iv) the refinancing of the M/V Free Jupiter.
 Free Impala Free Knight Free Jupiter
 Historical as of
    
    
    As Adjusted as ofDecember 31, 2007
    
    
    April 14, 2008Debt:Long-term debt, current portion
    
    $
    11,800
    
    
    $
    18,000Long-term debt, net of current portion
    
    
    44,500
    
    
    
    85,700Total debt
    
    $
    56,300
    
    
    $
    103,700Shareholders equity:Preferred stock, $0.001 par value;
5,000,000 shares authorized, none
issued
    
    
    
    
    
    
    Common stock, $0.001 par value,
40,000,000 shares authorized,
6,290,100 and 20,743,456 shares
issued and outstanding, actual and as
adjusted
    
    
    20
    
    
    
    20Additional paid-in capital
    
    
    115,464
    
    
    
    115,464Accumulated (deficit)
    
    
    (2,858
    )
    
    
    (2,858
    )Total shareholders equity
    
    $
    112,626
    
    
    $
    112,626Total capitalization
    
    $
    168,926
    
    
    $
    215,326
  C. Reasons for the Offer and Use of Proceeds
  D. Risk Factors
 Our business faces certain risks. The risks described below may not be the only risks we face.
Additional risks that we do not yet know of or that we currently think are immaterial may also
impair our business. If any of the events or circumstances described as risks below or elsewhere in
this report actually occurs, our business, results of operations or financial condition could
be materially and adversely affected.
 Risk Related to Our Industry
 The cyclical nature of the international shipping industry may lead to volatile changes in
charter rates and vessel values, which may reduce our revenues and net income.
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
    
    economic and market conditions affecting the shipping industry in general;
    
    supply of drybulk vessels, including secondhand vessels;
    
    demand for drybulk vessels;
    
    types and sizes of vessels;
    
    other modes of transportation;
    
    cost of newbuildings;
    
    new regulatory requirements from governments or self-regulated organizations; and
    
    prevailing level of charter rates.
  3




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Charter rates, which in the international drybulk shipping industry approached historic
highs in the third quarter of 2007, may decline as a result of increased capacity and
slowing worldwide economic growth, thereby reducing our future profitability.
   
    
    supply and demand for drybulk commodities;
    
    global and regional economic conditions;
    
    the distance drybulk commodities are to be moved by sea; and
    
    changes in seaborne and other transportation patterns.
  
    
    the number of newbuilding deliveries;
    
    the scrapping rate of older vessels;
    
    changes in environmental and other regulations that may limit the useful life of vessels;
    
    the number of vessels that are laid-up; and
    
    changes in global drybulk commodity production.
 An oversupply of drybulk carrier capacity may lead to reductions in charter rates and our
profitability.
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An economic slowdown in the Asia Pacific region or elsewhere could materially reduce the
amount and/or profitability of our business.
  Changes in the economic and political environment in China and policies adopted by the
government to regulate its economy may have a material adverse effect on our business,
financial condition and results of operations.
  Charter rates are subject to seasonal fluctuations, which may adversely affect our operating
results.
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The operation of drybulk carriers has certain unique operational risks.
  We are subject to regulation and liability under environmental laws that could require
significant expenditures and reduce our cash flows and net income.
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If any of our vessels fail to maintain their class certification and/or fail any annual
survey, intermediate survey, dry-docking or special survey, that vessel would be unable to
carry cargo, thereby reducing our revenues and profitability and violating certain loan
covenants of our third-party indebtedness.
    Maritime claimants could arrest our vessels, which could interrupt our cash flow.
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Governments could requisition our vessels during a period of war or emergency, resulting in
loss of earnings.
  World events outside our control such as terrorism and international and regional
hostilities may negatively affect our ability to operate, thereby reducing our revenues and
net income or our ability to obtain additional financing, thereby restricting the
implementation of our business strategy.
   Risks involved with operating ocean-going vessels could affect our business and reputation,
which may reduce our revenues.
  
    
    crew strikes and/or boycotts;
    
    marine disaster;
    
    piracy;
    
    environmental accidents;
    
    cargo and property losses or damage; and
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
    
    business interruptions caused by mechanical failure, human error, war,
terrorism, political action in various countries, labor strikes or adverse weather
conditions.
  Rising fuel prices may adversely affect our profits.
  Risks Related to Our Company
 We have a limited operating history and have cumulative deficits.
  If we fail to manage our planned growth properly, we may not be able to successfully expand
our market share.
  
    
    locating and acquiring suitable vessels;
    
    identifying and consummating acquisitions or joint ventures;
    
    integrating any acquired vessel successfully with our existing operations;
    
    enhancing our customer base;
    
    managing our expansion; and
    
    obtaining the required financing.
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Our charterers may terminate or default on their charters, which could adversely affect our
results of operations and cash flow.
    Our earnings may be adversely affected if we do not successfully employ our vessels.
  We will not be able to take advantage of favorable opportunities in the current spot market
with respect to vessels employed on medium- to long-term time charters.
  We previously relied on spot charters and may spot charter certain of our vessels in the
future. The rates on spot charters are very competitive and volatile, which can result in
decreased revenues if spot charter rates decline.
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If vessels that we acquire for our fleet are not delivered on time or delivered with
significant defects, our business, results of operations, financial condition and ability to
pay dividends could be adversely affected.
 Free Lady
 We depend entirely on Free Bulkers and Safbulk to manage and charter our fleet.
  Because our seafaring employees are covered by collective bargaining agreements, failure of
industry groups to renew those agreements may disrupt our operations and adversely affect
our earnings.
  If Free Bulkers is unable to perform under its vessel management agreements with us, our
results of operations may be adversely affected.
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We, and one of our executive officers, have affiliations with Free Bulkers that could create
conflicts of interest detrimental to us.
  Operational or financial problems experienced by Free Bulkers, our affiliate, may adversely
impact us.
  If Free Bulkers is unable to recruit suitable seafarers for our fleet or as we expand our
fleet, our results of operations may be adversely affected.
  In the highly competitive international drybulk shipping industry, we may not be able to
compete for charters with new entrants or established companies with greater resources.
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A decline in the market value of our vessels could lead to a default under our loan
agreements and the loss of our vessels.
  Servicing debt may limit funds available for other purposes and inability to service debt
may lead to acceleration of debt and foreclosure on our fleet.
 Free Hero Free Jupiter Free Goddess
 Free Hero Free Goddess Free Jupiter Free Knight Free Impala Free Jupiter Free Knight Free Impala
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Continued increase in interest rates would reduce funds available to purchase vessels and
service debt.
  Our loan agreements contain covenants that may limit our liquidity and corporate activities.
  
    
    incur additional indebtedness;
    
    create liens on our assets;
    
    sell capital stock of our subsidiaries;
    
    make investments;
    
    engage in mergers or acquisitions;
    
    pay dividends;
    
    make capital expenditures; and
    
    change the management of our vessels or terminate or materially amend the
management agreements and sell our vessels.
  We cannot assure you that we will pay dividends.
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We are a holding company, and we will depend on the ability of our subsidiaries to
distribute funds to us in order to satisfy our financial obligations or to make dividend
payments.
  The performance of our existing charters and the creditworthiness of our charterers may
hinder our ability to implement our business strategy by making additional debt financing
unavailable or available only at higher than anticipated cost.
  As we expand our business, we will need to upgrade our operational and financial systems,
and add more staff. If we cannot upgrade these systems or recruit suitable additional
employees, our performance may suffer.
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We are required by Section 404 of the Sarbanes-Oxley Act of 2002 to evaluate our controls,
which evaluation requires substantial resources. If these evaluations result in the
identification of material weaknesses, we may be adversely affected until these weaknesses
can be corrected.
  We may be unable to attract and retain key management personnel and other employees in the
shipping industry, which may reduce the effectiveness of our management and lower our
results of operations.
  Our vessels may suffer damage and may face unexpected dry-docking costs, which could reduce
our cash flow and impair our financial condition.
  The grounding of the M/V Free Jupiter has negatively impacted our financial condition and
results of operations. Since our fleet is currently small, the loss of service of any
vessels in the future could also have a material adverse effect on our earnings.
 Free Jupiter
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Purchasing and operating previously owned, or secondhand, vessels may result in increased
operating costs and vessels off-hire, which could adversely affect our earnings.
    Unless we set aside reserves or are able to borrow 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 and financial condition.
  Because we will generate all of our revenues in U.S. dollars but will incur a portion of our
expenses in other currencies, exchange rate fluctuations could have an adverse impact on our
results of operations.
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Investment in derivative instruments such as freight forward agreements could result in
losses.
  We may not have adequate insurance to compensate us adequately for damage to, or loss of,
our vessels.
  We may have to pay tax on United States source income, which would reduce our earnings.
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U.S. tax authorities could treat us as a passive foreign investment company, which could
have adverse U.S. federal income tax consequences to U.S. holders.
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Legislation has been proposed in the United States which would prevent dividends on our
shares from qualifying for certain preferential rates for U.S. federal income tax purposes.
  Risks Related to Our Common Stock
 There may not be a liquid market for our common stock, which may cause our common stock to
trade at lower prices and make it difficult to sell your common stock.
  The market price of our common stock has been and may in the future be subject to
significant fluctuations.
  
    
    quarterly variations in our results of operations;
    
    changes in sales or earnings estimates or publication of research reports by analysts;
    
    speculation in the press or investment community about our business or the
shipping industry generally;
    
    changes in market valuations of similar companies and stock market price and
volume fluctuations generally;
    
    strategic actions by us or our competitors such as acquisitions or restructurings;
    
    regulatory developments;
    
    additions or departures of key personnel;
    
    general market conditions; and
    
    domestic and international economic, market and currency factors unrelated to our
performance.
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If holders of our warrants exercise their right to purchase shares of our common stock, you
will experience immediate dilution.
   Two of our principal shareholders may effectively control the outcome of matters on which
our shareholders are entitled to vote, including the election of directors and other
significant corporate actions.
  Future sales of our stock could cause the market price of our common stock to decline.
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Because the Republic of the Marshall Islands, where we are incorporated, does not have a
well-developed body of corporate law, shareholders may have fewer rights and protections
than under typical United States law, such as Delaware, and shareholders may have difficulty
in protecting their interest with regard to actions taken by our Board of Directors.
  It may not be possible for investors to enforce U.S. judgments against us.
  Anti-takeover provisions in our organizational documents, and under Marshall Islands
corporate law, could make it difficult for our shareholders to replace or remove our current
board of directors or have the effect of discouraging, delaying or preventing a merger or
acquisition, which could adversely affect the market price of our common stock.
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
    
    authorizing our board of directors to issue blank check preferred stock without
shareholder approval;
    
    providing for a classified board of directors with staggered, three year terms;
    
    prohibiting cumulative voting in the election of directors;
    
    authorizing the removal of directors only for cause and only upon the
affirmative vote of the holders of a two-thirds majority of the outstanding shares of
our common shares, voting as a single class, entitled to vote for the directors;
    
    limiting the persons who may call special meetings of shareholders;
    
    establishing advance notice requirements for election to our board of directors
or proposing matters that can be acted on by shareholders at shareholder meetings; and
    
    limiting our ability to enter into business combination transactions with certain
shareholders.
  
 ITEM 4. INFORMATION ON THE COMPANY
 Our Organization and Corporate Structure
    Free Destiny Free Envoy Free Fighter
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Our Fleet
   Vessel
    
    DWT
    
    Country Built
    
    Year Built
    
    Vessel Type
    
    Purchase PriceOwned Prior to 2007:Free Destiny
    
    
    25,240
    
    
    Bulgaria
    
    1982
    
    Handysize
    
    $
    7.60
    millionFree Envoy
    
    
    26,318
    
    
    Japan
    
    1984
    
    Handysize
    
    $
    9.50
    millionPurchased in 2007:Free Goddess
    
    
    22,051
    
    
    Japan
    
    1995
    
    Handysize
    
    $
    25.20
    millionFree Hero
    
    
    24,318
    
    
    Japan
    
    1995
    
    Handysize
    
    $
    25.20
    millionFree Jupiter
    
    
    47,777
    
    
    China
    
    2002
    
    Handymax
    
    $
    47.00
    millionPurchased in 2008:Free Impala
    
    
    24,111
    
    
    China
    
    1997
    
    Handysize
    
    $
    37.50
    millionFree Knight
    
    
    24,111
    
    
    China
    
    1998
    
    Handysize
    
    $
    39.25
    millionPurchases Pending
in 2008:Free Lady
    
    
    50,246
    
    
    Japan
    
    2003
    
    Handymax
    
    $
    62.50
    million
 Free Fighter
 Free Hero Free Jupiter Free
Goddess Free Impala Free Knight Free Lady
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Competitive Strengths
  
    
    Experienced Management Team.Our management team has significant experience in
commercial, technical, operational and financial areas of our business and has developed
relationships with leading charterers, ship brokers and financial institutions. Since 1997,
Ion G. Varouxakis, our chairman, chief executive officer and president, has served in
various management roles for shipping companies in the drybulk sector. Dimitris
Papadopoulos, who became our chief financial officer in May 2007, served from 1975 to 1991
as financial and administrative vice president in charge of, among other things, the
shipping interests of the owners of Archirodon Group, Inc.
    
