UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
20-F





(Mark
One)





[  ]
            REPORT
      PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
      1934





OR





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





For the
fiscal year endedDecember 31,
2009





OR





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





For the
transition period from _________________ to _________________





OR





[  ]
            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 _________________





Commission
file number 000-50859





TOP
SHIPS INC.





(Exact
name of Registrant as specified in its charter)









(Translation
of Registrant's name into English)








Republic
of the Marshall Islands





(Jurisdiction
of incorporation or organization)





1 Vas.
Sofias and Meg. Alexandrou Str, 15124 Maroussi, Greece





(Address
of principal executive offices)





Alexandros
Tsirikos, (Tel) +30 210 8128180, atsirikos@topships.org, (Fax) +30 210 6141273,
1 Vas. Sofias and Meg. Alexandrou Str, 15124 Maroussi, Greece





(Name,
Telephone, E-mail and/or Facsimile number and Address of Company Contact
Person)








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











Title of each class
            
            Name of each exchange
              on which registeredCommon
      Stock par value $0.01 per share
            
            NASDAQ
      Global Select Market





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





NONE





(Title of
class)





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





NONE


(Title of
class)





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





As
of December 31, 2009, 32,894,696 shares of Common Stock, par value $0.01 per
share.





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





Yes
            
            
            No
            X





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





Yes
            
            
            No
            X





Note –
Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from
their obligations under those Sections.





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.





Yes
            X
            
            No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of





Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).





Yes
            
            
            No





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





Large
      accelerated filer   o
            Accelerated
      filer   oNon-accelerated
      filer    x











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





X
            U.S.
      GAAPInternational
      Financial Reporting Standards as issued by the
    InternationalAccounting
      Standards BoardOther





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





Item 17
            
            
            Item 18





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





Yes
            
            
            No
            X











TABLE
OF CONTENTS




PART
      IITEM 1 - IDENTITY OF DIRECTORS, SENIOR
      MANAGEMENT AND ADVISERS
              7ITEM 2 - OFFER STATISTICS AND EXPECTED
      TIMETABLE
              7ITEM 3 - KEY INFORMATION
              7ITEM 4 - INFORMATION ON THE
      COMPANY
              37ITEM 4A - UNRESOLVED STAFF
      COMMENTS
              54ITEM 5 - OPERATING AND FINANCIAL REVIEW
      AND PROSPECTS
              55ITEM 6 - DIRECTORS, SENIOR MANAGEMENT AND
      EMPLOYEES
              93ITEM 7 - MAJOR SHAREHOLDERS AND RELATED
      PARTY TRANSACTIONS
              97ITEM 8 - FINANCIAL
      INFORMATION
              98ITEM 9 - THE OFFER AND
      LISTING
              99ITEM 10 - ADDITIONAL
      INFORMATION
              100ITEM 11 - QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET RISK
              111ITEM 12 - DESCRIPTION OF SECURITIES OTHER
      THAN EQUITY SECURITIES
              113PART
      IIITEM 13 - DEFAULTS, DIVIDEND ARREARAGES
      AND DELINQUENCIES
              114ITEM 14 - MATERIAL MODIFICATIONS TO THE
      RIGHTS OF SECURITY HOLDERS AND
      USE OF PROCEEDS
              114ITEM 15T - CONTROLS AND
      PROCEDURES
              114
  
    ITEM 16A- AUDIT COMMITTEE FINANCIAL
      EXPERT
              115ITEM 16B- CODE OF ETHICS
              116ITEM 16C- PRINCIPAL AUDITOR FEES AND
      SERVICES
              116ITEM 16D- EXEMPTIONS FROM THE LISTING
      STANDARDS FOR AUDIT COMMITTEE
              116ITEM 16E- PURCHASES OF EQUITY SECURITIES
      BY THE ISSUER AND AFFILIATED PURCHASERS
              116ITEM 16F- CHANGE IN REGISTRANT'S
      CERTIFYING ACCOUNTANT
              116ITEM 16G- CORPORATE
      GOVERNANCE
              116PART
      IIIITEM 17 - FINANCIAL
      STATEMENTS
              117ITEM 18 - FINANCIAL
      STATEMENTS
              117INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS
              F-1ITEM 19 – EXHIBITS








CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS





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





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





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





In
addition to these assumptions and matters discussed elsewhere herein and in the
documents incorporated by reference herein, important factors that, in our view,
could cause actual results to differ materially from those discussed in the
forward-looking statements include the strength of world economies and
currencies, general market conditions, including fluctuations in charterhire
rates and vessel values, changes in demand in the shipping market, including the
effect of changes in OPEC's petroleum production levels and worldwide oil
consumption and storage, changes in regulatory requirements affecting vessel
operating including requirements for double hull tankers, changes in TOP SHIPS
INC.'s operating expenses, including bunker prices, dry-docking and insurance
costs, changes in governmental rules and regulations or actions taken by
regulatory authorities, changes in the price of our capital investments,
potential liability from pending or future litigation, general domestic and
international political conditions, potential disruption of shipping routes due
to accidents, political events or acts by terrorists, and other important
factors described from time to time in the reports filed by us with the
Securities and Exchange Commission, or the SEC.











6





PART
I





ITEM
1.    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS





Not
Applicable.





ITEM
2.     OFFER STATISTICS AND EXPECTED
TIMETABLE





Not
Applicable.





ITEM
3.     KEY INFORMATION





Unless
the context otherwise requires, as used in this report, the terms ''Company,''
''we,'' ''us,'' and ''our'' refer to TOP SHIPS INC. and all of its subsidiaries,
and ''TOP SHIPS INC.'' refers only to TOP SHIPS INC. and not to its
subsidiaries. We use the term deadweight ton or dwt, in describing the size of
vessels. Dwt, expressed in metric tons each of which is equivalent to 1,000
kilograms, refers to the maximum weight of cargo and supplies that a vessel can
carry.





7


A.           Selected
Financial Data





The
following table sets forth the selected historical consolidated financial data
and other operating data of TOP SHIPS INC. for the years ended December 31,
2005, 2006, 2007, 2008 and 2009. The following information should be read in
conjunction with Item 5 "Operating and Financial Review and Prospects" and the
consolidated financial statements and related notes included herein. The
following selected historical consolidated financial data of TOP SHIPS INC. are
derived from our consolidated financial statements and notes thereto which have
been prepared in accordance with U.S. generally accepted accounting principles,
or GAAP, and have been audited for the year ended December 31, 2005 by Ernst
& Young (Hellas) Certified Auditors Accountants S.A, or Ernst and Young, and
for the years ended December 31, 2006, 2007, 2008 and 2009 by Deloitte,
Hadjipavlou, Sofianos & Cambanis S.A., or Deloitte, both independent
registered public accounting firms.





Year Ended December 31,U.S.Dollars
      in thousands, except per share data and average daily
    results
            
            2005
            
            
            2006
            
            
            2007
            
            
            2008
            
            
            2009STATEMENT
      OF OPERATIONS DATARevenues
            
            $
            244,215
            
            
            $
            310,043
            
            
            $
            252,259
            
            
            $
            257,380
            
            
            $
            107,979Voyage
      expenses
            
            
            36,889
            
            
            
            55,351
            
            
            
            59,414
            
            
            
            38,656
            
            
            
            3,372Charter
      hire expense
            
            
            7,206
            
            
            
            96,302
            
            
            
            94,118
            
            
            
            53,684
            
            
            
            10,827Amortization
      of deferred gain on sale and leaseback of vessels and write-off of
      seller's credit
            
            
            (837
            )
            
            
            (8,110
            )
            
            
            (15,610
            )
            
            
            (18,707
            )
            
            
            (7,799
            )Lease
      termination expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            15,391Vessel
      operating expenses
            
            
            47,315
            
            
            
            66,082
            
            
            
            67,914
            
            
            
            67,114
            
            
            
            23,739Dry-docking
      costs
            
            
            10,478
            
            
            
            39,333
            
            
            
            25,094
            
            
            
            10,036
            
            
            
            4,602General
      and administrative expenses
            
            
            23,750
            
            
            
            23,271
            
            
            
            25,000
            
            
            
            31,388
            
            
            
            23,835Gain
      on sale of vessels
            
            
            (10,831
            )
            
            
            (12,667
            )
            
            
            (1,961
            )
            
            
            (19,178
            )
            
            
            -Vessel
      Depreciation
            
            
            47,055
            
            
            
            35,266
            
            
            
            27,408
            
            
            
            32,664
            
            
            
            31,585Impairment
      on vessels
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            36,638Total
      operating expenses
            
            
            161,025
            
            
            
            294,828
            
            
            
            281,377
            
            
            
            195,657
            
            
            
            142,190Operating
      income (loss)
            
            
            83,190
            
            
            
            15,215
            
            
            
            (29,118
            )
            
            
            61,723
            
            
            
            (34,211
            )Interest
      and finance costs
            
            
            (19,430
            )
            
            
            (27,030
            )
            
            
            (19,518
            )
            
            
            (25,764
            )
            
            
            (13,969
            )Loss
      on financial instruments
            
            
            (747
            )
            
            
            (2,145
            )
            
            
            (3,704
            )
            
            
            (12,024
            )
            
            
            (2,081
            )Interest
      income
            
            
            1,774
            
            
            
            3,022
            
            
            
            3,248
            
            
            
            1,831
            
            
            
            235Other
      income (expense), net
            
            
            134
            
            
            
            (67
            )
            
            
            16
            
            
            
            (127
            )
            
            
            (170
            )Net
      income (loss)
            
            $
            64,921
            
            
            $
            (11,005
            )
            
            $
            (49,076
            )
            
            $
            25,639
            
            
            $
            (50,196
            )Earnings
      (loss) per share, basic and diluted
            
            $
            6.96
            
            
            $
            (1.16
            )
            
            $
            (4.09
            )
            
            $
            0.97
            
            
            $
            (1.78
            )Weighted
      average common shares outstanding, basic
            
            
            9,308,923
            
            
            
            10,183,424
            
            
            
            11,986,857
            
            
            
            25,445,031
            
            
            
            28,230,585Weighted
      average common shares outstanding, diluted
            
            
            9,310,670
            
            
            
            10,183,424
            
            
            
            11,986,857
            
            
            
            25,445,031
            
            
            
            28,230,585Dividends
      declared per share
            
            $
            2.64
            
            
            $
            23.13
            
            
            
            -
            
            
            
            -
            
            
            
            -








On
January 1, 2009 the Company adopted ASC 260-10-45-61A "Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities" (formerly known as FSP FASB 03-6-1). Upon adoption of the new
guidance, unvested share-based payment awards that contain rights to receive
non-forfeitable dividends or dividend equivalents (whether paid or unpaid) are
participating securities and, thus, should be included in the two-class method
of computing earnings per share (EPS). This standard was applied retroactively
to all periods presented and reduced basic EPS by $0.01 and $0.04 for the twelve
months ended December 31, 2005 and 2008, respectively. When it was retroactively
applied to the years ended December 31, 2006 and 2007, EPS data was not affected
due to the fact that the Company incurred a net loss and non-vested shares do
not participate in losses.





8





Year Ended December 31,U.S.
      Dollars in thousands, except per share data and average daily
      results
            
            2005
            
            
            2006
            
            
            2007
            
            
            2008
            
            
            2009BALANCE
      SHEET DATACurrent
      assets
            
            $
            67,574
            
            
            $
            72,799
            
            
            $
            102,161
            
            
            $
            57,088
            
            
            $
            3,787Total
      assets
            
            
            970,386
            
            
            
            490,885
            
            
            
            776,917
            
            
            
            698,375
            
            
            
            675,149Current
      liabilities, including current portion of long-term debt
            
            
            76,143
            
            
            
            45,416
            
            
            
            153,290
            
            
            
            386,934
            
            
            
            427,953Total
      long-term debt, including current portion
            
            
            564,103
            
            
            
            218,052
            
            
            
            438,884
            
            
            
            342,479
            
            
            
            399,087Common
      Stock
            
            
            280
            
            
            
            108
            
            
            
            205
            
            
            
            283
            
            
            
            311Stockholders'
      equity
            
            
            359,147
            
            
            
            161,198
            
            
            
            211,408
            
            
            
            292,051
            
            
            
            247,196FLEET
      DATATotal
      number of vessels at end of period
            
            
            27.0
            
            
            
            24.0
            
            
            
            23.0
            
            
            
            12.0
            
            
            
            13.0Average
      number of vessels(1)
            
            
            21.7
            
            
            
            26.7
            
            
            
            22.4
            
            
            
            18.8
            
            
            
            13.7Total
      calendar days for fleet(2)
            
            
            7,905
            
            
            
            9,747
            
            
            
            8,176
            
            
            
            6,875
            
            
            
            5,008Total
      available days for fleet(3)
            
            
            7,635
            
            
            
            8,837
            
            
            
            7,562
            
            
            
            6,610
            
            
            
            4,813Total
      operating days for fleet(4)
            
            
            7,436
            
            
            
            8,634
            
            
            
            7,032
            
            
            
            6,099
            
            
            
            4,775Total
      time charter days for fleet
            
            
            5,567
            
            
            
            6,223
            
            
            
            4,720
            
            
            
            4,729
            
            
            
            2,841Total
      bareboat charter days for fleet
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            335
            
            
            
            1,934Total
      spot market days for fleet
            
            
            1,869
            
            
            
            2,411
            
            
            
            2,312
            
            
            
            1,035
            
            
            
            -Fleet
      utilization(5)
            
            
            97.4
            %
            
            
            97.7
            %
            
            
            93.0
            %
            
            
            92.3
            %
            
            
            99.2
            %AVERAGE
      DAILY RESULTSTime
      charter equivalent(6)
            
            $
            27,881
            
            
            $
            29,499
            
            
            $
            27,424
            
            
            $
            35,862
            
            
            
            21,907Vessel
      operating expenses(7)
            
            
            5,985
            
            
            
            6,780
            
            
            
            8,307
            
            
            
            9,762
            
            
            
            4,740General
      and administrative expenses(8)
            
            
            3,004
            
            
            
            2,388
            
            
            
            3,058
            
            
            
            4,566
            
            
            
            4,759








(1)
            Average
      number of vessels is the number of vessels that constituted our fleet
      (including leased vessels) 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 that
    period.





(2)
            Calendar
      days are the total days the vessels were in our possession for the
      relevant period. Calendar days are an indicator of the size of our fleet
      over the relevant period and affect both the amount of revenues and
      expenses that we record during that
period.





(3)
            Available
      days are the number of calendar days less the aggregate number of days
      that our vessels are off-hire due to scheduled repairs or scheduled
      guarantee inspections in the case of newbuildings, vessel upgrades or
      special surveys and the aggregate amount of time that we spend positioning
      our vessels. Companies in the shipping industry generally use available
      days to measure the number of days in a period during which vessels should
      be capable of generating revenues. We determined to use available days as
      a performance metric, for the first time, in the second quarter and first
      half of 2009. We have determined to adjust the calculation method of
      utilization to include available days in order to be comparable with
      shipping companies that calculate utilization using operating days divided
      by available days.






9





(4)
            Operating
      days are the number of available days in a period less the aggregate
      number of days that our vessels are off-hire due to unforeseen
      circumstances. The shipping industry uses operating days to measure the
      aggregate number of days in a period during which the vessels actually
      generate revenue.





(5)
            Fleet
      utilization is calculated by dividing the number of operating days during
      a period by the number of available 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 number of
      days that its vessels are off-hire for reasons other than scheduled
      repairs or scheduled guarantee inspections in the case of newbuildings,
      vessel upgrades, special or intermediate surveys and vessel positioning.
      We used a new calculation method for fleet utilization, for the first
      time, in the second quarter and first half of 2009. In all prior filings
      and reports, utilization was calculated by dividing operating days by
      calendar days. We have determined to adjust the calculation method in
      order to be comparable with most shipping companies, which calculate
      utilization using operating days divided by available
  days.





(6)
            Time
      charter equivalent rate, or TCE rate, is a measure of the average daily
      revenue performance of a vessel on a per voyage basis. Our method of
      calculating TCE rate is consistent with industry standards and is
      determined by dividing time charter equivalent revenues or TCE revenues
      by operating days for the relevant time period. TCE revenues are
      revenues minus voyage expenses. 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, as well
      as commissions. TCE revenues and TCE rate, which are non-GAAP measures,
      provide additional meaningful information in conjunction with shipping
      revenues, the most directly comparable GAAP measure, because it assists
      the Company's management in making decisions regarding the deployment and
      use of its vessels and in evaluating their financial
      performance.





(7)
            Daily
      vessel operating expenses, which include crew costs, provisions, deck and
      engine stores, lubricating oil, insurance, maintenance and
      repairs are calculated by dividing vessel operating expenses by fleet
      calendar days for the relevant time
period.





(8)
            Daily
      general and administrative expenses are calculated by dividing general and
      administrative expenses by fleet calendar days for the relevant time
      period.





10


The
following table reflects reconciliation of TCE revenues to revenues as reflected
in the consolidated statements of operations and calculation of the TCE rate
(all amounts are expressed in thousands of U.S. Dollars, except for Average
Daily Time Charter Equivalent amounts and Total Operating Days):





2005
            
            
            2006
            
            
            2007
            
            
            2008
            
            
            2009On a consolidated basisRevenues
            
            $
            244,215
            
            
            $
            310,043
            
            
            $
            252,259
            
            
            $
            257,380
            
            
            $
            107,979Less:Voyage
      expenses
            
            
            (36,889
            )
            
            
            (55,351
            )
            
            
            (59,414
            )
            
            
            (38,656
            )
            
            
            (3,372
            )Time
      charter equivalent revenues
            
            $
            207,326
            
            
            $
            254,692
            
            
            $
            192,845
            
            
            $
            218,724
            
            
            $
            104,607Total
      Operating days
            
            
            7,436
            
            
            
            8,634
            
            
            
            7,032
            
            
            
            6,099
            
            
            
            4,775Average
      Daily Time Charter Equivalent
            
            $
            27,881
            
            
            $
            29,499
            
            
            $
            27,424
            
            
            $
            35,862
            
            
            $
            21,907








2005
            
            
            2006
            
            
            2007
            
            
            2008
            
            
            2009Tanker FleetRevenues
            
            $
            244,215
            
            
            $
            310,043
            
            
            $
            248,944
            
            
            $
            163,995
            
            
            $
            47,353Less:Voyage
      expenses
            
            
            (36,889
            )
            
            
            (55,351
            )
            
            
            (59,253
            )
            
            
            (34,215
            )
            
            
            (1,118
            )Time
      charter equivalent revenues
            
            $
            207,326
            
            
            $
            254,692
            
            
            $
            189,691
            
            
            $
            129,780
            
            
            $
            46,235Total
      Operating days
            
            
            7,436
            
            
            
            8,634
            
            
            
            6,991
            
            
            
            4,357
            
            
            
            2,989Average
      Daily Time Charter Equivalent
            
            $
            27,881
            
            
            $
            29,499
            
            
            $
            27,134
            
            
            $
            29,786
            
            
            $
            15,468








2007
            
            
            2008
            
            
            2009Drybulk FleetRevenues
            
            $
            1,902
            
            
            $
            71,590
            
            
            $
            56,715Less:Voyage
      expenses
            
            
            (161
            )
            
            
            (4,441
            )
            
            
            (2,254
            )Time
      charter equivalent revenues
            
            $
            1,741
            
            
            $
            67,149
            
            
            $
            54,461Total
      Operating days
            
            
            41
            
            
            
            1,742
            
            
            
            1,786Average
      Daily Time Charter Equivalent
            
            $
            42,463
            
            
            $
            38,547
            
            
            $
            30,493








B.           Capitalization
and Indebtedness





Not
Applicable.





C.           Reasons
for the Offer and Use of Proceeds





Not
Applicable.





11


D.           Risk
Factors





The
following risks relate principally to the industries in which we operate and our
business in general. Any of the risk factors could materially and adversely
affect our business, financial condition or operating results and the trading
price of our common stock.




Risks
Related to Our Industries


Disruptions
in world financial markets and the resulting governmental action in the United
States and other parts of the world could have a material adverse impact on our
ability to obtain financing, our results of operations, financial condition and
cash flows and could cause the market price of our common shares to
decline.
 
 Although
the world economy is currently recovering from the second-worst downturn in the
last 100 years, the future of this recovery still remains fragile. The effects
of the downturn are still lingering as credit remains tight, demand for goods
and services has not yet fully recovered and unemployment is high. Most major
economies have been backing up this recovery via fiscal stimulus packages,
liquidity injections and by decreasing interest rates. The credit markets in the
United States and worldwide have experienced significant contraction,
de-leveraging and reduced liquidity, and the United States federal government,
state governments and foreign governments have implemented a broad variety of
governmental action and/or new regulation of the financial markets. Securities
and futures markets and the credit markets are subject to comprehensive
statutes, regulations and other requirements. The Commission, other regulators,
self-regulatory organizations and exchanges are authorized to take extraordinary
actions in the event of market emergencies, and may effect further changes in
law or interpretations of existing laws.
 
 A number
of financial institutions have experienced financial difficulties and, in some
cases, have entered bankruptcy proceedings or are in regulatory enforcement
actions. The uncertainty surrounding the recovery of the credit markets in the
United States and the rest of the world has resulted in reduced access to credit
worldwide that is especially evident in our industry, the banking institutions
of which have recently been forced to record heavy losses from troubled shipping
loans. These difficulties may adversely affect the financial institutions that
provide our credit facilities and may impair their ability to continue to
perform under their financing obligations to us, which could have an impact on
our ability to fund current and future obligations.
 
 We face
risks attendant to changes in economic environments, changes in interest rates,
and instability in certain securities markets, among other factors. Major market
disruptions and the current adverse changes in market conditions and regulatory
climate in the United States and worldwide may adversely affect our business.
The current market conditions may last longer than we anticipate. These recent
and developing economic and governmental factors may have a material adverse
effect on our results of operations, financial condition or cash flows and could
cause the price of our common shares to further decline.


12


The
international tanker and drybulk industries are both cyclical and volatile and
this may lead to reductions and volatility in our charter rates when we
re-charter our vessels, vessel values and our results of
operations.


The
international tanker and drybulk industries in which we operate are cyclical
with attendant volatility in charter hire rates, vessel values and industry
profitability. For both tankers and drybulk vessels, the degree of charter rate
volatility among different types of vessels has varied widely. If we enter into
a charter when charter rates are low, our revenues and earnings will be
adversely affected. In addition, a decline in charter hire rates likely will
cause the value of our vessels to decline. In the case of two of our tanker
vessels, following the expiration of their charters in 2010 we anticipated
that future hires would be at lower rates due to the adverse market conditions
that have been prevailing in the product tanker market for most of 2009 and the
first quarter of 2010. More specifically in March 2010, one of these vessels
commenced a new two-year time charter agreement at a lower gross daily rate. We
do not anticipate an improvement in product tanker hire rates in the immediate
future and to this end we concluded that there was a need to write down the
carrying value of these two vessels to their fair values. See "Item 5 –
Operating and Financial Review and Prospects – Critical Accounting
Policies-Impairment of long-lived assets" for more information on
impairment.




Our
current fleet deployment consists mainly of long term time charters and long
term bareboat charters which significantly limits our exposure to charter rate
volatility and its effect on our result of operations. Additionally, changes in
spot rates in the tanker sector and the drybulk sector can affect the value of
respective vessels at any given time despite the existence of long term
employment contracts. Our ability to re-charter our vessels on the expiration or
termination of their current time and bareboat charters and the charter rates
payable under any renewal or replacement charters will depend upon, among other
things, economic conditions in the tanker and drybulk market.




The
factors affecting the supply and demand for our vessels are outside our control
and are unpredictable. The nature, timing, direction and degree of changes in
tanker and drybulk industry conditions are also unpredictable. Factors that
influence demand for tanker and drybulk vessel capacity include:




•
              demand
      for refined petroleum products and crude oil for tankers and drybulk
      commodities for drybulk vessels;•
              changes
      in crude oil production and refining capacity as well as drybulk commodity
      production and resulting shifts in trade flows for crude oil, petroleum
      product and drybulk commodities;•
              the
      location of regional and global crude oil refining facilities and drybulk
      commodities markets that affect the distance refined petroleum products
      and crude oil or drybulk commodities are to be moved by
    sea;•
              global
      and regional economic and political conditions;•
              the
      location of regional and global crude oil refining facilities and drybulk
      commodities markets that affect the distance refined petroleum products
      and crude oil or drybulk commodities are to be moved by
    sea;•
              environmental
      and other regulatory developments;•
              currency
      exchange rates; and•
              weather.
   13
 
 The
factors that influence the supply of oceangoing vessel capacity
include:
 
 •
              the
      number of newbuilding deliveries;•
              the
      scrapping rate of older vessels;•
              the
      price of steel;•
              vessel
      casualties;•
              potential
      conversion of vessels to alternative use;•
              changes
      in environmental and other regulations that may limit the useful lives of
      vessels;•
              port
      or canal congestion;•
              the
      number of vessels that are out of service at a given time;
    and•
              changes
      in global crude oil and drybulk commodity
  production.


The
international tanker and drybulk shipping industries have experienced drastic
downturns after experiencing historically high charter rates and vessel values
in the recent past, and a continued downturn in these markets may have an
adverse effect on our earnings, impair the carrying value of our vessels and
affect compliance with our loan covenants.




The
Baltic Drybulk Index, or BDI, a U.S. Dollar daily average of charter rates
issued by the London-based Baltic Exchange (an organization providing maritime
market information for the trading and settlement of physical and derivative
contracts) that takes into account input from brokers around the world regarding
fixtures for various routes, dry cargoes and various drybulk vessel sizes,
steeply declined in 2008 but then rebounded in 2009, although not to pre-crisis
levels. The BDI declined from a high of 11,793 in May 2008 to a low of 663 in
December 2008, which represents a decline of 94%, but has since risen to 3,933
as of June 3, 2010.  The decline in charter rates was due to various
factors, including the lack of trade financing for purchases of commodities
carried by sea, which resulted in a significant decline in cargo shipments, and
the excess supply of iron ore in China, which resulted in falling iron ore
prices and increased stockpiles in Chinese ports. The decline in charter rates
in the drybulk market also affected the value of our drybulk vessels, which
followed the trends of drybulk charter rates, and earnings on our charters, and
similarly, affected our cash flows, liquidity and compliance with the covenants
contained in our loan agreements. During 2009 and the beginning of 2010, the
abovementioned factors affecting the BDI partially subsided, allowing for the
recovery of rates and a recovery in drybulk vessel values.




The
Baltic Dirty Tanker Index, a U.S. Dollar daily average of charter rates issued
by the London based Baltic Exchange that takes into account input from brokers
around the world regarding crude oil fixtures for various routes various tanker
vessel sizes, after a steep decline that started in mid-2008 and lasted until
the end of the third quarter 2009, has rebounded in the fourth quarter of 2009,
although not to pre-crisis levels. The Baltic Dirty Tanker Index declined from a
high of 2,347 in July 2008 to a low of 453 in mid-April 2009, which represents a
decline of 80%, but has since risen to 911 as of June 3, 2010.




The
Baltic Clean Tanker Index fell from 1, 509 points as of June 19, 2008,
to 345 points as of April 4, 2009, but has rebounded to 644 points as of June 3,
2010. The dramatic decline in charter rates was due to various factors,
including the significant fall in demand for crude oil and petroleum products,
the consequent rising inventories of crude oil and petroleum products in the
United States and in other industrialized nations and the corresponding
reduction in oil refining, the dramatic fall in the price of oil in 2008, and
the restrictions on crude oil production that the Organization of Petroleum
Exporting Countries (OPEC) and other non-OPEC oil producing countries have
imposed in an effort to stabilize the price of oil. During 2009, the
abovementioned factors affecting the Baltic Dirty and Clean Tanker Indices
partially subsided, allowing for the recovery of rates and a stabilization of
tanker vessel values.








14


If the
charter rates in the tanker and drybulk market decline from their current
levels, our future earnings may be adversely affected and we may have to record
impairment adjustments to the carrying values of our fleet, and we may not be
able to maintain compliance with the financial covenants in our loan agreements.
We realized impairment charges of $36.6 million during the fourth quarter of
2009. See "Item 5 – Operating and Financial Review and Prospects – Critical
Accounting Policies – Impairment of long-lived assets". We are currently in
discussions with our lenders in relation to covenant breaches.  Our
lenders' interests may be different from ours, and we may not be able to obtain
our lenders' permission or waivers when needed. This may limit our ability to
continue to conduct our operations, finance our future operations, make
acquisitions or pursue business opportunities. A decline in charter rates could
have a material adverse effect on our business, financial condition and results
of operations. See "Item 5 – Operating and Financial Review and Prospects -
Tabular Disclosure of Contractual Obligations – Long term debt" for relevant
discussion of debt and respective covenants.




Rising
fuel prices may adversely affect our business.




Fuel is a
significant, if not the largest, operating expense for many of our shipping
operations when our vessels are not under period charter. The price and supply
of fuel is unpredictable and fluctuates based on events outside our control,
including geopolitical developments, supply and demand for oil and gas, actions
by OPEC and other oil and gas producers, war and unrest in oil producing
countries and regions, regional production patterns and environmental concerns.
Further, fuel may become much more expensive in future, which may reduce the
profitability and competitiveness of our business versus other forms of
transportation, such as truck or rail. Currently, all of our vessels are under
period employment whereby the fuel cost is taken up by the charterer except for
periods when the vessel is off-hire.




Compliance
with environmental laws or regulations may adversely affect our
operations.





The
shipping industry in general and our business and the operation of tankers and
drybulk vessels in particular, are affected by a variety of governmental
regulations in the form of numerous international conventions, national, state
and local laws and international, national and local regulations in force in the
jurisdictions in which such tankers and drybulk vessels operate, as well as in
the country or countries in which such tankers and drybulk vessels are
registered. These regulations include:





•
            the
      United States Oil Pollution Act of 1990, or OPA, which imposes strict
      liability for the discharge of oil into the 200-mile United States
      exclusive economic zone, the obligation to obtain certificates of
      financial responsibility for vessels trading in United States waters and
      the requirement that newly constructed tankers that trade in United States
      waters be constructed with
double-hulls;





•
            the
      International Convention on Civil Liability for Oil Pollution Damage of
      1969, as amended in 2000, or the CLC, entered into by many countries
      (other than the United States) relating to strict liability for pollution
      damage caused by the discharge of
oil;





•
            the
      International Maritime Organization, or IMO (the United Nations agency for
      maritime safety and the prevention of pollution by ships), International
      Convention for the Prevention of Pollution from Ships, 1973, as modified
      by the related Protocol of 1978 relating thereto, or the MARPOL
      Convention, which has been updated through various amendments, with
      respect to strict technical and operational requirements for
      tankers;





•
            the
      IMO International Convention for the Safety of Life at Sea, or SOLAS
      Convention, with respect to crew and passenger
  safety;




•
            the
      International Convention on Load Lines, 1966, or LL Convention, with
      respect to the safeguarding of life and property through limitations on
      load capability for vessels on international
  voyages;




•
              the
      United States Marine Transportation Security Act of 2002, or MTSA;
      and
   15


•
            The
      European Union Directive 1999/32/EC of 1999 as amended by Directive
      2005/33/EC of 2005, regarding reductions in emissions of sulphur dioxide
      resulting from the combustion of petroleum-derived liquid fuels within
      Member States' territory, territorial seas and exclusive economic zones or
      pollution control zones.





Additional
laws and regulations may also be adopted that could limit our ability to do
business or increase the cost of our doing business and that could have a
material adverse effect on our operations. In addition, we are required by
various governmental and quasi-governmental agencies to obtain certain permits,
licenses, certificates and financial assurances with respect to our vessel
operations. In the event of war or national emergency, our tankers and drybulk
vessels may be subject to requisition by the government of the flag flown by the
tanker or drybulk vessel without any guarantee of compensation for lost profits.
We believe our vessels are maintained in good condition in compliance with
present regulatory requirements, are operated in compliance with applicable
safety/environmental laws and regulations and are insured against usual risks
for such amounts as our management deems appropriate. In
relation to EU and US low-sulphur requirements our vessels are currently in the
process of being in full compliance.Our vessels' operating certificates
and licenses are renewed periodically during each vessel's required annual
survey. However, government regulation of tankers and drybulk vessels,
particularly in the areas of safety and environmental impact, may change in the
future and require us to incur significant capital expenditures on our ships to
keep them in compliance.





Under
local, national and foreign laws, as well as international treaties and
conventions, we could incur material liabilities, including cleanup obligations,
natural resource damages and third-party claims for personal injury or property
damages, in the event that there is a release of petroleum or other hazardous
substances from our vessels or otherwise in connection with our current or
historic operations. We could also incur substantial penalties, fines and other
civil or criminal sanctions, including in certain instances seizure or detention
of our vessels, as a result of violations of or liabilities under environmental
laws, regulations and other requirements.





For
example, OPA affects all vessel owners shipping oil to, from or within the
United States. OPA allows for potentially unlimited liability for owners,
operators and bareboat charterers of vessels without regard to fault for oil
pollution in United States waters. Similarly, the CLC, which has been adopted by
most countries outside of the United States, imposes liability for oil pollution
in international waters. OPA expressly permits individual states to impose their
own liability regimes with regard to hazardous materials and oil pollution
incidents occurring within their boundaries. Coastal states in the United States
have enacted pollution prevention liability and response laws, many providing
for unlimited liability.





Future
accidents may be expected in the shipping industry, and such accidents or other
events may be expected to result in the adoption of even stricter laws and
regulations, which could limit our operations or our ability to do business and
which could have a material adverse effect on our business and financial
results.





We are subject to international
safety regulations and the failure to comply with these regulations may subject us
to increased liability, may adversely affect our insurance coverage and may
result in a denial of access to, or detention in, certain
ports.





The
operation of our vessels is affected by the requirements set forth in the IMO's
International Management Code for the Safe Operation of Ships and Pollution
Prevention, or ISM Code. The ISM Code requires shipowners, ship managers and
bareboat charterers to develop and maintain an extensive "Safety Management
System" that includes the adoption of a safety and environmental protection
policy setting forth instructions and procedures for safe operation and
describing procedures for dealing with emergencies. The failure of a shipowner
or bareboat charterer to comply with the ISM Code may subject it to increased
liability, may invalidate existing insurance or decrease available insurance
coverage for the affected vessels and may result in a denial of access to, or
detention in, certain ports. As of the date of this Annual Report, each of our
vessels is ISM code-certified.






16





Compliance
with safety and other vessel requirements imposed by classification societies
may be very costly and may adversely affect our business.





The hull
and machinery of every commercial vessel must be classed by a classification
society authorized by its country of registry. The classification society
certifies that a vessel is safe and seaworthy in accordance with the applicable
rules and regulations of the country of registry of the vessel and the Safety of
Life at Sea Convention. Our vessels are currently enrolled with Lloyd's Register
of Shipping, Det Norske Veritas and Bureau Veritas each of which is a member of
the International Association of Classification Societies.





A vessel
must undergo annual surveys, intermediate surveys and special surveys. In lieu
of a special survey, a vessel's machinery may be placed on a continuous survey
cycle, under which the machinery would be surveyed periodically over a five-year
period. Our vessels are on special survey cycles for hull inspection and
continuous survey cycles for machinery inspection.





Most
vessels are also dry-docked every 30 to 36 months for inspection of the
underwater parts and for repairs related to such inspections. If any defects are
found, the classification surveyor will issue a ''recommendation'' which must be
rectified by the ship owner within prescribed time limits.





If a
vessel does not maintain its class and/or fails any annual survey, intermediate
survey or special survey, the vessel will be unable to trade between ports and
will be unemployable, which will negatively impact our revenues and results from
operations.




Climate change and greenhouse gas
restrictions may adversely impact our operations and
markets.





Due to concern over the risk of climate
change, a number of countries and the IMO have adopted, or are considering the
adoption of, regulatory frameworks to reduce greenhouse gas emissions. These
regulatory measures may include, among others, adoption of cap and trade
regimes, carbon taxes, increased efficiency standards, and incentives or
mandates for renewable energy. In addition, although the emissions of greenhouse
gases from international shipping currently are not subject to the Kyoto
Protocol to the United Nations Framework Convention on Climate Change, which
required adopting countries to implement national programs to reduce emissions
of certain gases, a new treaty may be adopted in the future that includes
restrictions on shipping emissions. Compliance with changes in laws, regulations
and obligations relating to climate change could increase our costs related to
operating and maintaining our vessels and require us to install new emission
controls, acquire allowances or pay taxes related to our greenhouse gas
emissions, or administer and manage a greenhouse gas emissions program. Revenue
generation and strategic growth opportunities may also be adversely
affected.





Adverse effects upon the oil and gas
industry relating to climate change, including growing public concern about the
environmental impact of climate change, may also adversely affect demand for our
services. For example, increased regulation of greenhouse gases or other
concerns relating to climate change may reduce the demand for oil and gas in the
future or create greater incentives for use of alternative energy sources. Any
long-term material adverse effect on the oil and gas industry could have a
significant financial and operational adverse impact on our business that we
cannot predict with certainty at this time.





17


Our vessels may suffer damage due to
the inherent operational risks of the seaborne transportation industry and
we may experience unexpected dry-docking costs, which may adversely affect our
business and financial condition.





Our
vessels and their cargoes will be at risk of being damaged or lost because of
events such as marine disasters, bad weather, business interruptions caused by
mechanical failures, grounding, fire, explosions and collisions, human error,
war, terrorism, piracy and other circumstances or events. These hazards may
result in death or injury to persons, loss of revenues or property,
environmental damage, higher insurance rates, damage to our customer
relationships, delay or rerouting. If our vessels suffer damage, they may need
to be repaired at a dry-docking facility. The costs of dry-dock repairs are
unpredictable and may be substantial. We may have to pay dry-docking costs that
our insurance does not cover in full. The loss of earnings while these vessels
are being repaired and repositioned, as well as the actual cost of these
repairs, would decrease our earnings. In addition, space at dry-docking
facilities is sometimes limited and not all dry-docking facilities are
conveniently located. We may be unable to find space at a suitable dry-docking
facility or our vessels may be forced to travel to a dry-docking facility that
is not conveniently located to our vessels' positions. The loss of earnings
while these vessels are forced to wait for space or to steam to more distant
dry-docking facilities would decrease our earnings.




Because
the market value of our vessels may fluctuate significantly, we may incur losses
when we sell vessels or we may be required to write down their carrying value,
which will adversely affect our earnings.





Current
market conditions have caused a decrease in the fair market value of our
vessels. The fair market value of our vessels may increase and decrease
depending on the following factors:


•
                general
      economic and market conditions affecting the international tanker and
      drybulk shipping industries;
 •
                  prevailing
      level of charter rates;
 •
                    competition
      from other shipping companies;
 •
                      types,
      sizes and ages of vessels;
 •
                        other
      modes of transportation;
 •
                          cost
      of newbuildings;
 •
                            price
      of steel;
 •
                              governmental
      or other regulations; and
 •
                                technological
      advances.





If we
sell vessels at a time when vessel prices have fallen, the sale may be at less
than the vessel's carrying amount in our financial statements in which case we
will realize a loss. Vessel prices can fluctuate significantly, and in the case
where the market value falls below the carrying amount we evaluate the asset for
a potential impairment and may be required to write down the carrying amount of
the vessels on our financial statements and incur a loss and a reduction in
earnings, if the estimate of undiscounted cash flows, excluding interest
charges, expected to be generated by the use of the asset is less than its
carrying amount.  Such was the case for our two oldest tankers, which
resulted in an impairment charge of $36.6 million during the fourth quarter of
2009. See "Item 5 – Operating and Financial Review and Prospects - Critical
Accounting Policies" for relevant discussion and analysis.




18


An over-supply of
drybulk carrier and/or tanker capacity may lead to reductions in charter hire
rates and profitability.





The
market supply of drybulk carriers has been increasing, and the number of drybulk
carriers on order is near historic highs. These newbuildings were delivered in
significant numbers starting at the beginning of 2006 and continuing through
2010. As of December 31, 2009, newbuilding orders had been placed for an
aggregate of approximately 57% of the existing global drybulk fleet, with
deliveries expected during the next 36 months.