    Affiliation with Leading Shipping Group. In January 2007, FS Holdings Limited, an
entity controlled by the Restis family, acquired 2,108,782 shares of our common stock. As
April 9, 2008, F.S. Holdings Limited owned 2,808,782 shares of our common stock. The Restis
family has been engaged in the international shipping industry for more than 40 years and
their interests include ownership and operation of more than 60 vessels in several segments
of the shipping industry, as well as cargo and chartering interests. The Restis family
group is regarded as one of the largest independent ship-owning and management groups in
the shipping industry. Our management believes that affiliation with and access to the
resources of companies controlled by the Restis family commercially enhances the operations
of our fleet, our ability to obtain employment for our vessels, and our ability to obtain
more favorable financing.
    
    Strong Customer Relationships. Through Free Bulkers, our ship management company, and
Safbulk, a Restis family controlled management company, we have established customer
relationships with leading charterers around the world, such as major international
industrial companies, commodity producers and traders and a number of chartering brokerage
houses. Free Bulkers has subcontracted the charter and post-charter management of our fleet
to Safbulk. We believe that the established customer base and the reputation of our fleet
managers enable us to secure favorable employment for our vessels with well-known
charterers.
    
    Stable Cash Flow from Well-Established and Reputable Charterers. A majority of the
vessels in our fleet may be employed on time charters to well-established and reputable
charterers. We believe these time charters will provide us with steady cash flow and high
vessel utilization rates while limiting our exposure to freight rate volatility.
    
    Efficient Operations. Through Free Bulkers, we believe that we have established a
strong track record in the technical management of drybulk carriers, which has enabled us
to maintain cost-efficient operations. We actively monitor and control vessel operating
expenses while maintaining the high quality of our fleet through regular inspections,
proactive maintenance programs, high standards of operations, and retaining and training
qualified crew members.
 Business Strategy
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
    
    Leveraging our Strategic Relationships.Free Bulkers, Safbulk, the Restis family
and their affiliates have extensive experience and relationships in the ship
brokerage and financial industries as well as directly with industrial charterers and
commodity traders. We use these relationships to identify chartering and acquisition
opportunities and make available to us sources of additional financing, make
contacts, and gain market intelligence.
    
    Handysize and Handymax Focus.Our fleet of drybulk carriers currently consists of
Handysize and Handymax vessels. Based on the relatively low number of drybulk
newbuildings on order in these categories, we believe there will be continued high
demand for such vessels. Handysize and Handymax vessels are typically shallow-drafted
and equipped with onboard cranes. This makes Handysize and Handymax vessels more
versatile and able to access a wider range of loading and discharging ports than
larger ships, which are unable to service many ports due to their size or the local
port infrastructure. Many countries in the Asia Pacific region, including China, as
well as countries in Africa and South America, have shallow ports. We believe that
our vessels, and any Handysize or Handymax vessels that we acquire, will enable us to
transport a wider variety of cargoes and to pursue a greater number of chartering
opportunities than if we owned larger drybulk vessels. Handysize and Handymax vessels
have also historically achieved greater charter rate stability than larger drybulk
vessels.
    
    Renew and Expand our Fleet.We intend to continue growing our fleet in a
disciplined manner through acquisition of well-maintained, secondhand vessels,
preferably not more than 15 years old. We perform technical review and financial
analysis of each potential acquisition and only purchase vessels as market conditions
and opportunities dictate and warrant. We are focused on purchasing such vessels,
because we believe that secondhand vessels, when operated in a cost-efficient manner,
should provide significant value given the prevailing charter rate environment and
currently provide better returns as compared to newbuildings. Furthermore, as part of
our fleet renewal, we will continue to sell vessels when we believe it is in the best
interests of FreeSeas and our shareholders.
    
    Maintain Balanced Time Charter Employment.We intend to strategically deploy a
substantial portion of our fleet under period employment and our remaining vessels
under spot employment. We actively pursue time charter coverage to provide adequate
cash flow to cover our fleets fixed costs, consisting of vessel operating expenses,
management fees, debt repayment and interest expense, general and administrative
expenses, and dry-docking costs for the upcoming 12-month period. We look to deploy
part of our fleet through spot charter, depending on our view of the direction of the
markets and other tactical or strategic considerations. We believe this balanced
employment strategy will provide us with more predictable operating cash flows and
sufficient downside protection, while allowing us to participate in the potential
upside of the spot market during periods of rising charter rates.
    
    Use of Flexible Financial Strategy.We have used and intend to continue to use a
combination of bank debt, cash flow and proceeds from equity offerings to fund our
vessel acquisitions. We assess the level of debt we will incur in light of our
ability to repay that debt based on the level of cash flow we expect to generate
pursuant to our chartering strategy and our operating cost structure. As of April 14,
2008, our ratio of debt to total capitalization is approximately 48.2%. We expect
that the maintenance of a reasonable ratio of debt to total capitalization will
increase our ability to borrow funds to make additional vessel acquisitions while
maintaining our ability to pay dividends to our shareholders.
 26




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##### Table of Contents




    
    Pay Quarterly Dividends. We have established a policy of distributing a portion
of our available cash from operations as quarterly cash dividends to our shareholders
in February, May, August and November of each year. On February 28, 2008, we paid a
dividend of $0.175 per share to shareholders of record as of February 18, 2008 and on May 9, 2008, our Board of Directors declared a dividend of $0.175 per share to shareholders of record on May 20, 2008 that will be payable on May 30, 2008. We
expect to pay a quarterly dividend of $0.175 per share in each of the following two quarters of 2008. See Forward-Looking Statements and Risk Factors.
 Vessel Employment
  Vessel
    
    
    
    
    
    VesselName
    
    Dwt
    
    Type
    
    EmploymentVessels owned:Free Destiny
    
    
    25,240
    
    
    Handysize
    
    75-day time charter through mid-May 2008 at $27,500 per dayFree Envoy
    
    
    26,318
    
    
    Handysize
    
    25-day time charter through May 2008 at $28,500 per dayFree Hero
    
    
    24,318
    
    
    Handysize
    
    Balance of time charter through December 2008/February 2009 at $14,500 per dayFree Jupiter
    
    
    47,777
    
    
    Handymax
    
    Three-year time charter through February 2011 at $32,000 per day for first year, $28,000 per day for second year, and $24,000 per day for third yearFree Goddess
    
    
    22,051
    
    
    Handysize
    
    Two-year time charter through November 2009 at $19,250 per dayFree Knight
    
    
    24,111
    
    
    Handysize
    
    One-year time charter through March 2009 at $31,500 per day commencing at deliveryFree Impala
    
    
    24,111
    
    
    Handysize
    
    One-year time charter through April 2009 at $31,500 per day commencing at deliveryAcquisition pending:Free Lady
    
    
    50,246
    
    
    Handymax
    
    No employment currently in place
   27




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##### Table of Contents



Customers
  Management of the Fleet
  Free Envoy Free Destiny
   28




---



##### Table of Contents




   Crewing and Employees
  Loans for Vessels
  Free Destiny Free Knight
 29




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##### Table of Contents



Free Envoy Free Envoy Free Fighter
 Free Knight,
 Free Destiny Free Envoy
 Free Hero Free Jupiter Free Hero Free Jupiter Free Goddess,
 Free Hero, Free Jupiter Free Goddess
   30




---



##### Table of Contents



Free Hero Free Jupiter Free Goddess Free Hero Free Jupiter Free Goddess
 Free Hero Free Jupiter Free Goddess,
 Free Lady
 Free Knight Free Knight
 Free Knight Free Knight Free Knight Free Knight Free Envoy Free Destiny
 Free Impala Free Impala
 31




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##### Table of Contents



Free Impala th Free
Impala
  Competition
   Seasonality
  32




---



##### Table of Contents



Environmental and Other Regulations
    International Maritime Organization
   33




---



##### Table of Contents



The U.S. Oil Pollution Act of 1990
       34




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##### Table of Contents



The United States Clean Water Act
  Northwest Environmental Advocate v. EPA
 Other Environmental Initiatives
    35




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##### Table of Contents



Vessel Security Regulations
  
    
    on-board installation of automatic information systems, to enhance vessel-to-vessel
and vessel-to-shore communications;
    
    on-board installation of ship security alert systems;
    
    the development of vessel security plans; and
    
    compliance with flag state security certification requirements.
  Inspection by Classification Societies
 Free Destiny Free Envoy Free Hero Free Jupiter Free Goddess Free Knight Free Impala Free Lady
  36




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##### Table of Contents



Next Intermediate
    
    Next Special SurveyVessel
    
    Dry-Docking
    
    Dry-DockingFree Envoy
    
    Second quarter 2011
    
    Second quarter 2008Free Destiny
    
    Second quarter 2008
    
    Second quarter 2012Free Jupiter(1)
    
    Second quarter 2010
    
    Second quarter 2012Free Hero
    
    Third quarter 2008
    
    Third quarter 2010Free Goddess
    
    Second quarter 2008
    
    Second quarter 2010Free Impala
    
    First quarter 2010
    
    Third quarter 2012Free Knight
    
    Second quarter 2009
    
    Second quarter 2013Free Lady
    
    Second quarter 2011
    
    Second quarter 2008
 
 (1)
    
    The M/V Free Jupiterunderwent an unscheduled dry-docking for repairs
necessitated by a grounding incident on September 21, 2007.     Risk of Loss and Liability Insurance
 General
  37




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##### Table of Contents



Hull and Machinery Insurance
   Protection and Indemnity Insurance
  Free Destiny, Free Envoy, Free Hero Free
Jupiter Free Goddess, Free Knight Free Impala Free Lady
 Loss of Hire Insurance
 Free Jupiter
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##### Table of Contents



Procedures in the Event of an Insured Event
  Free Jupiter
   Legal Proceedings
  Property
 
 39




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##### Table of Contents



ITEM 4A. UNRESOLVED STAFF COMMENTS
  
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
  General
    Vessel Name
    
    Dwt
    
    Vessel Type
    
    Built
    
    EmploymentFree Destiny
    
    
    25,240
    
    
    Handysize
    
    
    1982
    
    
    75-day time-charter at $27,500 p/dFree Envoy
    
    
    26,318
    
    
    Handysize
    
    
    1984
    
    
    25-day time charter through May
2008 at $28,500 p/dFree Goddess
    
    
    22,051
    
    
    Handysize
    
    
    1995
    
    
    Two-year time-charter through
November 2009 at $19,250 p/dFree Hero
    
    
    24,318
    
    
    Handysize
    
    
    1995
    
    
    Time-charter through February
2009 at $14,500 p/dFree Jupiter
    
    
    47,777
    
    
    Handymax
    
    
    2002
    
    
    Three-year time-charter through
February 2011 at
$32,000/28,000/24,000 p/dFree Knight (A)
    
    
    24,111
    
    
    Handysize
    
    
    1998
    
    
    One-year time-charter through
March 2009 at $31,500 p/dFree Impala (B)
    
    
    24,111
    
    
    Handysize
    
    
    1997
    
    
    One-year time-charter at $31,500
p/d through April 2009
 40




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##### Table of Contents



ExpectedVessel Name
    
    Dwt
    
    Vessel Type
    
    Built
    
    Delivery
    
    EmploymentFree Lady
    
    
    50,246
    
    
    Handymax
    
    
    2003
    
    
    June-July 2008
    
    No employment currently in place
 
 (A)
    
    Delivered on March 19, 2008.(B)
    
    Delivered on April 2, 2008. Acquisition of Vessels
       41




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
    
    Obtain the charterers consent to us as the new owner;
    
    Obtain the charterers consent to a new technical manager;
    
    Obtain the charterers consent to a new flag for the vessel, if applicable;
    
    Arrange for a new crew for the vessel;
    
    Replace all hired equipment on board the vessel, such as gas cylinders
and communication equipment;
    
    Negotiate and enter into new insurance contracts for the vessel
through our own insurance brokers;
    
    Register the vessel under a flag state and perform the related
inspections in order to obtain new trading certificates from the flag
state, if we change the flag state;
    
    Implement a new planned maintenance program for the vessel; and
    
    Ensure that the new technical manager obtains new certificates of
compliance with the safety and vessel security regulations of the flag
state.
  
    
    Employment and operation of our drybulk carriers; and
    
    Management of the financial, general and administrative elements
involved in the ownership and operation of our drybulk vessels.
  
    
    Vessel maintenance and repair;
    
    Planning and undergoing dry-docking, special surveys and other major repairs;
    
    Organizing and undergoing regular classification society surveys;
    
    Crew selection and training;
    
    Vessel spares and stores supply;
    
    Vessel bunkering;
    
    Contingency response planning;
    
    Onboard safety procedures auditing;
 42




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##### Table of Contents




    
    Accounting;
    
    Vessel insurance arrangements;
    
    Vessel chartering;
    
    Vessel hire management; and
    
    Vessel performance monitoring.
 Important Measures for Analyzing Our Results of Operations
  
    
    Ownership days.We define ownership days as the total number of
calendar days in a period during which each vessel in the fleet was
owned by us. Ownership days are an indicator of the size of the fleet
over a period and affect both the amount of revenues and the amount of
expenses that we record during that period.
    