The
market supply of tankers is affected by a number of factors such as demand for
energy resources, oil and petroleum products, as well as strong overall economic
growth in part of the world economy, including Asia. As of December 31, 2009,
newbuilding orders have been placed for an aggregate of approximately 30% of the
existing global tanker fleet.





An
over-supply of drybulk carrier and/or tanker capacity may result in a reduction
of charter hire rates. If such a reduction occurs, we may only be able to
re-charter our vessels at reduced or unprofitable rates or we may not be able to
charter these vessels at all upon the expiration or termination of our vessels'
current charters.





Operating
results from our tankers are subject to seasonal fluctuations, which may
adversely affect our operating results.





Eight of
the vessels in our combined fleet are tankers. We operate our tankers in markets
that have historically exhibited seasonal variations in demand and, therefore,
charter rates. This seasonality may result in quarter-to-quarter volatility in
our operating results. The tanker sector is typically stronger in the fall and
winter months in anticipation of increased consumption of oil and petroleum
products in the northern hemisphere during the winter months. As a result, our
revenues from our tankers may be weaker during the fiscal quarters ended June 30
and September 30, and, conversely, revenues may be stronger in fiscal quarters
ended December 31 and March 31. This seasonality could materially affect our
results of operations.





Our
earnings may be adversely affected if we do not successfully employ our
vessels.





Given
current market conditions, we seek to deploy our vessels on time and bareboat
charters in a manner that will help us achieve a steady flow of earnings. As of
the date of this annual report, two of our tanker vessels and four of our
drybulk vessels were contractually committed to time charters, and six of our
tanker vessels and one of our drybulk vessels were contractually committed to
bareboat charters. Although these period charters provide relatively steady
streams of revenue as well as a portion of the revenues generated by the
charterer's deployment of the vessels in the spot market or otherwise, our
vessels committed to period charters may not be available for spot voyages
during an upturn in the tanker or drybulk industry cycle, as the case may be,
when spot voyages might be more profitable. The spot market is highly
competitive, and spot market charter rates may fluctuate dramatically based on
the supply and demand for the major commodities carried internationally by water
as well as other factors.   As of the date of this annual report,
we did not have any vessels that were trading in the spot market. If we cannot
continue to employ our vessels on profitable time charters or trade them in the
spot market profitably, our results of operations and operating cash flow may
suffer if rates achieved are not sufficient to cover respective vessel operating
and financial expenses.





19


World
events could adversely affect our results of operations and financial
condition.





Terrorist
attacks such as the attacks on the United States on September 11, 2001, the
bombings in Spain on March 11, 2004 and in London on July 7, 2005 and the
continuing response of the United States to these attacks, as well as the threat
of future terrorist attacks in the United States or elsewhere, continue to cause
uncertainty in the world financial markets and may affect our business,
operating results and financial condition. The continuing conflict in
Afghanistan may lead to additional acts of terrorism and armed conflict around
the world, which may contribute to further economic instability in the global
financial markets. These uncertainties could also adversely affect our ability
to obtain any additional financing or, if we are able to obtain additional
financing, to do so on terms unfavorable to us. In the past, political conflicts
have also resulted in attacks on vessels, mining of waterways and other efforts
to disrupt international shipping, particularly in the Arabian Gulf region. Acts
of terrorism and piracy have also affected vessels trading in regions such as
the South China Sea. Any of these occurrences could have a material adverse
impact on our business, financial condition and results of
operations.





Acts
of piracy on oceangoing vessels have recently increased in frequency, which
could adversely affect our business.





Acts of
piracy have historically affected oceangoing vessels trading in regions of the
world such as the South China Sea and the Gulf of Aden off the coast of Somalia.
Throughout 2008, 2009 and 2010, the frequency of piracy incidents against
commercial shipping vessels increased significantly, particularly in the Gulf of
Aden. Since the beginning of 2009, numerous tanker and drybulk vessels have
fallen victim to piracy attacks off the coast of Somalia.  For
example, on December 28, 2009, the M/V Navios Apollon, a drybulk vessel not
affiliated with us, was seized by pirates while transporting fertilizers 800
miles off the Somali coast.





If these
piracy attacks result in regions in which our vessels are deployed being
characterized by insurers as "war risk" zones, as the Gulf of Aden has been
since May 2008, or Joint War Committee "war and strikes" listed areas, premiums
payable for such insurance coverage could increase significantly and such
insurance coverage may be more difficult to obtain. Crew costs, including those
due to employing onboard security guards, could increase in such circumstances.
In addition, while we believe the charterer remains liable for charter payments
when a vessel is seized by pirates, the charterer may dispute this and withhold
charter hire until the vessel is released. A charterer may also claim that a
vessel seized by pirates was not "on-hire" for a certain number of days and it
is therefore entitled to cancel the charter party, a claim that we would
dispute. We may not be adequately insured to cover losses from these incidents,
which could have a material adverse effect on us. In addition, detention
hijacking as a result of an act of piracy against our vessels, or an increase in
cost, or unavailability of insurance for our vessels, could have a material
adverse impact on our business, financial condition, results of operations and
cash flows.





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.





The
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD, in such respects
as structure, government involvement, level of development, growth rate, capital
reinvestment, allocation of resources, rate of inflation and balance of payments
position. Prior to 1978, the Chinese economy was a planned economy. Since 1978,
increasing emphasis has been placed on the utilization of market forces in the
development of the Chinese economy. Annual and five-year plans, or State Plans,
are adopted by the Chinese government in connection with the development of the
economy. Although state-owned enterprises still account for a substantial
portion of the Chinese industrial output, in general, the Chinese government is
reducing the level of direct control that it exercises over the economy through
State Plans and other measures. There is an increasing level of freedom and
autonomy in areas such as allocation of resources, production, pricing and
management and a gradual shift in emphasis to a "market economy" and enterprise
reform. Limited price reforms were undertaken, with the result that prices for
certain commodities are principally determined by market forces. Many of the
reforms are unprecedented or experimental and may be subject to revision, change
or abolition based upon the outcome of such experiments. If the Chinese
government does not continue to pursue a policy of economic reform the level of
imports to and exports from China could be adversely affected by changes to
these economic reforms by the Chinese government, as well as by changes in
political, economic and social conditions or other relevant policies of the
Chinese government, such as changes in laws, regulations or export and import
restrictions, all of which could, adversely affect our business, operating
results and financial condition.






20





A
further economic slowdown in the Asia Pacific region could exacerbate the effect
of recent slowdowns in the economies of the United States and the European Union
and may have a material adverse effect on our business, financial condition and
results of operations.





We
anticipate a significant number of the port calls made mainly by our drybulk
vessels will continue to involve the loading or discharging of drybulk
commodities in ports in the Asia Pacific region. As a result, negative changes
in economic conditions in any Asia Pacific country, particularly in China, may
exacerbate the effect of recent slowdowns in the economies of the United States
and the European Union and may have a material adverse effect on our business,
financial position and results of operations, as well as our future
prospects.




Before
the global economic financial crisis that began in 2008, China had one of the
world's fastest growing economies in terms of gross domestic product, or GDP,
which had a significant impact on shipping demand. The economic crisis affected
China as well, though to a much lesser extent, as was evidenced by the slowdown
in GDP growth in the last quarter of 2008 and the first half of 2009. In 2009,
the successful implementation of a $586.0 billion stimulus package aimed in part
at increasing investment and consumer spending and maintaining export growth
helped propel China to pre-crisis levels of growth, as was evidenced by the
fourth quarter GDP growth of 10.7% that helped raise the annual GDP growth for
2009 to 8.7%. However, fears of an overheated economy led the Chinese government
to adopt restraining monetary measures, increasing the required deposits for
commercial banks, in an effort to deflate a potential asset bubble. If the
Chinese government keeps pursuing such restraining measures, that could impact
the demand for shipping services and slow down the world recovery from the
economic crisis. Our business, financial condition and, results of operations as
well as our future prospects, will likely be materially and adversely affected
by a further economic downturn in any of these countries.




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




International
shipping is subject to various security and customs inspection and related
procedures in countries of origin and destination. Inspection procedures can
result in the seizure of, delay in the loading, offloading or delivery of, the
contents of our vessels or the levying of customs duties, fines or other
penalties against us. It is possible that changes to inspection procedures could
impose additional financial and legal obligations on us. Furthermore, changes to
inspection procedures could also impose additional costs and obligations on our
customers and may, in certain cases, render the shipment of certain types of
cargo uneconomical or impractical. Any such changes or developments may have a
material adverse effect on our business, financial condition, and results of
operations.


If our vessels call on ports located in
countries that are subject to restrictions imposed by the U.S. government, that
could adversely affect our reputation and the market for our common
stock.





From time
to time, vessels in our fleet may call on ports located in countries subject to
sanctions and embargoes imposed by the U.S. government and countries identified
by the U.S. government as state sponsors of terrorism. Although these sanctions
and embargoes do not prevent our vessels from making calls to ports in these
countries, potential investors could view such port calls negatively, which
could adversely affect our reputation and the market for our common stock. In
addition, certain institutional investors may have investment policies or
restrictions that prevent them from holding securities of companies that have
contracts with countries identified by the U.S. government as state sponsors of
terrorism. The determination by these investors not to invest in or to divest
our common shares may adversely affect the price at which our common shares
trade. Investor perception of the value of our common stock may be adversely
affected by the consequences of war, the effects of terrorism, civil unrest and
governmental actions in these and surrounding countries.




21


Risks Related to Our
Company





We
are in breach of certain loan covenants contained in our loan agreements. If we
are not successful in obtaining waivers and amendments with respect to covenants
breached, our lenders may declare an event of default and accelerate our
outstanding indebtedness under the relevant agreement, which would impair our
ability to continue to conduct our business.





Our
loan agreements require that we comply with certain financial and other
covenants. As a result of the significant drop of drybulk asset values beginning
in the fourth quarter of 2008 and the continuous fall of tanker asset values
during 2009, especially product tankers, we were not in compliance with
covenants relating to vessel values such as asset cover ratio for our product
tankers, adjusted net worth and net asset value covenants as of December 31,
2009. In addition, we were in breach of EBITDA and minimum liquidity covenants
with certain banks. A violation of these covenants constitutes an event of
default under our credit facilities, which would, unless waived by our lenders,
provide our lenders with the right to require us to post additional collateral,
enhance our equity and liquidity, increase our interest payments, pay down our
indebtedness to a level where we are in compliance with our loan covenants, sell
vessels in our fleet, reclassify our indebtedness as current liabilities and
accelerate our indebtedness and foreclose their liens on our vessels, which
impairs our ability to continue to conduct our business. As a result of these
breaches, our total indebtedness of $404.3 million (excluding unamortized
deferred financing fees of $5.2 million) and financial instruments of $13.8
million are presented within current liabilities in the accompanying December
31, 2009 consolidated balance sheet. The amounts of long term debt and financial
instruments that have been reclassified and presented together with current
liabilities amount to $351.2 million and $9.9 million,
respectively.





As
of the date of this annual report, we have no waivers for any of these covenant
breaches. We are currently in discussion with our banks in relation to these
covenant breaches. For more details on loans and relevant breaches see "Item 5 –
Operating and Financial Review and Prospects – Tabular Disclosure of Contractual
Obligations – Long term debt".





Breach of
our loan covenants, without applicable waiver, entitles our lenders to
accelerate our debt. If our indebtedness is accelerated, it would be very
difficult in the current financing environment for us to refinance our debt or
obtain additional financing and we could lose our vessels if our lenders
foreclose their liens.





Our
inability to comply with loan covenants under our loan agreements raises
substantial doubt about our ability to continue as a going concern.





As
discussed above, we are in breach of certain loan covenants contained in our
loan agreements. As a result of these loan covenant breaches, our lenders may
choose to accelerate our indebtedness. We believe that as long as we are able to
meet our obligations as they fall due, our lenders will not accelerate our
indebtedness.





Therefore,
our ability to continue as a going concern is dependent on management's ability
to successfully generate revenue to meet our obligations as they become due and
have the continued support of our lenders. Our independent registered public
accounting firm has issued its opinion, similar to its opinion included in our
2008 annual report, with an explanatory paragraph emphasizing that we have
prepared our financial statements under the going concern assumption despite our
covenants breaches and working capital deficit. Our financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of our inability to continue as a
going concern. However, there is a material uncertainty related to events or
conditions which raises significant doubt on our ability to continue as a going
concern and, therefore, we may be unable to realize our assets and discharge our
liabilities in the normal course of business.






22





If
we need to receive waivers and/or amendments to our loan agreements in the
future, our lenders may impose additional operating and financial restrictions
on us and/or modify the terms of our existing loan agreements.





In
connection with future waivers or amendments with our lenders, we may agree to
additional restrictions on us. See "Item 5. Operating and Financial Review and
Prospects – Liquidity and Capital Resources – Breach of Loan Covenants."
Therefore, we may need to seek permission from our lenders in order to engage in
some corporate actions. Our lenders' interests may be different from ours and we
may not be able to obtain our lender's permission when needed, which could
prevent us from pursuing a course of action that we deem necessary. In addition
to the above restrictions, our lenders may require the payment of additional
fees, require additional increase in margins, require prepayment of a portion of
our indebtedness to them, or impose other conditions on the issuance of waivers,
which could adversely affect our financial results and hinder our ability to
raise capital.





Servicing
current and future debt will limit funds available for other purposes and impair
our ability to react to changes in our business.





To
finance our fleet expansion program, we incurred secured indebtedness. We must
dedicate a portion of our cash flow from operations to pay the principal and
interest on our indebtedness. These payments limit funds otherwise available for
working capital, capital expenditures and other purposes. As of December 31,
2009, we had total indebtedness of $404.3 million (excluding unamortized
deferred financing fees of $5.2 million), and a ratio of indebtedness to total
capital of approximately 62%. Our substantial level of indebtedness increases
the possibility that we may be unable to generate cash sufficient to pay, when
due, the principal of, interest on or other amounts due in respect of, our
indebtedness. Our substantial debt could also have other significant
consequences. For example, it could:





•
            increase
      our vulnerability to general economic downturns and adverse competitive
      and industry conditions;





•
            require
      us to dedicate a substantial portion, if not all, of our cash flow from
      operations to payments on our indebtedness, thereby reducing the
      availability of our cash flow to fund working capital, capital
      expenditures and other general corporate
  purposes;





•
            limit
      our flexibility in planning for, or reacting to, changes in our business
      and the industry in which we
operate;





•
            place
      us at a competitive disadvantage compared to competitors that have less
      debt or better access to capital;





•
            limit
      our ability to raise additional financing on satisfactory terms or at all;
      and





•
            adversely
      impact our ability to comply with the financial and other restrictive
      covenants in the indenture governing the notes and the credit agreements
      governing the debts of our subsidiaries, which could result in an event of
      default under such agreements.





Furthermore,
our interest expense could increase if interest rates increase because most of
our debt and all the debt under the credit facilities of our subsidiaries is
variable rate debt. If we do not have sufficient earnings, we may be required to
refinance all or part of our existing debt, sell assets, borrow more money or
sell more securities, none of which we can guarantee we will be able to
do.




23




Our
loan agreements contain restrictive covenants that may limit our liquidity and
corporate activities.





Our loan
agreements impose operating and financial restrictions on us. These restrictions
may limit our ability to:


•
              incur
      additional indebtedness;
 •
                create
      liens on our assets;
 
 •
                sell
      capital stock of our subsidiaries;
 
 •
                engage
      in mergers or acquisitions;
 
 •
                pay
      dividends;
 
 •
                make
      capital expenditures or other
investments;
 
 •
                charter
      our vessels;
 
 •
                change
      the management of our vessels or terminate or materially amend the
      management agreement relating to each vessel;
  and;
  •
                sell
      our vessels.





Therefore,
we may need to seek permission from our lenders in order to engage in some
corporate actions. This may prevent us from taking actions that are in our best
interest.





If
we fail to manage our planned growth properly, we may not be able to
successfully expand our market share.




We intend
to continue to grow our fleet in the future. Our growth will depend
on:


•
              our
      ability to generate excess cash flow so that we can invest without
      jeopardizing our ability to cover current and foreseeable working capital
      needs (including debt
service);


•
              obtaining
      required financing; 
 •
                locating
      and acquiring suitable vessels; 
 •
                  identifying
      and consummating acquisitions or joint
ventures; 
 •
                    integrating
      any acquired business successfully with our existing
      operations; 
 •
                      enhancing
      our customer base; and 
 •
                        managing
      expansion.





Growing
any business by acquisition presents numerous risks such as undisclosed
liabilities and obligations, difficulty in obtaining additional qualified
personnel, managing relationships with customers and suppliers and integrating
newly acquired operations into existing infrastructures. We may not be
successful in executing our growth plans and we may incur significant additional
expenses and losses in connection therewith.






24





The
derivative contracts we have entered into to hedge our exposure to fluctuations
in interest rates could result in higher-than-market interest rates and charges
against our income.





As of
December 31, 2009, we have twelve interest rate swaps for purposes of
managing our exposure to fluctuations in interest rates applicable to
indebtedness under our credit facilities. Our hedging strategies, however, may
not be effective and we may incur substantial losses if interest rates move
materially differently from our expectations. Since our existing interest rate
swaps do not, and future derivative contracts may not, qualify for treatment as
hedges for accounting purposes, we recognize fluctuations in the fair value of
such contracts in our statement of operations. In addition, our financial
condition could be materially adversely affected to the extent we do not fully
hedge our exposure to interest rate fluctuations under our financing
arrangements.





Any
hedging activities we engage in may not effectively manage our interest rate
exposure or have the desired impact on our financial conditions or results of
operations. During the year ended December 31, 2009, the change in fair value of
our interest rate swaps was an unrealized gain of $2.6 million.  See
Note 21 to our December 31, 2009 consolidated financial statements included
herein.





Due to
the decline in interest rates since December 31, 2009, the fair value of our
interest rate swaps as of March 31, 2010, which is the most recent date for
which the Company has received a fair value estimate, was an unrealized gain of
$0.04 million.





Our
ability to obtain additional debt financing may be dependent on the performance
of our then existing charters and the creditworthiness of our
charterers.





The
actual or perceived credit quality of our charterers, and any defaults by them,
may materially affect our ability to obtain the additional capital resources
that we will require to purchase additional vessels or may significantly
increase our costs of obtaining such capital. Our inability to obtain additional
financing at all or at a higher than anticipated cost may materially affect our
results of operation and our ability to implement our business
strategy.





We
may not be able to renew our time charters when they expire.





We might
not be able to renew our existing time charters or, if renewed, they might not
be at favorable rates. If, upon expiration of the existing time charters, we are
unable to obtain time charters or voyage charters at desirable rates, our
profitability may be adversely affected.





In the
case of two of our tanker vessels, we anticipated that future hires would be at
lower rates following the expiration of their charters in 2010, due to the
adverse market conditions that have been prevailing in the product tanker market
for most of 2009 and the first quarter of 2010. More specifically, in March
2010, one of these vessels commenced a new two-year time charter agreement,
at a lower gross daily rate. We do not anticipate an improvement in product
tanker hire rates in the immediate future and to this end we concluded that
there was a need to write down the carrying value of these two vessels to their
fair values. See "Item 5 – Operating and Financial Review and Prospects –
Critical Accounting Policies – Impairment of long-lived assets" for more
information on impairment.






25


In
the highly competitive international tanker and drybulk shipping markets, we may
not be able to compete for charters with new entrants or established companies
with greater resources.





We employ
our vessels in a highly competitive market that is capital intensive and highly
fragmented. The operation of tanker and drybulk vessels and the transportation
of cargoes shipped in these vessels, as well as the shipping industry in
general, is extremely competitive. Competition arises primarily from other
vessel owners, including major oil companies as well as independent tanker and
drybulk shipping companies, some of whom have substantially greater resources
than we do. Competition for the transportation of oil and refined petroleum
products and drybulk cargoes can be intense and depends on price, location,
size, age, condition and the acceptability of the vessel and its operators to
the charterers. Due in part to the highly fragmented market, competitors with
greater resources could enter and operate larger fleets through consolidations
or acquisitions that may be able to offer better prices and fleets than
us.





We
depend upon a few significant customers for a large part of our revenues. The
loss of one or more of these customers could adversely affect our financial
performance.





We have
historically derived a significant part of our revenue from a small number of
charterers. In 2008, approximately 26% of our revenue was derived from two
charterers. These two charterers, Glencore and PDVSA, respectively provided 17%
and 9% of our revenues in 2008. In 2009, approximately 54% of our revenue was
derived from three charterers. These three charterers, Glencore, Hanjin and
Cosco, provided 22%, 18% and 14% of our revenues in 2009, respectively. If one
or more of these customers is unable to perform under one or more charters with
us and we are not able to find a replacement charter, or if a customer exercises
certain rights to terminate the charter, we could suffer a loss of revenues that
could materially adversely affect our business, financial condition and results
of operations.





We could
lose a customer or the benefits of a charter if, among other
things:





•
            the
      customer fails to make charter payments because of its financial
      inability, disagreements with us or
otherwise;





•
            the
      customer terminates the charter because we fail to deliver the vessel
      within a fixed period of time, the vessel is lost or damaged beyond
      repair, there are serious deficiencies in the vessel or prolonged periods
      of off-hire, or if we are otherwise in default under the charter;
      or





•
            the
      customer terminates the charter because the vessel has been subject to
      seizure for more than a specified number of
  days.





If we
lose a key customer, we may be unable to obtain charters on comparable terms or
may become subject to the volatile spot market, which is highly competitive and
subject to significant price fluctuations. The charters on which we deploy 10
of our vessels as of May 21, 2010, provide for charter rates that are
significantly above current market rates, particularly spot market rates that
most directly reflect the current levels of the drybulk and product tanker
charter markets. If it were necessary to secure substitute employment, in the
spot market or on charters, for any of these vessels due to the loss of a
customer in these market conditions, such employment would be at a significantly
lower charter rate than currently generated by such vessel, resulting in a
significant reduction in revenues. The loss of any of our customers, charters or
vessels, or a decline in payments under our charters, could have a material
adverse effect on our business, results of operations and financial
condition.








26





We
may be unable to attract and retain key management personnel and other employees
in the international tanker and drybulk shipping industries, which may
negatively impact the effectiveness of our management and our results of
operations.





Our
success depends to a significant extent upon the abilities and efforts of our
management team. We have entered into employment contracts with our President,
Chief Executive Officer, and Director, Evangelos Pistiolis, our Chief Financial
Officer and Director, Alexandros Tsirikos, our Executive Vice President,
Chairman and Director, Vangelis Ikonomou and our Vice President Demetris
Souroullas. Our success will depend upon our ability to hire and retain key
members of our management team. The loss of any of these individuals could
adversely affect our business prospects and financial condition. Difficulty in
hiring and retaining personnel could adversely affect our results of operations.
We do not maintain ''key man'' life insurance on any of our
officers.





As
we expand our business, we will need to improve our operations and financial
systems and staff; if we cannot improve these systems or recruit suitable
employees, our performance may be adversely affected.





Our
current operating and financial systems may not be adequate as we implement our
plan to expand the size of our fleet, and our attempts to improve those systems
may be ineffective. If we are unable to operate our financial and operations
systems effectively or to recruit suitable employees as we expand our fleet, our
performance may be adversely affected.





Risks
involved with operating oceangoing vessels could affect our business and
reputation, which would adversely affect our revenues and stock
price.





The
operation of an oceangoing vessel carries inherent risks. These risks include
the possibility of:


•
              marine
      disaster;
 
 •
              piracy;
 
 •
              environmental
      accidents;
 
 •
              cargo
      and property losses or damage; and
 
 •
              mechanical
      failure, human error, war, terrorism, political action in various
      countries, labor strikes or adverse weather
  conditions.





Any of
these circumstances or events could result in death or injury to persons, loss
of revenues or property, environmental damage, higher insurance rates, damage to
our customer relationships, delay or rerouting, and could increase our costs or
lower our revenues. The involvement of our vessels in an oil spill or other
environmental disaster may harm our reputation as a safe and reliable vessel
operator. If one of our vessels were involved in an accident with the potential
risk of environmental contamination, the resulting media coverage could have a
material adverse effect on our business, results of operations, cash flows and
financial condition.





Our
vessels may suffer damage and we may face unexpected dry-docking costs, which
could affect our cash flow and financial condition.





If our
vessels suffer damage, they may need to be repaired at a dry-docking facility,
resulting in vessel downtime. The costs of dry-dock repairs are unpredictable
and can be substantial. We may have to pay dry-docking costs that our insurance
does not cover. The inactivity of these vessels while they are being repaired
and repositioned, as well as the actual cost of these repairs, would decrease
our earnings. In addition, space at dry-docking facilities is sometimes limited
and not all dry-docking facilities are conveniently located. We may be unable to
find space at a suitable dry-docking facility or we may be forced to move to a
dry-docking facility that is not conveniently located to our vessels' positions.
The loss of earnings while our vessels are forced to wait for space or the cost
to relocate the vessel to dry-docking facilities that are farther away from the
routes on which our vessels trade would have a negative effect on our results of
operations.







27


The operation of drybulk carriers and
tankers each involve certain unique operational
risks.





The
operation of drybulk carriers has certain unique operational risks. With a
drybulk carrier, the cargo itself and its interaction with the ship can be a
risk factor. By their nature, drybulk cargoes are often heavy, dense, easily
shifted, and react badly to water exposure. In addition, drybulk carriers are
often subjected to battering treatment during unloading operations with grabs,
jackhammers (to pry encrusted cargoes out of the hold), and small bulldozers.
This treatment may cause damage to the drybulk carrier. Drybulk carriers damaged
due to treatment during unloading procedures may be more susceptible to a breach
to the sea. Hull breaches in drybulk carriers may lead to the flooding of their
holds. If a drybulk carrier suffers flooding in its forward holds, the bulk
cargo may become so dense and waterlogged that its pressure may buckle the
drybulk carrier's bulkheads leading to the loss of the drybulk
carrier.





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





If we are
unable to adequately maintain or safeguard our vessels we may be unable to
prevent these events. Any of these circumstances or events could negatively
impact our business, results of operations and financial condition. In addition,
the loss of any of our vessels could harm our reputation as a safe and reliable
vessel owner and operator.





A
drop in spot charter rates may provide an incentive for some charterers to
default on their charters, which could affect our cash flow and financial
condition.





During
August 2009, we announced that the bareboat charterer of the M/V Papillon (ex
VOC Gallant) had notified us of its intention to pay a reduced charterhire rate
of $18,000 per day for the month of August rather than $24,000 per day on a
bareboat basis as is set forth in the charterparty. The dispute was resolved and
the charterer has paid the full amount of chaterhire as required under the
charter agreements.





On
January 11, 2010, we announced that we had received from the bareboat charterer
of the M/T Ionian Wave and the M/T Tyrrhenian Wave a reduced charter hire rate
of $10,000 per day rather than the $14,300 per day on a bareboat basis that is
set forth in the charter agreement.  We have been examining this
unilateral reduction and intend to take all necessary steps to recover the
amounts owed since the said charterer is considered to be in breach of the
charter.  We may not be able to recover these amounts, which would
result in lower-than-expected cash flows.





When we
enter into a time or bareboat charter, charter rates under that charter are
fixed for the term of the charter. If the spot charter rates in the tanker or
drybulk shipping industry, as applicable, become significantly lower than the
time charter equivalent rates that some of our charterers are obligated to pay
us under our existing charters, the charterers may have incentive to default
under that charter or attempt to renegotiate the charter. If our charterers fail
to pay their obligations, we would have to attempt to re-charter our vessels at
lower charter rates, and as a result we could sustain significant losses which
could have a material adverse effect on our cash flow and financial condition,
which would affect our ability to meet our loan repayment obligations in which
case our lenders could choose to accelerate our indebtedness and foreclose their
liens, and we could be required to sell vessels in our fleet and our ability to
continue to conduct our business would be impaired.





28


The
aging of our fleet may result in increased operating costs in the future, which
could adversely affect our earnings.





In
general, the cost of maintaining a vessel in good operating condition increases
with the age of the vessel. Our current operating fleet has an average age of
approximately five years. As our fleet ages, we will incur increased costs.
Older vessels are typically less fuel efficient and more costly to maintain than
more recently constructed vessels due to improvements in engine technology.
Cargo insurance rates also increase with the age of a vessel, making older
vessels less desirable to charterers. Governmental regulations, including
environmental regulations, safety or other equipment standards related to the
age of vessels may require expenditures for alterations, or the addition of new
equipment, to our vessels and may restrict the type of activities in which our
vessels may engage. As our vessels age, market conditions might not justify
those expenditures or enable us to operate our vessels profitably during the
remainder of their useful lives.





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.





Unless we
maintain reserves or are able to borrow or raise funds for vessel replacement we
will be unable to replace the vessels in our fleet upon the expiration of their
remaining useful lives, which we estimate to be 25 years from the date of
initial delivery from the shipyard. Our cash flows and income are dependent on
the revenues earned by the chartering of our vessels to customers. If we are
unable to replace the vessels in our fleet upon the expiration of their useful
lives, our business, results of operations and financial condition will be
materially and adversely affected.





Purchasing
and operating previously owned, or secondhand, vessels may result in increased
operating costs and vessels off-hire, which could adversely affect our
earnings.





While we
rigorously inspect previously owned, or secondhand vessels prior to purchase,
this does not normally provide us with the same knowledge about their condition
and cost of any required (or anticipated) repairs that we would have had if
these vessels had been built for and operated exclusively by us. Also, we do not
receive the benefit of warranties from the builders if the vessels we buy are
older than one year. In general, the costs to maintain a vessel in good
operating condition increase with the age of the vessel.





We
may not have adequate insurance to compensate us if we lose our
vessels.





We
procure insurance for our fleet against those types of risks commonly insured
against by vessel owners and operators. These insurances include hull and
machinery insurance, protection and indemnity insurance, which includes
environmental damage and pollution insurance coverage, war risk insurance and
insurance against loss of hire, which covers business interruptions that result
in the loss of use of a vessel. In addition, we currently have loss of hire
insurance that covers, subject to annual coverage limits, vessels M/V Cyclades,
M/V Pepito, M/T Ioannis P, M/T Ionian Wave and M/T Hongbo. In the future, we may
not be able to obtain adequate insurance coverage at reasonable rates for our
fleet. The insurers may not pay particular claims. Our insurance policies
contain deductibles for which we will be responsible as well as, limitations and
exclusions which may nevertheless increase our costs or lower our
revenue.






29





We may be subject to calls because we
obtain some of our insurance through protection and indemnity
associations.





We may be
subject to increased premium payments, or calls, in amounts based on our claim
records and the claim records of our fleet managers as well as the claim records
of other members of the protection and indemnity associations through which we
receive insurance coverage for tort liability, including pollution-related
liability. In addition, our protection and indemnity associations may not have
enough resources to cover claims made against them. Our payment of these calls
could result in significant expense to us, which could have a material adverse
effect on our business, results of operations and financial
condition.





Maritime
claimants could arrest our vessels, which could interrupt our cash
flow.





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





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





A
government could requisition for title or seize our vessels. Requisition for
title occurs when a government takes control of a vessel and becomes her owner.
Also, a government could requisition our vessels for hire. Requisition for hire
occurs when a government takes control of a vessel and effectively becomes her
charterer at dictated charter rates. Generally, requisitions occur during a
period of war or emergency. Government requisition of one or more of our vessels
could negatively impact our revenues should we not receive adequate
compensation.





Certain existing stockholders, who
hold approximately 32.38% of our common stock, may have the power to exert
control over us, which may limit your ability to influence our
actions.





As of
June 15, 2010, Sovereign Holdings Inc., or Sovereign Holdings, a company that is
wholly owned by our President, Chief Executive Officer and Director, Evangelos
J. Pistiolis, and Kingdom Holdings Inc., or Kingdom Holdings, a company owned
primarily by adult relatives of Mr. Pistiolis, own, directly or indirectly,
approximately 13.34% of the outstanding shares of our common stock. In addition,
Sphinx Investment Corp., Maryport Navigation Corp. and Mr. George Economou
through Sphinx Investment Corp. and Maryport Navigation Corp. beneficially owns
12.56% of the outstanding shares of our common stock. QVT Financial LP, QVT
Financial GP LLC and QVT Associates GP LLC own 6.48% of the outstanding shares
of our common stock. Sphinx Investment Corp., Maryport Navigation Corp., QVT
Financial LP, QVT Financial GP LLC and QVT Associates GP LLC are entities owned
and controlled by unaffiliated third parties. Together, these existing
shareholders own 32.38% of our common stock. While these shareholders have no
agreement, arrangement or understanding relating to the voting of their shares
of common stock, due to the number of shares of our common stock they own, they
have the power to exert considerable influence over our actions.






30





Our
President, Chief Executive Officer, and Director, Mr. Evangelos Pistiolis, has
affiliations with a private shipping company which could create conflicts of
interest.





The
family of our President, Chief Executive Officer, and Director, Mr. Evangelos
Pistiolis, owns a private shipping company.  This relationship could
create conflicts of interest between us, on the one hand, and this private
shipping company, on the other hand. These conflicts may arise in connection
with the chartering, purchase, sale and operations of the vessels in our fleet
versus tankers and drybulk vessels managed by this private shipping company. For
example, Mr. Pistiolis may give preferential treatment to vessels that are
beneficially owned by this private shipping company because Mr. Pistiolis and
members of his family may receive greater economic benefits.





We
may have to pay tax on U.S.  source income, which would reduce our
earnings.





Under the
U.S. Internal Revenue Code of 1986, or the Code, 50% of the gross shipping
income of a vessel owning or chartering corporation, such as ourselves and our
subsidiaries, that is attributable to transportation that begins or ends, but
that does not begin and end, in the U.S. is characterized as United States
source shipping income and such income is subject to a 4% U.S. federal income
tax without allowance for deduction, unless that corporation qualifies for
exemption from tax under Section 883 of the Code. We expect that we and each of
our subsidiaries will qualify for this statutory tax exemption and we have taken
this position for U.S. federal income tax return reporting purposes. However,
there are factual circumstances beyond our control that could cause us to lose
the benefit of this tax exemption and thereby become subject to U.S. federal
income tax on our U.S. source income. Therefore, we can give no assurances on
our tax-exempt status or that of any of our subsidiaries. If we or our
subsidiaries are not entitled to this exemption under Section 883 for any
taxable year, we or our subsidiaries would be subject for those years to a 4%
U.S. federal income tax on our U.S. source shipping income. The imposition of
this taxation could have a negative effect on our business.


We
are likely to be treated as a "passive foreign investment company," which could
have adverse U.S. federal income tax consequences to U.S. holders.


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





In
general, income derived from the bareboat charter of a vessel will be treated as
"passive income" for this purpose and such vessels will be treated as assets
which produce "passive income."  On the other hand, income derived
from the time charter of a vessel will not be treated as "passive income" for
this purpose, but rather will be treated as services income; likewise, time
chartered vessels will generally not be treated as assets which produce "passive
income."




For our
2009 taxable year, we believe that at least 50% of the average value of our
assets consisted of vessels which are bareboat chartered.  Therefore,
we expect to be treated as a PFIC for our 2009 taxable year. We intend to take
necessary steps in order to avoid being classified as a PFIC for 2010 and future
taxable years, such as expanding our fleet through the purchase of non-passive
income producing assets. However, there can be no assurance that such remedial
measures will be effective to avoid PFIC status for 2010 or any future taxable
year.
   31
 
 Our U.S.
shareholders may face adverse U.S. federal income tax consequences and certain
information reporting obligations as a result of us being treated as a
PFIC.  Under the PFIC rules, unless those shareholders make an
election available under the Code (which election could itself have adverse
consequences for such shareholders, as discussed below under "Taxation– U.S.
Federal Income Taxation – U.S. Federal Income Taxation of U.S. Holders"), such
shareholders would be liable to pay U.S. federal income tax at the then
prevailing income tax rates on ordinary income plus interest upon excess
distributions and upon any gain from the disposition of their common shares, as
if the excess distribution or gain had been recognized ratably over the
shareholder's holding period of the common shares.  See
"Taxation  – U.S. Federal Income Taxation – U.S. Federal Income
Taxation of U.S. Holders" for a more comprehensive discussion of the U.S.
federal income tax consequences to U.S. shareholders as a result of our status
as a PFIC.  In addition, as a result of being treated as a PFIC for
the 2009 taxable year, any dividends paid by us during 2009 and 2010 will not be
eligible to be treated as "qualified dividend income," which may otherwise be
eligible for preferential tax rates in the hands of non-corporate U.S.
shareholders.


Because
we generate all of our revenues in U.S. Dollars but incur a portion of our
expenses in other currencies, exchange rate fluctuations could hurt our results
of operations.





We
generate all of our revenues in U.S. Dollars but incur certain expenses in
currencies other than U.S. Dollars, mainly Euros. During 2009, approximately 2%
of our expenses were in other currencies and 19% were in Euros. This difference
could lead to fluctuations in net income due to changes in the value of the U.S.
Dollar relative to the other currencies, in particular, the Euro. Should the
Euro further appreciate relative to the U.S. Dollar in future periods, our
expenses will increase in U.S. Dollar terms, thereby decreasing our net income.
Specifically, during 2009, the average exchange rate was 1.3912 U.S. Dollars to
1 Euro. We have not hedged these risks. Our operating results could suffer as a
result.


Risks Relating to Our Common
Shares





Our
share price may continue to be highly volatile, which could lead to a further
loss of all or part of an investor's investment.





The
market price of our common shares has fluctuated widely since our common shares
began trading in July of 2004 on the Nasdaq National Market, now the Nasdaq
Global Select Market. Over the last year and a half, the stock market has
experienced extreme price and volume fluctuations. This volatility has sometimes
been unrelated to the operating performance of particular companies. During
2009, the closing price of our common shares experienced a high of $3.52 and a
low of $0.77. In addition, because the market price of our common shares has
dropped below $5.00 per share, brokers generally prohibit shareholders from
using such shares as collateral for borrowing in margin accounts. This inability
to continue to use our common shares as collateral may lead to sales of such
shares creating downward pressure on and increased volatility in the market
price of our common shares. Furthermore, if the volatility in the market
continues or worsens, it could have a further adverse affect on the market price
of our common shares, regardless of our operating performance.





The
market price of our common shares is due to a variety of factors,
including:


•
              fluctuations
      in interest rates;
  •
                fluctuations
      in the availability or the price of
  oil;
 
 •
                fluctuations
      in foreign currency exchange
rates;
 
 •
                announcements
      by us or our
competitors;
 
 •
                changes
      in our relationships with customers or
    suppliers;
  32
  •
                actual
      or anticipated fluctuations in our quarterly and annual results and those
      of other public companies in our
  industry;
 
 •
                changes
      in United States or foreign tax
  laws;
 
 •
                actual
      or anticipated fluctuations in our operating results from period to
      period;
 
 •
                shortfalls
      in our operating results from levels forecast by securities
      analysts;
 
 •
                market
      conditions in the drybulk shipping industry and the general state of the
      securities markets;
 
 •
                mergers
      and strategic alliances in the drybulk shipping
      industry;
 
 •
                changes
      in government
regulation;
 
 •
                a
      general or industry-specific decline in the demand for, and price of,
      shares of our common stock resulting from capital market conditions
      independent of our operating
  performance;
 
 •
                the
      loss of any of our key management personnel;
    and
 
 •
                our
      failure to successfully implement our business
      plan.





There
may not be a continuing public market for you to resell our common
shares.





Our
common shares and warrants began trading in July of 2004 on the Nasdaq National
Market, now the Nasdaq Global Select Market. An active and liquid public market
for our common shares may not continue. You may not be able to sell your common
shares in the future at the price that you paid for them or at all. In addition,
if the price of our common shares remains below $1.00 for a period of 30
consecutive business days and we are unable to comply with the minimum bid price
requirements of the Nasdaq Global Select Market, including any applicable cure
period, we may be involuntarily delisted from the Nasdaq Global Select
Market.