    Available days.We define available days as the number of ownership
days less the aggregate number of days that our vessels are off-hire
due to major repairs, dry-dockings or special or intermediate surveys.
The shipping industry uses available days to measure the number of
ownership days in a period during which vessels are actually capable
of generating revenues.
    
    Operating days.Operating days are the number of available days in a
period less the aggregate number of days that vessels are off-hire due
to any reason, including unforeseen circumstances. The shipping
industry uses operating days to measure the aggregate number of days
in a period during which vessels actually generate revenues.
    
    Fleet utilization.We calculate fleet utilization by dividing the
number of operating days during a period by the number of ownership
days during that period. The shipping industry uses fleet utilization
to measure a companys efficiency in finding suitable employment for
its vessels and minimizing the amount of days that its vessels are
off-hire for any reason including scheduled repairs, vessel upgrades,
dry-dockings or special or intermediate surveys.
    
    Off-hire.The period a vessel is unable to perform the services for
which it is required under a charter. Off-hire periods typically
include days spent undergoing repairs and dry-docking, whether or not
scheduled.
    
    Time charter.A time charter is a contract for the use of a vessel
for a specific period of time during which the charterer pays
substantially all of the voyage expenses, including port costs, canal
charges and bunkers expenses. The vessel owner pays the vessel
operating expenses, which include crew wages, insurance, technical
maintenance costs, spares, stores and supplies and commissions on
gross voyage revenues. Time charter rates are usually fixed during the
term of the charter. Prevailing time charter rates do fluctuate on a
seasonal and year-to-year basis and may be substantially higher or
lower from a prior time charter agreement when the subject vessel is
seeking to renew the time charter agreement with the existing
charterer or enter into a new time charter agreement with another
charterer. Fluctuations in time charter rates are influenced by
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##### Table of Contents



changes in spot charter rates.
    
    Voyage charter.A voyage charter is an agreement to charter the
vessel for an agreed per-ton amount of freight from specified loading
port(s) to specified discharge port(s). In contrast to a time charter,
the vessel owner is required to pay substantially all of the voyage
expenses, including port costs, canal charges and bunkers expenses, in
addition to the vessel operating expenses.
    
    Time charter equivalent (TCE).The time charter equivalent equals
voyage revenues minus voyage expenses divided by the number of
operating days during the relevant time period, including the trip to
the loading port. TCE is a standard seaborne transportation industry
performance measure used primarily to compare period-to-period changes
in a seaborne transportation companys performance despite changes in
the mix of charter types (i.e., spot charters, time charters and
bareboat charters) under which the vessels may be employed during a
specific period.
    
    Adjusted EBITDA.We consider Adjusted EBITDA to represent net
earnings before interest, taxes, depreciation and amortization and
changes in fair value of derivatives. Under the laws of the Marshall
Islands, we are not subject to tax on international shipping income.
However, we are subject to registration and tonnage taxes, which have
been included in vessel operating expenses. Accordingly, no adjustment
for taxes has been made for purposes of calculating Adjusted EBITDA.
Adjusted EBITDA does not represent and should not be considered as an
alternative to net income or cash flow from operations, as determined
by United States generally accepted accounting principles, orU.S. GAAP, and our calculation of Adjusted EBITDA may not be comparable to that
reported by other companies. Adjusted EBITDA is included herein because it is
an alternative measure of our liquidity performance and indebtedness.
  Revenues
  
    
    Our ability to acquire additional vessels;
    
    The nature and duration of our charters;
    
    Our decisions regarding vessel acquisitions and sales;
    
    The amount of time that we spend repositioning our vessels;
    
    The amount of time that our vessels spend in dry-dock undergoing repairs;
    
    Maintenance and upgrade work;
 44




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##### Table of Contents




    
    The age, condition and specifications of our vessels;
    
    The levels of supply and demand in the drybulk carrier transportation market; and
    
    Other factors affecting charter rates for drybulk carriers.
     Free Envoy Free Destiny
 Vessel Operating Expenses
  45




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Depreciation
 Free Fighter
 Seasonality
  Principal Factors Affecting Our Business
  
    
    Number of vessels owned and operated;
    
    Charter market rates, which approached new historical record high
levels in May 2007, and periods of charter hire;
    
    Vessel operating expenses and voyage costs, which are incurred in both
U.S. Dollars and other currencies, primarily Euros;
    
    Cost of dry-docking and special surveys;
    
    Depreciation expenses, which are a function of the cost, any
significant post-acquisition improvements, estimated useful lives and
estimated residual scrap values of our vessels;
    
    Financing costs related to the indebtedness incurred by us and
    
    Fluctuations in foreign exchange rates.
 46




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##### Table of Contents



Performance Indicators
 PERFORMANCE INDICATORS
 Twelve Months Ended December 31,2007
    
    2006
    
    2005(dollars in thousands)
    
    (Unaudited)
    
    (Unaudited)
    
    (Unaudited)Adjusted EBITDA (1)
    
    $
    8,350
    
    
    $
    2,582
    
    
    $
    5,128Fleet Data:Average number of vessels (2)
    
    
    3.3
    
    
    
    3
    
    
    
    2.55Ownership days (3)
    
    
    1,206
    
    
    
    1,095
    
    
    
    931Available days (4)
    
    
    1,177
    
    
    
    1,005
    
    
    
    931Operating days (5)
    
    
    1,048
    
    
    
    941
    
    
    
    893Fleet utilization (6)
    
    
    86.9
    %
    
    
    86
    %
    
    
    95.9
    %Average Daily Results:Average TCE rate (7)
    
    $
    17.925
    
    
    $
    10.881
    
    
    $
    10.882Vessel operating expenses (8)
    
    
    4.976
    
    
    
    4.,094
    
    
    
    3.863Management fees (9)
    
    
    0.726
    
    
    
    0.493
    
    
    
    0.524General and administrative expenses (10)
    
    
    2.014
    
    
    
    2.046
    
    
    
    0.359Total vessel operating expenses (11)
    
    $
    5.702
    
    
    $
    4.587
    
    
    $
    4.387
 
 (1)
    
    Adjusted EBITDA reconciliation to net income:  Twelve Months Ended December 31,2007
    
    
    2006
    
    
    2005(dollars in thousands)
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Net income (loss)
    
    $
    (156
    )
    
    $
    (3,324
    )
    
    $
    152Depreciation and amortization
    
    
    5,192
    
    
    
    4,921
    
    
    
    3,908Change in fair value of derivatives
    
    
    749Interest and finance cost
    
    
    2,565
    
    
    
    985
    
    
    
    1,068Adjusted EBITDA
    
    $
    8,350
    
    
    $
    2,582
    
    
    $
    5,128
 
 (2)
    
    Average number of vessels is the number of vessels that constituted our fleet for the relevant
period, as measured by the sum of the number of days each vessel was a part of our fleet during the
period divided by the number of calendar days in the period.(3)
    
    Ownership days are the total number of days in a period during which the vessels in our fleet
have been owned by us. Ownership days are an indicator of the size of our fleet over a period and
affect both the amount of revenues and the amount of expenses that we record during a period. 47




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(4)
    
    Available days are the number of ownership days less the aggregate number of days that our
vessels are off-hire due to major repairs, dry dockings or special or intermediate surveys. The
shipping industry uses available days to measure the number of ownership days in a period during
which vessels should be capable of generating revenues.(5)
    
    Operating days are the number of available days less the aggregate number of days that our
vessels are off-hire due to any reason, including unforeseen circumstances. The shipping industry
uses operating days to measure the aggregate number of days in a period during which vessels
actually generate revenues.(6)
    
    We calculate fleet utilization by dividing the number of our fleets operating days during a
period by the number of ownership days during the period. The shipping industry uses fleet
utilization to measure a companys efficiency in finding suitable employment for its vessels and
minimizing the amount of days that its vessels are off-hire for reasons such as scheduled repairs,
vessel upgrades, or dry dockings or other surveys.(7)
    
    Time charter equivalent, or TCE, is a measure of the average daily revenue performance of a
vessel on a per voyage basis. Our method of calculating TCE is consistent with industry standards
and is determined by dividing operating revenues (net of voyage expenses and commissions) by
operating days for the relevant time period. Voyage expenses primarily consist of port, canal and
fuel costs that are unique to a particular voyage, which would otherwise be paid by the charterer
under a time charter contract. TCE is a standard shipping industry performance measure used
primarily to compare period-to-period changes in a shipping companys performance despite changes
in the mix of charter types (i.e., spot charters, time charters and bareboat charters) under which
the vessels may be employed between the periods: Twelve Months Ended December 31,2007
    
    
    2006
    
    
    2005(dollars in thousands)
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Operating revenues
    
    $
    20,147
    
    
    $
    11,727
    
    
    $
    10,326Voyage expenses and commissions
    
    
    (1,362
    )
    
    
    (1,488
    )
    
    
    (608
    )Net operating revenues
    
    
    18,785
    
    
    
    10,239
    
    
    
    9,718Operating days
    
    
    1,048
    
    
    
    941
    
    
    
    893Time charter equivalent daily rate
    
    $
    17.925
    
    
    $
    10.881
    
    
    $
    10.882
 (8)
    
    Average daily vessel operating expenses, which includes crew costs, provisions, deck and engine
stores, lubricating oil, insurance, maintenance and repairs, is calculated by dividing vessel
operating expenses by ownership days for the relevant time periods: Twelve Months Ended December 31,2007
    
    
    2006
    
    
    2005(dollars in thousands)
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Vessel operating expenses
    
    $
    6,001
    
    
    $
    4,483
    
    
    $
    3,596Ownership days
    
    
    1,206
    
    
    
    1,095
    
    
    
    931Daily vessel operating expense
    
    $
    4.976
    
    
    $
    4.094
    
    
    $
    3.863
 
 (9)
    
    Daily management fees are calculated by dividing total management fees paid on ships owned by
ownership days for the relevant time period.(10)
    
    Average daily general and administrative expenses are calculated by dividing general and
administrative expenses by operating days for the relevant period. 48




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##### Table of Contents



(11)
    
    Total vessel operating expenses, or TVOE, is a measurement of our total expenses associated
with operating our vessels. TVOE is the sum of daily vessel operating expense and daily management
fees. Daily TVOE is calculated by dividing TVOE by fleet ownership days for the relevant time
period. Results of Operations
 Year ended December 31, 2007 (fiscal 2007) as compared to year ended December 31, 2006 (fiscal
2006)
 Consolidated Statements of Income
  For the Year Ended
    
    
    For the Yeard EndedDecember 31, 2007
    
    
    December 31, 2006OPERATING REVENUES
    
    $
    20,147
    
    
    $
    11,727OPERATING EXPENSES:Vessel operating expenses
    
    
    (6,001
    )
    
    
    (4,483
    )Voyage expenses
    
    
    (267
    )
    
    
    (689
    )Depreciation expenses
    
    
    (4,435
    )
    
    
    (4,479
    )Amortization of deferred charges
    
    
    (757
    )
    
    
    (442
    )Management fees to a related party
    
    
    (875
    )
    
    
    (540
    )Commissions
    
    
    (1,095
    )
    
    
    (799
    )Stock-based compensation expense
    
    
    (96
    )
    
    
    (651
    )General and administrative expenses
    
    
    (2,111
    )
    
    
    (1,925
    )Bad debt
    
    
    (118
    )Gain on sale of vessel
    
    
    1,369Income (loss) from operations
    
    $
    5,761
    
    
    $
    (2,281
    )OTHER INCOME (EXPENSE):Interest and finance costs
    
    
    (3,204
    )
    
    
    (1,004
    )Loss on debt extinguishment
    
    
    (2,570
    )Change in derivatives fair value
    
    
    (749
    )Interest income
    
    
    639
    
    
    
    19Other
    
    
    (33
    )
    
    
    (58
    )Other income (expense)
    
    $
    (5,917
    )
    
    $
    (1,043
    )Net loss
    
    $
    (156
    )
    
    $
    (3,324
    )Basic loss per share
    
    
    (0.02
    )
    
    
    (0.53
    )Diluted loss per share
    
    
    (0.02
    )
    
    
    (0.53
    )Basic weighted average number of shares
    
    
    8,786,287
    
    
    
    6,290,100Diluted weighted average number of
shares
    
    
    8,786,287
    
    
    
    6,290,100
 REVENUES Free Jupiters
 OPERATING EXPENSES
 49




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Free Envoy Free Destiny Free Jupiter
 VOYAGE EXPENSES
 DEPRECIATION AND AMORTIZATION Free Fighter Free Fighter
 MANAGEMENT FEES
 COMMISSIONS AND GENERAL AND ADMINISTRATIVE EXPENSES
 50




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##### Table of Contents



STOCK-BASED COMPENSATION EXPENSE
 INTEREST AND FINANCE COSTS
 LOSS ON DEBT EXTINGUISHMENT 
 CHANGE IN FAIR VALUE OF DERIVATIVES 
 NET (LOSS) Free
Fighter Free Fighter
 Year Ended December 31, 2006 (fiscal 2006) as compared to year ended December 31, 2005
(fiscal 2005)
 Consolidated Statements of Income
  For the Year Ended
    
    For the Year EndedDecember 31, 2006
    
    December 31, 2005OPERATING REVENUES
    
    $
    11,727
    
    
    $
    10,326OPERATING EXPENSES :Vessel operating expenses
    
    
    (4,483
    )
    