Investors
may experience significant dilution as a result of the offering pursuant to our
Standby Equity Distribution Agreement, or SEDA, future offerings and any other
future issuances of shares if sold at prices significantly below the price at
which they invested.





On July
1, 2009, we entered into the SEDA with Yorkville Advisors Master SPV Ltd, or YA
Global. Pursuant to the SEDA, we may offer and sell such number of common shares
the proceeds of which equal to $200 million. See also Note 15 to our
consolidated financial statements included herein. On July 1, 2009, we filed a
shelf registration statement on Form F-3, which was declared effective on August
13, 2009. Under this registration statement, we registered 57,949,900 shares for
resale by YA Global as part of the SEDA limited by our then authorized share
capital. As of the date of this Annual Report, we have issued and sold an
aggregate of 2,230,000 common shares pursuant to the SEDA resulting in net
proceeds of $2.9 million. The last share sales under the SEDA took place on
October 21, 2009. If we sell the remaining U.S. Dollar amount of our common
shares offered pursuant to the SEDA of $197.1 million at an average price equal
to $1.11 per share, which was the last reported closing sale price for our
common shares on The Nasdaq Global Select Market on June 3,
2010, we would have approximately 88,613,930 million common shares outstanding,
which would represent an increase of 169.39% in our issued and outstanding
common shares from December 31, 2009.





Under our
registration statement filed on Form F-3, we may also sell up to $500 million of
an undeterminable number of common shares, preferred shares and warrants;
provided that we meet all eligibility requirements for sales of securities
pursuant to the From F-3 registration statement. Due to the fact that sales
pursuant to related prospectus supplements will be made at market prices or
prices related to such market prices, the prices at which we sell these shares
will vary and these variations may be significant. Purchasers of the shares we
sell, as well as our existing shareholders, will experience significant dilution
if we sell shares at prices significantly below the price at which they
invested. We may have to attempt to sell additional shares in the future in
order to satisfy our capital needs. Lenders may be unwilling to provide future
financing or will provide future financing at significantly increased rates. If
we are able to sell shares in the future, the prices at which we sell these
future shares will vary, and these variations may be significant.





33


In
addition, we may issue additional shares pursuant to our loan facility with DVB.
On July 31, 2009, we entered into a bridge loan facility of $12.5 million with
DVB in order to take delivery of our last newbuilding vessel, the M/T Hongbo. In
connection with this loan, we issued 12,512,400 common shares to Hongbo Shipping
Company Limited, our wholly owned subsidiary, who pledged these shares in favor
of DVB as security in case our subsidiary is not able to repay the bridge loan
as of the due date of July 31, 2010. This pledge must remain in an amount equal
to 180% of the outstanding bridge loan, which amount will be tested at the end
of each quarter. We also agreed to file a registration statement for the resale
of such shares and use our best efforts to keep the registration statement
effective during the security period under the loan documentation. As of the
date of this annual report, and based on fair value of our common stock and
outstanding balance of the loan measured at March 31, 2010, we are required to
issue and pledge 9,756,488 additional shares of common stock. If our subsidiary
is not able to repay the bridge loan to DVB bank, the lender may enforce its
right to take possession of the pledged shares.





Furthermore,
we may issue additional shares pursuant to our equity incentive plan. As of the
date of this annual report, we have issued a total of 4,135,604 common shares
under our equity incentive plan out of a total of 12,000,000 reserved for
issuance thereunder.





Our
existing shareholders will experience significant dilution if we issue shares in
the future, including the potential issuances described above, at prices
significantly below the price at which previous shareholders
invested.




Future
sales of our common shares could cause the market price of our common shares to
decline.





Sales of
a substantial number of our common shares in the public market, or the
perception that these sales could occur, may depress the market price for our
common shares. These sales could also impair our ability to raise additional
capital through the sale of our equity securities in the future.





Lack
of volume in our stock may affect investors' ability to sell their
shares.





Our
common shares have been experiencing low daily trading volumes in the market. As
a result, an investor may be unable to sell all of such investor's shares in the
desired time period, or may only be able to sell such shares at a significant
discount to the previous closing price.





We are incorporated in the Republic
of the Marshall Islands, which does not have a well-developed body of
corporate law and as a result, shareholders may have fewer rights and protections
under Marshall Islands law than under a typical jurisdiction in the United
States.





Our
corporate affairs are governed by our Amended and Restated Articles of
Incorporation and By-laws and by the Marshall Islands Business Corporations Act,
or BCA. The provisions of the BCA resemble provisions of the corporation laws of
a number of states in the United States. However, there have been few judicial
cases in the Republic of the Marshall Islands interpreting the BCA. The rights
and fiduciary responsibilities of directors under the law of the Republic of the
Marshall Islands are not as clearly established as the rights and fiduciary
responsibilities of directors under statutes or judicial precedent in existence
in certain United States jurisdictions. Shareholder rights may differ as well.
While the BCA does specifically incorporate the non-statutory law, or judicial
case law, of the State of Delaware and other states with substantially similar
legislative provisions, our public shareholders may have more difficulty in
protecting their interests in the face of actions by the management, directors
or controlling shareholders than would shareholders of a corporation
incorporated in a United States jurisdiction.





34


It may not be
possible for investors to enforce U.S. judgments against us.





We and
all of our subsidiaries are incorporated in jurisdictions outside the U.S. and
substantially all of our assets and those of our subsidiaries are located
outside the U.S. In addition, most of our directors and officers are
non-residents of the U.S., and all or a substantial portion of the assets of
these non-residents are located outside the U.S. As a result, it may be
difficult or impossible for U.S. investors to serve process within the U.S. upon
us, our subsidiaries or our directors and officers or to enforce a judgment
against us for civil liabilities in U.S. courts. In addition, you should not
assume that courts in the countries in which we or our subsidiaries are
incorporated or where our assets or the assets of our subsidiaries are located
(1) would enforce judgments of U.S. courts obtained in actions against us or our
subsidiaries based upon the civil liability provisions of applicable U.S.
federal and state securities laws or (2) would enforce, in original actions,
liabilities against us or our subsidiaries based on those laws.





We
may be subject to litigation that, if not resolved in our favor and not
sufficiently insured against, could have a material adverse effect on
us.





We may
be, from time to time, involved in various litigation matters. These matters may
include, among other things, contract disputes, personal injury claims,
environmental claims or proceedings, asbestos and other toxic tort claims,
employment matters, governmental claims for taxes or duties, and other
litigation that arises in the ordinary course of our business. Although we
intend to defend these matters vigorously, we cannot predict with certainty the
outcome or effect of any claim or other litigation matter, and the ultimate
outcome of any litigation or the potential costs to resolve them may have a
material adverse effect on us. Insurance may not be applicable or sufficient in
all cases and/or insurers may not remain solvent which may have a material
adverse effect on our financial condition.





A
small number of our stockholders effectively control the outcome of matters on
which our stockholders are entitled to vote.





Entities
affiliated with Mr. Evangelos Pistiolis, our Chief Executive Officer, currently
own, directly or indirectly, approximately 10.11% of our outstanding common
stock as of June 15, 2010. In addition, entities affiliated with Mr. George
Economou currently own, directly or indirectly, approximately 12.56% of our
outstanding common stock as of June 15, 2010. While, as far as we are aware,
those stockholders have no agreement, arrangement or understanding relating to
the voting of their shares of our common stock, they will effectively control
the outcome of matters on which our stockholders are entitled to vote, including
the election of directors and other significant corporate actions. The interests
of these stockholders may be different from your interests.





Anti-takeover
provisions in our organizational documents could have the effect of
discouraging, delaying or preventing a merger, amalgamation or acquisition,
which could reduce the market price of our common shares.





Several
provisions of our Amended and Restated Articles of Incorporation and our Amended
and Restated Bylaws could make it difficult for our shareholders to change the
composition of our Board of Directors in any one year, preventing them from
changing the composition of management. In addition, the same provisions may
discourage, delay or prevent a merger or acquisition that shareholders may
consider favorable.





These
provisions include:


•
              authorizing
      our Board of Directors to issue "blank check" preferred stock without
      shareholder
    approval;  35
  •
                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 at least 80% of the outstanding shares of our capital
      stock entitled to vote for the
      directors; 
 •
                      prohibiting
      shareholder action by written consent unless the written consent is signed
      by all shareholders entitled to vote on the
      action; 
 •
                        limiting
      the persons who may call special meetings of shareholders;
      and 
 •
                          establishing
      advance notice requirements for nominations for election to our Board of
      Directors or for proposing matters that can be acted on by shareholders at
      shareholder
      meetings.





In
addition, we have entered into a Stockholder Rights Agreement that will make it
more difficult for a third party to acquire us without the support of our Board
of Directors and principal shareholders. These anti-takeover provisions could
substantially impede the ability of public shareholders to benefit from a change
in control and, as a result, may reduce the market price of our common stock and
your ability to realize any potential change of control premium.





36




ITEM
4.              INFORMATION
ON THE COMPANY





A.           History
and Development of the Company





Our
predecessor, Ocean Holdings Inc., was formed as a corporation in January 2000
under the laws of the Republic of the Marshall Islands and renamed TOP TANKERS
INC. in May 2004. In December 2007, TOP TANKERS INC. was renamed TOP SHIPS INC.
Our common stock is currently listed on the NASDAQ Global Select Market under
the symbol "TOPS". The current address of our principal executive office is 1
Vas. Sofias and Meg. Alexandrou Str, 15124 Maroussi, Greece. The telephone
number of our registered office is +30 210 812 8000.





On July
23, 2004, we completed our initial public offering. The net proceeds of our
initial public offering, approximately $124.6 million, were primarily used to
finance the acquisition of 10 vessels, comprising of eight Ice-class double-hull
Handymax tankers and two double-hull Suezmax tankers. The total cost of the
acquisition was approximately $251.3 million.





On
November 5, 2004, we completed a follow-on offering of our common stock. The net
proceeds of our follow-on offering, approximately $139.5 million, were used
primarily to finance the acquisition of five double-hull Suezmax tankers. The
total cost of the acquisition was approximately $249.3 million.





During
2005, we acquired five double-hull Handymax and four double-hull Suezmax tankers
at a total cost of $453.4 million and sold one double-hull Handymax and our last
single-hull Handysize tanker. We sold and leased-back five double-hull Handymax
tankers for a period of seven years.





From
April 2006, until July 2006, we issued through a "controlled equity offering"
1,302,454 shares of common stock, par value $0.01. The net proceeds totaled
$26.9 million.





During
2006, we sold and leased-back on a fixed charter basis four double-hull
Handymax, four double-hull Suezmax and five double-hull Suezmax tankers for
periods of five years, five years and seven years, respectively. Additionally,
we sold three double-hull Handymax tankers, and we entered into an agreement
with SPP Shipbuilding Co., Ltd. of the Republic of Korea, or SPP, for the
construction of six product/chemical tankers.





In May
2007, we re-acquired four Suezmax tankers that we sold in 2006 in an earlier
sale and leaseback transaction and terminated the respective bareboat charters.
The re-acquisition price was $208.0 million and was partially financed by the
early redemption of the seller's credit of $20.6 million associated with the
2006 sales and leaseback transactions, along with secured debt financing and
cash from operations.





From June
2007 until July 2007, we issued through a "controlled equity offering" 1,435,874
shares of common stock, par value $0.01. The net proceeds totaled $29.4
million.





During
July and August 2007, we agreed to acquire one Supramax, one Handymax and four
Panamax drybulk vessels at a total cost of $370.1 million. The Handymax and two
of the four Panamax drybulk vessels were delivered to us during the fourth
quarter of 2007. The Supramax and the remaining two Panamax drybulk vessels were
delivered to us during the first two quarters of 2008.





In
December 2007, we completed a follow-on offering of our common stock. The net
proceeds of this follow-on offering, approximately $68.9 million, were used
primarily to repay outstanding secured debt and to partially finance the
acquisition of the six drybulk vessels mentioned above, one of which we have
since sold.





37


During
2007 we sold one Suezmax tanker, we agreed to sell one Suezmax tanker that we
later delivered in January 2008 to its new owners, and we terminated the
bareboat charters on three Handymax tankers that we sold in 2006 in sale and
leaseback transactions, due to the sale of the vessels by their owners to third
parties.





During
2008, we took delivery of one Supramax drybulk vessel and two Panamax drybulk
vessels, which we had agreed to acquire in 2007 as mentioned above.
Additionally, during 2008, we sold seven owned Suezmax tankers and one Panamax
drybulk vessel and we arranged the sale of six chartered-in vessels, under
bareboat charters, and terminated the respective charters.





On March
20, 2008, we effected a three-for-one reverse stock split of our common stock.
There was no change in the number of authorized common shares. As a result of
the reverse stock split, the number of outstanding shares as of March 20, 2008
decreased to 20,705,380, while the par value of our common shares remained
unchanged at $0.01 per share.





In April
2008, we privately placed with various investors 7.3 million unregistered shares
of common stock, par value $0.01, for aggregate proceeds of approximately $51.0
million. The 7.3 million shares were sold for $7.00 per share, which represents
a discount of 15.5 percent based on the closing share price of $8.28 on April
23, 2008. In July 2008, we filed a registration statement on Form F-3, with
respect to these 7.3 million shares.





During
the fourth quarter of 2008, the Board of Directors authorized a share repurchase
program up to $20 million for a share price of not more than $2.50 per share for
the duration of one year. We began the share repurchases during the fourth
quarter of 2008 and the transactions were made in the open market on NASDAQ
under Rule 10b-18 of the Exchange Act. As at December 31, 2008, we repurchased
and cancelled an amount of 396,949 shares from the open market. We continued our
repurchase program until February 3, 2009. During the first two months of 2009,
we repurchased an amount of 358,601 shares from the open market. All the
outstanding shares that have been repurchased under this program were held
initially as treasury stock and were subsequently cancelled. Consequently, the
outstanding amount of 358,601 shares was cancelled effective as of February 25,
2009.





In
February 2009, we took delivery of M/T Miss Marilena and M/T Lichtenstein from
SPP. M/T Miss Marilena and M/T Lichtenstein are two out of six 50,000 dwt
product / chemical tankers delivered in 2009. M/T Miss Marilena and M/T
Lichtenstein entered into bareboat time-charter employment for a period of 10
years at a daily rate of $14,400 and $14,550, respectively.





In March
2009, we took delivery of M/T Ionian Wave and M/T Tyrrhenian Wave from SPP. M/T
Ionian Wave and M/T Tyrrhenian Wave are the third and fourth out of the six
50,000 dwt product / chemical tankers discussed above. M/T Ionian Wave and M/T
Tyrrhenian Wave entered into bareboat time-charter employment for a period of
seven years at a daily rate of $14,300, with three successive one-year options
at a higher daily rate.





In April
2009, we agreed with the owners of the M/T Relentless to terminate the bareboat
charter initially entered into as part of the sale and leaseback deal in 2005.
Under this agreement, we redelivered the vessel to its owners and paid a
termination fee of $2.5 million during the third quarter of 2009. The bareboat
charter would have expired in 2012.





On May
22, 2009, we took delivery of M/T Britto from SPP. M/T Britto is the fifth out
of the six 50,000 dwt newbuilding product / chemical tankers delivered in 2009.
M/T Britto entered into bareboat time-charter employment for a period of ten
years at a daily rate of $14,550.





38


On June
24, 2009, we terminated the bareboat charters, initially entered into as part of
the sale and leaseback deal in 2006, and redelivered the vessels M/T Faithful,
the M/T Doubtless, the M/T Spotless and the M/T Vanguard to their owners after
paying $11.8 million in termination fees and expenses. In addition to the
termination fees and expenses, we forfeited our right to receive the seller's
credit of $10.0 million from the initial sale of the vessels, which would have
been received upon the expiration of the bareboat charters, and we paid for the
dry-dock of the M/T Spotless which was completed during July 2009. The bareboat
charters were set to expire in 2011. We remained the managers of M/T Faithful
until April 30, 2010, which was shortly after the expiration of its time
charter, and we were reimbursed by the owners for all expenses
incurred.





On July
3, 2009, we redelivered the M/T Relentless to its owners and paid the
termination fee of $2.5 million as part of a termination agreement signed in
April 2009 to terminate the bareboat charter initially entered into as part of
the sale and leaseback deal in 2005. In addition to the termination fee, we had
undertaken to perform certain works on the vessel prior to its redelivery which
involved additional costs. From the date of the agreement until the date of
redelivery, the bareboat hire had been set at $7,000 per day.  This
was the last leased vessel in our fleet.





On July
1, 2009, we entered into a Standby Equity Distribution Agreement, or the SEDA,
with YA Global Master SPV LTD., or YA Global, pursuant to which we may offer and
sell up to $200 million worth of our common shares to YA Global. The SEDA has a
duration of three years. We made initial sales under the SEDA on August 13, 2009
and as of December 31, 2009, 2,230,000 shares had been sold with net proceeds
amounting to approximately $2.9 million. During the period from October 21, 2009
to the date of this report, no shares have been sold to YA Global under the
SEDA.





On August
3, 2009, we took delivery of M/T Hongbo from SSP. M/T Hongbo  is the
last out of the six 50,000 dwt newbuilding product / chemical tankers delivered
in 2009. M/T Hongbo entered into bareboat time-charter employment for a period
of ten years at a daily rate of $14,550.





As of
December 31, 2009, our fleet consisted of thirteen owned vessels – eight
Handymax tankers, one Supramax drybulk vessel, one Handymax drybulk vessel, and
three Panamax drybulk vessels, with total carrying capacity of 0.7 million dwt,
as compared to twelve vessels, with total carrying capacity of 0.7 million dwt
(including five tankers sold and leased back), as of December 31,
2008.





B.           Business
Overview





Business
Strategy





We are a
provider of international seaborne transportation services, carrying petroleum
products, crude oil for the oil industry and drybulk commodities for the steel,
electric utility, construction and agriculture-food industries. As of the date
of this annual report, our fleet consists of thirteen owned vessels (eight
tankers and five drybulk vessels).





Two of
our tankers and four of our drybulk vessels are currently employed on time
charters and six of our tankers and one of our drybulk vessels are employed on
bareboat charters. We actively manage the deployment of our fleet between time
charters and bareboat charters, which last from several months to several years.
63% of our fleet by dwt are sister ships, which enhances the revenue generating
potential of our fleet by providing us with operational and scheduling
flexibility. Sister ships also increase our operating efficiencies because
technical knowledge can be applied to all vessels in a series and create cost
efficiencies and economies of scale when ordering spare parts, supplying and
crewing these vessels.





During
2006, we ordered six newbuilding product tankers in the SPP shipyard in the
Republic of Korea in order to modernize our tanker fleet. All of these tankers
were delivered to us during 2009.





39


In
addition, during 2007 we diversified our fleet portfolio by acquiring drybulk
vessels, beginning with the acquisition of six drybulk vessels, one of which we
subsequently sold.





We intend
to continue to review the market for tanker and drybulk vessels to continue our
program of acquiring suitable vessels on accretive terms.





We
believe we have established a reputation in the international ocean transport
industry for operating and maintaining our fleet with high standards of
performance, reliability and safety. We have assembled a management team
comprised of executives who have extensive experience operating large and
diversified fleets of tankers and drybulk vessels, and who have strong ties to a
number of national, regional and international oil companies, charterers and
traders.





Our
Fleet





The
following table presents our fleet list and employment as of the date of this
annual report:





Dwt
            Year
              Built
            Charter Type
            Expiry
            Daily Base Rate
            Profit Sharing
              Above Base Rate (2009)Eight
      Tanker VesselsDauntless
            46,168
            1999
            Time
      Charter
            Q1-2/2012
            $10,500
            50%Ioannis
      P
            46,346
            2003
            Time
      Charter
            Q4/2010
            $18,000
            100%
      first $1,000 + 50% thereafterMiss
      Marilena
            50,000
            2009
            Bareboat
      Charter
            Q1-2/2019
            $14,400
            NoneLichtenstein
            50,000
            2009
            Bareboat
      Charter
            Q1-2/2019
            $14,550
            NoneIonian
      Wave
            50,000
            2009
            Bareboat
      Charter
            Q1-2/2016
            $14,300A
            NoneThyrrhenian
      Wave
            50,000
            2009
            Bareboat
      Charter
            Q1-2/2016
            $14,300A
            NoneBritto
            50,000
            2009
            Bareboat
      Charter
            Q1-2/2019
            $14,550
            NoneHongbo
            50,000
            2009
            Bareboat
      Charter
            Q1-2/2019
            $14,550
            NoneTotal
      Tanker dwt
            392,514Five
      Drybulk VesselsCyclades
            75,681
            2000
            Time
      Charter
            Q2/2011
            $54,250
            NoneAmalfi
            45,526
            2000
            Time
      Charter
            Q4/2011-Q1/2012
            $14,000
            NonePapillon
      (ex Voc Gallant))
            51,200
            2002
            Bareboat
      Charter
            Q1-3/2012
            $24,000
            NonePepito
            75,928
            2001
            Time
      Charter
            Q1-2/2013
            $41,000
            NoneAstrale
            75,933
            2000
            Time
      Charter
            Q3-4/2011
            $18,000
            NoneTotal
      Drybulk dwt
            324,268TOTAL
      DWT
            716,782





A.  
      On January 11, 2010, we announced that we received from the bareboat
      charterer of the M/T Ionian Wave and the M/T Tyrrhenian Wave, a reduced
      charter hire rate of $10,000 per day rather than the $14,300 per day on a
      bareboat basis that is set forth in the charter agreement.  We
      are currently examining this unilateral reduction and intend to take all
      necessary steps to recover the amounts owed since the said charterer is
      considered to be in breach of the
charter.








40


Management
of the Fleet





Since
July 1, 2004, TOP Tanker Management Inc., or TOP Tanker Management, our
wholly-owned subsidiary, has been responsible for all of the chartering,
operational and technical management of our fleet, including crewing,
maintenance, repair, capital expenditures, dry-docking, vessel taxes,
maintaining insurance and vessel operating expenses under management agreements
with our vessel owning subsidiaries. TOP Tanker Management has built a
management team with significant experience in operating large and diversified
fleets of tankers and drybulk vessels and has expertise in all aspects of
commercial, technical, management and financial areas of our business. Prior to
July 1, 2004, the operations of our fleet were managed by Primal Tankers Inc.,
which was wholly-owned by the father of our Chief Executive
Officer.





From
January 1, 2009 to December 31, 2009, TOP Tanker Management subcontracted the
technical management and crewing of one Handymax tanker and the crewing of
another Handymax tanker to V. Ships Management Limited, or V. Ships, for monthly
fees of $12,400 and $3,550, respectively. For the period from January 2010 to
the date of this annual report, the monthly fee to V. Ships for the technical
management and crewing of the one Handymax tanker increased to $12,900. In
January 2010, we transferred the crewing of the other Handymax tanker to
Interorient Maritime Enterprises Inc., or Interorient, for a fee of $1,700 per
month.





From
January 1, 2009 to December 31, 2009, TOP Tanker Management subcontracted the
crewing of four drybulk carriers to Interorient for a monthly fee of $1,700 per
vessel.





On April
6, 2010, we provided V. Ships approximately two months' notice of termination of
our agreement with it for the technical management and crewing of the one
Handymax tanker. The change of both crew and technical Management is to take
place during the last week of June 2010, always subject to the vessel's
schedule.





On May
12, 2010, our Board of Directors agreed to outsource all of the commercial
and technical management of the Company's vessels to Central Mare
Inc., or Central Mare, a related party controlled by the family of the Company's
Chief Executive Officer, on a timeline to be determined by its
executive officers in consideration of the vessels' schedule.





Crewing
and Employees





During
2007, 2008 and 2009, TOP SHIPS INC. had four employees, while our wholly-owned
subsidiary, TOP Tanker Management, employed on average 82, 88 and 55
employees respectively, all of whom are shore-based. During 2009, V. Ships
Management Limited and Interorient Maritime Enterprises Inc, were responsible
for the crewing of the fleet. Such responsibilities include training,
transportation, compensation and insurance of the crew.





TOP
Tanker Management ensures that all seamen have the qualifications and licenses
required to comply with international regulations and shipping conventions, and
that our vessels employ experienced and competent personnel.





All of
the employees of TOP Tanker Management are subject to a general collective
bargaining agreement covering employees of shipping agents in Greece. These
agreements set industry-wide minimum standards. We have not had any labor
problems with our employees under this collective bargaining agreement and
consider our workplace and labor union relations to be good.





41


The
Industry - Tankers





The
international tanker industry represents, we believe, the most efficient and
safest method of transporting large volumes of crude oil and refined petroleum
products such as gasoline, diesel, fuel oil, gas oil and jet fuel, as well as
edible oils and chemicals.





Freight
rates in the tanker shipping industry are determined by the supply of product
tankers and the demand for crude oil and refined petroleum products
transportation. Factors that affect the supply of product tankers and the demand
for transportation of crude oil and refined petroleum products
include:




Demand




•
              general
      economic conditions, including increases and decreases in industrial
      production and transportation, in which China has played a significant
      role since it joined the World Trade
      Organization. •
                  oil
      prices; •
                      environmental
      issues or
  concerns; •
                          climate; •
                              competition
      from alternative energy sources;
      and •
                                  regulatory
      environment.


Supply


•
              the
      number of combined carriers, or vessels capable of carrying oil or drybulk
      cargoes, carrying oil
      cargoes; •
                  the
      number of newbuildings on order and being
      delivered; •
                      the
      number of tankers in lay-up, which refers to vessels that are in storage,
      dry-docked, awaiting repairs or otherwise not available or out of
      commission;
  and •
                          the number of tankers scrapped for obsolescence or subject
      to casualties; •
                              prevailing
      and expected future charterhire
      rates; •
                                  costs
      of bunkers, fuel oil, and other operating
      costs; •
                                      the
      efficiency and age of the world tanker
      fleet; •
                                          current
      shipyard capacity;
    and •
                                              government
      and industry regulation of maritime transportation practices, particularly
      environmental protection laws and
      regulations. 
   42
  Developments
in the International Tanker
Market





The
Baltic Dirty Tanker Index, a U.S. Dollar daily average of charter rates issued
by the London based Baltic Exchange (an organization providing maritime market
information for the trading and settlement of physical and derivative contracts)
which takes into account input from brokers around the world regarding crude oil
fixtures for various routes various tanker vessel sizes, after a steep decline
that started in mid-2008 and lasted until the end of the third quarter of 2009,
has rebounded in the fourth quarter of 2009, although not to pre-crisis levels.
The Baltic Dirty Tanker Index declined from a high of 2,347 in July 2008 to a
low of 453 in mid-April 2009, which represents a decline of 80%, but has since
rebounded to 911 as of June 3, 2010. The Baltic Clean Tanker Index fell from
1,509 points as of June 19, 2008, to 345 points as of April 4, 2009, but
has rebounded to 644 points as of June 3, 2010. The dramatic decline in charter
rates was due to various factors, including the significant fall in demand for
crude oil and petroleum products, the consequent rising inventories of crude oil
and petroleum products in the United States and in other industrialized nations
and the corresponding reduction in oil refining, the dramatic fall in the price
of oil in 2008, and the restrictions on crude oil production that the
Organization of Petroleum Exporting Countries (OPEC) and other non-OPEC oil
producing countries have imposed in an effort to stabilize the price of oil.
During 2009, the above factors affecting the Baltic Dirty and Clean Tanker
Indices have partially subsided, allowing for the recovery of rates and a
stabilization of tanker vessel values.





The price
of crude oil after reaching historical highs in the summer of 2008 declined
sharply as a result of the deterioration in the world economy, the collapse of
financial markets, declining oil demand and bearish market sentiment. In 2009,
oil prices started rising again amidst a growing demand for oil leading to a
price of approximately $72.88 per barrel as of June 3, 2010.





The
Industry – Drybulk Vessels





Drybulk
cargo is cargo that is shipped in quantities and can be easily stowed in a
single hold with little risk of cargo damage. The demand for drybulk vessel
capacity is determined by the underlying demand for commodities transported in
drybulk vessels, which in turn is influenced by trends in the global economy.
Between 2000 and 2009, trade in all drybulk commodities increased from 2.3
billion tons to 3.03 billion tons, representing a CAGR (compound average growth
rate) of 4.7 %). One of the main reasons for that increase in drybulk trade was
the growth in imports by China of iron ore, coal and steel products since 2000.
Chinese imports of iron ore alone increased from 92.2 million tons in 2001 to
approximately 630 million tons in 2009.





The
supply of drybulk vessels is dependent on the delivery of new vessels and the
removal of vessels from the global fleet, either through scrapping or loss. The
orderbook of new drybulk vessels scheduled to be delivered until 2012 represents
approximately 57% of the world drybulk fleet. The level of scrapping activity is
generally a function of scrapping prices in relation to current and prospective
charter market conditions, as well as operating, repair and survey costs.
Drybulk vessels at or over 25 years old are considered to be scrapping candidate
vessels.





Developments
in the International Drybulk Shipping Industry





The
Baltic Drybulk Index, or BDI, a U.S. Dollar daily average of charter rates
issued by the London based Baltic Exchange which takes into account input from
brokers around the world regarding fixtures for various routes, dry cargoes and
various drybulk vessel sizes, declined from a high of 11,793 in May 2008 to a
low of 663 in December 2008, which represents a decline of 94%, but has since
risen to 3,933 as of June 3, 2010. The decline in charter rates was due to
various factors, including the lack of trade financing for purchases of
commodities carried by sea, which has resulted in a significant decline in cargo
shipments, and the excess supply of iron ore in China, which has resulted in
falling iron ore prices and increased stockpiles in Chinese ports. The decline
in charter rates in the drybulk market also affected the value of our drybulk
vessels, which followed the trends of drybulk charter rates, and earnings on our
charters, and similarly, affected our cash flows, liquidity and compliance with
the covenants contained in our loan agreements. During 2009, the abovementioned
factors affecting the BDI have partially subsided, allowing for the recovery of
rates and a recovery in drybulk vessel values.






43





Environmental
and Other Regulations





Government
regulations and laws significantly affect the ownership and operation of our
vessels. We are subject to international conventions, national, state and local
laws and regulations in force in the countries in which our vessels may operate
or are registered and compliance with such laws, regulations and other
requirements may entail significant expense.





Our
vessels are subject to both scheduled and unscheduled inspections by a variety
of government, quasi-governmental and private organizations including the local
port authorities, national authorities, harbor masters or equivalent,
classification societies, flag state administrations (countries of registry) and
charterers. Our failure to maintain permits, licenses, certificates or other
approvals required by some of these entities could require us to incur
substantial costs or temporarily suspend operation of one or more of our
vessels.





We
believe that the heightened levels of environmental and quality concerns among
insurance underwriters, regulators and charterers have led to greater inspection
and safety requirements on all vessels and may accelerate the scrapping of older
vessels throughout the industry. Increasing environmental concerns have created
a demand for vessels that conform to stricter environmental
standards.





We
believe that the operation of our vessels is in substantial compliance with
applicable environmental laws and regulations and that our vessels have all
material permits, licenses, certificates or other authorizations necessary for
the conduct of our operations; however, because such laws and regulations are
frequently changed and may impose increasingly stricter requirements, we cannot
predict the ultimate cost of complying with these requirements, or the impact of
these requirements on the resale value or useful lives of our vessels. In
addition, additional legislation or regulation applicable to the operation of
our vessels that may be implemented in the future could negatively affect our
profitability.




International
Maritime Organization





The
International Maritime Organization, or the IMO, the United Nations agency for
maritime safety and the prevention of pollution by ships, has adopted several
international conventions that regulate the international shipping industry,
including the International Convention on Civil Liability for Oil Pollution
Damage, the International Convention on Civil Liability for Bunker Oil Pollution
Damage, and the International Convention for the Prevention of Pollution from
Ships, or the MARPOL Convention. The MARPOL Convention establishes environmental
standards relating to oil leakage or spilling, garbage management, sewage, air
emissions, handling and disposal of noxious liquids and the handling of harmful
substances in packaged form.





In
September 1997, the IMO adopted Annex VI to MARPOL to address air pollution from
ships. Annex VI came into force on May 19, 2005. It sets limits on sulfur oxide
and nitrogen oxide emissions from ship exhausts and prohibits deliberate
emissions of ozone depleting substances, such as chlorofluorocarbons. Annex VI
also includes a global cap on the sulfur content of fuel oil and allows for
special areas to be established with more stringent controls on sulfur
emissions. Annex VI has been ratified by some, but not all IMO member states. In
October 2008, the Marine Environment Protection Committee, or MEPC, of the IMO
approved amendments to Annex VI regarding particulate matter, nitrogen oxide and
sulfur oxide emissions standards. These amendments will enter into force in July
2010. They seek to reduce air pollution from vessels by establishing a series of
progressive standards to further limit the sulfur content in fuel oil, which
would be phased in by 2020, and by establishing new tiers of nitrogen oxide
emission standards for new marine diesel engines, depending on their date of
installation. Additionally, more stringent emission standards could apply in
coastal areas designated as Emission Control Areas ("ECAs"). Please see "United
States – the U.S. Clean Air Act" below for information on the ECA designated in
North America and the Hawaiian Islands. We have obtained International Air
Pollution Prevention certificates evidencing compliance with Annex VI
requirements for all of our vessels.






44





Although
the United States is not a party, many countries have ratified the International
Convention on Civil Liability for Oil Pollution Damage of 1969, as amended in
2000, or the CLC. Under this convention and depending on whether the country in
which the damage results is a party to the 1992 Protocol to the CLC, a vessel's
registered owner is strictly liable for pollution damage caused in the
territorial waters of a contracting state by discharge of persistent oil,
subject under certain circumstances to certain defenses and limitations. Vessels
trading to states that are parties to these conventions must provide evidence of
insurance covering the liability of the owner. In jurisdictions where the CLC
has not been adopted, various legislative schemes or common law govern, and
liability is imposed either on the basis of fault or in a manner similar to the
CLC.





The IMO
also has adopted the International Convention on Civil Liability for Bunker Oil
Pollution Damage, or the Bunker Convention, which imposes strict liability on
ship owners for pollution damage in jurisdictional waters of ratifying states
caused by discharges of bunker fuel and requires registered owners of ships over
1,000 gross tons to maintain insurance for pollution damage in an amount equal
to the limits of liability under the applicable national or international
limitation regime.





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





Noncompliance
with the ISM Code or with other IMO regulations may subject a shipowner or
bareboat charterer to increased liability, may lead to decreases in available
insurance coverage for affected vessels and may result in the denial of access
to, or detention in, some ports including United States and European Union
ports.





United
States





The
U.S. Oil Pollution Act of 1990 and the Comprehensive Environmental Response,
Compensation and Liability Act




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










45




Under
OPA, vessel owners, operators and bareboat charterers are responsible parties
who are jointly, severally and strictly liable (unless the spill results solely
from the act or omission of a third party, an act of God or an act of war) for
all containment and clean-up costs and other damages arising from oil spills
from their vessels. OPA limits the liability of responsible parties with respect
to tankers over 3,000 gross tons to the greater of $3,200 per gross tons or
$23,496,000 per single hull tanker, $2,000 per gross ton or $17,088,000 per
double hull tanker, and $1,000 per gross ton or $854,400 for
any non-tank vessel respectively, and permits individual states to impose their
own liability regimes with regard to oil pollution incidents occurring within
their boundaries. Some states have enacted legislation providing for unlimited
liability for discharge of pollutants within their waters, however, in some
cases, states which have enacted this type of legislation have not yet issued
implementing regulations defining tanker owners' responsibilities under these
laws. CERCLA, which applies to owners and operators of vessels, contains a
similar liability regime and provides for cleanup, removal and natural resource
damages. Liability under CERCLA is limited to the greater of $300 per gross ton
or $5.0 million for vessels carrying a hazardous substance as cargo and the
greater of $300 per gross ton or $0.5 million for any other
vessel.





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





OPA also
requires owners and operators of vessels to establish and maintain with the U.S.
Coast Guard evidence of financial responsibility sufficient to meet the limit of
their potential strict liability under the act. Under the regulations, evidence
of financial responsibility may be demonstrated by insurance, surety bond,
self-insurance or guaranty. Under OPA regulations, an owner or operator of more
than one tanker is required to demonstrate evidence of financial responsibility
for the entire fleet in an amount equal only to the financial responsibility
requirement of the tanker having the greatest maximum strict liability under OPA
and CERCLA. We have provided such evidence and received certificates of
financial responsibility from the U.S. Coast Guard for each of our vessels
required to have one.





OPA
specifically permits individual U.S. coastal states to impose their own
liability regimes with regard to oil pollution incidents occurring within their
boundaries, and some states have enacted legislation providing for unlimited
liability for oil spills.





The
U.S. Clean Water Act





The U.S.
Clean Water Act of 1972, or CWA, prohibits the discharge of oil, hazardous
substances, and ballast water  in U.S. navigable waters unless
authorized by a duly-issued permit or exemption, and imposes strict liability in
the form of penalties for any unauthorized discharges. The CWA also imposes
substantial liability for the costs of removal, remediation and damages and
complements the remedies available under OPA and CERCLA. Furthermore, most U.S.
states that border a navigable waterway have enacted environmental pollution
laws that impose strict liability on a person for removal costs and damages
resulting from a discharge of oil or a release of a hazardous substance. These
laws may be more stringent than U.S. federal law.





The
United States Environmental Protection Agency, or EPA, has enacted rules
requiring a permit regulating ballast water discharges and other discharges
incidental to the normal operation of certain vessels within United States
waters under the Vessel General Permit for Discharges Incidental to the Normal
Operation of Vessels, or VGP. To be covered by the VGP, owners of certain
vessels must submit a Notice of Intent, or NOI, at least 30 days before the
vessel operates in United States waters. Compliance with the VGP could require
the installation of equipment on our vessels to treat ballast water before it is
discharged or the implementation of other disposal arrangements, and/or
otherwise restrict our vessels from entering United States waters. In addition,
certain states have enacted more stringent discharge standards as conditions to
their required certification of the VGP. We have submitted NOIs for our vessels
where required and do not believe that the costs associated with obtaining and
complying with the VGP will have a material impact on our
operations.








46


The
U.S. Clean Air Act





The U.S.
Clean Air Act of 1970, as amended by the Clean Air Act Amendments of 1977 and
1990, or the CAA, requires the EPA to promulgate standards applicable to
emissions of volatile organic compounds and other air contaminants. Our vessels
are subject to vapor control and recovery requirements for certain cargoes when
loading, unloading, ballasting, cleaning and conducting other operations in
regulated port areas and emission standards for so-called "Category 3" marine
diesel engines operating in U.S. waters. The marine diesel engine emission
standards are currently limited to new engines beginning with the 2004 model
year. On December 22, 2009, the EPA announced final emission standards for
Category 3 marine diesel engines equivalent to those adopted in the amendments
to Annex VI to MARPOL. The emission standards apply in two stages: near-term
standards for newly-built engines will apply from 2011, and long-term standards
requiring an 80% reduction in nitrogen dioxides (NOx) will apply from 2016.
Compliance with these standards may cause us to incur costs to install control
equipment on our vessels.





The CAA
also requires states to draft State Implementation Plans, or SIPs, designed to
attain national health-based air quality standards in primarily major
metropolitan and/or industrial areas. Several SIPs regulate emissions resulting
from vessel loading and unloading operations by requiring the installation of
vapor control equipment. As indicated above, our vessels operating in covered
port areas are already equipped with vapor recovery systems that satisfy these
existing requirements. Vessels sailing within 24 miles of the California
coastline whose itineraries call for them to enter any California ports,
terminal facilities, or internal or estuarine waters must use marine gas oil at
or below 1.5% sulfur and marine diesel oil at or below 0.5% sulfur and,
effective January 1, 2012, marine fuels with a sulfur content at or below 0.1%
(1,000 ppm) sulfur.