    
    (3,596
    )Voyage expenses
    
    
    (689
    )
    
    
    (55
    )Depreciation expense
    
    
    (4,479
    )
    
    
    (3,553
    )Amortization of deferred dry-docking and
special survey costs
    
    
    (442
    )
    
    
    (355
    )Management fees to a related party
    
    
    (540
    )
    
    
    (488
    )Commissions
    
    
    (799
    )
    
    
    (553
    )Compensation costs
    
    
    (651
    )
    
    
    (200
    )General and administrative expenses
    
    
    (1,925
    )
    
    
    (321
    )
 51




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##### Table of Contents



For the Year Ended
    
    
    For the Year EndedDecember 31, 2006
    
    
    December 31, 2005(Loss) Income from operations
    
    
    (2,281
    )
    
    
    1,205OTHER INCOME (EXPENSE):Finance costs
    
    
    (1,004
    )
    
    
    (1,076
    )Interest income
    
    
    19
    
    
    
    8Other
    
    
    (58
    )
    
    
    15Other expense
    
    
    (1,043
    )
    
    
    (1,053
    )Net (loss) income
    
    $
    (3,324
    )
    
    $
    152Basic (loss) earnings per share
    
    $
    (0.53
    )
    
    $
    0.03Diluted (loss) earnings per share
    
    $
    (0.53
    )
    
    $
    0.03Basic weighted average number of shares
    
    
    6,290,100
    
    
    
    4,574,588Diluted weighted average number of shares
    
    
    6,290,100
    
    
    
    4,600,444
 REVENUES Free Fighter Free Destiny
 VESSEL OPERATING EXPENSES Free Fighter
 VOYAGE EXPENSES Free Fighter
 DEPRECIATION AND AMORTIZATION Free Fighter Free Envoy
 MANAGEMENT FEES Free Fighter
 52




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##### Table of Contents



COMMISSIONS AND GENERAL AND ADMINISTRATIVE EXPENSES Free Fighter,
 COMPENSATION COST
 FINANCING COSTS
 NET (LOSS)/INCOME Free Fighter
 53




---



##### Table of Contents



Liquidity and Capital Resources
   Free Fighter
 Free Fighter Free Hero Free Jupiter Free Goddess
 Free Hero Free Jupiter
 Free Goddess
 Free Impala Free Knight Free Lady
 54




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##### Table of Contents



Free Destiny Free Envoy, Free Hero Free Goddess Free Envoy Free Hero Free
Goddess ,
  Cash Flows
 OPERATING ACTIVITIES Free Fighter
 INVESTING ACTIVITIES Free Hero Free Jupiter Free Fighter
 55




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##### Table of Contents



FINANCING ACTIVITIES
 Capital Requirements
 Free Lady
 Long-Term Debt
  Off-Balance Sheet Arrangements
  Contractual Obligations and Commercial Commitments
  Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    
    More than(Dollars in thousands)
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsLong-term debt
    
    $
    56,300
    
    
    $
    11,800
    
    
    $
    17,400
    
    
    $
    14,560
    
    
    $
    12,540Interest on
variable-rate debt
    
    
    7,605
    
    
    
    2,310
    
    
    
    2,667
    
    
    
    1,504
    
    
    
    1,124Total obligations
    
    $
    63,905
    
    
    $
    14,110
    
    
    $
    20,067
    
    
    $
    16,064
    
    
    $
    13,664
 Critical Accounting Policies
  56




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##### Table of Contents



Impairment of long-lived assets.
 Depreciation. Free Fighter
 Deferred dry-dock and special survey costs.
   57




---



##### Table of Contents



Accounting for revenues and expenses.
   Insurance claims.
 Recent Accounting Pronouncements
 Company
  58




---



##### Table of Contents



ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. Directors and Senior Management
  59




---



##### Table of Contents



Name
    
    Age
    
    Position
    
    Director ClassIon G. Varouxakis
    
    
    37
    
    
    Chairman of the Board of Directors,
Chief Executive Officer and President
    
    CDimitris D.
Papadopoulos
    
    
    63
    
    
    Chief Financial Officer
    
    Kostas Koutsoubelis
    
    
    53
    
    
    Director, Vice President and Treasurer
    
    AAlexis Varouxakis
    
    
    31
    
    
    Secretary
    
    N/AMatthew W. McCleery
    
    
    38
    
    
    Director
    
    AFocko H. Nauta
    
    
    50
    
    
    Director
    
    BDimitrios Panagiotopoulos
    
    
    47
    
    
    Director
    
    C
 Ion G. Varouxakis
 Dimitris D. Papadopoulos
 60




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##### Table of Contents



Kostas Koutsoubelis
 Alexis Varouxakis
 Matthew W. McCleery
 Focko H. Nauta
 Dimitrios Panagiotopoulos
  61




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##### Table of Contents



B. Compensation
  C. Board Practices
     D. Employees
  E. Share Ownership
   Percentage ofNumber of Shares of
    
    Shares of CommonCommon Stock
    
    Stock BeneficiallyName
    
    Beneficially Owned
    
    Owned(1)Ion G. Varouxakis
    
    
    2,394,890
    (2)
    
    
    11.4
    %Dimitris D. Papadopoulos
    
    
    0
    
    
    
    *Matthew W. McCleery
    
    
    0
    
    
    
    *Focko H. Nauta
    
    
    0
    
    
    
    *Dimitrios Panagiotopoulos
    
    
    0
    
    
    
    *Kostas Koutsoubelis
    
    
    0
    
    
    
    *Alexis Varouxakis
    
    
    0
    
    
    
    *All directors and officers as a group (seven persons)
    
    
    2,394,890
    
    
    
    11.4
    %
 62




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##### Table of Contents



*
    
    Less than 1%.(1)
    
    For purposes of computing the percentage of outstanding shares of common stock held
by each person named above, any shares that the named person has the right to acquire within
60 days under warrants or options are deemed to be outstanding for that person, but are not
deemed to be outstanding when computing the percentage ownership of any other person. These
percentages are calculated on the basis of 20,743,456 outstanding shares of FreeSeas common
stock.(2)
    
    Reflects 2,078,223 shares owned by The Midas Touch S.A., a Marshall Islands
corporation wholly owned by Mr. Varouxakis; 66,667 shares issuable upon the exercise of
immediately exercisable warrants issued to The Midas Touch; and 250,000 shares that may be
acquired by Mr. Varouxakis pursuant to immediately exercisable stock options. Does not include
40,000 shares owned by V Estates S.A., which is controlled by the father of Mr. Varouxakis,
and 30,600 shares owned by the mother of Mr. Varouxakis, as to which shares he disclaims
beneficial ownership. Amended and Restated 2005 Stock Incentive Plan
   Employment Agreements
   63




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##### Table of Contents



ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A. Major Shareholders
  Percentage ofNumber of Shares of
    
    Shares of CommonCommon Stock
    
    Stock BeneficiallyName
    
    Beneficially Owned
    
    Owned(1)Ion G. Varouxakis
    
    
    2,394,890
    (2)
    
    
    11.4
    %FS Holdings Limited
    
    
    2,808,782
    
    
    
    13.5
    %Trafelet Capital Management, L.P.
    
    
    1,200,000
    (3)
    
    
    5.8
    %
 
 (1)
    
    For purposes of computing the percentage of outstanding shares of common stock held
by each person named above, any shares that the named person has the right to acquire within
60 days under warrants or options are deemed to be outstanding for that person, but are not
deemed to be outstanding when computing the percentage ownership of any other person.(2)
    
    Reflects 2,078,223 shares owned by The Midas Touch S.A., a Marshall Islands
corporation wholly owned by Mr. Varouxakis; 66,667 shares issuable upon the exercise of
immediately exercisable warrants issued to The Midas Touch; and 250,000 shares that may be
acquired by Mr. Varouxakis pursuant to immediately exercisable stock options. Does not include
40,000 shares owned by V Estates S.A., which is controlled by the father of Mr. Varouxakis,
and 30,600 shares owned by the mother of Mr. Varouxakis, as to which shares he disclaims
beneficial ownership.(3)
    
    Based solely on information contained in a Schedule 13G filed with the SEC on
November 11, 2007.     64




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##### Table of Contents



B. Related Party Transactions
  Free
Envoy Free Destiny
 
   65




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##### Table of Contents



Free Destiny Free Envoy
    C. Interest of Experts and Counsel
  66




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##### Table of Contents



ITEM 8. FINANCIAL INFORMATION
 A. Consolidated Statements and Other Financial Information
  B. Significant Changes
  
 ITEM 9. THE OFFER AND LISTING
 A. Offer and Listing Details
  B. Plan of Distribution
  C. Markets
 ® ®
 ®
 For the Years Ended:
    
    Common Stock
    
    Class W Warrants
    
    Class Z WarrantsHigh
    
    Low
    
    High
    
    Low
    
    High
    
    LowDecember 31, 2006
    
    $
    5.45
    
    
    $
    2.62
    
    
    $
    0.95
    
    
    $
    0.18
    
    
    $
    1.20
    
    
    $
    0.35December 31, 2007
    
    
    10.24
    
    
    
    2.76
    
    
    
    5.14
    
    
    
    0.25
    
    
    
    5.20
    
    
    
    0.48
 For the Quarters Ended:
    
    Common Stock
    
    Class W Warrants
    
    Class Z WarrantsHigh
    
    Low
    
    High
    
    Low
    
    High
    
    LowMarch 31, 2006
    
    $
    5.45
    
    
    $
    4.50
    
    
    $
    0.95
    
    
    $
    0.55
    
    
    $
    1.20
    
    
    $
    0.60June 30, 2006
    
    
    4.85
    
    
    
    3.65
    
    
    
    0.58
    
    
    
    0.46
    
    
    
    0.68
    
    
    
    0.48September 30, 2006
    
    
    5.07
    
    
    
    3.70
    
    
    
    0.60
    
    
    
    0.30
    
    
    
    0.72
    
    
    
    0.42December 31, 2006
    
    
    4.90
    
    
    
    2.62
    
    
    
    0.60
    
    
    
    0.18
    
    
    
    0.70
    
    
    
    0.35March 31, 2007
    
    
    5.15
    
    
    
    2.76
    
    
    
    1.29
    
    
    
    0.25
    
    
    
    1.15
    
    
    
    0.48June 30, 2007
    
    
    7.63
    
    
    
    4.55
    
    
    
    2.65
    
    
    
    0.81
    
    
    
    2.76
    
    
    
    1.00September 30, 2007
    
    
    9.35
    
    
    
    6.77
    
    
    
    3.30
    
    
    
    1.82
    
    
    
    3.35
    
    
    
    2.10December 31, 2007
    
    
    10.24
    
    
    
    5.12
    
    
    
    5.14
    
    
    
    1.68
    
    
    
    5.20
    
    
    
    1.73
 67




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##### Table of Contents



For the Months Ended:
    
    Common Stock
    
    Class W Warrants
    
    Class Z WarrantsHigh
    
    Low
    
    High
    
    Low
    
    High
    
    LowNovember 30, 2007
    
    
    8.45
    
    
    
    5.12
    
    
    
    4.01
    
    
    
    1.90
    
    
    
    3.85
    
    
    
    1.90December 31, 2007
    
    
    6.48
    
    
    
    5.16
    
    
    
    2.80
    
    
    
    1.68
    
    
    
    2.65
    
    
    
    1.73January 31, 2008
    
    
    6.10
    
    
    
    4.62
    
    
    
    2.45
    
    
    
    1.08
    
    
    
    2.45
    
    
    
    1.40February 29, 2008
    
    
    6.15
    
    
    
    5.10
    
    
    
    1.80
    
    
    
    1.44
    
    
    
    1.93
    
    
    
    1.65March 31, 2008
    
    
    5.94
    
    
    
    4.96
    
    
    
    1.90
    
    
    
    1.06
    
    
    
    1.88
    
    
    
    1.45April 30, 2008
    
    
    7.41
    
    
    
    6.09
    
    
    
    3.00
    
    
    
    1.87
    
    
    
    2.95
    
    
    
    1.85
 D. Selling Shareholders
  E. Dilution
  F. Expenses of the Issue
  
 ITEM 10. ADDITIONAL INFORMATION
 A. Share Capital
  B. Memorandum and Articles of Incorporation
  C. Material Contracts
 Loan Agreement dated March 31, 2008 between Adventure Nine, S.A. and First Business Bank; First
Preferred Mortgage on the M/V Free Impala; Deed of Covenants dated April 2, 2008 between Adventure
Nine and First Business Bank
 Free Impala th Free Impala
  68




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##### Table of Contents



Memorandum of Agreement dated March 10, 2008 for M/V Free Lady
 Free Lady Free Lady
 Memorandum of Agreement dated January 22, 2008 for the M/V Free Impala
 Free Impala Free Impala
 Memorandum of Agreement dated January 22, 2008 for the M/V Free Knight
 Free Knight Free Knight
 Credit Agreement dated January 21, 2008 among Adventure Two, Adventure Three and Adventure Seven
with Hollandsche Bank  Unie N.V.; Short term Loan Agreement among Adventure Two, Adventure Three,
Adventure Seven and Hollandsche BankUnie N.V.; Rollover Loan Agreement dated April 3, 2008 among
Adventure Two, Adventure Three, Adventure Seven and Hollandsche BankUnie N.V.; First Preferred
Mortgage dated March 19, 2008 on the M/V Free Knight; Deed of Covenants between Adventure Seven and
Hollandsche Bank  Unie N.V; Second Preferred Mortgage on the M/V Free Destiny; Second Preferred
Mortgage on the M/V Free Envoy
 Free Knight Free Knight Free Knight Free Envoy Free Destiny
 69




---



##### Table of Contents



Facility Agreement date December 24, 2008 between FreeSeas Inc. and Credit Suisse; First Preferred
Mortgage on the M/V Free Hero; First Preferred Mortgage on the M/V Free Goddess; First Preferred
Mortgage on the M/V Free Jupiter
 Free Hero Free Jupiter Free Goddess Free Hero Free Jupiter Free Goddess
 Free Hero Free Jupiter Free Goddess
 Memorandum of Agreement dated August 20, 2007 for the M/V Free Goddess
 Free Goddess Free Goddess
 Loan Agreement between FreeSeas Inc. and HSH Nordbank; Loan Agreement between FreeSeas Inc. and
BTMU Capital Corporation; Amendment to Loan Agreement between FreeSeas Inc, and HSH Nordbank
  70




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##### Table of Contents



Memoranda of Agreement dated May 1, 2007 regarding vessel acquisitions
  Promissory Note dated May 7, 2007 from FreeSeas Inc. to FS Holdings Limited
  71




---



##### Table of Contents



Loan Agreement dated September 2006 between Adventure Four. S.A. and First Business Bank, S.A. 
Mortgage dated September 2006 by Adventure Four S.A. in favor of First Business Bank, S.A.  Deed
of Assignment dated September 2006 between Adventure Four S.A. and First Business Bank, S.A.
 Free Fighter Free Fighter
  Credit Agreement dated September 23, 2005 between Adventure Two S.A. and Hollandsche Bank-Unie N.V.
 Mortgage dated October 24, 2005 by Adventure Two S.A. in favor of Hollandsche Bank-Unie N.V. -
Deed of Assignment dated October 24, 2005 between Adventure Two S.A. and Hollandsche Bank-Unie N.V.
 Free Destiny Free Destiny
  Loan Agreement dated August 2, 2004, as amended on April 25, 2005 and October 7, 2005, among
Adventure Holdings S.A. (now known as FreeSeas Inc.), G. Bros S.A., and V Capital S.A., regarding
the M/V Free Destiny and Loan Agreement dated September 20, 2004, as amended on April 25, 2005
and October 7, 2005, among Adventure Holdings S.A. (now known as FreeSeas Inc.), G. Bros S.A., and
V Capital S.A., regarding the M/V Free Envoy
 72




---



##### Table of Contents



Free Destiny Free Envoy
 Short-Term Loan Agreement in Euros and Optional Currencies dated July 8, 2004 between Adventure
Three S.A. and Hollandsche Bank-Unie N.V.
  Credit Agreement dated June 24, 2004 between Adventure Three S.A. and Hollandsche Bank-Unie N.V. 
Mortgage dated September 29, 2004 by Adventure Three S.A. in favor of Hollandsche Bank-Unie N.V . 
Deed of Assignment dated September 29, 2004 between Adventure Three S.A. and Hollandsche Bank-Unie
N.V.
 Free Envoy
  D. Exchange Controls and Other Limitations Affecting Security Holders
  E. Taxation
  73




---



##### Table of Contents



Marshall Islands Tax Consequences
  United States Federal Income Tax Consequences
  United States Federal Income Taxation of Our Company
 Taxation of Operating Income: In General
    74




---



##### Table of Contents




 
 
 
       75




---



##### Table of Contents



Taxation in Absence of Exemption
   76




---



##### Table of Contents




 
  United States Taxation of Gain on Sale of Vessels
  United States Federal Income Taxation of U.S. Holders
   Distributions
  77




---



##### Table of Contents



Sale, Exchange or Other Disposition of Common Stock
  Passive Foreign Investment Company Status and Significant Tax Consequences
  
 
  78




---



##### Table of Contents



Taxation of U.S. Holders Making a Timely QEF Election
  Taxation of U.S. Holders Making a Mark-to-Market Election
  79




---



##### Table of Contents



Taxation of U.S. Holders Not Making a Timely QEF or Mark-to-Market Election
  
 
 
  United States Federal Income Taxation of Non-U.S. Holders
  80




---



##### Table of Contents



Dividends on Common Stock
  Sale, Exchange or Other Disposition of Common Stock
  
 
  Backup Withholding and Information Reporting
  
 
 
  81




---



##### Table of Contents



F. Dividends and Paying Agents
  G. Statement by Experts
  H. Documents on Display
 http://www.sec.gov
  I. Subsidiary Information
  
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Fluctuation
  82




---



##### Table of Contents



Vessel Name
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012Free Destiny
    
    $
    30,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Free Jupiter
    
    
    103,000
    
    
    
    339,000
    
    
    
    281,000
    
    
    
    126,000
    
    
    
    204,000Free Hero/ Free Goddess
    
    
    229,000
    
    
    
    287,000
    
    
    
    200,000
    
    
    
    113,000
    
    
    
    27,000
  Foreign Exchange Rate Risk
  
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  83




---



##### Table of Contents



PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
  
 ITEM 15. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
 Managements Annual Report on Internal Control over Financial Reporting
   84




---



##### Table of Contents



Changes in Internal Control over Financial Reporting
  
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
 www.freeseas.gr
 
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  2006(1)
    
    2007(1)Audit fees
    
    $
    210,000
    
    
    $
    1,078,000
 
 (1)
    
    Audit fees represent fees for professional services related to the audit of our
financial statements for the years ended December 31, 2006 and December 31, 2007 and include
fees for professional services related to the filing of our
registration statement with the SEC for our 2007 public offering. .
 
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  85




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##### Table of Contents



ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
  86




---



##### Table of Contents



PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
  PageNumberIndex to Consolidated Financial Statements
    
    
    F-1Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets
    
    
    F-3Consolidated Statements of Operations
    
    
    F-4Consolidated Statements of Cash Flows
    
    
    F-5Consolidated Statements of Shareholders Equity
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
 
 ITEM 19. EXHIBITS
 1.1
    
    Amended and Restated Articles of
Incorporation of FreeSeas Inc. (formerly
known as Adventure Holdings S.A.)
    
    Exhibit 3.1 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on May 11,
2005 and
incorporated herein
by reference1.2
    
    Amended and Restated By-Laws of FreeSeas
Inc. (formerly known as Adventure
Holdings S.A.)
    
    Exhibit 3.2 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on May 11,
2005 and
incorporated herein
by reference1.3
    
    First Amendment to the Amended and
Restated Bylaws of FreeSeas Inc.
    
    Exhibit 3.3 to
Amendment No. 1 to
Registrants
Registration
Statement on Form
F-1 (File
No. 333-145203)
filed on October 15,
2007 and
incorporated herein
by reference2.1
    
    Specimen Common Stock Certificate
    
    Exhibit 4.1 to
Amendment No. 1 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on July 22,
2005 and
incorporated herein
by reference2.2
    
    Form of Class A Warrant
    
    Exhibit 4.2 to
Amendment No. 1 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on July 22,
2005 and
incorporated herein
by reference
 87




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##### Table of Contents



2.3
    
    Warrant dated as of May 8, 2007 issued to
FS Holdings Limited
    
    Exhibit 4.3 to
Registrants
Registration
Statement on
Form F-3 filed on
August 3, 2007 and
incorporated herein
by reference2.4
    
    Warrant dated as of June 22, 2007 issued
to FS Holdings Limited
    
    Exhibit 4.4 to
Registrants
Registration
Statement on
Form F-3 filed on
August 3, 2007 and
incorporated herein
by reference2.5
    
    Form of Class W Warrant
    
    Exhibit 4.3 to
Amendment No. 1 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on July 22,
2005 and
incorporated herein
by reference2.6
    
    Form of Class Z Warrant
    
    Exhibit 4.4 to
Amendment No. 1 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on July 22,
2005 and
incorporated herein
by reference2.7
    
    Warrant Clarification Agreement dated May
10, 2007 between FreeSeas Inc. and
American Stock Transfer & Trust Company
    
    Exhibit 4.27 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2006
and incorporated
herein by reference2.8
    
    Form of Management Stock Option Agreement
    
    Exhibit 4.5 to
Amendment No. 2 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on October 11,
2005 and
incorporated herein
by reference4.1
    
    Employment Agreement between Ion G.
Varouxakis and FreeSeas Inc.
    
    Exhibit 10.2 to
Amendment No. 1 to
Registrants
Registration
Statement on
Form F-1 (File No
333-124825) filed on
July 22, 2005 and
incorporated herein
by reference4.2
    
    Employment Agreement between Dimitris D.
Papadopoulos and FreeSeas Inc.
    
    Exhibit 10.2 to
Amendment No. 1 to
Registrants
Registration
Statement on Form
F-1 (File
No. 333-145203)
filed on October 15,
2007 and
incorporated herein
by reference4.3
    
    2005 Amended and Restated Stock Incentive
Plan
    
    Annex A to
Registrants
Form 6-K filed on
December 1, 2006 and
incorporated herein4.4
    
    Credit Agreement dated June 24, 2004
between Adventure Three S.A. and
Hollandsche Bank-Unie N.V.
    
    Exhibit 10.7 to
Amendment No. 1 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on July 22,
2005 and
incorporated herein
by reference
 88




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##### Table of Contents



4.5
    
    Mortgage dated September 29, 2004 by
Adventure Three S.A. in favor of
Hollandsche Bank-Unie N.V.
    
    Exhibit 10.8 to
Amendment No. 1 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on July 22,
2005 and
incorporated herein
by reference4.6
    
    Deed of Assignment dated September 29,
2004 between Adventure Three S.A. and
Hollandsche Bank-Unie N.V.
    
    Exhibit 10.9 to
Amendment No. 1 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on July 22,
2005 and
incorporated herein
by reference4.7
    
    Short-Term Loan Agreement in Euros and
Optional Currencies dated July 8, 2004
between Adventure Three S.A. and
Hollandsche Bank-Unie N.V.
    
    Exhibit 10.10 to
Amendment No. 1 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on July 22,
2005 and
incorporated herein
by reference4.8
    
    Standard Ship Management Agreement dated
July 1, 2004 between Free Bulkers S.A.
and Adventure Two S.A.
    
    Exhibit 10.11 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on May 11,
2005 and
incorporated herein
by reference4.9
    
    Amendment No. 1 of July 22, 2005 to the
Shipman 98 Agreement dated July 1, 2004
between Adventure Two S.A. and Free
Bulkers S.A.
    
    Exhibit 10.20 to
Amendment No. 1 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on July 22,
2005 and
incorporated herein
by reference4.10
    
    Standard Ship Management Agreement dated
July 1, 2004 between Free Bulkers S.A.
and Adventure Three S.A.
    
    Exhibit 10.12 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on May 11,
2005 and
incorporated herein
by reference4.11
    
    Amendment No. 1 of July 22, 2005 to the
Shipman 98 Agreement dated July 1, 2004
between Adventure Three S.A. and Free
Bulkers S.A.
    
    Exhibit 10.13 to
Amendment No. 1 to
Registrants
Registration
Statement on Form
F-1 (File
No. 333-145203)
filed on October 15,
2007 and
incorporated herein
by reference4.12
    
    Loan Agreement dated August 2, 2004 among
Adventure Holdings S.A. (now known as
FreeSeas Inc.), G. Bros S.A., and V
Capital S.A., regarding the M/V Free
Destiny
    
    Exhibit 10.13 to
Amendment No. 1 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on July 22,
2005 and
incorporated herein
by reference
 89




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##### Table of Contents



4.13
    
    First Amendment to Loan Agreement dated
effective as of April 25, 2005 among
Adventure Holdings S.A. (now known as
FreeSeas Inc.), G. Bros S.A., and V
Capital S.A., regarding the M/V Free
Destiny
    
    Exhibit 10.14 to
Amendment No. 1 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on July 22,
2005 and
incorporated herein
by reference4.14
    
    Loan Agreement dated September 20, 2004
among Adventure Holdings S.A. (now known
as FreeSeas Inc.), G. Bros S.A., and V
Capital S.A., regarding the M/V Free
Envoy
    
    Exhibit 10.15 to
Amendment No. 1 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on July 22,
2005 and
incorporated herein
by reference4.15
    
    First Amendment to Loan Agreement dated
effective as of April 25, 2005 among
Adventure Holdings S.A. (now known as
FreeSeas Inc.), G. Bros S.A., and V
Capital S.A., regarding the M/V Free
Envoy
    
    Exhibit 10.16 to
Amendment No. 1 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on July 22,
2005 and
incorporated herein
by reference4.16
    
    Credit Agreement dated September 23, 2005
between Adventure Two S.A. and
Hollandsche Bank-Unie N.V.
    
    Exhibit 10.22 to
Amendment No. 2 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on October 11,
2005 and
incorporated herein
by reference4.17
    
    Credit Agreement dated September 23, 2005
between Adventure Three S.A. and
Hollandsche Bank-Unie N.V.
    