The MEPC
has designated the area extending 200 miles from the territorial sea baseline
adjacent to the Atlantic/Gulf and Pacific coasts and the eight main Hawaiian
Islands as an ECA under the Annex VI amendments. The new ECA will enter into
force in August 2012, whereupon fuel used by all vessels operating in the ECA
cannot exceed 1.0% sulfur, dropping to 0.1% sulfur in 2015. From 2016, NOx
after-treatment requirements will also apply. If other ECAs are approved by the
IMO or other new or more stringent requirements relating to emissions from
marine diesel engines or port operations by vessels are adopted by the EPA or
the states where we operate, compliance with these regulations could entail
significant capital expenditures or otherwise increase the costs of our
operations.




European
Union




The
European Union has adopted legislation that would: (1) ban manifestly
sub-standard vessels (defined as those over 15 years old that have been detained
by port authorities at least twice in a six month period) from European waters
and create an obligation of port states to inspect vessels posing a high risk to
maritime safety or the marine environment; and (2) provide the European Union
with greater authority and control over classification societies, including the
ability to seek to suspend or revoke the authority of negligent societies. In
addition, European Union regulations enacted in 2003 now prohibit all single
hull tankers from entering into its ports or offshore terminals.





In
October 2009, the European Union amended a previously adopted Directive to
impose criminal sanctions for illicit ship-source discharges of polluting
substances, including minor discharges, if committed with intent, recklessly or
with serious negligence and the discharges individually or in the aggregate
result in deterioration of the quality of water. Criminal liability for
pollution may result in substantial penalties or fines and increased civil
liability claims.






47




The
European Union has also adopted a Directive to limit the sulphur content of
marine fuels in order to reduce sulphur dioxide emissions from
ships.





The
sinking of the oil tanker Prestige in 2002 has led to the adoption of other
environmental regulations by certain European Union Member States. It is
difficult to predict what legislation or additional regulations, if any, may be
promulgated by the European Union in the future.




Other
Environmental Initiatives




U.S.
Coast Guard regulations adopted and proposed for adoption under the U.S.
National Invasive Species Act, or NISA, impose mandatory ballast water
management practices for all vessels equipped with ballast water tanks entering
U.S. waters, which could require the installation of equipment on our vessels to
treat ballast water before it is discharged or the implementation of other port
facility disposal arrangements or procedures, and/or otherwise restrict our
vessels from entering U.S. waters.





At the
international level, the IMO adopted an International Convention for the Control
and Management of Ships' Ballast Water and Sediments in February 2004 (the "BWM
Convention"). The Convention's implementing regulations call for a phased
introduction of mandatory ballast water exchange requirements, to be replaced in
time with mandatory concentration limits. The BWM Convention will not enter into
force until 12 months after it has been adopted by 30 states, the combined
merchant fleets of which represent not less than 35% of the gross tonnage of the
world's merchant shipping. As of April 30, 2010 the BWM Convention has been
adopted by 24 states, representing 23.29% of world tonnage.





If
mid-ocean ballast exchange is made mandatory throughout the United States or at
the international level, or if ballast water treatment requirements or options
are instituted, the cost of compliance could increase for ocean carriers.
Although we do not believe that the costs of compliance with a mandatory
mid-ocean ballast exchange would be material, it is difficult to predict the
overall impact of such a requirement on our operations.





Greenhouse
Gas Regulation





The IMO
is evaluating mandatory measures to reduce greenhouse gas emissions from
international shipping, which may include market-based instruments or a carbon
tax. The European Union has indicated that it intends to propose an expansion of
the existing European Union emissions trading scheme to include emissions of
greenhouse gases from marine vessel. In the United States, the EPA has issued a
proposed finding that greenhouse gases threaten the public health and safety. In
addition, climate change initiatives are being considered in the U.S.
Congress.  Any passage of climate control legislation or other
regulatory initiatives by the IMO, EU, the U.S. or other countries where we
operate, or any treaty adopted at the international level to succeed the Kyoto
Protocol, that restrict emissions of greenhouse gases could require us to make
significant financial expenditures that we cannot predict with certainty at this
time.





Vessel
Security Regulations





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


•
              on-board
      installation of automatic identification systems to provide a means for
      the automatic transmission of safety-related information from among
      similarly equipped ships and shore stations, including information on a
      ship's identity, position, course, speed and navigational
      status; 
 48




•
              on-board
      installation of ship security alert systems, which do not sound on the
      vessel but only alert the authorities on
      shore; •
                  the
      development of vessel security
      plans; •
                      ship
      identification number to be permanently marked on a vessel's
      hull; •
                          a
      continuous synopsis record kept onboard showing a vessel's history
      including, the name of the ship and of the state whose flag the ship is
      entitled to fly, the date on which the ship was registered with that
      state, the ship's identification number, the port at which the ship is
      registered and the name of the registered owner(s) and their registered
      address;
      and •
                              compliance
      with flag state security certification
      requirements.


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





Inspection
by Classification Societies





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





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





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





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





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






49





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





At an
owner's application, the surveys required for class renewal may be split
according to an agreed schedule to extend over the entire period of class. This
process is referred to as continuous class renewal.





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





Most
vessels are also dry-docked every 30 to 36 months for inspection of the
underwater parts and for repairs related to inspections. If any defects are
found, the classification surveyor will issue a ''recommendation'' which must be
rectified by the ship owner within prescribed time limits.





Most
insurance underwriters make it a condition for insurance coverage that a vessel
be certified as ''in class'' by a classification society which is a member of
the International Association of Classification Societies. All our vessels are
certified as being ''in class'' by the American Bureau of Shipping, Lloyd's
Register of Shipping or Det Norske Veritas. All new and secondhand vessels that
we purchase must be certified prior to their delivery under our standard
contracts and memorandum of agreement. If the vessel is not certified on the
date of closing, we have no obligation to take delivery of the
vessel.





Risk
of Loss and Liability Insurance Generally





The
operation of any cargo vessel includes risks such as mechanical failure,
collision, property loss, cargo loss or damage and business interruption due to
political circumstances in foreign countries, hostilities and labor strikes. In
addition, there is always an inherent possibility of marine disaster, including
oil spills and other environmental mishaps, and the liabilities arising from
owning and operating vessels in international trade. OPA, which imposes
virtually unlimited liability upon owners, operators and demise charterers of
any vessel trading in the United States exclusive economic zone for certain oil
pollution accidents in the United States, has made liability insurance more
expensive for ship owners and operators trading in the United States market.
While we carry loss of hire insurance to cover 100% of our fleet, we may not be
able to maintain this level of coverage. Furthermore, while we believe that our
present insurance coverage is adequate, not all risks can be insured, and there
can be no guarantee that any specific claim will be paid, or that we will always
be able to obtain adequate insurance coverage at reasonable rates.





Hulland Machinery
Insurance





We have
obtained marine hull and machinery, marine interests and war risk insurance,
which includes the risk of actual or constructive total loss, general average,
particular average, salvage, salvage charges, sue and labor, damage received in
collision or contact with fixed or floating objects for all of the vessels in
our fleet. In 2009, the vessels in our fleet were each covered up to at least
fair market value, with deductibles of $100,000 per vessel per incident, for the
non-bareboat vessels in our fleet. In 2010, deductibles changed to include an
additional machinery deductible of $100,000 per vessel per incident for the
non-bareboat vessels in our fleet. For the vessels that are under bareboat
charters, the charterer is responsible for arranging and paying the hull and
machinery insurance. We have also arranged increased value coverage for one of
our bareboat chartered vessels, M/V Papillon, in order to conform with relevant
loan covenants. Under this increased value coverage, in the event of total loss
of a vessel, we will recover for amounts not recoverable under the hull and
machinery policy by reason of any under-insurance by the charterers, in relation
to values dictated by loan covenants.






50







Loss
of Hire Insurance





During
2009, we obtained Loss of Hire Insurance to cover the loss of hire of each
non-bareboat vessel and two of the bareboat chartered vessels, M/T Ionian Wave
and M/T Hongbo, as required by the relevant loan agreements, for 90 days in
excess of 30 days in case of an incident that is coverable by our Hull and
Machinery policy. In 2010, we have obtained Loss of Hire Insurance to cover the
loss of hire for M/V Cyclades, M/V Pepito, M/T Ioannis P, M/T Ionian Wave and
M/T Hongbo for 90 days in excess of 30 days in case of an incident that is
coverable by our Hull and Machinery policy.





Protection
and Indemnity Insurance





Protection
and indemnity insurance is provided by mutual protection and indemnity
associations, or P&I Associations, which covers our third party liabilities
in connection with our shipping activities. This includes third party liability
and other related expenses of injury or death of crew, passengers and other
third parties, loss or damage to cargo, claims arising from collisions with
other vessels, damage to other third party property, pollution arising from oil
or other substances, including wreck removal. Protection and indemnity insurance
is a form of mutual indemnity insurance, extended by protection and indemnity
mutual associations, or ''clubs.'' Subject to the ''capping'' discussed below,
our coverage, except for pollution, is unlimited.





Our
current protection and indemnity insurance coverage for pollution remains at
$1.0 billion per vessel per incident. The 13 P&I Associations that comprise
the International Group insure approximately 90% of the world's commercial
tonnage and have entered into a pooling agreement to reinsure each association's
liabilities. Each P&I Association has capped its exposure to this pooling
agreement at approximately $5.5 billion. As a member of a P&I Association,
which is a member of the International Group, we are subject to calls payable to
the associations based on its claim records as well as the claim records of all
other members of the individual associations, and members of the pool of P&I
Associations comprising the International Group.





Competition





We
operate in markets that are highly competitive and based primarily on supply and
demand. We compete for charters on the basis of price, vessel location, size,
age and condition of the vessel, as well as on our reputation as an operator. We
arrange our time charters, bareboat charters and voyage charters in the spot
market through the use of brokers, who negotiate the terms of the charters based
on market conditions. We compete primarily with owners of tankers in the
Handymax class sizes and also with owners of drybulk vessels in the Handymax,
Supramax and Panamax class sizes. Ownership of tankers is highly fragmented and
is divided among major oil companies and independent vessel owners. The drybulk
market is less fragmented with more small operators.





Seasonality





We
operate our vessels in markets that have historically exhibited seasonal
variations in demand and, therefore, charter rates. This seasonality may affect
operating results.






51





C.
Organizational Structure





The
following are the wholly-owned subsidiaries of TOP SHIPS INC. as of December 31,
2009.








Shipowning
      Companies with vessels in operations
              at
      December 31, 2009
            Date
      of
              Incorporation
            Country
      of Incorporation
            Vessel1
            Lefka
      Shipping Company Limited ("Lefka")
            March
      2005
            Marshall
      Islands
            Dauntless
      (acquired March 2005)2
            Ilisos
      Shipping Company Limited ("Ilisos")
            April
      2005
            Marshall
      Islands
            Ioannis
      P (acquired November 2005)3
            Amalfi
      Shipping Company Limited ("Amalfi")
            July
      2007
            Marshall
      Islands
            Amalfi
      (acquired December 2007)4
            Jeke
      Shipping Company Limited ("Jeke")
            July
      2007
            Liberia
            Voc
      Gallant (acquired February 2008)5
            Japan
      I Shipping Company Limited ("Japan I")
            August
      2007
            Liberia
            Pepito
      (acquired March 2008)6
            Japan
      II Shipping Company Limited ("Japan II")
            August
      2007
            Liberia
            Astrale
      (acquired May 2008)7
            Japan
      III Shipping Company Limited ("Japan III")
            August
      2007
            Liberia
            Cyclades
      (acquired December 2007)8
            Warhol
      Shipping Company Limited ("Warhol")
            July
      2008
            Liberia
            Miss
      Marilena (delivered February 2009)9
            Lichtenstein
      Shipping Company Limited ("Lichtenstein")
            July
      2008
            Liberia
            Lichtenstein
      (delivered February 2009)10
            Banksy
      Shipping Company Limited ("Banksy")
            July
      2008
            Liberia
            Ionian
      Wave (delivered March 2009)11
            Indiana
      R Shipping Company Limited ("Indiana R")
            July
      2008
            Liberia
            Tyrrhenian
      Wave (delivered March 2009)12
            Britto
      Shipping Company Limited ("Britto")
            July
      2008
            Liberia
            Britto
      (delivered May 2009)13
            Hongbo
      Shipping Company Limited ("Hongbo")
            July
      2008
            Liberia
            Hongbo
      (delivered August 2009)Other
      Companies14
            Top
      Tankers (U.K.) Limited
            January
      2005
            England
      and Wales
            Representative
      office in London15
            Top
      Bulker Management Inc.
            April
      2005
            Marshall
      Islands
            Inactive
      Management Company16
            TOP
      Tanker Management Inc. ((the "Manager")
            May
      2004
            Marshall
      Islands
            Management
      Company17
            Ierissos
      Shipping Inc.
            November
      2008
            Marshall
      Islands
            Cash
      Manager








52


It should
be noted that Ierissos Shipping Inc was dissolved in April 2010.





Shipowning
      Companies with vessels sold
            Date
      of Incorporation
            Country
      of Incorporation
            Vessel18
            Olympos
      Shipping Company Limited
            December
      1999
            British
      Cayman Islands
            Med
      Prologue (sold to "Olympos Shipping Company Limited")19
            Vermio
      Shipping Company Limited ("Faithful")
            December
      2001
            Marshall
      Islands
            Faithful
      (sold to "Gramos Shipping Company Inc" July 2003)20
            Kalidromo
      Shipping Company Limited ("Kalidromo")
            May
      2003
            Marshall
      Islands
            Tireless
      (sold September 2004)21
            Olympos
      Shipping Company Limited ("Olympos")
            May
      2003
            Marshall
      Islands
            Med
      Prologue (sold December 2004)22
            Rupel
      Shipping Company Inc. ("Rupel")
            January
      2003
            Marshall
      Islands
            Fearless
      (sold July 2005)23
            Helidona
      Shipping Company Limited ("Helidona")
            May
      2003
            Marshall
      Islands
            Yapi
      (sold September 2005)24
            Mytikas
      Shipping Company Limited ("Mytikas")
            February
      2004
            Marshall
      Islands
            Limitless
      (sold September 2008)25
            Litochoro
      Shipping Company Limited ("Litochoro")
            March
      2004
            Marshall
      Islands
            Endless
      (sold  September 2008)26
            Vardousia
      Shipping Company Limited ("Vardousia")
            July
      2004
            Cyprus
            Invincible
      (sold by its new owners July 2007)27
            Psiloritis
      Shipping Company Limited ("Psiloritis")
            July
      2004
            Liberia
            Victorious
      (sold by its new owners August 2007)28
            Menalo
      Shipping Company Limited ("Menalo")
            July
      2004
            Cyprus
            Restless
      (sold by its new owners September 2007)29
            Pintos
      Shipping Company Limited ("Pintos")
            July
      2004
            Cyprus
            Sovereign
      (sold by its new owners August 2008)30
            Pylio
      Shipping Company Limited ("Pylio")
            July
      2004
            Liberia
            Flawless
      (sold by its new owners September 2008)31
            Taygetus
      Shipping Company Limited ("Taygetus")
            July
      2004
            Liberia
            Timeless
      (sold by its new owners September 2008)32
            Imitos
      Shipping Company Limited ("Imitos")
            November
      2004
            Marshall
      Islands
            Noiseless
      (sold January 2008)33
            Parnis
      Shipping Company Limited ("Parnis")
            November
      2004
            Marshall
      Islands
            Stainless
      (sold January 2008)34
            Parnasos
      Shipping Company Limited ("Parnasos")
            November
      2004
            Liberia
            Faultless
      (sold by its new owners March 2008)35
            Vitsi
      Shipping Company Limited ("Vitsi")
            November
      2004
            Liberia
            Stopless
      (sold  by its new owners September 2008)36
            Kisavos
      Shipping Company Limited ("Kisavos")
            November
      2004
            Marshall
      Islands
            Priceless
      (sold by its new owners September 2008)37
            Agion
      Oros Shipping Company Limited ("Agion Oros")
            February
      2005
            Marshall
      Islands
            Topless
      (sold December 2006)   53
   Shipowning
      Companies with vessels sold
              Date
      of Incorporation
              Country
      of Incorporation
              Vessel
 38
            Giona
      Shipping Company Limited ("Giona")
            March
      2005
            Marshall
      Islands
            Taintless
      (sold November 2006)39
            Agrafa
      Shipping Company Limited ("Agrafa")
            March
      2005
            Marshall
      Islands
            Soundless
      (sold November 2006)40
            Ardas
      Shipping Company Limited ("Ardas")
            April
      2005
            Marshall
      Islands
            Errorless
      (sold April 2007)41
            Nedas
      Shipping Company Limited ("Nedas")
            April
      2005
            Marshall
      Islands
            Stormless
      (sold June 2008)42
            Kifisos
      Shipping Company Limited ("Kifisos")
            April
      2005
            Marshall
      Islands
            Edgeless
      (sold July 2008)43
            Sperhios
      Shipping Company Limited ("Sperhios")
            April
      2005
            Marshall
      Islands
            Ellen
      P (sold September 2008)44
            Noir
      Shipping S.A. ("Noir")
            June
      2007
            Marshall
      Islands
            Bertram
      (sold April 2008)45
            Gramos
      Shipping Company Inc. ("Gramos")
            January
      2003
            Marshall
      Islands
            Faithful
      (sold and leased back March 2006)46
            Falakro
      Shipping Company Limited ("Falakro")
            July
      2004
            Liberia
            Doubtless
      (sold and leased back March 2006)47
            Pageon
      Shipping Company Limited ("Pageon")
            July
      2004
            Cyprus
            Vanguard
      (sold and leased back March 2006)48
            Idi
      Shipping Company Limited ("Idi")
            July
      2004
            Liberia
            Spotless
      (sold and leased back March 2006)49
            Parnon
      Shipping Company Limited ("Parnon")
            July
      2004
            Cyprus
            Relentless
      (sold and leased back September
2005)




D.           Properties,
Plants and Equipment





For a
list of our fleet see "Business Overview – Our Fleet" above.





In
January 2006, we entered into an agreement with an unrelated party to lease
office space in Athens, Greece. The office is located at 1, Vasilisis Sofias
& Megalou Alexandrou Street, 151 24 Maroussi, Athens, Greece. The agreement
is for a duration of 12 years beginning May 2006 with a lessee's option for an
extension of 10 years. The current monthly rental is $0.2 million (based on the
U.S. Dollar/Euro exchange rate as of December 31, 2009) adjusted annually for
inflation increase plus 1.0%.





In
addition, our subsidiary TOP TANKERS (U.K.) LIMITED, a representative office in
London, leases office space in London from an unrelated third party. The
agreement is valid from June 2007 and shall continue until either party shall
give to the other one calendar month written notice. The annual lease is $0.03
million (based on the U.S. Dollar/GBP exchange rate as of December 31, 2009)
payable quarterly in advance.





In
November 2009, TOP SHIPS INC. entered into a lease agreement for office space in
London. The agreement is for a duration of one year from and including November
15, 2009 to and including November 14, 2010. The current monthly rent is $0.04
million (based on the U.S. Dollar/GBP exchange rate as of December 31,
2009).





ITEM
4A.                      UNRESOLVED
STAFF COMMENTS





None.






54





ITEM
5.                 OPERATING
AND FINANCIAL REVIEW AND PROSPECTS





The
following management's discussion and analysis is intended to discuss our
financial condition, changes in financial condition and results of operations,
and should be read in conjunction with our historical consolidated financial
statements and their notes included in this report.





This
discussion contains forward-looking statements that reflect our current views
with respect to future events and financial performance. Our actual results may
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, such as those set forth in the section entitled
"Risk Factors" and elsewhere in this report.





A.           Operating
results





Overview





We are an
international provider of seaborne transportation services, carrying petroleum
products, crude oil and drybulk commodities for the steel, electric utility,
construction and agriculture-food industries.





As of
December 31, 2009, our fleet consisted of thirteen owned vessels (five drybulk
vessels and eight tankers), with total carrying capacity of approximately 0.7
million dwt as compared to twelve vessels (five drybulk vessels and seven
tankers), with total carrying capacity of approximately 0.7 million dwt
(including seven owned and five vessels sold and leased back for a period of
five to seven years) on December 31, 2008.





Segments





Since the
acquisition of drybulk vessels in the fourth quarter of 2007, we have been
analyzing and reporting our results of operations in two segments: tanker
segment and drybulk segment.





Tanker segment: For the year ended
December 31, 2009, revenues for this segment were $47.4 million and operating
loss was $56.2 million.





Drybulk segment: For
the year ended December 31, 2009, revenues for this segment were $56.7 million
and operating income was $18.2 million.





Factors affecting our
results of operations – all segments





We
believe that the important measures for analyzing trends in the results of our
operations for both tankers and drybulk vessels consist of the
following:





•
Calendar days. We define calendar days as the total number of days the vessels
were in our possession for the relevant period. Calendar days are an indicator
of the size of our fleet during the relevant period and affect both the amount
of revenues and expenses that we record during that period.





•
Available days. We define available days as the number of calendar days less the
aggregate number of days that our vessels are off-hire due to scheduled repairs
or scheduled guarantee inspections in the case of newbuildings, vessel upgrades
or special surveys and the aggregate amount of time that we spend positioning
our vessels. Companies in the shipping industry generally use available days to
measure the number of days in a period during which vessels should be capable of
generating revenues. We determined to use available days as a performance metric
for the first time, in the second quarter and first half of 2009. We have
determined to adjust the calculation method of utilization to include available
days in order to be comparable with shipping companies that calculate
utilization using operating days divided by available days.






55







•
Operating days. We define operating days as the number of available days in a
period less the aggregate number of days that our vessels are off-hire due to
unforeseen circumstances. The shipping industry uses operating days to measure
the aggregate number of days in a period during which the vessels actually
generate revenues.





• Fleet
utilization. We calculate fleet utilization by dividing the number of operating
days during a period by the number of available 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 number of days
that its vessels are off-hire for reasons other than scheduled repairs or
scheduled guarantee inspections in the case of newbuildings, vessel upgrades,
special or intermediate surveys and vessel positioning. We used a new
calculation method for fleet utilization for the first time, in the second
quarter and first half of 2009. In all prior filings and reports, utilization
was calculated by dividing operating days by calendar days. We have determined
to adjust the calculation method in order to be comparable with most shipping
companies, which calculate utilization using operating days divided by available
days.





• Spot
Charter Rates. Spot charter rates are volatile and fluctuate on a seasonal and
year-to-year basis. Fluctuations derive from imbalances in the availability of
cargoes for shipment and the number of vessels available at any given time to
transport these cargoes.





•
Bareboat Charter Rates. Under a bareboat charter party, all operating costs,
voyage costs and cargo-related costs are covered by the charterer, who takes
both the operational and the shipping market risk.





• TCE
Revenues / TCE Rates. We define TCE revenues as revenues minus voyage expenses.
Voyage expenses primarily consist of port, canal and fuel costs that are unique
to a particular voyage, which would otherwise be paid by a charterer under a
time charter, as well as commissions. We believe that presenting revenues net of
voyage expenses neutralizes the variability created by unique costs associated
with particular voyages or the deployment of vessels on the spot market and
facilitates comparisons between periods on a consistent basis. We calculate
daily TCE rates by dividing TCE revenues by operating days for the relevant
time period. TCE revenues include demurrage revenue, which represents fees
charged to charterers associated with our spot market voyages when the charterer
exceeds the agreed upon time required to load or discharge a cargo. We calculate
daily direct vessel operating expenses and daily general and administrative
expenses for the relevant period by dividing the total expenses by the aggregate
number of calendar days that we owned each vessel for the period.





In
accordance with GAAP measures, we report revenues in our income statements and
include voyage expenses among our expenses. However, in the shipping industry
the economic decisions are based on vessels' deployment upon anticipated TCE
rates, and industry analysts typically measure shipping freight rates in terms
of TCE rates. This is because under time-charter and bareboat contracts the
customer usually pays the voyage expenses, while under voyage charters the
ship-owner usually pays the voyage expenses, which typically are added to the
hire rate at an approximate cost. Consistent with industry practice, management
uses TCE as it provides a means of comparison between different types of vessel
employment and, therefore, assists decision making process.




Voyage
Revenues





Tanker
segment




Our
voyage revenues are driven primarily by the number of vessels in our fleet, the
number of operating days during which our vessels generate revenues and the
amount of daily charterhire that our vessels earn under charters, which, in
turn, are affected by a number of factors, including our decisions relating to
vessel acquisitions and disposals, the amount of time that we spend positioning
our vessels, the amount of time that our vessels spend in dry-dock undergoing
repairs, maintenance and upgrade work, the duration of the charter, the age,
condition and specifications of our vessels, levels of supply and demand in the
global transportation market for oil products or bulk cargo and other factors
affecting spot market charter rates such as vessel supply and demand
imbalances.






56





Vessels
operating on period charters, time charters or bareboat charters, provide more
predictable cash flows, but can yield lower profit margins than vessels
operating in the short-term, or spot, charter market during periods
characterized by favorable market conditions. Vessels operating in the spot
charter market generate revenues that are less predictable, but may enable us to
capture increased profit margins during periods of improvements in charter
rates, although we are exposed to the risk of declining charter rates, which may
have a materially adverse impact on our financial performance. If we employ
vessels on period charters, future spot market rates may be higher or lower than
the rates at which we have employed our vessels on period time
charters.





Under a
time charter, the charterer typically pays us a fixed daily charter hire rate
and bears all voyage expenses, including the cost of bunkers (fuel oil) and port
and canal charges. We remain responsible for paying the chartered vessel's
operating expenses, including the cost of crewing, insuring, repairing and
maintaining the vessel, the costs of spares and consumable stores, tonnage taxes
and other miscellaneous expenses, and we also pay commissions to one or more
unaffiliated ship brokers and to in-house brokers associated with the charterer
for the arrangement of the relevant charter.





Under a
bareboat charter, the vessel is chartered for a stipulated period of time which
gives the charterer possession and control of the vessel, including the right to
appoint the master and the crew. Under bareboat charters all voyage and
operating costs are paid by the charterer. During 2009, we took delivery of six
newbuilding product tankers all of which are on bareboat charters for a period
between 7 and 10 years.





During
2007 and 2008, we also employed vessels in the spot market and we may do so
again in the future depending on prevailing market conditions at the time our
period charters expire. Such might be the case for one of our tankers, the time
charter of which expires during 2010. Given the market conditions prevailing in
the product tanker market as of the date of this annual report, we intend to
seek to enter into period charters for periods ranging from one to three years
at market rates. Nevertheless, if we are not able to secure such employment we
might need to operate these vessels in the spot market.





In 2007,
approximately 33% of our revenues in the tanker segment were derived from two
charterers. These two charterers, Glencore and PDVSA, provided 23% and 10%,
respectively, of our revenues in 2007. In 2008 and 2009, approximately 17% and
22%, respectively, of our total revenues was derived from one charterer,
Glencore.





Drybulk
segment




The
factors affecting voyage revenues discussed also apply to the drybulk segment
with the only difference being the different economics that apply in the global
markets for oil versus the global market for dry products shipped in
bulk.





As of the
date of this annual report, four of our drybulk vessels were operating under
time charters and one under a bareboat charter.






57





Revenues related
to drybulk vessels include amortization of fair value of below market
acquired time charter liability. However, relevant revenues are considered
unallocated for the purposes of analyzing and reporting our results of
operations in two segments: tanker segment and drybulk segment. Specifically,
when vessels are acquired with period charters attached and the rates on such
charters are below market on the acquisition date, we allocate the total cost
between the vessel and the fair value of below market time charter based on the
relative fair values of the vessel and the liability acquired. The fair value of
the attached period charter is computed as the present value of the difference
between the contractual amount to be received over the term of the period
charter and management's estimates of the market period charter rate at the time
of acquisition. The fair value of below market period charter is amortized over
the remaining period of the period charter as an increase to
revenues.





In November and December 2007 and
February 2008, we acquired the drybulk vessels M/V Bertram, M/V Amalfi and M/V
Papillon (ex Voc Gallant), respectively, with attached time charter contracts.
As a result, the purchase price of the vessels was allocated between vessel cost
and the fair value of the time charter contracts, totaling in aggregate $43.3
million. Following the sale of the M/V Bertram, on April 16, 2008, the then
unamortized fair value of its below market time charter of $16.1 million was
written-off to the loss from the sale of the vessel. For the years ended
December 31, 2008 and 2009, the amortization of the fair value of the time
charter contracts totaled $21.8 million and $3.9 million, respectively. The fair
value of the time charter contracts was fully amortized up to the second quarter
of 2009.




In 2009,
approximately 32% of our revenues in the drybulk segment were derived from two
charterers. These two charterers, Hanjin and Cosco provided 18% and 14%,
respectively, of our total revenues in 2009.





Voyage
Expenses





Tanker
segment




Voyage
expenses primarily consist of port charges, including canal dues, bunkers (fuel
costs) and commissions. All these expenses, except commissions, are paid by the
charterer under a time charter or bareboat charter contract. The amount of
voyage expenses are mainly driven by the routes that the vessels travel, the
amount of ports called on, the canals crossed and the price of bunker fuels
paid. This category was less significant in 2009 when compared to 2008 since all
our tanker vessels were either on time charters or bareboat charters, as
compared to 2008 when up to 11 vessels operated in the spot
market.




Drybulk
segment




Our
drybulk vessels are operating under time charter or bareboat charter contracts
and hence voyage expenses primarily consist of commissions on the time
charters.




Charter Hire
Expenses





Tanker
segment




Charter
hire expenses consist of lease payments for vessels sold and leased-back during
2005 and 2006 for periods between five to seven years. After the termination of
the last five lease agreements, during 2009, we are no longer obligated to pay
lease payments (see "Item 4-Information on the Company-History and Development
of the Company").





Drybulk
segment




Not
applicable.






58





Vessel Operating
Expenses





Tanker and Drybulk
segment




Vessel
operating expenses include crew wages and related costs, the cost of insurance,
expenses relating to repairs and maintenance, the costs of spares and consumable
stores, tonnage taxes and other miscellaneous expenses for vessels that we own
and vessels that we lease under our operating leases. Our vessel operating
expenses, which generally represent fixed costs, have historically increased as
a result of the increase in the size of our fleet. We analyze vessel operating
expenses on a U.S. Dollar / per day basis. Additionally, vessel operating
expenses can fluctuate due to factors beyond our control, such as unplanned
repairs and maintenance which can be attributed to damages, regulatory
compliance or market forces and can be quite significant, or factors which may
affect the shipping industry in general, such as developments relating to
insurance premiums, or developments relating to the availability of crew, may
also cause these expenses to increase.





Dry-docking
Costs





Tanker
segment




Dry-docking
costs relate to the regularly scheduled intermediate survey or special survey
dry-docking necessary to preserve the quality of our vessels as well as to
comply with international shipping standards and environmental laws and
regulations. Dry-docking costs can vary according to the age of the vessel, the
location where the dry-dock takes place, shipyard availability, local
availability of manpower and material, the billing currency of the yard, the
days the vessel is off hire in order to complete its survey and the diversion
necessary in order to get from the last port of employment to the yard and back
to a position for the next employment. Please see "Item 18 – Financial
Statements: Note 2 – Significant Accounting Policies." In the case of tankers,
dry-docking costs may also be affected by new rules and regulations (see "Item 4
– Information on the Company – B. Business Overview – Environmental
Regulations").





Drybulk
segment


The above
discussion for the Tanker Segment also applies to the drybulk segment. The
effect of new rules and regulations on cost is lower in the drybulk segment due
to the lower pollution risk this segment has as compared to
tankers.





General and Administrative
Expenses





Tanker and Drybulk
segments




General
and administrative expenses include the salaries and other related costs of
senior management, directors and other on-shore employees, our office rent,
legal and auditing costs, regulatory compliance costs, other miscellaneous
office expenses, long-term compensation costs, non cash stock compensation,
corporate overhead and sub-manager fees. General and administrative expenses are
Euro denominated except for some legal fees and are therefore affected by the
conversion rate of the U.S. Dollar versus the Euro.





General
and administrative expenses are allocated to different segments based on
calendar days of vessels operated.





Interest and Finance
Costs





Tanker and Drybulk
segments




We have
historically incurred interest expense and financing costs in connection with
vessel-specific debt. Interest expense is directly related with the repayment
schedule of our loans, the prevailing LIBOR and the relevant
margin.





Since the
fourth quarter of 2008, however, lenders have required provisions that entitle
the lenders, in their discretion, to replace published LIBOR as the base for the
interest calculation with their cost-of-funds rate which in all cases is higher
than LIBOR. Additionally, as part of our discussions with banks with regards to
loan covenant breaches, we have agreed to increase the margins to certain of our
loans (see " – B. Liquidity and Capital Resources").







59


Inflation





Tanker and Drybulk
segments




Inflation
has not had a material effect on our expenses given current economic conditions.
In the event that significant global inflationary pressures appear, these
pressures would increase our operating, voyage, administrative and financing
costs.





In
evaluating our financial condition, we focus on the above measures to assess our
historical operating performance and we use future estimates of the same
measures to assess our future financial performance. In assessing the future
performance of our fleet, the greatest uncertainty relates to future charter
rates which affect those of our vessels that come out from their present period
employment whether under a time charter or a bareboat charter. Decisions about
future purchases and sales of vessels are based on the availability of excess
internal funds, the availability of financing, the financial and operational
evaluation of such actions and depend on the overall state of the drybulk and
tanker markets, the availability of relevant purchase candidates, and our
general assessment of the prospects for the segments that we operate
in.





Lack of Historical Operating
Data for Vessels Before Their Acquisition





Although
vessels are generally acquired free of charter, we have acquired (and may in the
future acquire) some vessels with time charters. Where a vessel has been under a
voyage charter, the vessel is usually delivered to the buyer free of charter. It
is rare in the shipping industry for the last charterer of the vessel in the
hands of the seller to continue as the first charterer of the vessel in the
hands of the buyer. In most cases, when a vessel is under time charter and the
buyer wishes to assume that charter, the vessel cannot be acquired without the
charterer's consent and the buyer entering into a separate direct agreement (a
"novation agreement") with the charterer to assume the charter. The purchase of
a vessel itself does not transfer the charter because it is a separate service
agreement between the vessel owner and the charterer.





Where we
identify any intangible assets or liabilities associated with the acquisition of
a vessel, we allocate the purchase price to identified tangible and intangible
assets or liabilities based on their relative fair values. Fair value is
determined by reference to market data and the discounted amount of expected
future cash flows. Where we have assumed an existing charter obligation or
entered into a time charter with the existing charterer in connection with the
purchase of a vessel at charter rates that are less than market charter rates,
we record a liability, based on the difference between the assumed charter rate
and the market charter rate for an equivalent vessel. Conversely, where we
assume an existing charter obligation or enter into a time charter with the
existing charterer in connection with the purchase of a vessel at charter rates
that are above market charter rates, we record an asset, based on the difference
between the market charter rate for an equivalent vessel and the contracted
charter rate. This determination is made at the time the vessel is delivered to
us, and such assets and liabilities are amortized as a reduction or increase to
revenue over the remaining period of the charter.





In
November and December 2007 and February 2008, we acquired the drybulk vessels
M/V Bertram, M/V Amalfi and M/V Papillon (ex Voc Gallant), respectively, with
attached time charter contracts. As a result, the purchase price of the vessels
was allocated between vessel cost and the fair value of the time charter
contracts, totaling in aggregate $43.3 million. The fair value of the time
charter contracts was fully amortized up to the second quarter of
2009.





During
2009, we did not acquire any vessels with existing period charter
arrangements.







60





When we
purchase a vessel and assume or renegotiate a related time charter, we must take
the following steps before the vessel will be ready to commence
operations:




•
              obtain
      the charterer's consent to us as the new
      owner; •
                    obtain
      the charterer's consent to a new technical
      manager; •
                          in
      some cases, obtain the charterer's consent to a new flag for the
      vessel; •
                                arrange
      for a new crew for the vessel, and where the vessel is on charter, in some
      cases, the crew must be approved by the
      charterer; •
                                      replace
      all hired equipment on board, such as gas cylinders and communication
      equipment; •
                                            negotiate
      and enter into new insurance contracts for the vessel through our own
      insurance brokers;
      and •
                                                  register
      the vessel under a flag state and perform the related inspections in order
      to obtain new trading certificates from the flag
      state.


The
following discussion is intended to help you understand how acquisitions of
vessels affect our business and results of operations. Our business is comprised
of the following main elements:




•
                employment
      and operation of our tanker and drybulk vessels;
      and •
                        management
      of the financial, general and administrative elements involved in the
      conduct of our business and ownership of our tanker and drybulk
      vessels. The
employment and operation of our vessels require the following main
components:


•
                vessel
      maintenance and
      repair; •
                        crew
      selection and
      training; •
                                vessel
      spares and stores
      supply; •
                                        contingency
      response
      planning; •
                                                onboard
      safety procedures
      auditing; •
                                                        accounting; •
                                                                vessel
      insurance
      arrangement; •
                                                                        vessel
      chartering; •
                                                                                vessel
      security training and security response plans
      (ISPS); •
                                                                                        obtain
      ISM certification and audit for each vessel within the six months of
      taking over a
      vessel; •
                                                                                                vessel
      hire
      management; •
                                                                                                        vessel
      surveying;
      and •
                                                                                                                vessel
      performance
      monitoring.   61


The
management of financial, general and administrative elements involved in the
conduct of our business and ownership of our vessels requires the following main
components:


•
                management
      of our financial resources, including banking relationships, i.e.,
      administration of bank loans and bank
      accounts; •
                        management
      of our accounting system and records and financial
      reporting; •
                                administration
      of the legal and regulatory requirements affecting our business and
      assets;
      and •
                                        management
      of the relationships with our service providers and
      customers.


The
principal factors that affect our profitability, cash flows and shareholders'
return on investment include:


•
                Charter
      rates and periods of charter hire for our tanker and drybulk
      vessels; •
                        Utilization
      of our tanker and drybulk vessels (earnings
      efficiency); •
                                levels
      of our tanker and drybulk vessels' operating expenses and dry-docking
      costs; •
                                        depreciation
      and amortization
      expenses; •
                                                financing
      costs;
    and •
                                                        fluctuations
      in foreign exchange
      rates.


62


Results of operations for
the fiscal years ended December 31, 2007, 2008 and 2009





The
following table depicts changes in the results of operations for 2009 compared
to 2008 and 2008 compared to 2007.