    Exhibit 10.23 to
Amendment No. 2 of
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on October 11,
2005 and
incorporated herein
by reference4.18
    
    Second Amendment to Loan Agreement dated
effective as of October 7, 2005 among
FreeSeas Inc., G. Bros S.A., and V
Capital regarding the M/V Free Destiny
    
    Exhibit 10.24 to
Amendment No. 2 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on October 11,
2005 and
incorporated herein
by reference4.19
    
    Second Amendment to Loan Agreement dated
effective as of October 7, 2005 among
FreeSeas Inc., G. Bros S.A., and V
Capital regarding the M/V Free Envoy
    
    Exhibit 10.25 to
Registrants
Registration
Statement of
Amendment No. 2 of
Form F-1 (File
No. 333-124825)
dated October 11,
2005 and
incorporated herein
by reference4.20
    
    Mortgage dated October 24, 2005 by
Adventure Two S.A. in favor of
Hollandsche Bank-Unie N.V.
    
    Exhibit 4.22 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2005
and incorporated
herein by reference4.21
    
    Deed of Assignment dated October 24, 2005
between Adventure Two S.A. and
Hollandsche Bank-Unie N.V.
    
    Exhibit 4.23 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2005
and incorporated
herein by reference
 90




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##### Table of Contents



4.22
    
    Amendment dated January 23, 2006 to
Credit Agreement dated September 23, 2005
between Adventure Two S.A. and
Hollandsche Bank-Unie N.V.
    
    Exhibit 4.27 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2005
and incorporated
herein by reference4.23
    
    Amendment dated January 23, 2006 to
Credit Agreement dated September 23, 2005
between Adventure Three S.A. and
Hollandsche Bank-Unie N.V.
    
    Exhibit 4.28 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2005
and incorporated
herein by reference4.24
    
    Loan Agreement dated September 2006 among
Adventure Four, S.A. and First Business
Bank S.A.
    
    Exhibit 4.24 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2006
and incorporated
herein by reference4.25
    
    Deed of Assignment dated September 2006
between Adventure Four, S.A. in favor of
First Business Bank S.A.
    
    Exhibit 4.25 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2006
and incorporated
herein by reference4.26
    
    Mortgage dated September 2006 by
Adventure Four S.A. in favor of First
Business Bank S.A.
    
    Exhibit 4.26 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2006
and incorporated
herein by reference4.27
    
    Promissory Note dated May 7, 2007 from
Free Seas Inc. in favor of FS Holdings
Limited
    
    Exhibit 4.28 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2006
and incorporated
herein by reference4.28
    
    Loan Agreement between FreeSeas Inc. and
HSH Nordbank
    
    Exhibit 10.30 to
Amendment No. 2 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on October 11,
2005 and
incorporated herein
by reference4.29
    
    Loan Agreement between FreeSeas Inc. and
BTMU Capital Corporation
    
    Exhibit 10.31 to
Amendment No. 2 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on October 11,
2005 and
incorporated herein
by reference4.30
    
    Credit Agreement dated May 7, 2007 among
Adventure Two S.A., Adventure Three S.A.
and Hollandsche Bank  Unie N.V.
    
    Exhibit 10.32 to
Amendment No. 2 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on October 11,
2005 and
incorporated herein
by reference
 91




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##### Table of Contents



4.31
    
    Memorandum of Agreement dated May 1, 2007
for the M/V Free Hero
    
    Exhibit 10.34 to
Amendment No. 2 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on October 11,
2005 and
incorporated herein
by reference4.32
    
    Memorandum of Agreement dated May 1, 2007
for the M/V Free Jupiter
    
    Exhibit 10.35 to
Amendment No. 2 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on October 11,
2005 and
incorporated herein
by reference4.33
    
    Memorandum of Agreement dated August 20,
2007 for the M/V Free Goddess
    
    Exhibit 10.36 to
Amendment No. 2 to
Registrants
Registration
Statement on
Form F-1 (File
No. 333-124825)
filed on October 11,
2005 and
incorporated herein
by reference4.34
    
    Supplemental Agreement with HSH Nordbank
dated December 28, 2007
    
    Filed herewith4.35
    
    Memorandum of Agreement dated January 22,
2008 for the M/V Free Impala
    
    Filed herewith.4.36
    
    Memorandum of Agreement dated January 22,
2008 for the M/V Free Knight
    
    Filed herewith.4.37
    
    Supplemental Agreement dated October 2007
to Loan Agreement between FreeSeas Inc.,
and HSH Nordbank AG
    
    Filed herewith.4.38
    
    Memorandum of Agreement dated March 10,
2008 for M/V Free Lady
    
    Filed herewith.4.39
    
    Facility Agreement date December 24, 2007
between FreeSeas Inc. and Credit Suisse
    
    Filed herewith.4.40
    
    First Preferred Mortgage on the M/V Free
Heroin favor of Credit Suisse
    
    Filed herewith.4.41
    
    First Preferred Mortgage on the M/V Free
Goddessin favor of Credit Suisse
    
    Filed herewith.4.42
    
    First Preferred Mortgage on the M/V Free
Jupiterin favor of Credit Suisse
    
    Filed herewith.4.43
    
    Loan Agreement dated March 31, 2008
between Adventure Nine and First Business
Bank
    
    Filed herewith.
 92




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##### Table of Contents



4.44
    
    First Preferred Mortgage on the M/V Free
Impalain favor of First Business Bank
    
    Filed herewith.4.45
    
    Deed of Covenants dated April 2, 2008
between Adventure Nine and First Business
Bank
    
    Filed herewith.4.46
    
    Credit Agreement dated January 21, 2008
among Adventure Two, Adventure Three and
Adventure Seven with Hollandsche Bank 
Unie N.V.
    
    Filed herewith.4.47
    
    Short Term Loan Agreement among Adventure
Two, Adventure Three, Adventure Seven and
Hollandsche BankUnie N.V.
    
    Filed herewith.4.48
    
    Rollover Loan Agreement dated April 3,
2008 among Adventure Two, Adventure
Three, Adventure Seven and Hollandsche
BankUnie N.V.
    
    Filed herewith.4.49
    
    First Preferred Mortgage dated March 19,
2008 on the M/V Free Knightin favor of
Hollandsche Bank  Unie N.V.
    
    Filed herewith.4.50
    
    Deed of Covenants between Adventure Seven
and Hollandsche Bank  Unie N.V
    
    Filed herewith.4.51
    
    Second Preferred Mortgage on the M/V Free
Destinyin favor of Hollandsche Bank 
Unie N.V.
    
    Filed herewith.4.52
    
    Second Preferred Mortgage on the M/V Free
Envoyin favor of Hollandsche Bank  Unie
N.V.
    
    Filed herewith.8.1
    
    Subsidiaries of the Registrant
    
    Filed herewith.12.1
    
    Section 302 Certification of Chief
Executive Officer
    
    Filed herewith.12.2
    
    Section 302 Certification of Chief
Financial Officer
    
    Filed herewith.13.1
    
    Section 906 Certification of Chief
Executive Officer
    
    Filed herewith.13.2
    
    Section 906 Certification of Chief
Financial Officer
    
    Filed herewith.15.1
    
    Code of Business Conduct and Ethics
    
    Exhibit 15.1 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2005
and incorporated
herein by reference15.2
    
    Consent of PriceWaterhouseCoopers, S.A.
    
    Filed herewith.
 93




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##### Table of Contents



SIGNATURES
  FREESEAS INC.By:
    
    /s/ Ion G. VarouxakisName:
    
    Ion G. VarouxakisTitle:
    
    President and Chief Financial Officer
  94




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets
    
    
    F-3Consolidated Statements of Operations
    
    
    F-4Consolidated Statements of Cash Flows
    
    
    F-5Consolidated Statements of Shareholders Equity
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 To the Shareholders and the Board of Directors of
FreeSeas Inc.:
    
 F-2




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##### Table of Contents



FREESEAS INC.
 
 CONSOLIDATED BALANCE SHEETS
  Notes
    
    
    December 31, 2007
    
    
    December 31, 2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    
    
    
    
    $
    63,394
    
    
    $
    372Trade receivables, net
    
    
    
    
    
    
    60
    
    
    
    278Insurance claims
    
    
    
    
    
    
    16,116
    
    
    
    485Due from related party
    
    
    9
    
    
    
    1,037
    
    
    
    40Inventories
    
    
    
    
    
    
    499
    
    
    
    242Prepayments and other
    
    
    
    
    
    
    334Total current assets
    
    
    
    
    
    $
    81,440
    
    
    $
    1,417Fixed assets, net
    
    
    3
    
    
    
    108,021
    
    
    
    19,369Deferred charges, net
    
    
    4
    
    
    
    2,161
    
    
    
    2,300Restricted cash
    
    
    
    
    
    
    350Total Assets
    
    
    
    
    
    $
    191,972
    
    
    $
    23,086LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    
    5
    
    
    $
    3,181
    
    
    $
    2,003Accrued liabilities
    
    
    6
    
    
    
    16,713
    
    
    
    1,515Unearned revenue
    
    
    
    
    
    
    783
    
    
    
    179Shareholders loan  current portion
    
    
    8
    
    
    
    
    
    
    
    1,218Bank overdraft
    
    
    
    
    
    
    
    
    
    
    2,000Deferred revenue
    
    
    
    
    
    
    1,620Bank loans  current portion
    
    
    7
    
    
    
    11,800
    
    
    
    3,345Total current liabilities
    
    
    
    
    
    $
    34,097
    
    
    $
    10,260Derivative financial instruments
    
    
    
    
    
    
    749Shareholders loans  net of current portion
    
    
    8
    
    
    
    
    
    
    
    1,334Bank loans  net of current portion
    
    
    7
    
    
    
    44,500
    
    
    
    4,485Total long term liabilities
    
    
    
    
    
    $
    45,249
    
    
    $
    5,819Commitments and Contingencies
    
    
    11SHAREHOLDERS EQUITY:Common stock
    
    
    13
    
    
    
    20
    
    
    
    6Additional paid-in capital
    
    
    
    
    
    
    115,464
    
    
    
    9,703Accumulated deficit
    
    
    
    
    
    
    (2,858
    )
    
    
    (2,702
    )Total shareholders equity
    
    
    
    
    
    $
    112,626
    
    
    $
    7,007Total liabilities and Shareholders Equity
    
    
    
    
    
    $
    191,972
    
    
    $
    23,086
  F-3




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##### Table of Contents



FREESEAS
INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Year ended December 31,2007
    
    
    2006
    
    
    2005OPERATING REVENUES
    
    $
    20,147
    
    
    $
    11,727
    
    
    $
    10,326OPERATING EXPENSES:Vessel operating expenses
    
    
    (6,001
    )
    
    
    (4,483
    )
    
    
    (3,596
    )Voyage expenses
    
    
    (267
    )
    
    
    (689
    )
    
    
    (55
    )Depreciation expenses
    
    
    (4,435
    )
    
    
    (4,479
    )
    
    
    (3,553
    )Amortization of deferred charges
    
    
    (757
    )
    
    
    (442
    )
    
    
    (355
    )Management fees to a related party
    
    
    (875
    )
    
    
    (540
    )
    
    
    (488
    )Commissions
    
    
    (1,095
    )
    
    
    (799
    )
    
    
    (553
    )Stock-based compensation expenses
    
    
    (96
    )
    
    
    (651
    )
    
    
    (200
    )General and administrative expenses
    
    
    (2,111
    )
    
    
    (1,925
    )
    
    
    (321
    )Bad debts
    
    
    (118
    )Gains on sale of vessel
    
    
    1,369Income (loss) from operations
    
    $
    5,761
    
    
    $
    (2,281
    )
    
    $
    1,205OTHER INCOME (EXPENSE):Interest and finance costs
    
    
    (3,204
    )
    
    
    (1,004
    )
    
    
    (1,076
    )Loss on debt extinguishment
    
    
    (2,570
    )Change in fair value of derivatives
    
    
    (749
    )Interest income
    
    
    639
    
    
    
    19
    
    
    
    8Other
    
    
    (33
    )
    
    
    (58
    )
    
    
    15Other income (expense)
    
    $
    (5,917
    )
    
    $
    (1,043
    )
    
    $
    (1,053
    )Net income (loss)
    
    $
    (156
    )
    
    $
    (3,324
    )
    
    $
    152Basic earnings (loss) per share
    
    $
    (0.02
    )
    
    $
    (0.53
    )
    
    $
    0.03Diluted earnings (loss) per share
    
    $
    (0.02
    )
    
    $
    (0.53
    )
    
    $
    0.03Basic weighted average number of shares
    
    
    8,786,287
    
    
    
    6,290,100
    
    
    
    4,574,588Diluted weighted average of shares
    
    
    8,786,287
    
    
    
    6,290,100
    
    
    
    4,600,444
  F-4




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##### Table of Contents



FREESEAS INC.
 