Year
      Ended December 31,
              
              
              change2007
              
              
              2008
              
              
              2009
              
              
              YEO8
      v YEO7
              
              
              YEO9
      v YEO8($
      in thousands)
              
              
              $
              
              
              %
              
              
              $
              
              
              %Voyage
      Revenues
              
              
              252,259
              
              
              
              257,380
              
              
              
              107,979
              
              
              
              5,121
              
              
              
              2.0
              %
              
              
              (149,401
              )
              
              
              -58.0
              %Voyage
      expenses
              
              
              59,414
              
              
              
              38,656
              
              
              
              3,372
              
              
              
              (20,758
              )
              
              
              -34.9
              %
              
              
              (35,284
              )
              
              
              -91.3
              %Charter
      hire expense
              
              
              94,118
              
              
              
              53,684
              
              
              
              10,827
              
              
              
              (40,434
              )
              
              
              -43.0
              %
              
              
              (42,857
              )
              
              
              -79.8
              %Amortization
      of deferred gain on sale and leaseback of vessels and write-off of
      seller's credit
              
              
              (15,610
              )
              
              
              (18,707
              )
              
              
              (7,799
              )
              
              
              (3,097
              )
              
              
              19.8
              %
              
              
              10,908
              
              
              
              -58.3
              %Lease
      termination Expense
              
              
              -
              
              
              
              -
              
              
              
              15,391
              
              
              
              -
              
              
              
              -
              
              
              
              15,391
              
              
              
              -Vessel
      operating expenses
              
              
              67,914
              
              
              
              67,114
              
              
              
              23,739
              
              
              
              (800
              )
              
              
              -1.2
              %
              
              
              (43,375
              )
              
              
              -64.6
              %Dry-docking
      costs
              
              
              25,094
              
              
              
              10,036
              
              
              
              4,602
              
              
              
              (15,058
              )
              
              
              -60.0
              %
              
              
              (5,434
              )
              
              
              -54.1
              %Depreciation
              
              
              27,408
              
              
              
              32,664
              
              
              
              31,585
              
              
              
              5,256
              
              
              
              19.2
              %
              
              
              (1,079
              )
              
              
              -3.3
              %General
      and administrative expenses
              
              
              25,000
              
              
              
              31,388
              
              
              
              23,835
              
              
              
              6,388
              
              
              
              25.6
              %
              
              
              (7,553
              )
              
              
              -24.1
              %Gain
      on sale of vessels
              
              
              (1,961
              )
              
              
              (19,178
              )
              
              
              -
              
              
              
              (17,217
              )
              
              
              878.0
              %
              
              
              19,178
              
              
              
              -100.0
              %Impairment
      on vessels
              
              
              -
              
              
              
              -
              
              
              
              36,638
              
              
              
              -
              
              
              
              -
              
              
              
              36,638
              
              
              
              -Expenses
              
              
              281,377
              
              
              
              195,657
              
              
              
              142,190
              
              
              
              (85,720
              )
              
              
              -30.5
              %
              
              
              (53,467
              )
              
              
              -27.3
              %Operating
      (loss) income
              
              
              (29,118
              )
              
              
              61,723
              
              
              
              (34,211
              )
              
              
              90,841
              
              
              
              -312.0
              %
              
              
              (95,934
              )
              
              
              -155.4
              %Interest
      and finance costs
              
              
              (19,518
              )
              
              
              (25,764
              )
              
              
              (13,969
              )
              
              
              (6,246
              )
              
              
              32.0
              %
              
              
              11,795
              
              
              
              -45.8
              %Gain
      / (loss) on financial instruments
              
              
              (3,704
              )
              
              
              (12,024
              )
              
              
              (2,081
              )
              
              
              (8,320
              )
              
              
              224.6
              %
              
              
              9,943
              
              
              
              -82.7
              %.Interest
      income
              
              
              3,248
              
              
              
              1,831
              
              
              
              235
              
              
              
              (1,417
              )
              
              
              -43.6
              %
              
              
              (1,596
              )
              
              
              -87.2
              %Other,
      net
              
              
              16
              
              
              
              (127
              )
              
              
              (170
              )
              
              
              (143
              )
              
              
              -893.8
              %
              
              
              (43
              )
              
              
              33.9
              %Total
      other expenses, net
              
              
              (19,958
              )
              
              
              (36,084
              )
              
              
              (15,985
              )
              
              
              (16,126
              )
              
              
              80.8
              %
              
              
              20,099
              
              
              
              -55.7
              %Net
      (loss) Income
              
              
              (49,076
              )
              
              
              25,639
              
              
              
              (50,196
              )
              
              
              74,715
              
              
              
              -152.2
              %
              
              
              (75,835
              )
              
              
              -295.8
              %




63


The table
below presents the key measures of each of our segments for the each of the
years 2007, 2008 and 2009 (also see "Item 18 — Financial Statements: Note 4 —
Segment Reporting"). Please see "Item 3.A. — Selected Financial Data" for a
reconciliation of Average Daily TCE to revenues.


12-months
      Ended December 31,
              
              
              change2007
              
              
              2008
              
              
              2009
              
              
              YEO8
      v YEO7
              
              
              YEO9
      v YEO8($ in
      thousands)
              
              
              %
              
              
              %TANKER
      FLEET**Total
      number of vessels at end of period
              
              
              20.0
              
              
              
              7
      0
              
              
              
              8.0
              
              
              
              -65.0
              %
              
              
              14.3
              %Average
      number of vessels
              
              
              22.2
              
              
              
              13.9
              
              
              
              8.7
              
              
              
              -37.3
              %
              
              
              -37.4
              %Total
      operating days for fleet under spot charters
              
              
              2,312
              
              
              
              1,035
              
              
              
              0
              
              
              
              -55.2
              %
              
              
              -100.0
              %Total
      operating days for fleet under time charters
              
              
              4,679
              
              
              
              3,322
              
              
              
              1,420
              
              
              
              -29.0
              %
              
              
              -57.3
              %Total
      operating days for fleet under
bareboat  charters
              
              
              0
              
              
              
              0
              
              
              
              1,569
              
              
              
              -
              
              
              
              -Average
      TCE ($/day)
              
              
              27,134
              
              
              
              29,786
              
              
              
              15,468
              
              
              
              9.8
              %
              
              
              -48.1
              %DRYBULK
      FLEETTotal
      number of vessels at end of period
              
              
              3.0
              
              
              
              5.0
              
              
              
              5.0
              
              
              
              66.7
              %
              
              
              0.0
              %Average
      number of vessels
              
              
              0.2
              
              
              
              4.9
              
              
              
              5.0
              
              
              
              2589.6
              %
              
              
              2.5
              %Total
      operating days for fleet under time charters
              
              
              41
              
              
              
              1,407
              
              
              
              1,421
              
              
              
              3331.7
              %
              
              
              1.0
              %Total
      operating days for fleet under bareboat charters
              
              
              0
              
              
              
              335
              
              
              
              365
              
              
              
              
              
              
              
              9.0
              %Average
      TCE ($/day)*
              
              
              42,463
              
              
              
              38,547
              
              
              
              30,493
              
              
              
              -9.2
              %
              
              
              -20.9
              %TOTAL
      FLEETTotal
      number of vessels at end of period
              
              
              23.0
              
              
              
              12.0
              
              
              
              13.0
              
              
              
              -47.8
              %
              
              
              8.3
              %Average
      number of vessels
              
              
              22.4
              
              
              
              18.8
              
              
              
              13.7
              
              
              
              -16.1
              %
              
              
              -27.0
              %Total
      operating days for fleet under spot charters
              
              
              2
      ,312
              
              
              
              1,035
              
              
              
              0
              
              
              
              -55.2
              %
              
              
              -100.0
              %Total
      operating days for fleet under time charters
              
              
              4,720
              
              
              
              4,729
              
              
              
              2,841
              
              
              
              0.2
              %
              
              
              -39.9
              %Total
      operating days for fleet under bareboat charters
              
              
              0
              
              
              
              335
              
              
              
              1,934
              
              
              
              -
              
              
              
              477.3
              %Average
      TCE ($/day)*
              
              
              27,424
              
              
              
              35,862
              
              
              
              21,907
              
              
              
              30.8
              %
              
              
              -38.9
              %
  *
Amortization of Time Charter Fair Value is not included in the calculation of
the Average TCE ($/day) of the drybulk fleet, but it is included in the total
fleet consistent with our segment presentation.


**
Includes owned and leased back vessels for 2007 and 2008.





64


Year On Year Comparison Of
Operating Results





Revenues







Year
      Ended December 31,
            change2007
            2008
            2009
            YEO8
      v YEO7
            YEO9
      v YEO8Revenues
      by Segment
            ($
      in thousands)
            $
            %
            $
            %Tanker
      Fleet
            248,944
            163,995
            47,353
            (84,949)
            -34.1%
            (116,642)
            -71.1%Drybulk
      Fleet
            1,902
            71,590
            56,715
            69,688
            3663.9%
            (14,875)
            -20.8%Unallocated
            1,413
            21,795
            3,911
            20,382
            1442.5%
            (17,884)
            -82.1%Consolidated
      Revenues
            252,259
            257,380
            107,979
            5,121
            2.0%
            (149,401)
            -58.0%




Tanker
segment




2009 Vs
2008




During
2009, tanker revenues decreased by $116.6 million or 71.1% compared to 2008.
This was mainly due to the decrease in the average number of tanker vessels that
we operated, from 13.9 in 2008 to 8.7 in 2009, as a result of our lease
unwinding strategy, which resulted in the termination of six leases and the sale
of seven owned vessels during 2008, and the termination of five leases during
2009. The decrease in the revenues relating to the vessels sold and leases
terminated in 2008 amounted to $117.7 million. The decrease in the revenues
relating to the leases terminated in 2009 amounted to $21.0 million. This
decrease was partially offset by an increase in revenues in 2009, which amounted
to $22.4 million related to the newbuilding vessels delivered during
2009.





2008 Vs
2007




During
2008, tanker revenues decreased by $84.9 million or 34.1% compared to 2007. This
was mainly due to the decrease in the average number of tanker vessels that we
operated, from 22.2 in 2007 to 13.9 in 2008, as a result of our lease unwinding
strategy, which resulted in the termination of six leases during 2008, and the
sale of seven owned vessels during 2008. The decrease in the revenues relating
to the vessels sold in 2008 amounted to $ 66.4 million. In addition, during 2008
total days operating in the spot market decreased by 55.2% which was partially
offset by an increase in average TCE by 9.8%. Utilization during 2008 was lower
than 2007 by 0.8% as a result of increased downtime due to repairs and
maintenance.





Drybulk
segment




2009 Vs
2008




During
2009, drybulk vessel revenues decreased by $14.9 million or 20.8% compared to
2008. This was mainly due to the lower rates achieved for vessels M/V Amalfi and
M/V Astrale in 2009 and the fact that the vessel M/V Bertram was sold in 2008,
and, therefore did not contribute to 2009 results.





2008 Vs
2007




During
2008, drybulk vessel revenues increased by $69.7 million or 3,663.9% compared to
2007. This was due to the fact that the drybulk fleet had its first full year of
operation during 2008. Our first three drybulk vessels were delivered during the
fourth quarter of 2007, and the remaining three during the first two quarters of
2008 (M/V Bertram which was delivered during 2007 was sold in
2008).





Unallocated
revenues




This
amount refers to the amortization of the fair value of the time charter
contracts of the drybulk vessels M/V Bertram, M/V Amalfi and M/V Papillon (ex
Voc Gallant). This amount is included in the total Revenues but is excluded from
segment revenue to be consistent with the way management evaluates segment
performance and allocates resources.








65





Expenses





1.
            Voyage
      expenses




Year
      Ended December 31,
              change2007
              2008
              2009
              YEO8
      v YEO7
              YEO9
      v YEO8Voyage
      Expenses by Segment
              ($
      in thousands)
              $
              %
              $
              %Tanker
      Fleet
              59,253
              34,215
              1,118
              (25,038)
              -42.3%
              (33,097)
              -96.7%Drybulk
      Fleet
              161
              4,441
              2,254
              4,280
              2658.4%
              (2,187)
              -49.2%Consolidated
      Voyage Expenses
              59,414
              38,656
              3,372
              (20,758)
              -34.9%
              (35,284)
              -91.3%




Voyage
expenses primarily consist of port charges, including bunkers (fuel costs),
canal dues and commissions.





Tanker
segment




2009 Vs
2008




During
2009, voyage expenses decreased by $33.1 million or 96.7% compared to 2008
mainly due to the decrease of the average number of our tanker vessels by 37.4%
and the fact that during the year none of our vessels operated in the spot
market. The decrease was a result of our lease unwinding strategy which resulted
in the termination of six leases and the sale of seven owned vessels during 2008
and the termination of five leases during 2009. Voyage expenses incurred during
2009 relate entirely to charter commissions.





2008 Vs
2007




During
2008, voyage expenses decreased by $25.0 million or 42.3% compared to 2007
mainly due to the decrease of the average number of our tanker vessels by 37.3%
and the decrease in operating days for vessels operating in the spot market by
55.2%. The decrease was a result of our lease unwinding strategy which resulted
in the termination of six leases during 2008 and the sale of seven owned
vessels. The decrease in the voyage expenses relating to the vessels sold in
2008 amounted to $ 22.7 million.





Drybulk
segment





2009 Vs
2008




During
2009, voyage expenses decreased by $2.2 million or 49.2% compared to 2008 mainly
due to a decrease in commissions on the time charters in the amount of $1.7
million, which mainly resulted from the decrease in revenues under time charters
of the respective vessels.





2008 Vs
2007




We are
unable to provide a meaningful year to year comparison due to the fact that our
entrance into the drybulk sector began in the fourth quarter of
2007.











66


2.
            Charter
      hire expenses




Year
      Ended December 31,
              change2007
              2008
              2009
              YEO8
      v YEO7
              YEO9
      v YEO8Charter
      Hire Expenses by Segment
              ($
      in thousands)
              $
              %
              $
              %Tanker
      Fleet
              94,118
              53.684
              10,827
              (40,434)
              -43.0%
              (42,857)
              -79.8%Drybulk
      Fleet
              -
              -
              -
              -
              -
              -
              -Consolidated
      Charter Hire Expenses
              94,118
              53.684
              10,827
              (40,434)
              -43.0%
              (42,857)
              -79.8%




Tanker
segment




2009 Vs
2008




During
2009, charter hire expense decreased by $42.9 million or 79.8% compared to 2008.
An amount of $30.5 was due to the termination of the six leases during 2008 and
an amount of $12.4 million was due to the termination of the remaining five
leases during the first half of 2009.





2008 Vs
2007




During
2008, charter hire expense decreased by $40.4 million or 43.0% compared to 2007.
This was mainly due to the termination of six leases during 2008.





Drybulk
segment




Not
applicable.




3.
            Lease
      Termination Expense




Year
      Ended December 31,
                change2007
                2008
                2009
                YEO8
      v YEO7
                YEO9
      v YEO8Lease
      Termination Expense by Segment
                ($
      in thousands)
                $
                %
                $
                %Tanker
      Fleet
                
                
                15,391
                -
                -
                15,391
                -Drybulk
      Fleet
                -
                -
                -
                -
                -
                -
                -Consolidated
      Lease Termination Expenses
                -
                -
                15,391
                -
                -
                15,391
                -





Tanker
segment




2009 Vs
2008




On June
24, 2009, we terminated the bareboat charters, initially entered into as part of
the sale and leaseback deal in 2006, and redelivered the vessels M/T Faithful,
the M/T Doubtless, the M/T Spotless and the M/T Vanguard to their owners after
paying $11.8 million in termination fees and expenses. In addition to the
termination fee and expenses, we also paid bareboat hire up to July 15, 2009 in
the amount of $1.1 million. Furthermore, on July 3, 2009 we redelivered the M/T
Relentless to its owners and paid a termination fee of $2.5 million as part of a
termination agreement entered into on April 3, 2009 to terminate the bareboat
charter initially entered into as part of the sale and leaseback deal in
2005.




Drybulk
segment




Not
applicable.





67








4.
            Amortization
      of deferred gain on sale and leaseback of vessels and write-off of
      seller's credit





Year
      Ended December 31,
              change2007
              2008
              2009
              YEO8
      v YEO7
              YEO9
      v YEO8Amortization
      of Deferred Gain on Sale and Leaseback of Vessels by
    Segment
              ($
      in thousands)
              $
              %
              $
              %Tanker
      Fleet
              (15,610)
              (18,707)
              (7,799)
              (3,097)
              19.8%
              10,908
              -58.3%Drybulk
      Fleet
              -
              -
              -
              -
              -
              -
              -Consolidated
      Amortization of Deferred Gain on Sale and Leaseback of
    Vessels
              (15,610)
              (18,707)
              (7,799)
              (3,097)
              19.8%
              10,908
              -58.3%


Tanker
segment




2009 Vs
2008




During
2009, amortization of deferred gain decreased by $10.9 million or 58.3% compared
to 2008. During 2009, amortization of deferred gain on sale and leaseback of
vessels included $14.1 million accelerated recognition of unamortized gain
offset by the write off of $7.9 million of seller's credit, due to the
termination of the remaining five leases. The 2009 amount also includes the
annual deferred gain amortization of $1.6 million. During 2008, amortization of
deferred gain on sale and leaseback of vessels included $4.4 million of annual
amortization and $27.2 million of accelerated amortization representing
unamortized gain resulting from the unwinding of six leases in 2008, offset by
the $14.3 million of vessel sale related expenses.





2008 Vs
2007




During
2008, amortization of deferred gain was higher by $3.1 million or 19.8% compared
to 2007 due to the unwinding of six leases in 2008 which resulted in the
immediate recognition of the unamortized gain of $27.2 from the initial sale and
leaseback transaction, offset by vessel sale related expenses of $14.3 million.
The 2008 amount also includes the annual deferred gain amortization of $4.4
million, which is decreased due to the termination of seven leases in 2007 and
the termination of six leases in 2008.   During 2007, the amount
includes accelerated amortization of deferred gain for vessels M/T Restless, M/T
Victorious and M/T Invincible of $8.3 million. The amount also includes $7.4
million scheduled amortization of deferred gain on sale and leaseback of the
vessels.





Drybulk
segment




Not
applicable.





5.
            Vessel
      Operating Expenses




Year
      Ended December 31,
              change2007
              2008
              2009
              YEO8
      v YEO7
              YEO9
      v YEO8Vessel
      Operating Expenses by Segment
              ($
      in thousands)
              $
              %
              $
              %Tanker
      Fleet
              67,225
              56,272
              15,032
              (10,953)
              -16.3%
              (41,240)
              -73.3%Drybulk
      Fleet
              689
              10,842
              8,707
              10,153
              1473.6%
              (2,135)
              -19.7%Consolidated
      Vessel Operating Expenses
              67,914
              67,114
              23,739
              (800)
              -1.2%
              (43,375)
              -64.6%





Vessel
operating expenses include:





-
            crew
      wages and related costs,


-
            insurance,


-
            repairs
      and maintenance,


-
            spares
      and consumable stores,


-
            tonnage
      taxes and VAT.





Vessel
operating expenses, which generally represent fixed costs, have historically
increased as a result of the increase in the size of our fleet.








68





Tanker
segment




2009 Vs
2008




During
2009, vessel operating expenses decreased by $41.2 million or 73.3% compared to
2008 mainly as a result of a 37.4% reduction in the average number of tanker
vessels that we operated from 13.9 in 2008 to 8.7 in 2009.





On a
daily basis, vessel operating expenses decreased in 2009 by $6,322 per day, or
57.2%, from 2008. The decrease was partly a result of lower crew wages and
related costs during 2009 representing $2,091 per day, or 47.9%, compared to
2008. Crew wages decreased due to a change in the mix of our crew during the
second half of 2009. More specifically, all of our Greek crew was replaced with
other nationalities during the second half of 2009. During 2009, repairs and
maintenance decreased by $2,414 per day, or 73.0%, from 2008, mainly as a result
of a decrease in unplanned repairs due to damages of $1,116 per day and
decreased costs related to other repairs and maintenance of $728 per day mainly
resulting from the decrease in the average age and capacity of vessels. Also,
during 2009, spares and consumable stores decreased by $1,225 per day, or 54.8%
compared to 2008 as a result of the decreased repairs and maintenance. Finally,
during 2009 the daily insurance cost decreased by $638 per day, or 52.4%
compared to 2008 as a result of the decrease in the average number of vessels
that we operated in 2009 relative to 2008, which offset the increased insurance
premiums imposed.





2008 Vs
2007




During
2008, vessel operating expenses decreased overall by $11.0 million or 16.3%
compared to 2007 mainly as a result of a 37.3% reduction in the average number
of tanker vessels that we operated from 22.2 in 2007 to 13.9 in
2008.





On a
daily basis, vessel operating expenses increased in 2008 by $2,755 per day, or
33.2%, from 2007. The increase was partly a result of higher crew wages and
related costs which were higher during 2008 by $985 per day, or 29.1%, from
2007. Crew wages increased due to a change in the mix of our crew during the
latter part of 2007. Other factors that lead to higher crew wages were the
appreciation of the Euro in respect of the U.S. Dollar, indemnities paid to
seafarers of ships sold and changeover costs related to a change of crewing
sub-managers. Repairs and maintenance during 2008 increased by $1,012 per day or
44.1%, from 2007. Also, during 2008 the daily insurance cost increased by $458
per day, or 60.4%, from 2007 as a result of additional P&I insurance
premiums imposed. Finally, spares and consumable stores increased by $280 per
day, or 14.4%, during 2008 compared to 2007 as a result of the increased repairs
and maintenance.





Drybulk
segment




2009 Vs
2008




During
2009, vessel operating expenses decreased by $2.1 million or 19.7% compared to
2008.





On a
daily basis, vessel operating expenses decreased in 2009 by $1,320 per day, or
21.7%, from 2008. The decrease was partly a result of lower crew wages and
related costs which decreased in 2009 by $186 per day, or 7.5%, from 2008.
During 2009, repairs and maintenance decreased by $841 per day, or 50.9%, from
2008, mainly as a result of the sale of M/V Bertram during the second half of
2008. Also, during 2009, spares and consumable stores decreased by $406 per day,
or 27.6% compared to 2008, mainly due to the sale of M/V Bertram and the fact
that 2008 was the first year of operation of the drybulk vessels, which was
characterized by an increased need for spares and consumable stores. Finally,
during 2009 the daily insurance cost increased by $77 per day, or 13.6%, from
2008 as a result of increased insurance premiums imposed.






69





2008 Vs
2007




During
2008, vessel operating expenses increased by $10.2 million or 1,473.6% compared
to 2007. This is mainly a result of the increase in the average number of
vessels that we operated in 2008 to 4.9 compared to 0.2 in 2007.





6.
            Dry-docking
      costs




Year
      Ended December 31,
              change2007
              2008
              2009
              YEO8
      v YEO7
              YEO9
      v YEO8Dry-docking
      Costs by Segment
              ($
      in thousands)
              $
              %
              $
              %Tanker
      Fleet
              25,094
              9,450
              4,543
              (15,644)
              -62.3%
              (4,907)
              -51.9%Drybulk
      Fleet
              -
              586
              59
              586
              -
              (527)
              -89.9%Consolidated
      Dry-docking Costs
              25,094
              10,036
              4,602
              (15,058)
              -60.0%
              (5,434)
              -54.1%


Tanker
segment




During
2009, dry-docking costs decreased 51.9% to $4.5 million. 2009 dry-docking costs
mainly relate to the special surveys of two Handymax tankers that were completed
in 2009.





During
2008, dry-docking costs decreased 62.3% to $9.4 million. 2008 dry-docking costs
mainly relate to the special surveys of two Suezmax tankers and two Handymax
tankers and the intermediate survey of one Suezmax tanker that was completed in
2008.





During
2007, dry-docking costs were $25 million. 2007 dry-docking costs mainly relate
to the special surveys of three Suezmax tankers and three Handymax tankers that
were completed in 2007.





Drybulk
segment




During
2009, no drybulk vessels underwent any dry-docking.





During
2008, we completed the intermediate survey of one Panamax drybulk
vessel.





7.
            Vessel
      Depreciation




Year
      Ended December 31,
              change2007
              2008
              2009
              YEO8
      v YEO7
              YEO9
      v YEO8Vessel
      Depreciation by Segment
              ($
      in thousands)
              $
              %
              $
              %Tanker
      Fleet
              26,560
              13,867
              12,580
              (12,693)
              -47.8%
              (1,287)
              -9.3%Drybulk
      Fleet
              848
              18,797
              19,005
              17,949
              2116.6%
              208
              1.1%Consolidated
      Vessel Depreciation
              27,408
              32,664
              31,585
              5,256
              19.2%
              (1,079)
              -3.3%





Tanker
segment




2009 Vs
2008




During
2009, vessel depreciation decreased by $1.3 million or 9.3% compared to 2008.
This is due to a decrease of $9.5 million related to the seven owned Suezmax
tankers that were sold during 2008, and an offsetting increase of $8.2 million
related to the newbuilding vessels delivered during 2009.





70





2008 Vs
2007




During
2008, vessel depreciation decreased by $12.7 million or 47.8% compared to 2007
due to the sale of seven owned Suezmax tankers which decreased the number of
owned vessels from nine as of December 31, 2007 to two as of December 31, 2008.
As of December 31, 2008 our owned fleet consisted of two Handymax
tankers.





Drybulk
segment




2009 Vs
2008




During
2009, vessel depreciation increased by $0.2 million or 1.1% compared to 2008.
This is due to the increase of $1.7 million related to M/V Papillon (ex. Voc
Gallant), M/V Astrale and M/V Pepito that were operating for the full year in
2009, which is offset by the decrease of $1.5 million, related to the sale of
the M/V Bertram during 2008.





2008 Vs
2007




Vessel
depreciation during 2008 increased by $17.9 million, or 2,116.6%, from 2007, due
to the acquisition of six drybulk vessels. Our first three drybulk vessels were
delivered during the fourth quarter of 2007, and the remaining three during the
first two quarters of 2008 including the M/V Bertram which was delivered during
2007 and then sold in 2008.





8.
            General
      and Administrative Expenses





General
and administrative expenses include the salaries and other related costs of
senior management, directors and other on shore employees, our office rent,
legal and auditing costs, regulatory compliance costs, other miscellaneous
office expenses, long-term compensation costs, corporate overhead and
sub-manager fees. General and administrative expenses are allocated
to either tanker or drybulk vessel segments based on the calendar days
that the specific vessels were operating. The below analysis combines tanker and
drybulk vessel segments.




Year
      Ended December 31,
              change2007
              2008
              2009
              YEO8
      v YEO7
              YEO9
      v YEO8General
      and Administrative Expenses by Segment
              ($
      in thousands)
              $
              %
              $
              %Tanker
      Fleet
              24,550
              23,554
              15,252
              (996)
              -4.1%
              (8,302)
              -35.2%Drybulk
      Fleet
              274
              7,935
              8,518
              7,661
              2796.0%
              583
              7.3%Unallocated
              176
              (101)
              65
              (277)
              -157.4%
              166
              -164.4%Consolidated
      General and Administrative Expenses
              25,000
              31,388
              23,835
              6,388
              25.6%
              (7,553)
              -24.1%


2009 Vs
2008




During
2009, our general and administrative expenses decreased by $7.6 million or
24.1%, compared to 2008. This decrease was attributed primarily to a decrease in
salaries and related costs of $3.6 million during 2009 due to a decrease in the
average number of employees from 92 in 2008 to 59 in 2009.  Also,
during 2009, stock based compensation expense decreased by $1.6 million from
$5.1 million in 2008 to $3.5 million in 2009, mainly related to the difference
in grant date fair value of awards granted to the senior management and
directors, offset by the accelerated vesting due to board member resignations in
2009 (See "Item 6 – Directors, Senior Management and Employees – Compensation").
Finally, during 2009, our audit expenses decreased by $1.5 million from
2008.






71





2008 Vs
2007




During
2008, our general and administrative expenses increased by $6.4 million or
25.6%, compared to 2007. This increase was attributed primarily to an increase
in stock based compensation expense of $4.2 million, from $0.9 million in 2007
to $5.1 million in 2008, granted to the senior management and directors pursuant
to our equity incentive plan (See "Item 6 – Directors, Senior Management and
Employees – Compensation"). Additionally, salaries and related costs increased
by $2.6 million during 2008 as a result of the shift of technical management
from sub managers to TOP Tanker Management which began during the last two
quarters of 2007 but affected salaries mainly during 2008. The increase in
salaries during 2008 is also attributed to severance payments relating to
layoffs relevant to the tanker segment due to sale of tanker vessels or
unwinding of leases and also to the increase in employees supporting the drybulk
segment which we entered in late 2007 but which affected our results mainly in
2008. Also, during 2008, our audit fees were higher by $0.7 million compared to
2007. Finally, general and administrative expenses are Euro denominated except
for certain legal fees and during 2008, the Euro/U.S. Dollar exchange rate was
the highest ever recorded reaching almost $1.6 to 1 Euro during the summer of
2008. During 2008, the average exchange rate was $1.4709 to 1 Euro. During 2007,
the average exchange rate was $1.3708 to 1 Euro.





9.
            Gain
      on sale of vessels




Year
      Ended December 31,
              change2007
              2008
              2009
              YEO8
      v YEO7
              YEO9
      v YEO8Gain
      on Sale of Vessels by Segment
              ($
      in thousands)
              $
              %
              $
              %Tanker
      Fleet
              (1,961)
              (21,347)
              -
              (19,386)
              988.6%
              21,347
              -100.0%Drybulk
      Fleet
              -
              2,169
              -
              2,169
              -
              (2,169)
              -100.0%Consolidated
      Gain on Sale of Vessels
              (1,961)
              (19,178)
              -
              (17,217)
              878.0%
              (19,178)
              -100.0%


Tanker
segment


During
2009, we did not sell any tanker vessels.





During
2008 we recognized a total gain of $19.4 million from the sale of M/T Edgeless,
M/T Ellen P, M/T Limitless and M/T Endless, a gain of $1.8 from the sale of M/T
Stormless, and a gain of $0.6 from the sale of M/T Noiseless.





During
2007, we realized a gain of $2.0 million from the sale of M/T
Errorless.





Drybulk
segment


During
2009, we did not sell any drybulk vessels.





During
2008 we recognized a loss of $2.2 million from the sale of M/V Bertram in April
2008.





10.
            Interest
      and Finance Costs




Year
      Ended December 31,
              change2007
              2008
              2009
              YEO8
      v YEO7
              YEO9
      v YEO8Interest
      and Finance Costs by Segment
              ($
      in thousands)
              $
              %
              $
              %Tanker
      Fleet
              (17,464)
              (11,888)
              (7,692)
              5,576
              -31.9%
              4,196
              -35.3%Drybulk
      Fleet
              (2,054)
              (13,876)
              (5,519)
              (11,822)
              575.6%
              8,357
              -60.2%Unallocated
              
              
              (758)
              -
              -
              (758)
              -Consolidated
      Interest and Finance Costs
              (19,518)
              (25,764)
              (13,969)
              (6,246)
              32.0%
              11,795
              -45.8%
 Tanker
segment




2009 Vs
2008




During
2009, interest and finance costs decreased by $4.2 million or 35.3% compared to
2008. The decrease is mainly due to the loan prepayment of $97.7 million
associated with the sale of tanker vessels M/T Edgeless, M/T Ellen P and M/T
Stormless in 2008, which resulted in a decrease of $3.8 million in loan interest
expenses and the loan prepayment of $100.1 million associated with the sale of
tanker vessels M/T Noiseless, M/T Limitless, M/T Endless and M/T Stainless in
2008, which resulted in a decrease of $3.1 million in loan interest expenses.
These decreases were partially offset by an increase of $4.5 million in loan
interest expenses relating to the financing of newbuilding vessels.






72





Also,
during 2009, there was a decrease in amortization of finance fees in a net
amount of $1.2 million. This decrease relates to a decrease in finance fees
associated with vessels sold during 2008 and a decrease related to the loan
associated with vessels M/T Dauntless and M/T Ioannis P. During 2008, relevant
amortization for this loan was accelerated due to restructuring. Finally, these
decreases were offset by an increase during 2009 related to finance fees of
newbuilding vessels.





2008 Vs
2007




During
2008, interest and finance costs decreased by $5.6 million or 31.9% compared to
2007. The decrease is mainly due to the loan prepayment of $28.2 million in
January 2008, associated with the sale of tanker vessel M/T Noiseless, the loan
prepayment of $108.7 million in September 2008 associated with the sale of
tanker vessels M/T Limitless, M/T Endless, M/T Ellen P, and M/T Stainless, the
loan prepayment of $31.7 million in July 2008 associated with the sale of tanker
vessel M/T Edgeless and the loan prepayment of $29.2 million in June 2008
associated with the sale of tanker vessel M/T Stormless and the fact that the
average interest rate as of December 31, 2008 was 4.54% compared to 6.12% at
December 12, 2007.





Drybulk
segment




2009 Vs
2008




During
2009, interest and finance costs decreased by $8.4 million or 60.2% compared to
2008. The decrease is mainly due to (i) decrease in LIBOR rates, associated with
the loans of M/T Astrale, M/T Pepito, M/T Cyclades, M/T Papillon (ex Voc
Gallant) and M/T Amalfi, which reduced interest and finance costs by $4.6
million, (ii) lower average interest rate as of December 31, 2009 of 3.30%
compared to 4.54% as of December 31, 2008, and (iii) a decrease in interest and
finance costs of $0.7 million relating to vessel Bertram which was sold during
2008. In addition, an amount of $1.2 million was charged as interest in 2008
related to the drybulk vessel M/V Astrale's capital lease entered into in
February 2008 for two months before the vessel was acquired. Finally, there was
a decrease in amortization of finance fees of vessel M/V Amalfi of an amount of
$2.0 million. This decrease is mainly related to decrease in finance fees which
were higher in 2008 due to write-off, as a result of amendments of loan
terms.





2008 Vs
2007




During
2008, interest and finance costs increased by $11.8 million or 575.6% compared
to 2007. Specifically, during 2008 we drew down $133.1 million in order to
finance the acquisition of three drybulk vessels of which $42.0 million was
repaid in April 2008 following the sale of M/V Bertram.





In
addition, an amount of $1.2 million was charged as interest in 2008 related to
the drybulk vessel M/V Astrale's capital lease entered into in February 2008 for
two months before the vessel was acquired.




Other
Income or Expenses Not Allocated to Segments





Our
management does not review the gain / (loss) on financial instruments and
interest income by segment.






73





11.
            Gain
      / (loss) on financial instruments




Year
      Ended December 31,
              change2007
              2008
              2009
              YEO8
      v YEO7
              YEO9
      v YEO8Gain
      / (loss) on Financial Instruments
              ($
      in thousands)
              $
              %
              $
              %Fair
      value change on financial instruments
              (4,904)
              (10,650)
              2,635
              (5,746)
              117.2%
              13,285
              -124.7%Swap
      Interest
              1,200
              (1,374)
              (4,716)
              (2,574)
              -214.5%
              (3,342)
              243.2%Total
      Gain / (loss) on Financial Instruments
              (3,704)
              (12,024)
              (2,081)
              (8,320)
              224.6%
              9,943
              -82.7%
  2009 Vs
2008




During
2009, fair value change in financial instruments decreased by $13.3 million or
124.7% compared to 2008.  During 2009, the fair value of our swaps
increased by $19.0 million in due to more favorable valuations of our swap
contracts as a result of an expectation of higher LIBOR rates in the future, as
evidenced by forward rates. This positive change was partly set-off by the
decrease relating to the gain of $5.6 million as a result of the termination of
a derivative product in the fourth quarter of 2008. (See "Item 11 – Quantitative
and Qualitative Disclosures About Market Risk").





During
2009, swap interest increased by $3.3 million or 243.2% compared to 2008, mainly
due to decreased LIBOR rates.





2008 Vs
2007




During
2008, fair value change in financial instruments increased by $5.7 million or
117.2% compared to 2007.  During 2008, we had a negative change in the
fair value of our swaps due to adverse fluctuations of interest rate parameters.
This negative change was partly set-off by the gain of $5.6 million as a result
of the termination of a derivative product in the fourth quarter of 2008.
Additionally, during 2008 we entered into several new swap agreements in order
to hedge our exposure related to the loans for our drybulk
vessels.  (See "Item 11 – Quantitative and Qualitative Disclosures
About Market Risk").





During
2008, swap interest changed by $2.6 million to $1.4 million additional interest
expense from $1.2 million interest income in 2007. This was a result of the
falling interest rates which declined significantly during the last two quarters
of 2008, and negatively affected interest income from our swaps.





12.
            Interest
      Income





2009 Vs
2008




During
2009, interest income decreased by 87.2% to $0.2 million from $1.8 million
during 2009. This decrease is mainly due to the decrease in the amounts kept
under time deposits and relevant interest rates.





2008 Vs
2007




During
2008, interest income decreased by 43.6% to $1.8 million from $3.2 million
during 2007. This decrease is mainly due to the decrease in the amounts kept
under time deposits and relevant interest rates.





74







B.           Liquidity
and Capital Resources








Since our
formation, our principal source of funds has been equity provided by our
shareholders through equity offerings or at the market sales, operating cash
flow and long-term borrowing. Our principal use of funds has been capital
expenditures to establish and grow our fleet, maintain the quality of our
vessels, comply with international shipping standards and environmental laws and
regulations, fund working capital requirements and make principal repayments on
outstanding loan facilities.





In
December 2007 and April 2008 we raised a total of $120.0 million of equity
capital to fund our diversification into the drybulk sector and our newbuilding
program. Additionally, during 2008 we sold seven owned Suezmax tankers and one
owned Panamax drybulk vessel for an aggregate sale price of $380.5
million.





We also
completed the refinancing of our six newbuilding product tankers in 2008 and
chartered all six vessels with three major charterers at fixed rates for periods
that range between seven and ten years. These charters are on a bareboat basis,
which not only reduces our long-term market risk relating to the vessels, but
also eliminates our operational risk for that period.





Our
business is capital intensive and its future success will depend on our ability
to maintain a high-quality fleet through the acquisition of newer vessels and
the selective sale of older vessels. Our practice has been to acquire tankers
and drybulk vessels using a combination of funds received from equity investors
and bank debt secured by mortgages on our vessels.  Future
acquisitions are subject to management's expectation of future market
conditions, our ability to acquire vessels on favorable terms and our liquidity
and capital resources.





As of
December 31, 2009, we had total indebtedness under senior secured and unsecured
credit facilities with our lenders of $404.3 million, excluding unamortized
financing fees of $5.2 million, maturing from 2010 through 2019.









Breach
of Loan Covenants





As of
December 31, 2009, we were in breach of loan covenants relating to EBITDA, our
overall cash position (minimum liquidity covenants), adjusted net worth, the net
asset value and the asset cover of our product tankers with certain
banks.  As a result of these covenant breaches with our banks, we have
classified all of our debt as current as discussed in Note 12 to our
consolidated financial statements included in this annual report (See also below
under "Working Capital Requirements and Sources of Capital").





A
violation of covenants constitutes an event of default under our credit
facilities, which would, unless waived by our lenders, provide our lenders with
the right to require us to post additional collateral, enhance our equity and
liquidity, increase our interest payments, pay down our indebtedness to a level
where we are in compliance with our loan covenants, sell vessels in our fleet
and accelerate our indebtedness, which would impair our ability to continue to
conduct our business.   We expect that the lenders will not
demand payment of the loans before their maturity, provided that we pay loan
installments and accumulated or accrued interest as they fall due under the
existing credit facilities.





We do not
expect that cash generated from the operations of the vessels owned or operated
by the Company will be sufficient to repay the existing total balance of loans
if such debt is accelerated by the lenders.






75





For
details of credit facilities as of December 31, 2009 and discussion regarding
waivers see "Item 5.F. – Tabular Disclosure of Contractual Obligations – Long
Term Debt".





Working
Capital Requirements and Sources of Capital





As of
December 31, 2009, we had a working capital deficit (current assets less current
liabilities) of $424.2 million assuming acceleration of our debt and financial
instruments by our lenders.  This working capital deficit consisted of
the following (figures in millions):




Total
      current assets
              
              $
              3.8Current
      portion of debt
              
              $
              47.9Current
      portion of debt (previously categorized as long term)
              
              $
              351.2Other
      current liabilities
              
              $
              15.1Current
      portion of financial instruments
              
              $
              3.9Current
      portion of financial instruments (previously categorized as long
      term)
              
              $
              9.9Total
      current liabilities (assuming acceleration of our debt and financial
      instruments by our lenders)
              
              $
              428.0Working
      capital deficit
              
              $
              424.2Other
      capital requirements for the coming 12 months:Lease
      payments
              
              $
              2.1Cash shortfall(Working
      capital deficit plus other capital requirements assuming acceleration of
      our debt and financial instruments by our lenders)
              
              $
              426.3Less:  Restricted cash (To be used
      against debt repayment assuming acceleration of our debt and financial
      instruments by our lenders)
              
              $
              22.2Adjusted Cash shortfall
              
              $
              404.1








76


We
believe that we will be able to make loan installments and accumulated or
accrued interest payments as they fall due under the existing senior credit
facilities and, therefore, our lenders will not demand payment of the loans
before their maturity, due to covenant breaches. Under this assumption, our
material capital requirements in the coming 12 months are as follows (figures in
millions):




Debt
      (excluding debt portion due after 12 months characterized as
      current)
            
            $
            47.9Interest
      payments
            
            $
            16.0Operating
      leases
            
            $
            2.1Total
      requirements:
            
            $
            66.0





Based on
our projections for 2010, we expect that cash generated from operations will
amount to $52.2 million, leaving a shortfall of $13.8 million. If we include the
amount of $3.4 million which is restricted solely as a result of our overall
cash position not meeting the targets set by the loan covenants, as mentioned
previously, the projected cash shortfall amounts to $10.4 million. We may not
meet our cash flow projections.  Please see "Risk Factors" for factors
which may have an adverse effect on our results of operation.





We have
been in discussions with DVB in order to defer part or the whole of the bridge
loan, which as of December 31, 2009 amounted to $11.2 million, due to be repaid
on July 30, 2010, which would enable us to meet our liquidity requirements for
2010. In addition to DVB, we are also in discussions with various other
financiers that can refinance part or all of the bridge loan.  If we
are unable to extend or refinance the bridge loan, we will consider whether a
sale of an asset is required. The sale and purchase market has been very liquid
as of the date of this annual report, and we expect that it will continue to be
so in the foreseeable future. Given the high quality of assets and charters that
we have in our portfolio, the sale of a vessel provides us with a realistic
alternative to the extension or refinancing of the bridge loan.





Cash Flow
Information





Cash and
cash equivalents decreased by $46.2 million to $0.0 as of December 31, 2009
compared to $46.2 million as of December 31, 2008. The decrease resulted
primarily from the amounts paid as advances for vessels under construction for
our six newbuilding product tankers, delivered in 2009. All our cash is
restricted due to minimum liquidity covenant requirements. An amount of $3.4
million is available for working capital purposes as it is not pledged, blocked
or used as part of collateral.





NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES-decreased 44.49% for 2009 to $6.6
million compared to $11.8 million for 2008. This decrease was attributed to the
overall decrease in operating income by $95.9 million, or 155.4%, which resulted
in a $34.2 million operating loss for 2009, compared to an operating income of
$61.7 million for 2008. The operating loss for 2009 includes net expenses of
$12.2 million, relating to the termination of leases and the impairment charge
of $36.6 million. The remainder of the decrease is mainly a result of the
decrease in revenues relating to the decrease in the average number of tanker
vessels that we operated, from 13.9 in 2008 to 8.7 in 2009, the lower rates
achieved for vessels M/V Amalfi and M/V Astrale in 2009 and the fact that vessel
M/V Bertram was sold in 2008, and, therefore, did not contribute to 2009
results, partly offset by a related decrease in expenses. For 2008, net cash
provided by operating activities amounted $11.8 million compared to net cash
used in operating activities of ($11.3) million for 2007. This increase was
attributed to the overall increase in operating income of $90.8 million, or
312.0%, to $61.7 million for 2008 compared to an operating loss of $29.1 million
for 2007.  Improved operating results during 2008 were mainly due to
the termination of six leases together with the delivery of our drybulk vessels,
which were deployed on time charters at above-market rates.






77





NET CASH
(USED IN) PROVIDED BY INVESTING ACTIVITIES-net cash used in investing activities
for 2009 was $104.4 million, mainly due to $136.7 million relating to advances
for our six newbuilding product tankers (representing payment of the third
installment for one vessel, the fourth installment for four vessels and the
delivery installment for six vessels in an aggregate amount of $133.3 million
and capitalized interest and expenses of $3.4 million). Net cash from investing
activities was $30.3 million mainly relating to a decrease in restricted cash of
$20 million due to the termination of sale and leaseback transactions and a
decrease of $4.8 million relating to the change in the minimum liquidity of our
revolving credit facility with Royal Bank of Scotland, or RBS. For 2008, we had
net cash from investing activities of $58.6 million, mainly due to net proceeds
from the sale of vessels totaling $338.1 million. Specifically, during 2008 we
sold seven owned Suezmax tankers and one owned Panamax drybulk
vessel.  Also, during 2008, we invested $118.1 million upon delivery
of two of our drybulk vessels (representing payment of the remaining purchase
price of $115.6 million and capitalized expenses of $2.5 million) and $114.3 as
advances for vessels under construction for our six newbuilding product tankers
(representing payment of the second installment for all vessels, the third
installment for five vessels and the fourth installment for two vessels in an
aggregate amount of $109.2 million and capitalized interest and expenses of $5.1
million).





NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES-net cash from
financing activities for 2009 was $51.6 million, consisting of $111.7 of new
bank loans relating to installments of our six newbuildings and the issuance of
2,230,000 shares of common stock under the SEDA with YA Global, with total net
proceeds, after commissions, in the amount of $2.6 million. These
inflows were offset by total loan repayments of $54.3 million. For 2008, net
cash used in financing activities was $50.2 million, consisting of total loan
repayments of $368.6 million relating to sold vessels offset by the draw down of
$271.2 of new bank loans relating to the purchase of drybulk vessels and
installments of newbuildings and the private placement of 7.3 million
unregistered shares of common stock for aggregate proceeds of approximately
$51.0 million.





C.           Research
and Development, Patents and Licenses, etc.





Not applicable.





D.           Trend
Information





For industry trends refer to industry
disclosure under "Item 4 - Business Overview." For company-specific trends refer
to "Item 5. Operating and Financial Review and Prospects – Operating
Results."




E.
            Off
      Balance Sheet Arrangements





None




78




F.
            Tabular
      Disclosure of Contractual
Obligations





The
following table sets forth our contractual obligations and their maturity dates
as of December 31, 2009:




Payments
      due by periodContractual
      Obligations
              
              Total
              
              
              Less
      than
                1
      year
              
              
              1-3
      years
              
              
              3-5
      years
              
              
              More
      than 5 years(1)
      (i) Long term debtA
              
              $
              404.3
              
              
              $
              404.3(ii)
      InterestB
              
              $
              16.0
              
              
              $
              16.0(2)
      Operating leasesC
              
              $
              17.4
              
              
              $
              2.1
              
              
              $
              2.1
              
              
              $
              2.1
              
              
              $
              11.1Total
              
              $
              437.7
              
              
              $
              422.4
              
              
              $
              2.1
              
              
              $
              2.1
              
              
              $
              11.1







A.
            Relates
      to the outstanding balance as of December 31, 2009, consisting of 1(a)
      (50.8 million), 1(b) (i) ($46.9 million), 1(b) (ii) ($100.5 million), 1(c)
      (i) ($28.0 million), 1(c) (ii) ($70.0 million), 1(d) (i) ($28.0 million),
      1(d) (ii) ($37.2 million), 1(e) ($40.0 million) and 1(f) ($2.9 million),
      discussed below.B.
            Interest
      payments are calculated using the Company's average going interest rate of
      3.96%, as of December 31, 2009, which takes into account additional
      interest expense from interest rate swaps, applied on the amortized long
      term debt as presented in the table above.C.
            Relates to the
      minimum rentals payable for the office
space.




79





(1)
Long Term Debt:





(a)
RBS Revolving Credit Facility:





As of
December 31, 2009 the outstanding amount under the RBS revolving credit facility
was $50.8 million payable in fifteen consecutive quarterly installments as
follows: (i) six installments of $1.0 million, starting in February, 2010; (ii)
nine installments of $1.6 million; and (iii) a balloon payment of $29.6 million
payable together with the last installment in August 2013. Furthermore, on March
31, 2010 the Borrower repaid the sum of $0.8 million, according to the repayment
schedule.





Additional
terms and conditions of the RBS credit facility are as follows:





During
2007, the interest rate on the RBS credit facility was 85 basis points over
LIBOR. From March 26, 2008, the interest rate was adjusted to 125 basis points
over LIBOR. On July 31, 2009, the Company amended the loan with RBS and adjusted
the margin to 2.5%. The RBS credit facility is collateralized by a first
priority mortgage on each of the M/T Ioannis P and M/T Dauntless as of December
31, 2009.





The RBS
credit facility contains, among other things, various financial covenants,
including (i) security value maintenance whereby the market value of the
mortgaged vessels and the market value of any additional security is
required to be greater than or equal to 130% of the outstanding loan and
the fair value of outstanding swaps. The minimum security cover is waived for a
period until not later than March 31, 2010, (ii) market value adjusted net worth
required to be greater than or equal to $250.0 million and greater than 35% of
total assets, (iii) EBITDA required to be greater than 120% of fixed charges
(excluding one off lease termination fees paid in June and July 2009 for the
termination of the remaining 5 leased vessels), (iv) minimum liquid funds of
$15.0 million overall and the higher of $5.0 million or $0.4 million per vessel
unencumbered (i.e. not blocked specifically as security for obligations) and (v)
a minimum balance of $0.1 million per vessel to be maintained in the operating
accounts.





Furthermore,
the facility includes a cash sweep mechanism whereby 75% of any surplus cash on
each repayment date, earned by M/T Ioannis P and M/T Dauntless will be applied
in the inverse order of maturity to the amount outstanding under the loan
agreement. Surplus cash is defined as net earnings less: (i) aggregate operating
expenses and general and administrative expenses capped at $10,500 per day, (ii)
scheduled capital repayments and (iii) loan interest and swap interest
payments.





The RBS
credit facility also contains general covenants that require us to maintain
adequate insurance coverage and obtain the bank's consent before we incur new
indebtedness that is secured by the vessels mortgaged thereunder. In addition,
the RBS credit facility prohibits us, without the lender's consent, from
appointing a Chief Executive Officer, or CEO, other than Mr. Evangelos Pistiolis
and requires that the vessels mortgaged thereunder be managed by TOP Tanker
Management, which will subcontract the technical management of the mortgaged
vessels to V. Ships Management Limited, Hanseatic Shipping Company Ltd., and any
other company acceptable to the lender. We are permitted to pay dividends under
the RBS credit facility so long as we are not in default of a loan covenant.
Finally, the RBS credit facility contains a cross-default
provision.




Covenant Breaches and
Waivers





As of
December 31, 2009, we were not in compliance with the security value maintenance
covenant, for which we have received a waiver until March 31, 2010, the EBITDA
covenant and the minimum liquid funds covenant. We are currently in discussions
with the bank regarding these breaches.






80





As of
December 31, 2009, we had two interest rate swaps with RBS.  For a full
description of our interest rate swap agreements, see "Item 11 – Quantitative
and Qualitative Disclosures about Market Risk".




(b)
HSH Credit Facilities:





(i) Loan of an initial amount of $95.0
million:As of December 31, 2009, we had a secured term loan outstanding
of $46.9 million, which was ultimately part of a $95.0 million secured term loan
available to partially finance the acquisition cost of the M/V Bertram, M/V
Amalfi and the M/V Papillon (ex Voc Gallant).





M/V
Bertram: A loan of $28.1 million was drawn down on November 9, 2007
(originally amounted to $29.6 million).  In December 2007, $1.5 million was
prepaid from the net proceeds of the equity offering. Following the sale of the
vessel in April 2008, the then outstanding loan of $26.5 million was fully
repaid.





M/V
Amalfi: A loan of $28.7 million was drawn down on December 27, 2007
(originally amounted to $30.3 million).  In December 2007, $1.6 million was
prepaid on this loan from the net proceeds of the equity offering. As of
December 31, 2009 the outstanding amount was $22.6 million, payable in 20
consecutive quarterly installments of approximately $0.53 million, starting in
March 2010, and a balloon payment of $11.9 million payable together with the
last installment in December 2014.





M/V
Papillon (ex Voc Gallant): On February 1, 2008, following the delivery of
the vessel, a loan of $33.2 million, net of a prepayment of $1.9 million, was
drawn down (originally amounted to $35.1 million). As of December 31, 2009 the
outstanding amount was $24.3 million, payable in 21 consecutive quarterly
installments as follows: (i) one installment of $0.85 million, starting in
February 2010; (ii) twenty installments of $0.50 million; and (iii) a balloon
payment of $13.4 million payable together with the last installment in February
2015.





The
credit facility bears interest at LIBOR plus a margin. Until March 27, 2008 the
margin was 100 basis points over LIBOR. From March 28, 2008 until March 24, 2009
the margin was adjusted to 135 basis points over LIBOR as a result of the waiver
received for our breach of the EBITDA covenant during 2008. According to the
amendment of the loan agreement dated May, 11, 2009, from March 24, 2009 until
March 31, 2010, the margin was set at 250 basis points over LIBOR. As of the
date of this annual report, due to covenant breaches, the margin has not been
reset to the initial loan agreement levels and it continues being 250 basis
points over LIBOR. Once covenant breaches have been rectified, the margin will
be reset to the initial loan agreement levels, i.e. 100 basis points per annum
while each of the related vessels are employed under time charter party
agreements acceptable to the Agent for periods of at least twelve months and
112.5 basis points per annum at all other times.






81





The
facility contains, among other things, various financial covenants, including
(i) at any time after March 31, 2010 asset maintenance whereby the fair market
value of the mortgaged vessels and of any additional security is required to be
greater than or equal to a required percentage of the outstanding loan and the
fair value of outstanding swaps. As per the initial loan agreement the minimum
required percentage had been set at 130% for the first four years up to November
2011 and 135% from then on until maturity, (ii) market value adjusted net worth
required to be greater than or equal to $125.0 up to March 31, 2010 and $250.0
million, thereafter and greater than or equal to 15% up to March 31, 2010, and
35% of total assets, thereafter, (iii) beginning on March 31, 2010 and at all
times thereafter, EBITDA required to be greater than 120% of fixed charges
(dry-docking costs are considered extraordinary items in the calculation up to
March 31, 2010 only), and (iv) minimum liquid funds of $25.0 million until March
31, 2010 inclusive of all pledged deposits and cash held with all banks and
afterwards minimum liquid funds of $25.0 million or $0.5 million per group
vessel.





Furthermore,
the facility provides for a cash pledge in the amount of $4.8 million as of
December 31, 2009 (originally amounted to $6.5 million), which is applied
against future installments starting from February 2010; 50% pro rata against
the eight installments starting from February 2010, and 50% pro rata against all
remaining installments of the facility including the balloon payment. This cash
pledge amounts to $3.8 million as of the date of this annual
report.





(ii) Loan of an initial amount of $121.3
million:As of December 31, 2009, we had a secured term loan outstanding
of $100.5 million, which is part of a $121.3 million loan that was concluded to
partially finance the construction cost of the newbuilding product tankers
S-1025, S-1029 and S-1031, all delivered in 2009.





M/T Miss
Marilena (S-1025): As of December 31, 2009, the outstanding amount was
$38.3 million out of a total of $40.1 million, of which $16.5 million was drawn
down in October 2008, $6.6 million was drawn down in November 2008 and $17.0
million was drawn down in February 2009. The loan is repayable in 37 consecutive
quarterly installments, as follows: (i) five installments of $0.60 million,
starting in February 2010; (ii) 12 installments of $0.70 million, (iii) 20
installments of $0.75 million; and (iv) a balloon payment of $11.9 million
payable together with the last installment in February 2019.





M/T
Tyrrhenian Wave (S-1029): As of December 31, 2009, the outstanding amount
was $28.0 million out of a total of $29.3 million, out of which $16.7 million
was drawn down in October 2008, $6.7 million was drawn down in January 2009 and
$5.9 million was drawn down in March 2009. The loan is repayable in 37
consecutive quarterly installments, as follows: (i) five installments of $0.43
million, starting in March, 2010; (ii) 12 installments of $0.51 million, (iii)
20 installments of 0.54 million; and (iv) a balloon payment of $8.9 million
payable together with the last installment in March 2019.





M/T
Britto (S-1031): As of December 31, 2009, the outstanding amount was
$34.2 million out of a total of $35.2 million, out of which $10.0 million was
drawn down in October 2008, $6.7 million was drawn down in November 2008 $6.7
million was drawn down in February 2009 and $11.8 million was drawn down in May
2009. The loan is repayable in 38 consecutive quarterly installments, as
follows: (i) six installments of $0.52 million, starting in February 2010; (ii)
12 installments of $0.61 million; (iii) 20 installments of $0.65 million; and
(iv) a balloon payment of $10.8 million payable together with the last
installment in May 2019.





The
credit facility bears interest at LIBOR plus a margin. Until March 24, 2009 the
margin was 175 basis points over LIBOR. According to the amendment of the loan
agreement dated May, 11, 2009, from March 24, 2009 until March 31, 2010,
the margin was set at 200 basis points over LIBOR. As of the date of this annual
report, due to covenant breaches, the margin has not been reset to the initial
loan agreement levels and it continues being 200 basis points over LIBOR. Once
covenant breaches have been rectified, the margin will be reset to the initial
loan agreement levels, i.e. 175 basis points per annum until maturity of the
loan while each of the related vessels are employed under time charter party
agreements acceptable to the Agent for periods of at least twelve months and
112.5 basis points per annum at all other times.






82





The
credit facility contains a provision whereby the bank may chose to use an
alternative base interest rate in case it believes that the LIBOR is not
representative of its funding cost. HSH has been using cost of funds instead of
LIBOR as this cost of funds is determined by KLIEM, a broker.





The
facility contains, among other things, various financial covenants, including
(i) asset maintenance whereby the fair market value of the mortgaged vessels and
of any additional security is required to be greater than or equal to a required
percentage of the outstanding loan and the fair value of outstanding swaps. The
minimum required percentage has been set at 125% until March 31, 2010, at 120%
from April 1, 2010 until the fourth anniversary of this Credit Facility
Agreement (October 2012) and at 125% at all times thereafter, (ii) market value
adjusted net worth required to be greater than or equal to $125.0 million up to
March 31, 2010 and $250.0 million thereafter, and greater than or equal to 15%
up to March 31 2010, and 35% of total assets thereafter and (iii) beginning on
March 31 2010 and at all times thereafter, EBITDA required to be greater than
120% of fixed charges (dry-docking costs are considered extraordinary items in
the calculation up to March 31, 2010 only), and (iv) minimum liquid funds of
$25.0 million until March 31, 2010, inclusive of all pledged deposits and cash
held with all banks and afterwards minimum liquid funds of $25.0 million or $0.5
million per group vessel.





In
addition, the HSH credit facilities require that the mortgaged vessels be
managed by TOP Tanker Management, which may subcontract the technical management
of the mortgaged vessels to V. Ships Management Limited, Hanseatic Shipping
Company Ltd., or any other company acceptable to the lender. In addition, it
prohibits the three borrowers, which are our subsidiaries, from declaring or
paying any dividends or making any distributions to TOP SHIPS INC. in excess of
70% of their net income and full dividend restriction or other distributions
(other than the Guarantor's stock incentive plan for its employees) for TOP
SHIPS INC. (as Corporate Guarantor) so long as the ratio of EBITDA to Fixed
Charges is below 120% or the Fair Market Value of the Vessels is below 140% of
the outstanding loan and the cost of terminating any Interest Rate SWAP
Agreement. The facility also does not permit any distribution of capital or
assets and permits investments relating to any share buy-back or similar actions
only up to an amount of $5.0 million. In the case of sale of vessels financed by
HSH, 100% of the sale proceeds following debt repayment are to be applied
towards full covenant compliance; in the case of sale of vessels not financed by
HSH, following debt repayment HSH is to be allocated an amount of the remaining
sale proceeds equal to the proportion of total HSH outstanding loans over our
total indebtedness; and in the case of a successful equity offering, HSH is to
be allocated an amount (on the basis of 50% of offering proceeds) equal to the
proportion of total HSH outstanding loans over TOP SHIPS INC. consolidated
indebtedness. Our cash deposits, in addition to the pledged amounts, are
required to be at least equal to $3.75 million (i.e. $0.75 million per vessel).
Finally, the facilities contain a cross-default provision and are cross
collateralized.





Covenant Breaches and
Waivers





In
relation to both of the above facilities, as of December 31, 2009, we were not
in compliance with the asset maintenance and the EBITDA covenant, for which we
have received a waiver until March 31, 2010. Furthermore, we were not in
compliance with the adjusted net worth and the minimum liquid funds covenants.
Both facilities provide that a default rate of two percent (2%) on top of the
initially agreed margin shall apply for as long as there is an event of default
such as covenant breaches. As of the date of this annual report, HSH has not
imposed such a rate on any of the two facilities. We are currently in
discussions with the bank regarding covenant breaches.


As of
December 31, 2009, we had seven interest rate swaps with HSH. For a full
description of our interest rate swap agreements, see "Item 11 – Quantitative
and Qualitative Disclosures about Market Risk".





83








(c)
DVB Credit Facilities:





(i) M/V Astrale: As of December
31, 2009, the outstanding amount was $28.0 million, payable in 23 consecutive
quarterly installments as follows: (i) two installments of $0.35 million,
starting in April 2010, (ii) twenty one installments of $0.7 million; and (iii)
a balloon payment of $12.6 million, payable together with the last installment
in October 2015. The loan of $48.0 million was drawn down in April, 2008 to
partially finance the acquisition cost of the drybulk vessel
Astrale.





The
facility bears interest at LIBOR plus a margin. The margin has been agreed at
175 basis points per annum for the period commencing on the date of the drawdown
and ending on, but not including, the first anniversary of the Actual Drawdown
Date, and 150 basis points annum thereafter. The credit facility contains a
provision whereby the bank may choose to use an alternative base interest rate
if it believes that the LIBOR is not representative of its funding cost. DVB has
been using cost of funds instead of LIBOR as this cost of funds is determined by
KLIEM, a broker.




The
facility contains, among other things, various financial covenants including (i)
asset maintenance whereby the fair market value of the mortgaged vessels under
the drybulk and the product tanker financing and of any additional security is
required to be greater than or equal to 100% until March 31, 2010, 105% until
March 31, 2011, 110% until March 31, 2012 and 120% thereafter of the outstanding
loan (excluding Top Up Loan) and the fair value of the outstanding swaps, (ii) a
Net Asset Value that is required to be greater than $125.0 million, calculated
on an annual basis, which was amended to $0 up to March 31, 2010, (iii)
Stockholder's equity required to be greater than $100.0 million and (iv) minimum
cash balances of $5.0 million unencumbered up to September, 30, 2010 and
thereafter $25.0 million or $0.5 million per vessel ($0.25 million per vessel as
cash in hand may be included).





Furthermore,
the facility includes a cash sweep mechanism for the period commencing after the
end of April 2010 until the maturity of the loan agreement, whereby 60% of any
excess cash earned by the M/V Astrale will be applied in the inverse order of
maturity to the amount outstanding under the loan agreement. Excess cash is
defined as net earnings less: (i) aggregate operating expenses and general and
administrative expenses capped at $10,000 per day as adjusted for an annual
increase of 3%, (ii) scheduled installment repayments and (iii) interest costs.
The cash sweep mechanism will cease to apply in the event the ratio of the
vessel's charter free fair market value over the outstanding loan is equal or
greater than 140% for a period of more than 3 consecutive months.





(ii) Loan of an initial amount of $80.0
million: As of December 31, 2009, we had a secured term loan outstanding
of $70.0 million, which is part of an $80.0 million loan that was concluded to
partially finance the construction cost of the newbuilding product tankers
S-1027 and S-1033 all of which were delivered in 2009.






84





M/T
Ionian Wave (S-1027): As of December 31, 2009, the outstanding amount was
$32.7 million out of a total of $33.8 million, out of which $16.7 million was
drawn down in October 2008, $6.7 million was drawn down in January 2009 and
$10.4 million was drawn down in March 2009. The loan is repayable in 38 equal
consecutive quarterly installments as follows: (i) 38 installments of $0.53
million, starting in March 2010; and (ii) a balloon payment of $12.6 million
payable together with the last installment in June 2019.





M/T
Hongbo (S-1033): As of December 31, 2009, the outstanding amount was
$26.1 million out of a total of $27.0 million out of which $10.0 million was
drawn down in October 2008, $6.7 million was drawn down in February 2009, $6.7
million was drawn down in April 2009 and $3.6 million was drawn down in July
2009. The loan is repayable in 38 equal consecutive quarterly installments as
follows: (i) 38 installments of $0.42 million, starting in March 2010; and (ii)
a balloon payment of $10.1 million payable together with the last installment in
June 2019.





Top Up
Loan:On July 31, 2009, we amended our $80.0 million product tanker
facility with DVB in order to take account of a bridge loan of $12.5 million
used in the financing of the delivery installment of the M/T Hongbo. As of
December 31, 2009, the outstanding amount was $11.2 million. The bridge loan is
payable in full on July 30, 2010. Furthermore, the facility includes a cash
sweep mechanism whereby 100% of the aggregate of any excess cash being hire
earned by M/T Hongbo and M/T Ionian Wave above capital repayments in connection
with the relevant loan tranches and interest expenses in connection with
relevant tranches, swap agreements and the Top Up Loan, is applied on a
quarterly basis as prepayment against the outstanding Top Up Loan, starting on
September 16, 2009. As of the date of this annual report, we have prepaid a
total amount of $2.4 million of the Top Up Loan in relation to the cash sweep
mechanism.





In
connection with this amendment and bridge loan, we issued 12,512,400 common
shares to Hongbo Shipping Company Limited, our wholly owned subsidiary, who
pledged these shares in favor of DVB. This pledge was granted as security and
must remain in an amount equal to 180% of the outstanding bridge
loan.  This amount will be tested at the end of each quarter. We also
agreed to file a registration statement for the resale of such shares and use
our best efforts to keep the registration statement effective during the
security period. As of the date of this annual report, and based on the fair
value of our common stock and the outstanding balance of the loan measured on
March 31, 2010, we are required to issue and pledge 9,756,488 additional shares
of common stock.





The
credit facility bears interest at LIBOR plus a margin of 155 basis points per
annum. According to the amendment of the loan agreement signed on July, 31,
2009, from March 16, 2009 the margin for the loan of the Ionian Wave has been
set at 175 basis points over LIBOR. The bridge loan carries a margin of 6.0%
over LIBOR. The credit facility contains a provision whereby the bank may chose
to use an alternative base interest rate in case it believes that the LIBOR is
not representative of its funding cost. DVB has been using cost of funds instead
of LIBOR as this cost of funds is determined by KLIEM, a broker.





The
facility contains, among other things, various financial covenants including (i)
asset maintenance whereby the fair market value of the mortgaged vessels and of
any additional security is required to be greater than or equal to 115% for
the first five years, up to August 2014 and 125% thereafter of the outstanding
loan (excluding Top Up Loan) and the fair value of the outstanding swaps. In
case of breach of the minimum security cover, the borrowers would be obliged to
reduce the tranche relating to M/T Ionian Wave and M/T Hongbo by 55% and 45% of
shortfall, respectively, and increase the Top Up Loan by the shortfall.
Thereafter, in case the security cover shows an excess of at least $1 million,
the tranche relating to M/T Ionian Wave and M/T Hongbo is to be increased by 55%
and 45%, respectively, of the excess and the Top Up Loan is to be reduced by the
same amount, (ii) a Net Asset Value that is required to be greater than
$225.0 million, calculated on an annual basis, which was amended to $0 up to
March 31, 2010, (iii) Stockholder's equity required to be greater than
$180.0 million, (iv) minimum cash balances of $5.0 million unencumbered up to
September, 30, 2010 and thereafter $25.0 million or $0.5 million per vessel
($0.25 million per vessel as cash in hand may be included); and (v) Interest
cover ratio of no less than 1.5 times (defined as EBITDAR divided by interest
expense plus Lease Obligations), which was amended to 1.2 times up to March 31,
2010.






85





According
to notice received from DVB, as of March 16, 2010, we were not in compliance
with the minimum security cover for an amount of $3.0 million based on
valuations dated December 31, 2009. As a result, we reduced the tranche relating
to M/T Ionian Wave by $1.7 million and the tranche relating to M/T Hongbo by
$1.3 million, representing the 55% and the 45% of shortfall, respectively, and
increase the Top Up Loan by $3.0 million. During May, 2010 we sent a notice to
DVB informing them that based on new valuations the Top Up Loan would need to be
reduced by approximately $4.5 million according to the mechanism described
above.





In
addition, the DVB credit facilities prohibit the borrower without the lender's
consent, from declaring or paying any dividends or returning any capital to its
equity holder and require that the mortgaged vessels be managed by TOP Tanker
Management, which may subcontract the technical management of the mortgaged
vessels to V.Ships Management Limited, Hanseatic Shipping Company Ltd., or any
other company acceptable to the lender. Finally, TOP SHIPS INC. is not allowed
to appoint any chief executive officer other than Mr. Evangelos Pistiolis
without the prior written consent of DVB. Finally, we are in the process of
cross collateralizing the terms of the two DVB facilities. The credit facilities
contain cross default provisions.





Covenant Breaches and
Waivers





As of
December 31, 2009, we were not in compliance with the asset maintenance covenant
in relation to the $80.0 million product tanker facility. Furthermore, we were
not in compliance with the net asset value and the minimum cash balance
covenants, in relation to both facilities. The asset maintenance covenant breach
was remedied through the Top Up Loan adjustment mechanism previously described.
Regarding the net asset value and the minimum cash balance covenant, we are
currently in discussions with the bank.





In July
2009, we paid a restructuring fee of $0.08 million in addition to the $0.24
million fee required in accordance with the loan agreement terms for renewing
the drybulk facility. Furthermore, we paid a $1.5 million arrangement fee on the
drawdown date of the Top Up loan.





As of
December 31, 2009, we had one interest rate swap with DVB. For a full
description of our interest rate swap agreements, see "Item 11– Quantitative and
Qualitative Disclosures about Market Risk".








(d)
ALPHA BANK Credit Facilities:





(i) M/V Cyclades: As of December
31, 2009, the outstanding amount was $28.0 million. The loan of $48.0 million
was drawn down on December 17, 2007 to partially finance the acquisition cost of
the drybulk vessel Cyclades. The loan is repayable in 24 consecutive quarterly
installments as follows: (i) four installments of $1.25 million, starting in
March 2010; (ii) 20 installments of $0.75 million; and (iii) a balloon payment
of $8.0 million payable together with the last installment in December
2015.




The
credit facility bears interest at LIBOR plus a margin of 130 basis points. Under
the first supplemental agreement of the loan signed in April 2009, from April 3,
2009 the margin has been set at 250 basis points over LIBOR and under the third
supplemental agreement of the loan signed in November, 2009, from September 17,
2009, the margin has been set at 300 basis points over LIBOR up to March 31,
2010 and 225 basis points over LIBOR, thereafter. As of the date of this annual
report, due to covenant breaches, the margin continues being 300 basis points
over LIBOR.






86






The
facility contains, among other things, various financial covenants including:
(i) asset maintenance whereby the fair market value of the mortgaged vessel and
of any additional security is required to be greater than or equal to 130%
of the outstanding loan. The minimum security requirement is waived up to March
31, 2010; (ii) market value adjusted net worth is required to be greater than or
equal to $250.0 million. The adjusted net worth is waived up to March 31, 2010;
(iii) book equity (total assets less consolidated debt) is required to be
greater than $100.0 million; and (iv) minimum cash balances of $25.0 million.
The minimum liquidity is waived up to March 31, 2010.





(ii) M/T Lichtenstein: As of
December 31, 2009, the outstanding amount was $37.2 million, out of a total of
$39.0 million, which was concluded to partially finance the construction cost of
newbuilding S-1026, out of which $10.6 million was drawn down in August 2008,
$7.1 million was drawn down in September 2008, $7.1 million was drawn down in
November 2008 and $14.2 million was drawn down in February 2009. The loan is
repayable in 37 equal consecutive quarterly installments as follows: (i) 37
installments of $0.6 million, starting in February 2010; and (ii) a balloon
payment of $15.0 million payable together with the last installment in February
2019.





The
credit facility bears interest at LIBOR plus a margin of 165 basis points. Under
the first supplemental agreement of the loan signed in April 2009, from April 3,
2009 the margin has been set at 225 basis points over LIBOR and under the
third supplemental agreement of the loan signed in November 2009, from October
26, 2009 the margin has been set at 300 basis points over LIBOR up to March 31,
2010 and 225 basis points over LIBOR, thereafter. As of the date of this annual
report, due to covenant breaches, the margin continues being 300 basis points
over LIBOR.





The
facility contains, among other things, various financial covenants including:
including (i) asset maintenance whereby the fair market value of the mortgaged
vessel and of any additional security is required to be greater than or
equal to 130% of the outstanding loan. The minimum security requirement is
waived up to March 31, 2010; (ii) market value adjusted net worth is
required to be greater than or equal to $250.0 million. The adjusted net
worth is waived up to March 31, 2010; (iii) book equity (total assets less
consolidated debt) is required to be greater than $100.0 million, and (iv)
minimum cash balances of $25.0 million. The minimum liquidity is waived up to
March 31, 2010.





In
addition, the credit facilities provide for a cash pledge of $4.0 million to be
maintained with Alpha Bank; this amount will be applied towards the drybulk
financing in case of renegotiation or cancellation of the existing time charter
agreement of M/V Cyclades. $2.0 million of the pledged cash will be released on
December 31, 2009 subject to the above and no other event of default. The
remaining $2.0 million will be released on March 30, 2010 given that: a) no
renegotiation or cancellation of the existing time charter agreement has been
effected until then, b) no event of default has occurred in the respective loan
facility. As of the date of this annual report, due to covenant breaches, the
$4.0 million cash pledge has not been released and we are in
discussions with the bank in relation to these funds.





Finally,
the two facilities are cross collateralized. The credit facilities contain a
cross-default provision.





Covenant Breaches and
Waivers





As of
December 31, 2009, we were not in compliance with the asset
maintenance, the adjusted net worth and the minimum cash balance covenants, for
which we have received waivers until March 31, 2010. We
are currently in discussions with the bank with respect to these
breaches.





(e) EMPORIKI Credit Facility:As of December 31, 2009, the outstanding amount was $40.0 million. The
loan of $50.0 million was entered into in March 2008 in order to partially
finance the acquisition cost of the drybulk vessel M/V Pepito. The loan is
repayable in 11 consecutive semi-annual installments as follows: (i) one
installment of $3.3 million, in March 2010; (ii) ten installments of $2.4
million; and (iii) a balloon payment of $12.9 million payable together with the
last installment in March 2015.





The
credit facility bears interest at LIBOR plus a margin of 110 basis points. Under
the first supplemental agreement of the loan signed in August 2009, from March
31, 2009 until March 31, 2010, the margin was set at 250 basis points over
LIBOR. Thereafter the margin would be  reduced to 175 basis points per
annum until maturity of the loan. As of the date of this annual report, due to
covenant breaches, the margin continues being 250 basis points over
LIBOR.




87





The
facility contains, among other things, various financial covenants including:
(i) the aggregate market value of the mortgaged vessel and of any additional
security is required to be equal to at least 125% of the outstanding principal
amount under the loan and the swap. The minimum security requirement is waived
up to March 31, 2010; (ii) the leverage ratio (defined as Total Liabilities
divided by Total Assets adjusted to fair market value, or FMV, of vessels) will
not exceed 75%. The maximum leverage ratio is waived up to March 31, 2010; (iii)
the interest cover ratio (as defined in the EMPORIKI credit facility agreement)
will stand at the minimum level of 2.5:1; (iv) minimum corporate liquidity not
to be less than next 6 months of senior debt principal payments; and (v) minimum
average monthly balances of the earnings account of $1 million.





In
addition, the EMPORIKI credit facility prohibits us, without the lender's
consent, from appointing a CEO other than Mr. Evangelos Pistiolis and requires
that the mortgaged vessel be managed by TOP Tanker Management, which may
subcontract the technical management of the mortgaged vessel to V.Ships
Management Limited, Hanseatic Shipping Company Ltd., or any other company
acceptable to the lender. In addition, it prohibits the borrower, which is our
subsidiary, without the lender's consent, from declaring or paying any dividends
or making any distributions to its shareholders. The credit facility contains a
cross-default provision.





Covenant Breaches and
Waivers





As of
December 31, 2009, we were not in compliance with the asset
maintenance and the minimum leverage ratio covenants, for which we
have received waivers until March 31, 2010 and the minimum liquid funds
covenant. We are currently in discussions with the bank in relation to these
breaches.





As
of December 31, 2009, we had one interest rate swap with Emporiki Bank. For a
full description of our interest rate swap agreements, see "Item 11 –
Quantitative and Qualitative Disclosures about Market Risk".





(f) CAPE MANUEL Credit Facility:On July 27, 2009, we entered into an unsecured bridge loan financing
facility with an unrelated party. The purpose of this loan was to provide
working capital financing. As of December 31, 2009, the outstanding amount was
Euro 2.0 million or $2.9 million (based on the U.S. Dollar/Euro exchange rate as
of December 31, 2009) that was drawn down in two tranches: one on July 29, 2009
for an amount of Euro 1.0 million or $1.4 million (based on the U.S. Dollar/Euro
exchange rate as of December 31, 2009) and one on September 24, 2009 for an
amount of Euro 1.0 million or $1.4 million (based on the U.S. Dollar/Euro
exchange rate as of December 31, 2009).





We have
undertaken to repay the first tranche, interest and fees in connection with the
facility by April 15, 2010 in cash or shares or in combination as demanded by
the lender. The number of shares cannot exceed 15% of our total number of
outstanding shares due to anti-takeover provisions in our Stockholder Rights
Agreement. On April 15, 2010, we repaid the first advance of Euro 1 million or
$1.4 million (based on the U.S. Dollar/Euro exchange rate as of April 15, 2010)
along with all accrued interest and finance costs by then.  The repayment
of the second advance and relevant accrued interest from April 15, 2010 was
extended up to July 31, 2010.








88





The loan
bears interest at 9.0% per annum.  As of December 31, 2009, an amount
of Euro 0.46 million or $0.66 million (based on the U.S. Dollar/Euro exchange
rate as of December 31, 2009) in relation to this loan is included under
interest and finance costs.





(2)
Operating Leases:





In
January 2006, we entered into an agreement with an unrelated party to lease
office space in Athens, Greece. The office is located at 1, Vasilisis Sofias
& Megalou Alexandrou Street, 151 24 Maroussi, Athens, Greece. The agreement
is for a duration of 12 years beginning May 2006 with a lessee's option for an
extension of 10 years. The current monthly rental is $0.2 million (based on the
U.S. Dollar/Euro exchange rate as of December 31, 2009) adjusted annually for
inflation increase plus 1.0%.





In
addition, our subsidiary TOP TANKERS (U.K.) LIMITED, a representative office in
London, leases office space in London from an unrelated third party. The
agreement is valid from June 2007 and shall continue until either party shall
give to the other, one calendar month written notice. The annual lease is $0.03
million (based on the U.S. Dollar/GBP exchange rate as of December 31, 2009)
payable quarterly in advance.





In
November 2009, TOP SHIPS INC. entered into an agreement to lease space in
London. The agreement is for the duration of one year from and including
November 15, 2009 to and including November 14, 2010. The current monthly rental
is $0.04 million (based on the U.S. Dollar/GBP exchange rate as of December 31,
2009).





Other
Contractual Obligations:





TOP
Tanker Management, our wholly-owned subsidiary, is responsible for the
chartering, operational and technical management of our tanker and drybulk
fleet, including crewing, maintenance, repair, capital expenditures,
dry-docking, vessel taxes, maintaining insurance and vessel operating expenses
under management agreements with each of our vessel owning
subsidiaries.





As of
December 31, 2009, TOP Tanker Management has subcontracted the day-to-day
technical management and crewing of one Handymax tanker and the crewing only of
another Handymax tanker to V. Ships Management Limited, or V. Ships, and had
also subcontracted the crewing of four drybulk vessels to Interorient Maritime
Enterprises Inc., or Interorient. The agreements between TOP Tanker Management
and V.Ships Management Limited may be terminated by either party upon three
months' written notice and the agreements with Interorient may be terminated by
either party upon two months' written notice.





Other
major capital expenditures include funding our maintenance program of regularly
scheduled intermediate survey or special survey dry-docking necessary to
preserve the quality of our vessels as well as to comply with international
shipping standards and environmental laws and regulations. Although we have some
flexibility regarding the timing of this maintenance, the costs are relatively
predictable. Management anticipates that the vessels that are younger than 15
years are required to undergo in-water intermediate surveys 2.5 years after a
special survey dry-docking and that such vessels are to be dry-docked every five
years, while vessels 15 years or older are to be dry-docked for an intermediate
survey every 2.5 years in which case the additional intermediate survey
dry-dockings take the place of in-water surveys.





89





Critical
Accounting Policies:





The
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with GAAP. The preparation of those financial statements requires us
to make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or
conditions.





Critical
accounting policies are those that reflect significant judgments or
uncertainties, and potentially result in materially different results under
different assumptions and conditions. We have described below what we believe
are our most critical accounting policies that involve a higher degree of
judgment and the methods of their application. For a description of all of our
significant accounting policies, see Note 2 to our consolidated financial
statements included herein.