 CONSOLIDATED STATEMENT OF CASH FLOWS
 Twelve Months EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2005Cash Flows from Operating Activities:Net income (loss)
    
    $
    (156
    )
    
    $
    (3,324
    )
    
    $
    152Adjustments to reconcile net income (loss) to net cashDepreciation
    
    
    4,435
    
    
    
    4,479
    
    
    
    3,553Amortization of deferred charges
    
    
    757
    
    
    
    514
    
    
    
    433Amortization of debt discount
    
    
    433
    
    
    
    77
    
    
    
    153Provision for bad debts
    
    
    118
    
    
    
    202Write offs of deferred charges
    
    
    
    
    
    
    32
    
    
    
    50Dry-docking and special survey
    
    
    (907
    )
    
    
    (2,069
    )
    
    
    (379
    )Compensation cost for stock options granted
    
    
    96
    
    
    
    651
    
    
    
    180Loss on debt extinguishment
    
    
    2,570Change in fair value of derivatives
    
    
    749Amortization of deferred revenue
    
    
    (1,516
    )Gain on sale of vessel
    
    
    (1,369
    )Changes in:Trade receivables
    
    
    100
    
    
    
    40
    
    
    
    (225
    )Inventories
    
    
    (257
    )
    
    
    (200
    )
    
    
    (1
    )Prepayments and other
    
    
    (334
    )Due from related party
    
    
    (997
    )
    
    
    637
    
    
    
    (431
    )Insurance claims
    
    
    (15,631
    )
    
    
    277
    
    
    
    (762
    )Accounts payable
    
    
    1,178
    
    
    
    827
    
    
    
    761Unearned revenue
    
    
    604
    
    
    
    7
    
    
    
    (112
    )Accrued liabilities
    
    
    15,198
    
    
    
    (25
    )
    
    
    1,424Due to related party
    
    
    
    
    
    
    (893
    )
    
    
    774Other liabilities
    
    
    
    
    
    
    (154
    )
    
    
    154Net Cash from Operating Activities
    
    $
    5,071
    
    
    $
    1,078
    
    
    $
    5,724Cash flows from (used in) Investing Activities:Vessel acquisitions
    
    
    (97,585
    )
    
    
    
    
    
    
    (11,213
    )Cash from sale of vessel, net
    
    
    10,606Net Cash used in Investing Activities
    
    $
    (86,979
    )
    
    
    
    
    
    $
    (11,213
    )Cash flows from (used in) Financing Activities:(Increase) decrease in restricted cash
    
    
    (350
    )
    
    
    
    
    
    
    400Net movement in bank overdraft
    
    
    (2,000
    )
    
    
    2,000
    
    
    
    (37
    )Proceeds from long term loan
    
    
    104,743
    
    
    
    2,330
    
    
    
    10,700Payments of bank loans
    
    
    (56,273
    )
    
    
    (7,500
    )
    
    
    (7,850
    )Payments of shareholders loans
    
    
    (16,614
    )
    
    
    (750
    )
    
    
    (5,016
    )Proceeds from issuance of common shares
    
    
    95,153
    
    
    
    
    
    
    
    5,901Shareholder contributions  exercise of warrants
    
    
    8,667Shareholders contributions
    
    
    
    
    
    
    
    
    
    
    105Shareholders loans
    
    
    14,000
    
    
    
    
    
    
    
    4,216Deferred financing cost
    
    
    (2,396
    )
    
    
    (71
    )
    
    
    (106
    )Net Cash from (used in) Financing Activities
    
    $
    144,930
    
    
    $
    (3,991
    )
    
    $
    8,313Net increase (decrease) in cash in hand and at bank
    
    $
    63,022
    
    
    $
    (2,913
    )
    
    $
    2,824Cash and cash equivalents, Beginning of year
    
    
    372
    
    
    
    3,285
    
    
    
    461Cash and cash equivalents, End of year
    
    $
    63,394
    
    
    $
    372
    
    
    $
    3,285Supplemental Cash Flow Information:Cash paid for interest
    
    $
    2,629
    
    
    $
    758
    
    
    $
    588Non-cash shareholder distributions
    
    $
    6
    
    
    $
    25
    
    
    $
    19Discount on promissory note
    
    $
    1,865Liability assumed in connection with vessel acquisitions
    
    $
    3,136
  F-5




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##### Table of Contents



FREESEAS
INC.
 
 CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
 AdditionalPreferred
    
    Preferred
    
    Common
    
    Common
    
    Paid-in
    
    Retained
    
    Deferred StockShares
    
    Shares $
    
    Shares
    
    Shares $
    
    Capital
    
    Earnings
    
    Compensation
    
    TotalBalance January 1, 2005
    
    
    
    
    
    
    
    
    
    
    4,500,000
    
    
    
    5
    
    
    
    2,911
    
    
    
    470
    
    
    
    
    
    
    
    3,386Issuance of shares, net (Note 13)
    
    
    
    
    
    
    
    
    
    
    1,790,100
    
    
    
    1
    
    
    
    5,900
    
    
    
    
    
    
    
    
    
    
    
    5,901Contributions from shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    105Distributions to shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    
    (19
    )Issuance of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    345
    
    
    
    
    
    
    
    (165
    )
    
    
    180Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    152
    
    
    
    
    
    
    
    152Balance December 31, 2005
    
    
    
    
    
    
    
    
    
    
    6,290,100
    
    
    
    6
    
    
    
    9,242
    
    
    
    622
    
    
    
    (165
    )
    
    
    9,705Issuance of shares, net (Note 13)
    
    
    
    
    
    
    
    
    
    
    Distributions to shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25
    )
    
    
    
    
    
    
    
    
    
    
    (25
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    486
    
    
    
    
    
    
    
    165
    
    
    
    651Exercise of warrant conversions
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,324
    )
    
    
    
    
    
    
    (3,324
    )Balance December 31, 2006
    
    
    
    
    
    
    
    
    
    
    6,290,100
    
    
    
    6
    
    
    
    9,703
    
    
    
    (2,702
    )
    
    
    
    
    
    
    7,007Issuance of shares, net (Note 13)
    
    
    
    
    
    
    
    
    
    
    12,650,000
    
    
    
    12
    
    
    
    95,141
    
    
    
    
    
    
    
    
    
    
    
    95,153Distributions to shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    (6
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    
    
    
    
    96Stock issued
from exercise of warrant conversions
    
    
    
    
    
    
    
    
    
    
    1,803,356
    
    
    
    2
    
    
    
    8,665
    
    
    
    
    
    
    
    
    
    
    
    8,667Discount on promissory note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,865
    
    
    
    
    
    
    
    
    
    
    
    1,865Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (156
    )
    
    
    
    
    
    
    (156
    )Balance December 31, 2007
    
    
    
    
    
    
    
    
    
    
    20,743,456
    
    
    
    20
    
    
    
    115,464
    
    
    
    (2,858
    )
    
    
    
    
    
    
    112,626
  F-6




---



##### Table of Contents



FREESEAS INC.
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation and General Information
   %
    
    
    
    
    
    
    
    
    
    
    
    
    
    Date of
    
    Date ofCompany
    
    Owned
    
    M/V
    
    Type
    
    Dwt
    
    Built
    
    Acquisition
    
    Disposal
    
    EmploymentFreeSeas Inc.Adventure Two S.A.
    
    
    100
    %
    
    Free Destiny
    
    Handysize
    
    
    25,240
    
    
    
    1982
    
    
    08/04/04
    
    N/A
    
    75-day time-charter
through mid-May 2008
at $27,500 p/dAdventure Three S.A.
    
    
    100
    %
    
    Free Envoy
    
    Handysize
    
    
    26,318
    
    
    
    1984
    
    
    09/29/04
    
    N/A
    
    25-day time-charter
though May at $28,500
p/dAdventure Four S.A.
    
    
    100
    %
    
    Free Fighter
    
    Handysize
    
    
    38,905
    
    
    
    1982
    
    
    06/14/05
    
    04/27/07
    
    N/AAdventure Five S.A.
    
    
    100
    %
    
    Free Goddess
    
    Handysize
    
    
    22,051
    
    
    
    1995
    
    
    10/30/07
    
    N/A
    
    Two-year time-charter
through November
2009 at $19,250 p/dAdventure Six S.A.
    
    
    100
    %
    
    Free Hero
    
    Handysize
    
    
    24,318
    
    
    
    1995
    
    
    07/03/07
    
    N/A
    
    Time-charter through
February 2009 at
$14,500 p/dAdventure Seven S.A.
    
    
    100
    %
    
    Free Knight
    
    Handysize
    
    
    24,111
    
    
    
    1998
    
    
    03/19/08
    
    N/A
    
    One-year time-charter
through March 2009 at
$31,500 p/dAdventure Eight S.A.
    
    
    100
    %
    
    Free Jupiter
    
    Handymax
    
    
    47,777
    
    
    
    2002
    
    
    09/05/07
    
    N/A
    
    Three-year time-
charter through
February 2011 at
$32,000/28,000/24,000
p/dAdventure Nine S.A.
    
    
    100
    %
    
    Free Impala
    
    Handysize
    
    
    24,111
    
    
    
    1997
    
    
    04/02/08
    
    N/A
    
    One-year time-charter
through April 2009 at
$31,500 p/d
    F-7




---



##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  2. Significant Accounting Policies
 Principles of Consolidation
  Use of Estimates:
 Foreign Currency Translation:
 Trade Receivables:
 Inventories:
 Insurance Claims:
 Vessels Cost:
 Vessels Depreciation:
 Restricted Cash:
 Impairment of Long-lived Assets:
 F-8




---



##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Accounting for Special Survey and Dry-docking Costs:
 Financing Costs:
 Accounting for Revenue and Expenses:
   Unearned Revenue:
 Deferred Revenue
 Profit Sharing Arrangements:
 Repairs and Maintenance:
 Interest Rate Swaps:
 F-9




---



##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Financial Instruments:
 Financial Risk Management:
 Credit Risk:
 Interest Rate Risk:
 Liquidity Risk:
 Foreign Exchange Risk:
 Stock-Based Compensation
 F-10




---



##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Segment Reporting:
 Comprehensive Income:
 Earnings per Share:
 Recent Accounting Developments:
  F-11




---



##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
      3. Fixed Assets
 Free Fighter Free Fighter
 Free Fighter Free Hero Free Jupiter
 F-12




---



##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Free Goddess
 AccumulatedVessel Cost
    
    
    depreciation
    
    
    Net book valueJanuary 1, 2005
    
    $
    17,060
    
    
    $
    (872
    )
    
    $
    16,188Additions new vessels
    
    
    11,213
    
    
    
    
    
    
    
    11,213Depreciation for the year
    
    
    
    
    
    
    (3,553
    )
    
    
    (3,553
    )December 31, 2005
    
    $
    28,273
    
    
    $
    (4,425
    )
    
    $
    23,848Depreciation for the year
    
    
    
    
    
    
    (4,479
    )
    
    
    (4,479
    )December 31, 2006
    
    $
    28,273
    
    
    $
    (8,904
    )
    
    $
    19,369Additions new vessels
    
    
    100,721
    
    
    
    
    
    
    
    100,721Depreciation for the year
    
    
    
    
    
    
    (4,435
    )
    
    
    (4,435
    )Disposal of vessel
    
    
    (11,213
    )
    
    
    3,579
    
    
    
    (7,634
    )December 31, 2007
    
    $
    117,781
    
    
    $
    (9,760
    )
    
    $
    108,021
 Free Hero, Free
Jupiter Free Goddess M Free Goddess Free Hero
 F-13




---



##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 4. Deferred Charges
 Dry-docking costs
    
    
    Special survey costs
    
    
    Financing costs
    
    
    TotalJanuary 1, 2005
    
    $
    260
    
    
    $
    272
    
    
    $
    172
    
    
    $
    704Additions
    
    
    299
    
    
    
    80
    
    
    
    106
    
    
    
    485Written-off
    
    
    
    
    
    
    
    
    
    
    (50
    )
    
    
    (50
    )Amortization
    
    
    (238
    )
    
    
    (117
    )
    
    
    (78
    )
    
    
    (433
    )December 31, 2005
    
    $
    321
    
    
    $
    235
    
    
    $
    150
    
    
    $
    706Additions
    
    
    715
    
    
    
    1,354
    
    
    
    71
    
    
    
    2,140Written-off
    
    
    
    
    
    
    
    
    
    
    (32
    )
    
    
    (32
    )Amortization
    
    
    (306
    )
    
    
    (136
    )
    
    
    (72
    )
    
    
    (514
    )December 31, 2006
    
    $
    730
    
    
    $
    1,453
    
    
    $
    117
    
    
    $
    2,300Additions
    
    
    147
    
    
    
    760
    
    
    
    2,396
    
    
    
    3,303Written-off
    
    
    (350
    )
    
    
    (1,252
    )
    
    
    (1,083
    )
    
    
    (2,685
    )Amortization
    
    
    (285
    )
    
    
    (209
    )
    
    
    (263
    )
    
    
    (757
    )December 31, 2007
    
    $
    242
    
    
    $
    752
    
    
    $
    1,167
    
    
    $
    2,161
 Free Fighter Free Hero Free Jupiter Free
Goddess
 5. Accounts Payable
  December 31, 2007
    
    
    December 31, 2006Suppliers
    
    $
    3,065
    
    
    $
    1,820Agents
    
    
    68
    
    
    
    57Insurers
    
    
    48
    
    
    
    126Total
    
    $
    3,181
    
    
    $
    2,003
 6. Accrued Liabilities
  December 31, 2007
    
    
    December 31, 2006Accrued wages
    
    $
    
    
    
    $
    28Accrued interest
    
    
    96
    
    
    
    42Accrued insurance and related liabilities
    
    
    16,089
    
    
    
    226Accrued drydocking and special survey costs
    
    
    
    
    
    
    865Accrued financial advisory costs
    
    
    26
    
    
    
    155Other accrued liabilities
    
    
    502
    
    
    
    199Total
    
    $
    16,713
    
    
    $
    1,515
 Free Jupiter
 F-14




---



##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 7. Long-Term Debt
  December 31, 2007
    
    
    December 31, 2006Current
    
    
    Long-term
    
    
    
    
    
    
    Current
    
    
    Long-termLender
    
    portion
    
    
    portion
    
    
    Total
    
    
    portion
    
    
    portion
    
    
    TotalFirst Business Bank.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    945
    
    
    
    1,385
    
    
    
    2,330(M/V Free Fighter)Hollandsche
Bank  Unie
N.V.
    