Vessel depreciation. We
record the value of our vessels at their cost (which includes the contract
price, pre-delivery costs incurred during the construction of newbuildings,
capitalized interest and any material expenses incurred upon acquisition such as
initial repairs, improvements and delivery expenses to prepare the vessel for
its initial voyage) less accumulated depreciation. We depreciate our vessels on
a straight-line basis over their estimated useful lives, estimated to be 25
years from the date of initial delivery from the shipyard. Depreciation is based
on cost of the vessel less its residual value which is estimated to be $160 per
light-weight ton. A decrease in the useful life of the vessel or in the residual
value would have the effect of increasing the annual depreciation charge. When
regulations place limitations over the ability of a vessel to trade on a
worldwide basis, the vessel's useful life is adjusted at the date such
regulations become effective. We have not historically experienced change in
estimate used in calculating depreciation and do not expect to experience
changes in estimates in a future.





Impairment of vessels: We evaluate the carrying
amounts and periods over which long-lived assets are depreciated on a quarterly
basis to determine if events have occurred which would require modification to
their carrying values or useful lives. In evaluating useful lives and carrying
values of long-lived assets, we review certain indicators of potential
impairment, such as undiscounted projected operating cash flows, vessel sales
and purchases, business plans and overall market conditions. We determine
undiscounted projected net operating cash flows for each vessel and compare it
to the vessel's carrying value. If the carrying value of the related vessel
exceeds its undiscounted future net cash flows, the carrying value is reduced to
its fair value.   We estimate fair market value primarily through
the use of third party valuations performed on an individual vessel
basis.





The
carrying values of our vessels may not represent their fair market value at any
point in time since the market prices of second-hand vessels tend to fluctuate
with changes in charter rates and the cost of newbuildings.





We
did not note for 2007, any events or changes in circumstances indicating that
the carrying amount of our vessels may not be recoverable.





In the fourth quarter of 2008, shipping
market conditions deteriorated significantly, mainly in the drybulk sector, as a
result of the credit crisis and the resulting slowdown in world
trade.  These were conditions we considered to be indicators of
potential impairment. We performed the undiscounted cash flow test as of
December 31, 2008 on our entire fleet and determined that the carrying amounts
of our vessels held for use were recoverable despite the significant drop in
values of drybulk vessels.





During
2009, the drybulk market stabilized and the charter market recovered resulting
in a partial recovery of asset values. In contrast, the product tanker sector to
which we are mainly exposed experienced a significant drop in charter rates and,
as a result, a quarter on quarter drop in asset values. Despite these market
conditions, our expectations of a recovery in charter rates, similar to the one
experienced in the drybulk market in 2009, did not lead to an impairment charge
for the first three quarters of 2009.





During
the fourth quarter of 2009, we began exploring the re-chartering of our two
oldest tanker vessels, M/T Dauntless and M/T Ioannis P, due to their upcoming
charter expirations. Based on discussions with charterers we had indications
that such vessels would need to be re-chartered at significantly lower
rates upon expiration of their existing charters. As a result, during the fourth
quarter of 2009, we performed the undiscounted cash flow test as of December 31,
2009 on our entire fleet and determined that the carrying amounts of these two
vessels were not recoverable by their undiscounted cash flows, indicating
impairment and thereby we recorded an impairment charge of $36.6 million for the
year ended December 31, 2009.








90





In
order to perform the undiscounted cash flow test, we make assumptions about
future charter rates, commissions, vessel operating expenses, dry-dock costs,
fleet utilization, scrap rates used to calculate estimated proceeds at the end
of vessels' useful lives and the estimated remaining useful lives of the
vessels. These assumptions are based on historical trends as well as future
expectations. The projected net operating cash flows are determined by
considering the charter revenues from existing time charters for the fixed fleet
days and an estimated daily time charter equivalent for the unfixed days (based
on a combination of three year time charter rates for the next three years and
the most recent 8 year average of the one-year time charter rates for each
vessels' category) over the remaining useful life of each vessel, which we
estimate to be 25 years from the date of initial delivery from the shipyard.
Expected outflows for scheduled vessels' maintenance and vessel operating
expenses are based on historical data, and adjusted annually assuming an average
annual inflation rate of 2.8%, which is the twenty year average (period
1990-2009) consumer price index. Effective fleet utilization, average
commissions, dry-dock costs and scrap values are also based on historical
data.





The fair
value of the impaired vessels was determined based on a market approach, which
consisted of quotations from well respected brokers regarding vessels with
similar characteristics as compared to our vessels. This market approach is
deemed more objective than the income approach mainly due to the multitude of
transactions of comparable assets in the active and liquid shipping market at
the time the impairment test was performed.





Our
impairment test exercise is highly sensitive to variances in the time charter
rates, fleet effective utilization rates, commissions, estimated scrap values,
future dry-docking costs, estimated remaining useful lives of vessels and
estimated vessel operating costs. Our analysis as of December 31, 2009, which
involved also a sensitivity analysis by assigning possible alternative values to
these inputs, indicates that except for the above mentioned two tanker vessels
there are no impairment indications of any other individual long lived assets.
However, there can be no assurance as to how long term charter rates and vessel
values will remain at their currently low levels or whether they will improve by
any significant degree. Charter rates may remain at depressed levels for some
time which could adversely affect our revenue and profitability, and future
assessments of vessel impairment.





Derivatives:





We
designate our derivatives based upon the criteria established by the FASB in its
accounting guidance for derivatives and hedging activities. The accounting
guidance for derivatives requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value.  The accounting for the changes in
the fair value of the derivative depends on the intended use of the derivative
and the resulting designation.  For a derivative that does not qualify
as a cash flow hedge, the change in fair value is recognized at the end of each
accounting period on the income statement.  For a derivative that
qualifies as a cash flow hedge, the change in fair value is recognized at the
end of each reporting period in accumulated other comprehensive income / (loss)
(effective portion) until the hedged item is recognized in income. The
ineffective portion of a derivative's change in fair value is immediately
recognized in the income statement.





If there
is an increase in the 3-month LIBOR or if the 10 year U.S. Dollar swap rate
exceeds 3.85%, there will be a positive effect on the fair value of our interest
rate swap agreements. In contrast, a decrease in the 3-month LIBOR or an
increase of over 0.05% in the difference between the 10 year U.S. Dollar swap
rate and the 2 year U.S. Dollar swap rate will have a negative effect on the
fair value of our interest rate swap agreements.







91


We have
not applied hedge accounting for our interest rate swaps. Additionally, we have
not adjusted the fair value of our derivative liabilities for non-performance
risk as we expect to be able to perform under the contractual terms of our
derivative agreements, such as making cash payments at periodic net settlement
dates or upon termination. Also refer to "Item 5 – Liquidity and Capital
Resources – Working capital requirements and sources of capital" for
availability of capital.





Provision for doubtful
accounts.  Revenue is based on contracted voyage and time
charter parties and, although our business is with customers who we believe to
be of the highest standard, there is always the possibility of dispute, mainly
over terms, calculation and payment of demurrages. In such circumstances, we
assess the recoverability of amounts outstanding and we estimate a provision if
there is a possibility of non-recoverability, combined with the application of a
historical recoverability ratio, for purposes of determining the appropriate
provision for doubtful accounts. Although we believe our provisions to be based
on fair judgment at the time of their creation, it is possible that an amount
under dispute is not recovered and the estimated provision for doubtful
recoverability is inadequate.





New accounting pronouncements:No significant effect from new accounting pronouncements. See Notes to
the December 31, 2009 Financial Statements for a full description of new
accounting pronouncements and effect on our financials.





G.           Safe Harbor





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







92





ITEM
6.


DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES





A.           Directors
and Senior Management





Set forth
below are the names, ages and positions of our directors, executive officers and
key employees as at December 31, 2009. Members of our Board of Directors are
elected annually on a staggered basis, and each director elected holds office
for a three-year term. Officers are elected from time to time by vote of our
Board of Directors and hold office until a successor is elected.




Name
              Age
              PositionEvangelos
      J. Pistiolis
              37
              Director,
      President, Chief Executive OfficerVangelis
      G. Ikonomou
              45
              Director,
      Executive Vice President and Chairman of the BoardAlexandros
      Tsirikos
              36
              Director,
      Chief Financial OfficerMichael
      G. Docherty
              50
              DirectorRoy
      Gibbs
              60
              DirectorMarios
      Hamboullas
              69
              DirectorYiannakis
      C. Economou
              61
              DirectorStavros
      Emmanuel
              67
              Chief
      Operating Officer of TOP Tanker ManagementDemetris
      P. Souroullas
              47
              Vice
      PresidentEirini
      Alexandropoulou
              38
              Secretary


Biographical
information with respect to each of our directors and executives is set forth
below.





Evangelos J. Pistiolis founded
our Company in 2000, is our President and Chief Executive Officer and has served
on our Board of Directors since July 2004. Mr. Pistiolis graduated from
Southampton Institute of Higher Education in 1999 where he studied shipping
operations and from Technical University of Munich in 1994 with a bachelor's
degree in mechanical engineering. His career in shipping started in 1992 when he
was involved with the day to day operations of a small fleet of drybulk vessels.
From 1994 through 1995 he worked at Howe Robinson & Co. Ltd., a London
shipbroker specializing in container vessels. While studying at the Southampton
Institute of Higher Education, Mr. Pistiolis oversaw the daily operations of
Compass United Maritime Container Vessels, a ship management company located in
Greece.





Vangelis G. Ikonomouis our
Executive Vice President and Chairman and has served on our Board of Directors
since July 2004. Prior to joining the Company, Mr. Ikonomou was the Commercial
Director of Primal Tankers Inc. From 2000 to 2002, Mr. Ikonomou worked with
George Moundreas & Company S.A. where he was responsible for the purchase
and sale of second-hand vessels and initiated and developed a shipping industry
research department. Mr. Ikonomou worked, from 1993 to 2000, for Eastern
Mediterranean Maritime Ltd., a ship management company in Greece, in the
commercial as well as the safety and quality departments. Mr. Ikonomou holds a
Masters degree in Shipping Trade and Finance from the City University Business
School in London, a Bachelors degree in Business Administration from the
University of Athens in Greece and a Navigation Officer Degree from the Higher
State Merchant Marine Academy in Greece.





Alexandros Tsirikos has served
as our Chief Financial Officer since April 1, 2009. Mr. Tsirikos, is a UK
qualified Chartered Accountant (ACA) and has been employed with TOP SHIPS INC.
since July 2007 as the Company's Corporate Development Officer. Prior to joining
TOP SHIPS INC., Mr Tsirikos was a manager with PricewaterhouseCoopers, or PwC,
where he worked as a member of the PwC Advisory team and the PwC Assurance team
thereby drawing experience both from consulting as well as auditing. As a member
of the Advisory team, he lead and participated in numerous projects in the
public and the private sectors, involving strategic planning and business
modeling, investment analysis and appraisal, feasibility studies, costing and
project management. As a member of the Assurance team, Mr. Tsirikos was part of
the International Financial Reporting Standards, or IFRS, technical team of PwC
Greece and lead numerous IFRS conversion projects for listed companies. He holds
a Master's of Science in Shipping Trade and Finance from City University of
London and a Bachelor's Degree with honors in Business Administration from
Boston University in the United States. He speaks English, French and
Greek.






93





Michael G. Dochertyhas served
on our Board of Directors since July 2004. Mr. Docherty is a founding partner of
Independent Average Adjusters Ltd., an insurance claims adjusting firm located
in Athens, Greece, which he co-founded in 1997. Mr. Docherty has 25 years of
international experience handling maritime insurance claims.





Roy Gibbshas served on our
Board of Directors since July 2004. Mr. Gibbs has been the chief executive
officer of Standard Chartered Grindlays Bank, Greece, formerly ANZ Grindlays,
since 1992. From 1988 to 1992, Mr. Gibbs was the chief manager of domestic
banking at ANZ Grindlays, London. Prior to that he was assistant director for
property, construction and shipping at ANZ London. Mr. Gibbs joined National and
Grindlays Bank in 1965.





Marios Hamboullas has served
on our Board since September 2009. Mr Hamboullas is the founder and Chairman of
Astarti Development Public Company Ltd., a public company founded in 1979 and
listed on the Cyprus Exchange (Symbol: AST) engaged in the hotel industry. Since
1968, Mr. Hamboullas has been a managing director of Kyriacos Hamboullas and Son
Ltd., a family owned company with extensive interests in agriculture, trading
and manufacturing. Mr. Hamboullas is also the Business Development Director of
D.H. Cyprotels Plc, a Cypriot private company engaged in the hotel and tourism
industry. Mr. Hamboullas also serves as a director of the following private
companies: Hamboullas Financial Services Ltd. and Marham Investments Ltd. Mr.
Hamboullas earned his M.A. degree in Law and Economics from Cambridge University
U.K. and a post-graduate degree in European Politics and Economics from
Strasbourg University in France. Mr. Hamboullas is a citizen of Cyprus and is
fluent in Greek, English and French.





Yiannakis C. Economou has
served on our Board since September 2009. Mr. Economou is a Managing Director of
Hull Blyth Araouzos Limited, a company based in Cyprus which provides a wide
variety of services in passenger and cargo transport by sea, land and air,
including agency services for shipping, aviation, travel and tourism, customs
clearance and freight forwarding. Since 1985, Mr. Economou has served as a
Managing Director and Secretary of the company. Prior to joining Hull Blyth, Mr.
Economou trained in shipping with Ellerman City Liners in Liverpool and London,
England. Mr. Economou earned his Bachelor of Laws degree at the University of
Athens. Since 1981, Mr. Economou has served on the Board of Directors of
Associated Agencies Ltd. and United Stevedoring Company Limited. Mr. Economou
for the third time serves as the President of the Cyprus Shipping Association.
He is also a member of the Employers Association of Cyprus, Honorable Consul for
Costa Rica in Cyprus, Secretary of the Consular Corps in Cyprus and was a past
President of the Rotary Club of Famagusta. Mr. Economou is a citizen of
Cyprus.





Captain Stavros Emmanuel has
been the Chief Operating Officer of TOP Tanker Management since July 2004. He
has 34 years experience in the shipping industry and expertise in operation and
chartering issues. Prior to joining TOP Tanker Management, Captain Emmanuel
served as General Manager of Primal Tankers Inc., where his responsibilities
included chartering and operations management. Prior to joining Primal Tankers
in 2000, Captain Emmanuel worked in various management capacities for Compass
United Maritime. Captain Emmanuel obtained a Naval Officers degree from ASDEN
Nautical Academy of Aspropyrgos, Greece and earned a Master Mariners degree in
1971.





Demetris P. Souroullasis Vice
President of TOP SHIPS INC. and has been with our Company since 2007. Prior to
joining the Company, and from 2001 onwards Mr. Souroullas held the positions of
Chief Executive Officer for the Fleet of Admibros Shipmanagement Co. Ltd and
Technical and General Manager of LMZ Transoil Shipmanagement S.A. Prior to that
Mr. Souroullas worked with the Cyprus Bureau of Shipping where he started in
1988 as a Surveyor and left in 2001 as the Head of Classification. Mr.
Souroullas holds a Masters degree in Naval Architecture from the University of
Newcastle upon Tyne, and a Bachelors degree in Maritime Technology from the
University of Wales Institute of Science and Technology.





Eirini Alexandropoulouhas
been our Secretary since August 2004. Mrs. Alexandropoulou's principal
occupation for the past ten years is as a legal advisor providing legal services
to ship management companies with respect to corporate and commercial as well as
shipping and finance law issues in Greece. From 2001 to 2004, Mrs.
Alexandropoulou served as a legal advisor to Eurocarriers SA, a ship manager.
Most recently, from 2000 to 2001, Mrs. Alexandropoulou served as a legal advisor
to Belize's ship registry office in Piraeus. Mrs. Alexandropoulou has been a
member of the Athens Bar Association since 1997 and has a law degree from the
Law Faculty of the University of Athens.







94





B.           Compensation





During
the fiscal year ended December 31, 2009, we paid to the members of our senior
management and to our directors' aggregate compensation of $6.5 million. We do
not have a retirement plan for our officers or directors.





Equity
Incentive Plan





In April
2005 the Board adopted the TOP SHIPS INC. 2005 Stock Incentive Plan, or the
Plan, under which our officers, key employees and directors may be granted
options to acquire common stock. A total of 1,000,000 shares of common stock
were initially reserved for issuance under the Plan, which is administered by
the Board. Since the Plan's inception, the number of shares of common stock
reserved for issuance under the Plan has been increased to 12,000,000. The Plan
also provides for the issuance of stock appreciation rights, dividend equivalent
rights, restricted stock, unrestricted stock, restricted stock units, and
performance shares at the discretion of our Board of Directors. The Plan expires
10 years from the date of its adoption. Please refer to Note 16 to the
consolidated financial statements included in Item 18 describing grants under
the Plan, which have occurred between April 2005 and January 2008.





On July
11, 2007, the Company increased the Plan's reserve by 1,000,000
shares





On
January 22, 2008, the Company granted 197,560 shares of restricted common stock
of the Company, pursuant to the Company's Plan. These shares were granted to two
officers and employees and proportionally vest over a period of four years in
equal annual installments with the following provisions: in the event of a
change of control or termination of employment, shares immediately vest, with
the exception of voluntary resignation or termination of employment for cause,
in which event the shares are forfeited. The fair value of each share on the
grant date was $6.69.





On July
1, 2008, the Company increased the Plan's reserve by 1,000,000 shares and
granted 500,000 shares to our CEO, and issued to Sovereign Holdings Inc., a
company wholly-owned by our CEO. Of these shares, 125,000 vested on the grant
date and the remainder of the shares vest over a period of three years in equal
annual installments beginning one year from the grant date. However, as the
shares granted to our CEO do not contain any future service vesting conditions,
all such shares are considered vested shares on the grant date. The fair value
of each share on the grant date was $6.20.





On July
10, 2008, the Company granted 2,666 shares to one of our employees, such shares
vested over a period of 6 months. The fair value of each share on the grant date
was $5.15.





On
September 2, 2008, the Company granted 387,666 shares, of which 375,000 were
granted to our non-executive directors and vest five years after the grant date.
10,000 of the shares were granted to one of our employees and vest
proportionally over a period of three years in equal installments, commencing on
the grant date. 2,666 of the shares were granted to another of our employees and
vested over a period of 6 months. The fair value of each Share on the grant date
was $5.08.






95





On
September 4, 2008, the Company increased the Plan's reserve by 2,000,000 shares
and granted 1,472,438 shares to our CEO, Mr. Evangelos Pistiolis in lieu of cash
compensation that would be owed to Mr. Pistiolis under his employment agreement
with the Company, in the event of a change in control of the Company. These
shares were issued to Sovereign Holdings Inc., a company wholly-owned by Mr.
Pistiolis. The shares will vest in the event of a change in control of the
Company, as defined in the employment agreement. The fair value of each share on
the grant date was $5.23.





On
October 21, 2009, the Company granted to an officer 30,326 unrestricted common
shares pursuant to the Plan. The shares vested immediately. The fair value of
each share on the grant date was $1.11.





On
December 21, 2009, the Company increased the Plan's reserve by 1,500,000 shares
and granted 150,000 restricted shares to each of the Company's two new
non-executive directors pursuant to the Plan. The shares vest over a period of 5
years. The fair value of each share on the grant date was $0.98.





On
December 21, 2009, the Company granted 500,000 shares to our CEO, and issued to
Sovereign Holdings Inc., a company wholly-owned by our CEO. The shares vest six
months from the date of grant, with any unvested restricted stock vesting upon
his termination from the Company for any reason (including resignation).
However, as the shares granted to our CEO do not contain any future service
vesting conditions, all such shares are considered vested shares on the grant
date. The fair value of each share on the grant date was $0.98.





On
December 21, 2009, the Company granted 300,000 shares to our CFO, and issued to
Puebla Investments Co, a company nominated by our CFO. One third of the shares
vest immediately, and the remainder of the shares vest over a period of 2 years,
with any unvested restricted stock vesting upon his termination from the Company
for any reason other than resignation. The fair value of each share on the grant
date was $0.98.





On
December 22, 2009, the Company increased the total number of shares of common
stock of the Company with respect to which awards may be granted pursuant to the
Plan, by 5,500,000 shares.





C.  Board
Practices





Committees
of the Board of Directors





We have
established an audit committee composed of three members, which pursuant to a
written audit committee charter is responsible for reviewing our accounting
controls and recommending to the Board of Directors, or the Board, the
engagement of our outside auditors. Each member is an independent director under
the corporate governance rules of the NASDAQ Global Select Market. The members
of the audit committee are Messrs. Gibbs, Hamboullas and Economou. In June 2007,
we established a compensation committee and a nominating and governance
committee. Both committees are composed of three members, all of whom are
independent directors. The compensation committee carries out the Board's
responsibilities relating to compensation of the Company's executive and
non-executive officers and provides such other guidance with respect to
compensation matters as the Committee deems appropriate. The nominating and
governance committee assists the Board in: (i) identifying, evaluating and
making recommendations to the Board concerning individuals for selections as
director nominees for the next annual meeting of stockholders or to otherwise
fill Board vacancies; (ii) developing and recommending to the Board a set of
corporate governance guidelines and principles applicable to the Company, and
(iii) reviewing the overall corporate governance of the Company and recommending
improvements to the Board from time to time.





The
board has determined that Mr. Gibbs, whose biographical details are included
elsewhere in this Item 6, chairman of our audit committee, qualifies as a
financial expert and is considered to be independent under the corporate
governance rules of the NASDAQ Global Select Market.





D.  Employees





During,
2007, 2008 and 2009 we had four employees, while our wholly-owned subsidiary,
TOP Tanker Management, employed on average 82, 88 and 55 employees,
respectively, all of whom are shore-based. TOP Tanker Management ensures that
all seamen have the qualifications and licenses required to comply with
international regulations and shipping conventions, and that our vessels employ
experienced and competent personnel. As of December 31, 2007, 2008 and 2009, we
also employed 560, 300 and 137 sea going employees, directly and indirectly
through our sub-managers.






96





E.
Share Ownership





The
common shares beneficially owned by our directors and senior managers and/or
companies affiliated with these individuals are disclosed in "Item 7. Major
Shareholders and Related Party Transactions".





ITEM
7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS





A.           Major
Shareholders





The
following table sets forth information regarding (i) the owners of more than
five percent of our common stock that we are aware of and (ii) the total amount
of capital stock owned by our officers and directors as of June 15, 2010.
All of the shareholders, including the shareholders listed in this table, are
entitled to one vote for each share of common stock held. The percentages below
are calculated as of June 15, 2010.




Title of Class
            Identity of Person or Group
            
            AmountOwned
            
            
            Percent
      of ClassCommon
      Stock, par value
            Sphinx
      Investment Corp.*
            
            
            4,133,333
            
            
            
            12.56
            %$.01
      per share
            Maryport
      Navigation Corp.*
            
            
            4,133,333
            
            
            
            12.56
            %George
      Economou*
            
            
            4,133,333
            
            
            
            12.56
            %QVT
      Financial LP**
            
            
            2,132,709
            
            
            
            6.48
            %QVT
      Financial GP LLC**
            
            
            2,132,709
            
            
            
            6.48
            %QVT
      Fund LP
            
            
            1,873,365
            
            
            
            5.69
            %QVT
      Associates GP LLC**
            
            
            2,132,709
            
            
            
            6.48
            %Kingdom
      Holdings Inc.***
            
            
            1,065,393
            
            
            
            3.23
            %Sovereign
      Holdings****
            
            
            3,326,564
            
            
            
            10.11
            %Evangelos
      Pistiolis*****
            
            
            3,326,564
            
            
            
            10.11
            %Shares
      of Officers and directors other than Evangelos Pistiolis
            
            
            965,920
            
            
            
            2.93
            %All
      officers and directors as a group
            
            
            4,292,484
            
            
            
            13.04
            %





*
            As
      of October 24, 2008. Sphinx Investment Corp., Maryport Navigation Corp.
      and Mr. Economou may constitute a "group" for reporting purposes of Rule
      13d-5 promulgated under the Exchange
Act.


**
            As
      of December 18, 2009. QVT Financial LP, QVT Financial GP LLC, QVT Fund LP
      and QVT Associates GP LLC share beneficial ownership of the shares listed
      in this table.


***
            A
      company owned primarily by adult relatives of our President, Chief
      Executive Officer, and Director, Evangelos
  Pistiolis.


****
            A
      company that is wholly owned by Evangelos
  Pistiolis.


*****
            By
      virtue of the shares owned directly through Sovereign Holdings
      Inc.








B.           Related
Party Transactions





For
Related Party Transactions please refer to Note 5 to the consolidated financial
statements included in Item 18.





Additionally,
on May 12, 2010, our Board of Directors agreed to outsource all of the
commercial and technical management of the Company's vessels to
Central Mare Inc., or Central Mare, a related party controlled by the family of
the Company's Chief Executive Officer, on a timeline to be determined by its
executive officers in consideration of the vessels' schedule. The Company has
not yet executed a management agreement with Central Mare, but has already
informed all relevant parties including banks and charterers of the impeding
change in management.






97





The
management agreement is expected to have a duration of five years and to include
management fees with currency conversion based on the U.S. Dollar/Euro exchange
rate as of June 3, 2010 as follows: (i) a base management fee of Euro 650 or
$800 per vessel per day on time or spot charter and Euro 250 or $308 per vessel
per day on bareboat charter; (ii) a quarterly accounting fee of Euro 0.25
million or $0.31 million; (iii) a quarterly financial reporting fee of Euro 0.08
million or $0.10 million; (iv) a Sarbanes-Oxley compliance fee of Euro 100
or $123 per vessel per day; (v) a commercial operation and freight collection
services fee of Euro 90 or $111 per vessel per day; (vi) a commission on all new
hires of 1.25% and on existing hires a post fixture fee of 0.75%; and (vii) a 1%
commission on the sale or purchase price of vessels upon sale or purchase.
Central Mare shall also supervise crewing, although it will use third parties in
order to access larger pools of crew.





C.           Interests
of Experts and Counsel.





Not
applicable.





ITEM
8. FINANCIAL INFORMATION.





A.
            Consolidated
      Statements and Other Financial
Information.





See Item
18.





Legal
Proceedings





We have
not been involved in any legal proceedings which may have, or have had, a
significant effect on our business, financial position, results of operations or
liquidity, nor are we aware of any proceedings that are pending or
threatened which may have a significant effect on our business, financial
position, results of operations or liquidity. From time to time, we may be
subject to legal proceedings and claims in the ordinary course of business,
principally personal injury and property casualty claims. We expect that these
claims would be covered by insurance, subject to customary deductibles. Those
claims, even if lacking merit, could result in the expenditure of significant
financial and managerial resources.





Dividend
Distribution Policy





The
Company paid special dividends of $15.00 per share and $7.50 per share on March
27, 2006 and April 25, 2006, respectively. On April 6, 2006 our Board decided to
discontinue the Company's policy of paying regular quarterly dividends. The
declaration and payment of any future special dividends shall remain subject to
the discretion of the Board and shall be based on general market and other
conditions including the Company's earnings, financial strength and cash
requirements and availability.





We are
permitted to pay dividends under the loans so long as we are not in default of a
loan covenant and if such dividend payment would not result in a default of a
loan covenant.





B.
            Significant
      Changes.





Please
refer to Note 22 to the consolidated financial statements included in Item
18.







98





ITEM
9. THE OFFER AND LISTING.





A.           Offer
and Listing Details.





Price
Range of Common Stock




The
trading market for our common stock is the NASDAQ Global Select Market, on which
the shares are listed under the symbol ''TOPS''. The following table sets forth
the high and low closing prices for our common stock since our initial public
offering of common stock at $33.00 per share on July 23, 2004, as reported by
the NASDAQ Global Select Market. The high and low closing prices for our common
stock for the periods indicated were as follows:




HIGH
              
              
              LOWFor
      the Fiscal Year Ended December 31, 2009
              
              $
              3.52
              
              
              $
              0.77For
      the Fiscal Year Ended December 31, 2008
              
              $
              10.62
              
              
              $
              1.40For
      the Fiscal Year Ended December 31, 2007
              
              $
              25.2
              
              
              $
              9.09For
      the Fiscal Year Ended December 31, 2006
              
              $
              54.96
              
              
              $
              13.83For
      the Fiscal Year Ended December 31, 2005
              
              $
              66.00
              
              
              $
              36.81
 
 HIGH
              
              
              LOWFor
      the Quarter EndedMarch
      31,2010
              
              $
              1.24
              
              
              $
              0.99December
      30, 2009
              
              $
              1.26
              
              
              $
              0.94September
      30, 2009
              
              $
              2.12
              
              
              $
              1.16June
      30, 2009
              
              $
              3.52
              
              
              $
              0.98March
      31, 2009
              
              $
              2.30
              
              
              $
              0.77December
      31, 2008
              
              $
              4.66
              
              
              $
              1.40September
      30, 2008
              
              $
              6.31
              
              
              $
              3.81June
      30, 2008
              
              $
              10.28
              
              
              $
              6.40March
      31, 2008
              
              $
              10.65
              
              
              $
              6.06
 
 HIGH
              
              
              LOWFor
      the MonthMay
      2010
              
              $
              1.22
              
              
              $
              1.02April
      2010
              
              $
              1.28
              
              
              $
              1.10March
      2010
              
              $
              1.14
              
              
              $
              1.05February
      2010
              
              $
              1.16
              
              
              $
              1.03January
      2010
              
              $
              1.24
              
              
              $
              0.99December
      2009
              
              $
              1.14
              
              
              $
              0.96


99







B.           Plan of Distribution.





Not
applicable





C.           Markets.





Shares of
our common stock trade on the NASDAQ Global Select Market under the symbol
TOPS".





D.           Selling
Shareholders.





Not
applicable.





E.           Dilution.





Not
applicable.





F.           Expenses of the
Issue.





Not
applicable.








ITEM
10. ADDITIONAL INFORMATION





A.           Share
Capital





Not
applicable.





B.           Memorandum
and Articles of Association





Our
purpose is to engage in any lawful act or activity for which corporations may
now or hereafter be organized under the Marshall Islands Business Corporations
Act, or BCA. Our Amended and Restated Articles of Incorporation and Amended and
Restated By-laws do not impose any limitations on the ownership rights of our
shareholders.





Under our
Amended and Restated By-laws, annual shareholder meetings will be held at a time
and place selected by our Board of Directors. The meetings may be held in or
outside of the Marshall Islands. Special meetings of the shareholders, unless
otherwise prescribed by law, may be called for any purpose or purposes at any
time exclusively by the Board of Directors. Notice of every annual and special
meeting of shareholders shall be given at least 15 but not more than 60 days
before such meeting to each shareholder of record entitled to vote
thereat.





Directors.    Our
directors are elected by a plurality of the votes cast at a meeting of the
shareholders by the holders of shares entitled to vote in the election. Our
Amended and Restated Articles of Incorporation and Amended and Restated By-laws
prohibit cumulative voting in the election of directors.





The Board
of Directors must consist of at least one member and not more than twelve, as
fixed from time to time by the vote of not less than 662/3% of
the entire board. Each director shall be elected to serve until the third
succeeding annual meeting of shareholders and until his successor shall have
been duly elected and qualified, except in the event of his death, resignation,
removal, or the earlier termination of his term of office. The Board of
Directors has the authority to fix the amounts which shall be payable to the
members of our Board of Directors, and to members of any committee, for
attendance at any meeting or for services rendered to us.






100





Classified
Board





Our
Amended and Restated Articles of Incorporation provide for the division of our
Board of Directors into three classes of directors, with each class as nearly
equal in number as possible, serving staggered, three-year terms. Approximately
one-third of our Board of Directors will be elected each year. This classified
board provision could discourage a third party from making a tender offer for
our shares or attempting to obtain control of our company. It could also delay
shareholders who do not agree
with the policies of the Board of Directors from removing a majority of the
Board of Directors for two years.





Election
and Removal





Our
Amended and Restated Articles of Incorporation and Amended and Restated by-laws
require parties other than the Board of Directors to give advance written notice
of nominations for the election of directors. Our Amended and Restated articles
of incorporation provide that our directors may be removed only for cause and
only upon the affirmative vote of the holders of at least 80% of the outstanding
shares of our capital stock entitled to vote for those directors. These
provisions may discourage, delay or prevent the removal of incumbent officers
and directors.





Dissenters' Rights of Appraisal and
Payment.    Under
the Business Corporation Act of the Republic of the Marshall Islands, or BCA,
our shareholders have the right to dissent from various corporate actions,
including any merger or sale of all or substantially all of our assets not made
in the usual course of our business, and receive payment of the fair value of
their shares. In the event of any further amendment of the articles, a
shareholder also has the right to dissent and receive payment for his or her
shares if the amendment alters certain rights in respect of those shares. The
dissenting shareholder must follow the procedures set forth in the BCA to
receive payment. In the event that, among other things, the institution of
proceedings in the circuit court in the judicial circuit in the Marshall Islands
in which our Marshall Islands office is situated. The value of the shares of the
dissenting we and any dissenting shareholder fail to agree on a price for the
shares, the BCA procedures involve shareholder is fixed by the court after
reference, if the court so elects, to the recommendations of a court-appointed
appraiser.





Shareholders' Derivative
Actions.    Under
the BCA, any of our shareholders may bring an action in our name to procure a
judgment in our favor, also known as a derivative action, provided that the
shareholder bringing the action is a holder of common stock both at the time the
derivative action is commenced and at the time of the transaction to which the
action relates.





Anti-takeover Provisions of our
Charter Documents.    Several
provisions of our Amended and Restated Articles of Incorporation and Amended and
Restated by-laws may have anti-takeover effects. These provisions are intended
to avoid costly takeover battles, lessen our vulnerability to a hostile change
of control and enhance the ability of our Board of Directors to maximize
shareholder value in connection with any unsolicited offer to acquire us.
However, these anti-takeover provisions, which are summarized below, could also
discourage, delay or prevent (1) the merger or acquisition of our company by
means of a tender offer, a proxy contest or otherwise, that a shareholder may
consider in its best interest and (2) the removal of incumbent officers and
directors.





Business
Combinations





The
Company's Amended and Restated Articles of Incorporation include provisions
which prohibit the Company from engaging in a business combination with an
interested shareholder for a period of three years after the date of the
transaction in which the person became an interested shareholder,
unless:


•
                prior
      to the date of the transaction that resulted in the shareholder becoming
      an interested shareholder, the Board approved either the business
      combination or the transaction that resulted in the shareholder becoming
      an interested
      shareholder;   101
 •
                upon
      consummation of the transaction that resulted in the shareholder becoming
      an interested shareholder, the interested shareholder owned at least 85%
      of the voting stock of the corporation outstanding at the time the
      transaction
      commenced; •
                      at
      or subsequent to the date of the transaction that resulted in the
      shareholder becoming an interested shareholder, the business combination
      is approved by the Board and authorized at an annual or special meeting of
      shareholders by the affirmative vote of at least 66 2/3% of the
      outstanding voting stock that is not owned by the interested shareholder;
      and
 •
                the
      shareholder became an interested shareholder prior to the consummation of
      the initial public
      offering.


Limited
Actions by Shareholders





Our
Amended and Restated Articles of Incorporation and our Amended and Restated
By-laws provide that any action required or permitted to be taken by our
shareholders must be effected at an annual or special meeting of shareholders or
by the unanimous written consent of our shareholders.





Our
Amended and Restated Articles of Incorporation and our Amended and Restated
By-laws provide that only our Board of Directors may call special meetings of
our shareholders and the business transacted at the special meeting is limited
to the purposes stated in the notice. Accordingly, a shareholder may be
prevented from calling a special meeting for shareholder consideration of a
proposal over the opposition of our Board of Directors and shareholder
consideration of a proposal may be delayed until the next annual
meeting.





Blank
Check Preferred Stock





Under the
terms of our Amended and Restated Articles of Incorporation, our Board of
Directors has authority, without any further vote or action by our shareholders,
to issue up to 20,000,000 shares of blank check preferred stock. Our Board of
Directors may issue shares of preferred stock on terms calculated to discourage,
delay or prevent a change of control of our company or the removal of our
management.





Super-majority
Required for Certain Amendments to Our By-Laws





On
February 28, 2007, we amended our by-laws to require that amendments to certain
provisions of our by laws may be made when approved by a vote of not less than
662/3% of
the entire Board of Directors. These provisions that require not less than
662/3%
vote of the Board of Directors to be amended are provisions governing: the
nature of business to be transacted at our annual meetings of shareholders, the
calling of special meetings by our Board of Directors, any amendment to change
the number of directors constituting our Board of Directors, the method by which
our Board of Directors is elected, the nomination procedures of our Board of
Directors, removal of our Board of Directors and the filling of vacancies on our
Board of Directors.





C.           Material
Contracts





Long
Term Debt





As of
December 31, 2009 we had long term debt obligations under credit facilities with
RBS, HSH, DVB, EMPORIKI, ALPHA BANK and CAPE MANUEL. For a full description of
our credit facilities and related interest rate swaps, see "Item 5 – Operating
and Financial Review and Prospects - Tabular Disclosure of Contractual
Obligations – Long Term Debt" and "Item 11 – Quantitative
and Qualitative Disclosures about Market Risk".







102


Equity
Offerings





On July
1, 2009, we entered into a Standby Equity Distribution Agreement, or the SEDA,
with YA Global Master SPV LTD, or YA Global, pursuant to which we may offer and
sell up to $200 million worth of our common shares to YA Global. The SEDA has a
duration of three years. We made initial sales under the SEDA on August 13, 2009
and as of December 31, 2009 2,230,000 shares had been sold with net proceeds
amounting to approximately $2.9 million. During the period from October 21, 2009
to the date of this report, no shares have been sold to YA Global under the
SEDA.





Office
space lease





In
January 2006, we entered into an agreement with an unrelated party to lease
office space in Athens, Greece. The agreement is for a duration of 12 years
beginning May 2006 with a lessee's option for an extension of 10
years.





In
addition, our subsidiary TOP TANKERS (U.K.) LIMITED, leases office space in
London, from an unrelated third party. The agreement is valid from June 2007 and
shall continue until either party shall give to the other, one calendar month
written notice.





In
November 2009, TOP SHIPS INC. entered into a lease agreement for office space in
London. The agreement is for the duration of one year from and including
November 15, 2009 to and including November 14, 2010.





For a
full description of the above mentioned agreements see "Item 5 – Operating and
Financial Review and Prospects - Tabular Disclosure of Contractual Obligations –
Operating Leases".





Stockholders
Rights Agreement





We
entered into a Stockholders Rights Agreement with Computershare Investor
Services, LLC, as Rights Agent, as of August 19, 2005. Under this Agreement, we
declared a dividend payable of one right, or Right, to purchase one
one-thousandth of a share of the Company's Series A Participating Preferred
Stock for each outstanding share of TOP SHIPS INC. common stock, par value
U.S.$0.01 per share. The Rights will separate from the common stock and become
exercisable after (1) the 10th day after public announcement that a person or
group acquires ownership of 15% or more of the company's common stock or (2) the
10th business day (or such later date as determined by the company's Board of
Directors) after a person or group announces a tender or exchange offer which
would result in that person or group holding 15% or more of the company's common
stock. On the distribution date, each holder of a right will be entitled to
purchase for $25 (the "Exercise Price") a fraction (1/1000th) of one share of
the company's preferred stock which has similar economic terms as one share of
common stock. If an acquiring person (an "Acquiring Person") acquires more than
15% of the company's common stock then each holder of a right (except that
Acquiring Person) will be entitled to buy at the exercise price, a number of
shares of the company's common stock which has a market value of twice the
exercise price. If after an Acquiring Person acquires more than 15% of the
company's common stock, the company merges into another company or the company
sells more than 50% of its assets or earning power, then each holder of right
(except for those owned by the acquirer) will be entitled to purchase at the
Exercise Price, a number of shares of common stock of the surviving entity which
has a then current market value of twice the Exercise Price. Any time after the
date an Acquiring Person obtains more than 15% of the company's common stock and
before that Acquiring Person acquires more than 50% of the company's outstanding
common stock, the company may exchange each right owned by all other rights
holders, in whole or in part, for one share of  the company's common
stock. The rights expire on the earliest of (1) August 31, 2015 or (2) the
exchange or redemption of the rights as described above. The company can redeem
the rights at any time on or prior to the earlier of a public announcement that
a person has acquired ownership of 15% or more of the company's common stock, or
the expiration date. The terms of the rights and the Stockholders Rights
Agreement may be amended without the consent of the rights holders at any time
on or prior to the Distribution Date. After the Distribution Date, the terms of
the rights and the Stockholders Rights Agreement may be amended to make changes
that do not adversely affect the rights of the rights holders (other than the
Acquiring Person). The rights do not have any voting rights. The rights have the
benefit of certain customary anti-dilution protections.