    
    3,100
    
    
    
    
    
    
    
    3,100
    
    
    
    225
    
    
    
    3,100
    
    
    
    3,325(M/V Free Destiny)Hollandsche
Bank  Unie
N.V.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,175
    
    
    
    
    
    
    
    2,175(M/V Free Envoy)HSH Nordbank AG
    
    
    3,700
    
    
    
    24,300
    
    
    
    28,000
    
    
    
    
    
    
    
    
    
    
    
    ( M/V Free Jupiter)Credit Suisse
    
    
    5,000
    
    
    
    20,200
    
    
    
    25,200
    
    
    
    
    
    
    
    
    
    
    
    (M/V Free Hero and M/V
Free Goddess)Total
    
    
    11,800
    
    
    
    44,500
    
    
    
    56,300
    
    
    
    3,345
    
    
    
    4,485
    
    
    
    7,830
  Lender
    
    Vessel
    
    Repayment Terms( a ) Hollandsche Bank  Unie N.V.
    
    M/V FREE DESTINY
    
    Eight quarterly installments of
$75 the first due in December
2005, one quarterly installment
of $100 in March 2008, two
quarterly installments of $500
and a balloon payment of $2,000
due in December 2008. Interest
rate at 1.95% above LIBOR.( b ) HSH Nordbank AG
    
    M/V FREE JUPITER
    
    Thirty two quarterly instalments;
first twelve of $925 each, next
twenty of $570 each plus a
balloon of $5,500 at final
maturity. Interest rate at 1.5%
above LIBOR for the balloon
amount and 1.3% for the
remaining balance of the loan.( c ) Credit Suisse
    
    M/V FREE HERO
M/V FREE
GODDESS
M/V FREE JUPITER
(REFINANCE)
    
    Thirty two quarterly instalments
of $1,250 each plus a $8,700
balloon payment on final
maturity. Interest rate at 1%
above LIBOR.
 F-15




---



##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
   Free
Destiny Free Fighter
 Free Hero Free Jupiter Free Goddess
 Free Hero Free Goddess Free Jupiter Free Hero Free Goddess Free Jupiter Free Lady
 Free Jupiter
 Year
    
    Amount2008
    
    
    11,8002009
    
    
    8,7002010
    
    
    8,7002011
    
    
    7,2802012
    
    
    7,4802013
    
    
    2,2802014
    
    
    2,2802015
    
    
    7,780Total
    
    
    56,300
 F-16




---



##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 8. Shareholders Loans
 AmountJanuary 1, 2005
    
    
    3,228New loan
    
    
    4,216Payment
    
    
    (4,416
    )Debt discount decrease
    
    
    19Debt discount amortization
    
    
    153December 31, 2005
    
    
    3,200Payment
    
    
    (750
    )Debt discount decrease
    
    
    25Debt discount amortization
    
    
    77December 31, 2006
    
    
    2,552Payment
    
    
    (2,614
    )Debt discount decrease
    
    
    8Debt discount amortization
    
    
    54December 31, 2007
    
    
    
  .
   Free Hero Free Jupiter Free Goddess
  F-17




---



##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
   9. Related Party Transactions
 Purchases of services
   
  Employment agreements
  
  F-18




---



##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Shareholders options and warrants
  10. Earnings Per Share
   For the year ended
    
    
    For the year ended
    
    
    For the year endedDecember 31, 2007
    
    
    December 31, 2006
    
    
    December 31, 2005Numerator:Net income (loss)  basis and diluted
    
    $
    (156
    )
    
    $
    (3,324
    )
    
    $
    152Basic earnings per share denominatorWeighted average common shares outstanding
    
    
    8,786,827
    
    
    
    6,290,100
    
    
    
    4,574,588Diluted earnings per share denominator:Weighted average common shares outstanding
    
    
    8,786,827
    
    
    
    6,290,100
    
    
    
    4,574,588Dilutive common shares:Options
    
    
    
    
    
    
    
    
    
    
    20,825Warrants
    
    
    
    
    
    
    
    
    
    
    5,031Dilutive effect
    
    
    
    
    
    
    
    
    
    
    25,856Weighted average common shares  diluted
    
    
    8,786,827
    
    
    
    6,290,100
    
    
    
    4,600,444Basic income/(loss) per common share
    
    $
    (0.02
    )
    
    
    (0.53
    )
    
    
    (0.03
    )Diluted income/(loss) per common share
    
    $
    (0.02
    )
    
    
    (0.53
    )
    
    
    (0.03
    )
    11. Commitments and Contingencies
 Agreement with financial advisor
  F-19




---



##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Shares, warrants and options committed to HCFP Brenner Securities LLC
    Warrants
     Claims
 Free Jupiter
 F-20




---



##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 12. Stock Option Plan
     For the year endedDecember 31, 2005Net income available to common shareholders, as
reportedAs reported
    
    
    152Add: Stock-based employee compensation expense
included in reported net income
    
    
    180Deduct: Total stock compensation expense
determined under the fair value based method
    
    
    (1,075
    )Net income available to common shareholders, pro
forma
    
    
    (743
    )Basic earnings (loss) per share  as reported
    
    $
    0.03Basic earnings (loss) per share  pro forma
    
    $
    (0.16
    )Diluted earnings (loss) per share  as reported
    
    $
    0.03Diluted earnings (loss) per share  pro forma
    
    $
    (0.16
    )
  For the year endedDecember 31, 2005Expected life of option (years) (1)
    
    
    5Risk-free interest rate (2)
    
    
    4.35
    %Expected volatility of the Companys stock (3)
    
    
    37.50
    %Expected dividend yield on Companys stock
    
    
    
 
 (1)
    
    The expected life of options (in years) is based on the expected exercise date of the
options.(2)
    
    Risk Free Rate is the yield on a U.S. Government Zero Coupon Bond with a maturity equal
to the term of the grant.(3)
    
    Expected volatility is calculated by monitoring the volatility of ten shipping
companies listed in NASDAQ for the last 30 months (Source: Bloombergs Financial Markets
Commodities News). F-21




---



##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    Exercise
    
    Options
    
    Warrants
    
    
    
    
    
    ExerciseOptions
    
    Warrants
    
    Total
    
    Price
    
    Exercisable
    
    Exercisable
    
    Total
    
    PriceJanuary 1, 2005Granted
    
    
    750,000
    
    
    
    200,000
    
    
    
    950,000
    
    
    $
    5.00Options vested
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    200,000
    
    
    
    450,000
    
    
    $
    5.00December 31, 2005
    
    
    750,000
    
    
    
    200,000
    
    
    
    950,000
    
    
    $
    5.00
    
    
    
    250,000
    
    
    
    200,000
    
    
    
    450,000
    
    
    $
    5.00Options vested
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    
    
    
    
    
    
    
    $
    5.00December 31, 2006
    
    
    750,000
    
    
    
    200,000
    
    
    
    950,000
    
    
    $
    5.00
    
    
    
    500,000
    
    
    
    200,000
    
    
    
    450,000
    
    
    $
    5.00Options granted to
directors
    
    
    45,000
    
    
    
    
    
    
    
    45,000
    
    
    $
    8.25Options granted to
officers
    
    
    125,000
    
    
    
    
    
    
    
    125,000
    
    
    $
    8.25Options forfeited
    
    
    (165,000
    )
    
    
    
    
    
    
    (165,000
    )
    
    $
    5.00Options cancelled
    
    
    (335,000
    )
    
    
    
    
    
    
    (335,000
    )
    
    $
    5.00
    
    
    
    (335,000
    )
    
    
    
    
    
    
    
    
    
    $
    5.00Options vested
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85,000
    
    
    
    
    
    
    
    
    
    
    $
    5.00December 31, 2007
    
    
    420,000
    
    
    
    200,000
    
    
    
    620,000
    
    
    $
    5.83
    
    
    
    250,000
    
    
    
    200,000
    
    
    
    450,000
    
    
    $
    5.00
      F-22




---



##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  13. Shareholders Equity
          F-23




---



##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 14. Taxes
   15. Financial Instruments
  Interest rate risk:
 Concentration of credit risk:
 Fair value:
 F-24




---



##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 16. Revenue from Voyages
  December 31, 2007ChartererSeaside Navigation ApS
    
    
    30
    %Armada Pacific Bulk Carriers
    
    
    19
    %Navison Shipping Co. A/S
    
    under
    10
    %Oldendorff
    
    under
    10
    %
  Operating revenuesDecember 31, 2007
    
    
    December 31, 2006
    
    
    December 31, 2005Europe
    
    $
    2,855
    
    
    $
    3,031
    
    
    $
    4,412North America
    
    
    2,715
    
    
    
    
    
    
    
    South America
    
    
    2,674
    
    
    
    1,803
    
    
    
    496Asia
    
    
    6,811
    
    
    
    4,758
    
    
    
    3,399Africa
    
    
    5,092
    
    
    
    2,135
    
    
    
    2,019Total
    
    $
    20,147
    
    
    $
    11,727
    
    
    $
    10,326
 17. Subsequent Events
 A.
    
    On January 22, 2008, the Company entered into memoranda of agreement to acquire two
second-hand dry-bulk carriers from affiliated parties for a total combined purchase price
of approximately $76,750. Both vessels, to be renamed M/V Free Impalaand M/V Free Knight,
are 24,111 dwt Handysize vessels built in 1997 and in 1998, respectively.B.
    
    On February 28, 2008, the Company paid its first quarterly dividend of $0.175 per share
to shareholders of record as February 18, 2008. The total dividend paid amounted to $3,630
on 20,743,456 common stock shares issued and outstanding.C.
    
    On February 28, 2008, the repairs of the M/V Free Jupiterwere completed and the vessel
was delivered to its charterers. As previously disclosed, the 2002-built Handymax M/V Free
Jupiterhas been fixed to a three-year time charter at a rate of $32,000 per day for the
first year, $28,000 per day for the second year and $24,000 per day for the third year.D.
    
    The M/V Free Knightwas delivered on March 19, 2008. The Company financed the vessel
with available cash from its recent common stock offering and bank financing from a $27,000
seven and one half year bank loan from HOLLANDSCHE BANK -UNIE N.V. Netherlands (HBU).
HBU, in addition to this loan and the existing facility of $3,100 outstanding as of
December 31, 2007, provided the Group with two new secured overdraft facilities totaling
$4,500, at a decreased interest rate. Employment for the vessel has been fixed for a one
year time charter at $31,500 per day commencing on delivery.E.
    
    The M/V Free Impalawas delivered on April 2, 2008 partly financed by FIRST BUSINESS
BANK S.A., Greece, in the amount of a $26,250 seven-year loan and cash available from its
recent common stock offering.
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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 F.
    
    On March 10, 2008, the Group signed a memorandum of agreement to purchase one
second-hand dry-bulk carrier from an unaffiliated third party for approximately $65,200 and
paid a deposit of $6,520 against the purchase price. The vessel is a 2003-built, 50,246 dwt
Handymax vessel built in Japan, and is scheduled for charter-free delivery to the Group in
June or July of 2008. The Company intends to finance this acquisition using cash on hand
and the Companys existing credit facility. Employment arrangements for the vessel will be
announced when finalized.G.
    
    On April 14, 2008, the Group refinanced the M/V Free Jupiterby drawing $23,500 under
the Credit Suisse facility and repaying in full the HSH Norbank loan remaining outstanding
as of that date.
 H.
    
    On March 27, 2008 the Company filed with the U.S. Securities and Exchange
Commission a universal shelf registration statement on Form F-3 for the purpose of
undertaking possible capital raises in the future. Included in this universal shelf
registration statement are various securities of the Company, including common stock,
preferred stock, debt securities, warrants, rights, purchase contracts and units, which
the Company may determine to offer in the future, from time to time, based on market
conditions and the Companys capital needs. On May 9, 2008, the Companys Board of
Directors approved an increase in the aggregate amount of securities registered from
$200 million to $300 million, which increase will be reflected in an amendment to the
Form F-3.I.
    
    On May 9, 2008, the Company declared a quarterly dividend of $0.175 per share
to shareholders of record as of May 20, 2008 that will  be payable on May 30, 2008. The total
dividend to be paid is $3,630 on 20,743,456 common shares currently issued and
outstanding.
 F-26