103






We have no other material contracts,
other than contracts entered into in the ordinary course of business, to which
we are a party




D.           Exchange
controls





The Marshall Islands imposes no
exchange controls on non-resident corporations.





E.           Taxation.





The
following is a discussion of the material Marshall Islands and United States
federal income tax considerations relevant to an investment decision by a U.S.
Holder and a non U.S. Holder, each as defined below, with respect to the common
stock. This discussion does not purport to deal with the tax consequences of
owning common stock to all categories of investors, some of which, such as
dealers in securities and investors whose functional currency is not the U.S.
Dollar, may be subject to special rules. You are encouraged to consult your own
tax advisors concerning the overall tax consequences arising in your own
particular situation under United States federal, state, local or foreign law of
the ownership of common stock.





Marshall IslandsTax Consequences





We are
incorporated in the Republic of the Marshall Islands. Under current Marshall
Islands law, we are not subject to tax on income or capital gains, and no
Marshall Islands withholding tax will be imposed upon payments of dividends by
us to our shareholders.





United StatesFederal Income Tax
Consequences





The
following are the material United States federal income tax consequences to us
of our activities and to U.S. Holders and non U.S. Holders, each as defined
below, of our common stock. The following discussion of United States federal
income tax matters is based on the Code, judicial decisions, administrative
pronouncements, and existing and proposed regulations issued by the United
States Department of the Treasury, all of which are subject to change, possibly
with retroactive effect. Treasury Regulations interpreting Code Section 883
became effective on January 1, 2005 for calendar year taxpayers such as
ourselves and our subsidiaries. The discussion below is based, in part, on the
description of our business as described in "Business" above and assumes that we
conduct our business as described in that section. Except as otherwise noted,
this discussion is based on the assumption that we will not maintain an office
or other fixed place of business within the United States. References in the
following discussion to "we" and "us" are to TOP SHIPS INC. and its subsidiaries
on a consolidated basis.





United
States Federal Income Taxation of Our Company





Taxation
of Operating Income: In General





Unless
exempt from United States federal income taxation under the rules discussed
below, a foreign corporation is subject to United States federal income taxation
in respect of any income that is derived from the use of vessels, from the
hiring or leasing of vessels for use on a time, voyage or bareboat charter
basis, from the participation in a pool, partnership, strategic alliance, joint
operating agreement, code sharing arrangements or other joint venture it
directly or indirectly owns or participates in that generates such income, or
from the performance of services directly related to those uses, which we refer
to as "shipping income," to the extent that the shipping income is derived from
sources within the United States. For these purposes, 50% of shipping income
that is attributable to transportation that begins or ends, but that does not
both begin and end, in the United States constitutes income from sources within
the United States, which we refer to as "U.S.-source shipping
income."





Shipping
income attributable to transportation that both begins and ends in the United
States is considered to be 100% from sources within the United States. We are
not permitted by law to engage in transportation that produces income which is
considered to be 100% from sources within the United States.





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






104





In the
absence of exemption from tax under Section 883, our gross U.S. source shipping
income would be subject to a 4% tax imposed without allowance for deductions as
described below.





Exemption of Operating Income fromUnited StatesFederal
Income Taxation





Under
Section 883 of the Code and the regulations there under, we will be exempt from
United States federal income taxation on our U.S.-source shipping income
if:





(1)
            we
      are organized in a foreign country, or our country of organization, that
      grants an "equivalent exemption" to corporations organized in the United
      States; and





(2)
            either





(A)
            more
      than 50% of the value of our stock is owned, directly or indirectly, by
      individuals who are "residents" of our country of organization or of
      another foreign country that grants an "equivalent exemption" to
      corporations organized in the United States, which we refer to as the "50%
      Ownership Test," or





(B)
            our
      stock is "primarily and regularly traded on an established securities
      market" in our country of organization, in another country that grants an
      "equivalent exemption" to United States corporations, or in the United
      States, which we refer to as the "Publicly-Traded
  Test".





The
Marshall Islands, Cyprus and Liberia, the jurisdictions where our ship-owning
subsidiaries are incorporated, each grant an "equivalent exemption" to United
States corporations. Therefore, we will be exempt from United States federal
income taxation with respect to our U.S.-source shipping income if either the
50% Ownership Test or the Publicly-Traded Test is met.





The
regulations provide, in pertinent part, that stock of a foreign corporation will
be considered to be "primarily traded" on an established securities market if
the number of shares of each class of stock that are traded during any taxable
year on all established securities markets in that country exceeds the number of
shares in each such class that are traded during that year on established
securities markets in any other single country. Our common stock, which is our
sole class of issued and outstanding stock, is and we anticipate will continue
to be "primarily traded" on the NASDAQ Global Select Market.





Under the
regulations, our common stock will be considered to be "regularly traded" on an
established securities market if one or more classes of our stock representing
more than 50% of our outstanding shares, by total combined voting power of all
classes of stock entitled to vote and total value, is listed on the market which
we refer to as the listing threshold. Since our common stock, our sole class of
stock, is listed on the NASDAQ Global Select Market, we will satisfy the listing
requirement.





It is
further required that with respect to each class of stock relied upon to meet
the listing threshold, (i) such class of stock be traded on the market, other
than in minimal quantities, on at least 60 days during the taxable year or
one-sixth of the days in a short taxable year; and (ii) the aggregate number of
shares of such class of stock traded on such market is at least 10% of the
average number of shares of such class of stock outstanding during such year or
as appropriately adjusted in the case of a short taxable year. We believe we
will satisfy the trading frequency and trading volume tests. Even if this were
not the case, the regulations provide that the trading frequency and trading
volume tests will be deemed satisfied if, as is the case with our common stock,
such class of stock is traded on an established market in the United States and
such stock is regularly quoted by dealers making a market in such
stock.






105





Notwithstanding
the foregoing, the regulations provide, in pertinent part, that each class of
our stock will not be considered to be "regularly traded" on an established
securities market for any taxable year in which 50% or more of each class of our
outstanding shares of the stock are owned, actually or constructively under
specified stock attribution rules, on more than half the days during the taxable
year by persons who each own 5% or more of the value of each class of our
outstanding stock, which we refer to as the "5 Percent Override
Rule."





For
purposes of being able to determine the persons who own 5% or more of our stock,
or "5% Shareholders," the regulations permit us to rely on those persons that
are identified on Schedule 13G and Schedule 13D filings with the SEC, as having
a 5% or more beneficial interest in our common stock. The regulations further
provide that an investment company identified on a SEC Schedule 13G or Schedule
13D filing which is registered under the Investment Company Act of 1940, as
amended, will not be treated as a 5% shareholder for such purposes.





In the
event the 5 Percent Override Rule is triggered, the regulations provide that the
5 Percent Override Rule will not apply if we can establish that among the
closely-held group of 5% Shareholders, there are sufficient 5% Shareholders that
are considered to be qualified shareholders for purposes of Section 883 to
preclude non-qualified 5% Shareholders in the closely-held group from owning 50%
or more of each class of our stock for more than half the number of days during
such year.





We
believe that we currently satisfy the Publicly-Traded Test and are not subject
to the 5 Percent Override Rule and we will take this position for U.S. federal
income tax reporting purposes.  However, there are factual
circumstances beyond our control which could cause us to lose the benefit of
this exemption.





Taxation
in the Absence of Code Section 883 Exemption





To the
extent the benefits of Code Section 883 are unavailable, our U.S. source
shipping income, to the extent not considered to be "effectively connected" with
the conduct of a U.S. trade or business, as described below, would be subject to
a 4% tax imposed by Section 887 of the Code on a gross basis, without the
benefit of deductions. Since under the sourcing rules described above, no more
than 50% of our shipping income would be treated as being derived from U.S.
sources, the maximum effective rate of U.S. federal income tax on our shipping
income would never exceed 2% under the 4% gross basis tax regime.





To the
extent the benefits of the Code Section 883 exemption are unavailable and our
U.S. source shipping income is considered to be "effectively connected" with the
conduct of a U.S. trade or business, as described below, any such "effectively
connected" U.S. source shipping income, net of applicable deductions, would be
subject to the U.S. federal corporate income tax currently imposed at rates of
up to 35%. In addition, we may be subject to the 30% "branch profits" taxes on
earnings effectively connected with the conduct of such trade or business, as
determined after allowance for certain adjustments, and on certain interest paid
or deemed paid attributable to the conduct of its U.S. trade or
business.





Our U.S.
source shipping income would be considered "effectively connected" with the
conduct of a U.S. trade or business only if:


•
              We
      have, or are considered to have, a fixed place of business in the United
      States involved in the earning of shipping income;
      and  •
                  substantially
      all of our U.S. source shipping income is attributable to regularly
      scheduled transportation, such as the operation of a vessel that follows a
      published schedule with repeated sailings at regular intervals between the
      same points for voyages that begin or end in the United
      States.


We do not
have currently or intend to have, or permit circumstances that would result in
having any vessel operating to the United States on a regularly scheduled basis.
Based on the foregoing and on the expected mode of our shipping operations and
other activities, we believe that none of our U.S. source shipping income will
be "effectively connected" with the conduct of a U.S. trade or
business.





United
States Taxation of Gain on Sale of Vessels





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






106





United StatesFederal Income Taxation ofU.S.Holders





As used
herein, the term "U.S. Holder" means a beneficial owner of our common stock
that




•
              is
      a United States citizen or resident, United States corporation or other
      United States entity taxable as a corporation, an estate the income of
      which is subject to United States federal income taxation regardless of
      its source, or a trust if a court within the United States is able to
      exercise primary jurisdiction over the administration of the trust and one
      or more United States persons have the authority to control all
      substantial decisions of the
      trust, •
                  owns
      the common stock as a capital asset, generally, for investment purposes,
      and •
                      owns
      less than 10% of our common stock for United States federal income tax
      purposes.


If a
partnership holds our common stock, the tax treatment of a partner will
generally depend upon the status of the partner and upon the activities of the
partnership. If you are a partner in a partnership holding our common stock, you
are encouraged to consult your tax advisor.





Distributions





Subject
to the discussion of passive foreign investment companies below, any
distributions made by us with respect to our common stock to a U.S. Holder will
generally constitute dividends to the extent of our current or accumulated
earnings and profits, as determined under United States federal income tax
principles. Distributions in excess of such earnings and profits will be treated
first as a nontaxable return of capital to the extent of the U.S. Holder's tax
basis in his common stock on a dollar-for-dollar basis and thereafter as capital
gain. Because we are not a United States corporation, U.S. Holders that are
corporations will not be entitled to claim a dividends received deduction with
respect to any distributions they receive from us. Dividends paid with respect
to our common stock will generally be treated as ''passive category income'' for
purposes of computing allowable foreign tax credits for United States foreign
tax credit purposes.





Dividends
paid on our common stock to a U.S. Holder who is an individual, trust or estate
(a ''U.S. Non-Corporate Holder'') will generally be treated as ''qualified
dividend income'' that is taxable to such U.S. Non-Corporate Holder at
preferential tax rates (through 2010) provided that (1) the common stock is
readily tradable on an established securities market in the United States (such
as the Nasdaq Global Select Market on which our common stock is traded); (2) we
are not a passive foreign investment company for the taxable year during which
the dividend is paid or the immediately preceding taxable year (as discussed in
more detail below); (3) the U.S. Non-Corporate Holder has owned the common stock
for more than 60 days in the 121-day period beginning 60 days before the date on
which the common stock becomes ex-dividend; and (4) the U.S. Non-Corporate
Holder is not under an obligation to make related payments with respect to
positions in substantially similar or related property.





As
discussed below, we expect to be treated as a passive foreign investment
company, or PFIC, for its 2009 taxable year.  Assuming this is the
case, any dividends paid by us during 2009 and 2010 will not be treated as
"qualified dividend income" in the hands of a U.S. Non-Corporate
Holder.  There can be no assurance that any dividends paid on our
common stock will be eligible for these preferential rates in the hands of a
U.S. Non-Corporate Holder.  Legislation has been previously introduced
in the United States Congress which, if enacted in its present form, would
preclude our dividends from qualifying for such preferential rates prospectively
from the date of enactment, even if the we are not treated as a PFIC. Any
dividends out of earnings and profits we pay which are not eligible for these
preferential rates will be taxed as ordinary income to a U.S. Non-Corporate
Holder.  Further, in the absence of legislation extending the term of
the preferential tax rates for qualified dividend income, all dividends received
by a taxpayer in tax years beginning on January 1, 2011 or later will be taxed
at ordinary graduated tax rates.





Special
rules may apply to any ''extraordinary dividend''—generally, a dividend in an
amount which is equal to or in excess of 10% of a shareholder's adjusted basis
in a common share—paid by us. If we pay an ''extraordinary dividend'' on our
common stock that is treated as ''qualified dividend income,'' then any loss
derived by a U.S. Non-Corporate Holder from the sale or exchange of such common
stock will be treated as long-term capital loss to the extent of such
dividend.





Sale, Exchange or other Disposition of Common
Stock





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






107





Passive
Foreign Investment Company Status and Significant Tax Consequences





Special
United States federal income tax rules apply to a U.S. Holder that holds stock
in a foreign corporation classified as a passive foreign investment company for
United States federal income tax purposes. In general, we will be treated as a
passive foreign investment company with respect to a U.S. Holder if, for any
taxable year in which such holder held our common stock, either


•
              at
      least 75% of our gross income for such taxable year consists of passive
      income (e.g., dividends, interest, capital gains and rents derived other
      than in the active conduct of a rental business),
      or •
                  at
      least 50% of the average value of the assets held by the corporation
      during such taxable year produce, or are held for the production of,
      passive
      income.


For
purposes of determining whether we are a passive foreign investment company, we
will be treated as earning and owning our proportionate share of the income and
assets, respectively, of any of our subsidiary corporations in which we own at
least 25 percent of the value of the subsidiary's stock. Income earned, or
deemed earned, by us in connection with the performance of services would not
constitute passive income. By contrast, rental income would generally constitute
"passive income" unless we were treated under specific rules as deriving our
rental income in the active conduct of a trade or business.





In
general, income derived from the bareboat charter of a vessel will be treated as
"passive income" for this purpose and such vessels will be treated as assets
which produce "passive income."  On the other hand, income derived
from the time charter of a vessel will not be treated as "passive income," but
rather will be treated as services income; likewise, time chartered vessels will
generally not be treated as assets which produce "passive income."





For its
2009 taxable year, at least 50% of the average value of our assets consisted of
vessels which were bareboat chartered.  Therefore, we believe that
were we treated as a PFIC for our 2009 taxable year.  We intend to
take necessary steps in order to avoid being classified as a PFIC for 2010 and
future taxable years, such as expanding its fleet through the purchase of
non-passive income producing assets.  However, there can be no
assurance that such remedial measures will be effective to avoid PFIC status for
2010 or any future taxable year.





If we are
a PFIC, then a U.S. Holder will be treated as owning his proportionate share of
the stock of any of our subsidiaries which is a PFIC.  We expect that
certain of our subsidiaries were PFICs in 2009 and therefore a U.S. Holder will
be treated as owning shares in such PFICs.  The PFIC rules discussed
below will apply on a company-by-company basis to us and each of our
subsidiaries which is treated as a PFIC.





Assuming
we are a PFIC, a U.S. Holder will be subject to different taxation rules
depending on whether the U.S. Holder (1) makes an election to treat us as a
"Qualified Electing Fund," which is referred to as a "QEF election," (2) makes a
"mark-to-market" election with respect to our common stock, or (3) makes no
election and therefore is subject to the Default PFIC Regime (as defined
below).  As discussed in detail below, making a QEF election or a
mark-to-market election generally will mitigate the otherwise adverse United
States federal income tax consequences under the Default PFIC
Regime.  However, the mark-to-market election may not be possible with
respect to our subsidiaries which are treated as PFICs.  In addition,
if we were to be treated as a PFIC for any taxable year after 2010, a U.S.
Holder would be required to file an annual report with the IRS for that year
with respect to such holder's common stock.





Taxation ofU.S.Holders Making a Timely QEF
Election





Making
the Election.  A U.S. Holder would make a QEF election with respect to
any year that we are a PFIC by filing IRS Form 8621 with his United States
federal income tax return.  A separate QEF election will need to be
made with respect to us and each of our subsidiaries that is treated as a
PFIC.  We intend to annually provide each U.S. Holder with all
necessary information in order to make and maintain a QEF election with respect
to us and each of our subsidiaries that is treated as a PFIC.  A U.S.
Holder who makes a QEF election for the first taxable year in which he owns
common stock and we are treated as a PFIC, or an Electing Holder, will not be
subject to the Default PFIC Regime (as defined below) for any taxable
year.  A U.S. Holder who does not make a timely QEF election would be
subject the Default PFIC Regime for taxable years during his holding period in
which a QEF election was not in effect, unless such U.S. Holder makes a special
"purging" election.  A U.S. Holder who does not make a timely QEF
election is encouraged to consult such U.S. Holder's tax advisor regarding the
availability of such purging election.






108





Current
Taxation and Dividends.  An Electing Holder must report each year for
United States federal income tax purposes his pro rata share of our ordinary
earnings and our net capital gain, if any, for our taxable year that ends with
or within the taxable year of the Electing Holder, regardless of whether or not
distributions were received from us by the Electing Holder.  An
Electing Holder's adjusted tax basis in his common stock will be increased to
reflect any amounts currently included in income under the QEF
rules.  Distributions of earnings and profits that had been previously
included in income will result in a corresponding reduction in the adjusted tax
basis in the common stock and will not be taxed again once
distributed.  Any other distributions generally will be treated as
discussed above under "Tax Considerations – United States Federal Income
Taxation of U.S. Holders – Distributions."  Income inclusions under
the QEF rules described above generally should be treated as foreign-source
income for United States foreign tax credit limitation purposes, but Electing
Holders should consult their tax advisors in this regard.





Sale,
Exchange or Other Disposition.  An Electing Holder would generally
recognize capital gain or loss on the sale, exchange, or other disposition of
the common stock in an amount equal to the excess of the amount realized on such
disposition over the Electing Holder's adjusted tax basis in the common
stock.  Such gain or loss will be treated as long-term capital gain or
loss if the Electing Holder's holding period in the common stock is greater than
one year at the time of the sale, exchange or other
disposition.  Long-term capital gains of United States Individual
Holders currently are taxable at a maximum rate of 15%.  An Electing
Holder's ability to deduct capital losses is subject to certain
limitations.  Any gain or loss generally will be treated as United
States-source gain or loss for United States foreign tax credit limitation
purposes.




Taxation ofU.S.Holders Making a ''Mark-to-Market''
Election





Making the
Election.  Alternatively, if, as is anticipated, the common
stock is treated as "marketable stock," a U.S. Holder would be allowed to make a
"mark-to-market" election with respect to the common stock, provided the U.S.
Holder completes and files IRS Form 8621 in accordance with the relevant
instructions and related Treasury Regulations.  The common stock will
be treated as "marketable stock" for this purpose if it is "regularly traded" on
a "qualified exchange or other market."  The common stock will be
"regularly traded" on a qualified exchange or other market for any calendar year
during which it is traded (other than in de minimis quantities) on at least 15
days during each calendar quarter.  A "qualified exchange or other
market" means either a United States national securities exchange that is
registered with the SEC, the NASDAQ, or a foreign securities exchange that is
regulated or supervised by a governmental authority of the country in which the
market is located and which satisfies certain regulatory and other
requirements.  We believe that the Nasdaq Global Select Market should
be treated as a "qualified exchange or other market" for this
purpose.  However, it should be noted that a separate mark-to-market
election would need to be made with respect to each of our subsidiaries which is
treated as a PFIC.  The stock of these subsidiaries is not expected to
be "marketable stock."  Therefore, a "mark-to-market" election is not
expected to be available with respect to these subsidiaries.





Current Taxation and
Dividends.  If the "mark-to-market" election is made, the U.S.
Holder generally would include as ordinary income in each taxable year the
excess, if any, of the fair market value of the common stock at the end of the
taxable year over such U.S. Holder's adjusted tax basis in the common
stock  The U.S. Holder would also be permitted an ordinary loss in
respect of the excess, if any, of the U.S. Holder's adjusted tax basis in its
common stock over its fair market value at the end of the taxable year, but only
to the extent of the net amount previously included in income as a result of the
mark-to-market election.  Any income inclusion or loss under the
preceding rules should be treated as gain or loss from the sale of common stock
for purposes of determining the source of the income or
loss.  Accordingly, any such gain or loss generally should be treated
as United States-source income or loss for United States foreign tax credit
limitation purposes.  A U.S. Holder's tax basis in his common stock
would be adjusted to reflect any such income or loss
amount.  Distributions by us to a U.S. Holder who has made a
mark-to-market election generally will be treated as discussed above under "Tax
Considerations – United States Federal Income Taxation of U.S. Holders –
Distributions."





Sale, Exchange or Other
Disposition.  Gain realized on the sale, exchange, redemption
or other disposition of the common stock would be treated as ordinary income,
and any loss realized on the sale, exchange, redemption or other disposition of
the common stock would be treated as ordinary loss to the extent that such loss
does not exceed the net mark-to-market gains previously included in income by
the U.S. Holder.  Any loss in excess of such previous inclusions would
be treated as a capital loss by the U.S. Holder.  A U.S. Holder's
ability to deduct capital losses is subject to certain
limitations.  Any such gain or loss generally should be treated as
United States-source income or loss for United States foreign tax credit
limitation purposes.





Taxation ofU.S.Holders Not Making a Timely QEF or
Mark-to-Market Election





Finally,
a U.S. Holder who does not make either a QEF election or a "mark-to-market"
election, or a Non-Electing Holder, would be subject to special rules, or the
Default PFIC Regime, with respect to (1) any excess distribution (i.e., the
portion of any distributions received by the Non-Electing Holder on the common
stock in a taxable year in excess of 125% of the average annual distributions
received by the Non-Electing Holder in the three preceding taxable years, or, if
shorter, the Non-Electing Holder's holding period for the common stock), and (2)
any gain realized on the sale, exchange, redemption or other disposition of the
common stock.






109





Under the
Default PFIC Regime:




•
              the
      excess distribution or gain would be allocated ratably over the
      Non-Electing Holder's aggregate holding period for the common
      stock;  •
                the
      amount allocated to the current taxable year and any taxable year before
      we became a PFIC would be taxed as ordinary income;
      and •
                    the
      amount allocated to each of the other taxable years would be subject to
      tax at the highest rate of tax in effect for the applicable class of
      taxpayer for that year, and an interest charge for the deemed deferral
      benefit would be imposed with respect to the resulting tax attributable to
      each such other taxable
      year.


Any
distributions other than "excess distributions," by us to a Non-Electing Holder
will be treated as discussed above under "Tax Considerations – United States
Federal Income Taxation of U.S. Holders – Distributions."





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





United
States Federal Income Taxation of "Non-U.S. Holders"





A
beneficial owner of common stock that is not a U.S. Holder is referred to herein
as a "Non-U.S. Holder."





Dividends
on Common Stock





Non-U.S.
Holders generally will not be subject to United States federal income tax or
withholding tax on dividends received from us with respect to our common stock,
unless that income is effectively connected with the Non-U.S. Holder's conduct
of a trade or business in the United States. If the Non-U.S. Holder is entitled
to the benefits of a United States income tax treaty with respect to those
dividends, that income is taxable only if it is attributable to a permanent
establishment maintained by the Non-U.S. Holder in the United
States.





Sale, Exchange or Other Disposition of Common
Stock





Non-U.S.
Holders generally will not be subject to United States federal income tax or
withholding tax on any gain realized upon the sale, exchange or other
disposition of our common stock, unless:




•
            the
      gain is effectively connected with the Non-U.S. Holder's conduct of a
      trade or business in the United States. If the Non-U.S. Holder is entitled
      to the benefits of an income tax treaty with respect to that gain, that
      gain is taxable only if it is attributable to a permanent establishment
      maintained by the Non-U.S. Holder in the United States;
      or


•
                the
      Non-U.S. Holder is an individual who is present in the United States for
      183 days or more during the taxable year of disposition and other
      conditions are
      met.


If the
Non-U.S. Holder is engaged in a United States trade or business for United
States federal income tax purposes, the income from the common stock, including
dividends and the gain from the sale, exchange or other disposition of the stock
that is effectively connected with the conduct of that trade or business will
generally be subject to regular United States federal income tax in the same
manner as discussed in the previous section relating to the taxation of U.S.
Holders. In addition, if you are a corporate Non-U.S. Holder, your earnings and
profits that are attributable to the effectively connected income, which are
subject to certain adjustments, may be subject to an additional branch profits
tax at a rate of 30%, or at a lower rate as may be specified by an applicable
income tax treaty.





Backup
Withholding and Information Reporting





In
general, dividend payments, or other taxable distributions, made within the
United States to you will be subject to information reporting requirements. In
addition, such payments will be subject to backup withholding tax if you are a
non-corporate U.S. Holder and you:




•
              fail
      to provide an accurate taxpayer identification
      number;  110
 •
                are
      notified by the Internal Revenue Service that you have failed to report
      all interest or dividends required to be shown on your federal income tax
      returns;
      or •
                      in
      certain circumstances, fail to comply with applicable certification
      requirements.


Non-U.S.
Holders may be required to establish their exemption from information reporting
and backup withholding by certifying their status on IRS Form W-8BEN, W-8ECI or
W-8IMY, as applicable.





If you
sell your common stock to or through a United States office or broker, the
payment of the proceeds is subject to both United States backup withholding and
information reporting unless you certify that you are a non-U.S. person, under
penalties of perjury, or you otherwise establish an exemption. If you sell your
common stock through a non-United States office of a non-United States broker
and the sales proceeds are paid to you outside the United States then
information reporting and backup withholding generally will not apply to that
payment. However, United States information reporting requirements, but not
backup withholding, will apply to a payment of sales proceeds, even if that
payment is made to you outside the United States, if you sell your common stock
through a non-United States office of a broker that is a United States person or
has some other contacts with the United States. Backup withholding tax is not an
additional tax. Rather, you generally may obtain a refund of any amounts
withheld under backup withholding rules that exceed your income tax liability by
filing a refund claim with the Internal Revenue Service.





F.           Dividends
and Paying Agents





Not applicable.





G.           Statement
by Experts





Not applicable.





H.           Documents
on Display





We file
annual reports and other information with the SEC. You may read and copy any
document we file with the SEC at its public reference room at 100 F Street,
N.E., Room 1580, Washington, D.C. 20549. You may also obtain copies of this
information by mail from the public reference section of the SEC, 100 F Street,
N.E., Room 1580, Washington, D.C. 20549, at prescribed rates. Please call the
SEC at 1-800-SEC-0330 for further information on the operation of the public
reference room. Our SEC filings are also available to the public at the web site
maintained by the SEC at http://www.sec.gov, as well as on our website at http://www.topships.org





I.           Subsidiary
Information





Not applicable.





ITEM
11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Our risk management
policy




Our
primary market risks relate to adverse movements in freight rates in the product
tanker market and in the Handymax and Panamax sectors of the drybulk market. In
2008, we began to implement our strategy of entering into long term period
charters (either time or bareboat). As of the date of this annual report, all of
our vessels are on long term period charters with duration of more than one year
except for one of our tankers is on a period charter with a duration of less
than one year, and therefore we believe we have mitigated this market risk until
the expiration of each charter.





Our
policy is to continuously monitor our exposure to other business risks,
including the impact of changes in interest rates, currency rates, and bunker
prices on earnings and cash flows. We assess these risks and, when appropriate,
enter into derivative contracts with credit-worthy counter parties to minimize
our exposure to the risks. With regard to bunker prices, as our employment
policy for our vessels has been and is expected to continue to be with a high
percentage of our fleet on period employment, we are not directly exposed with
respect to those vessels to increases in bunker fuel prices, as these are the
responsibility of the charterer under period charter arrangements.





Interest rate
risk





We are
subject to market risks relating to changes in interest rates because we have
floating rate debt outstanding under our loan agreements on which we pay
interest based on LIBOR, or cost of funds for certain banks, plus a margin. In
order to manage our exposure to changes in interest rates due to this floating
rate indebtedness, we enter into interest rate swap agreements. Set forth below
is a table of our interest rate swap arrangements as of December 31, 2008 and
2009 (in thousands of U.S. Dollars).







111




Counterparty
            
            SWAP Number (Nr)
            
            
            Notional Amount
            
            Period
            Effective Date
            
            Interest Rate Payable
            
            
            Fair Value - Asset
    (Liability)December 31, 2009
            
            
            
            
            
            
            
            December 31, 2008
            
            
            December 31, 2009RBS
            
            
            1
            
            
            
            
            4
      years
            June
      30, 2005
            
            
            4.66
            %
            
            $
            (270
            )
            
            
            -HSH
      NORDBANK
            
            
            2
            
            
            $
            9,923
            
            2
      years
            December
      12, 2008
            
            
            4.80
            %
            
            $
            (701
            )
            
            $
            (444
            )HSH
      NORDBANK
            
            
            3
            
            
            $
            9,923
            
            2
      years
            December
      12, 2008
            
            
            4.80
            %
            
            $
            (701
            )
            
            $
            (444
            )HSH
      NORDBANK
            
            
            4
            
            
            $
            9,923
            
            2
      years
            December
      12, 2008
            
            
            4.80
            %
            
            $
            (701
            )
            
            $
            (444
            )RBS
            
            
            5
            
            
            $
            10,000
            
            7
      years
            September
      30, 2006
            
            
            4.23
            %
            
            $
            (1,852
            )
            
            $
            (907
            )RBS
            
            
            6
            
            
            $
            10,000
            
            7
      years
            September
      30, 2006
            
            
            4.11
            %
            
            $
            (1,812
            )
            
            $
            (869
            )EGNATIA
            
            
            7
            
            
            $
            10,000
            
            7
      years
            July
      3, 2006
            
            
            4.76
            %
            
            $
            (1,650
            )
            
            $
            (1,090
            )HSH
      NORDBANK
            
            
            8
            
            
            $
            11,938
            
            5
      years
            March
      27, 2008
            
            
            4.60
            %
            
            $
            (732
            )
            
            $
            (620
            )HSH
      NORDBANK
            
            
            9
            
            
            $
            6,798
            
            5
      years
            March
      27, 2008
            
            
            4.60
            %
            
            $
            (468
            )
            
            $
            (320
            )EMPORIKI
            
            
            10
            
            
            $
            20,000
            
            7
      years
            May
      15, 2008
            
            
            10.85
            %
            
            $
            (3,944
            )
            
            $
            (5,975
            )HSH
      NORDBANK
            
            
            11
            
            
            $
            12,345
            
            7
      years
            July
      15, 2008
            
            
            5.55
            %
            
            $
            (2,344
            )
            
            $
            (1,316
            )HSH
      NORDBANK
            
            
            12
            
            
            $
            15,108
            
            4
      years
            June
      28, 2010
            
            
            4.73
            %
            
            $
            (1,263
            )
            
            $
            (921
            )DVB
            
            
            13
            
            
            $
            32,695
            
            3
      years
            March,
      19, 2009
            
            
            2.095
            %
            
            
            -
            
            
            $
            (453
            )$
            (16,438
            )
            
            $
            (13,803
            )




SWAP Nr 1 - This SWAP agreement expired during May
2009.
 
 SWAPS Nr 2, 3, 4, 12, 13 -Under these SWAP agreements, we pay a fixed rate and we receive variable
three month LIBOR.
 
 SWAPS Nr 5, 6 -Under these
SWAP agreements, for the first year (2006-2007) we paid RBS a fixed rate of
4.23% and 4.11% respectively. From the second year onwards we pay a fixed rate
of 4.23% and 4.11% respectively plus a coupon equal to three times the
difference between 0.08% and the difference of the 10 year U.S. Dollar swap rate
and the two year U.S. Dollar swap rate for the payment period (quarter) in
question, plus the coupon of the previous payment period (quarter). The coupon
of the previous payment period is essentially the same formula calculated for
the previous payment period (quarter). The coupon payments are capped at 10.25%.
We receive from RBS variable three month LIBOR.
 
 SWAP Nr 7 - Under this SWAP
agreement, we paid Egnatia a fixed rate of 4.70% for the first payment period
(quarter) in 2006. From the second quarter onwards we pay a fixed rate of 4.70%
plus a coupon equal to three times the difference between 0.05% and the
difference of the 10 year U.S. Dollar swap rate and the two year U.S. Dollar
swap rate for the payment period (quarter) in question, plus the coupon of the
previous payment period (quarter). The coupon of the previous payment period is
essentially the same formula calculated for the previous payment period
(quarter). The coupon payment is capped at 8.80%. We receive from Egnatia
variable three month LIBOR.
 
 SWAPS Nr 8, 9– Under these
SWAP agreements, we pay a fixed rate of the three-month U.S. Dollar LIBOR
multiplied with the factor 0.95 per annum if the three month U.S. Dollar LIBOR
is between 1.50% and 4.84%. In case the U.S. Dollar LIBOR is lower than 1.50% or
higher 4.84%, we will pay a fixed rate of 4.60% per annum for that period. We
receive from HSH Nordbank variable three month LIBOR.
 
 SWAP Nr 10 –Under this SWAP
agreement, we received an upfront amount of $1.5 million. During the first year,
we received a fixed rate of 5.25% and paid a fixed rate of 5.50%. From the
second year, we receive quarterly a fixed rate of 5.25% and we pay a rate of
5.10%, if either of two conditions are met: i) the difference between the 10
year Euro swap rate and the 2 year Euro swap rate is greater or equal than
-0.15% and ii) the six month USD LIBOR is between 1.00% and 6.00%. Otherwise, we
pay 10.85% less 5.75% multiplied by a cushion consisting of the number of days
that either of the above two conditions are not met, divided by the total number
of days of the period multiplied by the previous quarter's cushion. The first
cushion, as of the end of the first year, was set to 1. During the third and
fourth quarter of 2009, the six month USD LIBOR has been consistently below 1%
and the cushion has become zero. As a result we will be paying 10.85% until the
instrument's maturity date.
 
 SWAP Nr 11 -Under this SWAP
agreement, we receive the three month LIBOR and pay 5.55%, less 2.5% multiplied
by the quotient of the number of days the three month LIBOR and the 10 year swap
rate falls within certain fixed ranges.
 
 As of
December 31, 2009, our total bank indebtedness was $404.3 million, (excluding
unamortized financing fees of $5.2 million), of which $158.7 million was covered
by the interest rate swap agreements described above. As set forth in the above
table, as of December 31, 2009, we paid fixed rates ranging from 2.095% to
10.85% and received floating rates on the SWAPs that are based on three month
LIBOR, of approximately
0.28% as well as a fixed rate of 5.25% from Swap Nr 10. As of December
31, 2009 and March 31, 2010, our interest rate swap agreements are, on an
average basis, above the prevailing three month LIBOR rates over which our loans
are priced due to the steep reduction in prevailing interest rates during
2009.  Accordingly, the effect of these interest rate swap agreements
in 2009 and the first three months of 2010 has been to increase our loss on
financial instruments.


112











Based on
the amount of our outstanding indebtedness as of December 31, 2009 that is not
covered by interest swap arrangements as of December 31, 2009, a hypothetical
one percentage point increase in the three month U.S. Dollar LIBOR would
increase our interest rate expense for 2010, on an annualized basis, by
approximately $2.56 million. We have not and do not intend to enter into
interest rate swaps for speculative purposes.








Foreign exchange rate
fluctuation





We
generate all of our revenues in U.S. Dollars but incur certain expenses in
currencies other than U.S. Dollars, mainly Euro. During 2009, approximately 2%
of our expenses were in other currencies and 19% were in Euro. For accounting
purposes, expenses incurred in other currencies are converted into U.S. Dollars
at the exchange rate prevailing on the date of each transaction. We have not
hedged currency exchange risks associated with our expenses and our operating
results could be adversely affected as a result. We constantly monitor the U.S.
Dollar exchange rate and we try to achieve the most favorable exchange rates
from the financial institutions we work with.





Based on
our total expenses for the year ended December 31, 2009, and using as an
exchange rate the 2009 average exchange rate of $1.3912 / 1 Euro, a 5% decrease
in the exchange rate to $1.3217 / 1 Euro, which reflects current exchange rate
levels, would result in an expense saving of approximately $0.80
million.





ITEM 12. DESCRIPTION OF SECURITIES
OTHER THAN EQUITY SECURITIES





Not
Applicable.





113


PART
II





ITEM
13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES





As of
December 31, 2009 we were in breach of certain loan covenants (Refer to
discussion of covenant breaches under "Item 5 – Operating and Financial Review
And Prospects - Tabular Disclosure of Contractual Obligations – Long term debt"
above. Despite these breaches, neither we nor any of our subsidiaries have been
subject to a material default in the payment of principal, interest, a sinking
fund or purchase fund installment or any other material default that was not
cured within 30 days.





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





Not
Applicable.





ITEM
15T.                      CONTROLS
AND PROCEDURES





a)           Disclosure
Controls and Procedures.





Management,
under the supervision and with the participation of the Chief Executive Officer
and the Chief Financial Officer, evaluated the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to Rules
13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934
(the "Exchange Act"), as of the end of the period covered by this annual report
(as of December 31, 2009).





The term
disclosure controls and procedures are defined under SEC rules as controls and
other procedures of an issuer that are designed to ensure that information
required to be disclosed by the issuer in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Act is accumulated and communicated to the
issuer's management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. There are inherent limitations
to the effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or overriding of
the controls and procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control
objectives.





Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective as
of December 31, 2009.





b)           Management's
Annual Report on Internal Control over Financial Reporting.





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





Internal
control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Exchange Act as a process designed by, or under the
supervision of, the Company's principal executive and principal financial
officers and effected by the Company's Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:





114




•
              Pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company; •
                    Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being
      made only in accordance with authorizations of Company's management and
      directors;
      and •
                          Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on the financial
      statements.


Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control system's objectives will be met. Our disclosure controls and procedures
are designed to provide reasonable assurance of achieving their objectives. The
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Further, because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to
error or fraud will not occur or that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.





Our
management with the participation of our Chief Executive Officer and Chief
Financial Officer assessed the effectiveness of the Company's internal control
over financial reporting as of December 31, 2009. In making this assessment, the
Company used the control criteria framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission, or COSO, published in its
report entitled Internal Control-Integrated Framework. As a result of its
assessment, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's internal controls over financial reporting are effective as
of December 31, 2009.





This
annual report does not contain an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the SEC that permit the
company to provide only management's report in this annual report.





c)           Changes
in Internal Control over Financial Reporting


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








ITEM
16A.                      AUDIT
COMMITTEE FINANCIAL EXPERT




We have
established an audit committee composed of three members that is responsible for
reviewing our accounting controls and recommending to the Board of Directors the
engagement of our outside auditors. Each member is an independent director under
the corporate governance rules of the NASDAQ Global Select Market. The members
of the audit committee are Messrs. Gibbs, Hamboullas and Economou. Mr. Gibbs
meets the qualifications of an audit committee financial expert.





115








ITEM
16B.                      CODE OF ETHICS




The Board
of Directors has adopted a Corporate Code of Business Ethics and Conduct that
applies to all employees, directors and officers, that complies with applicable
guidelines issued by the SEC. The finalized Code of Ethics has been approved by
the Board of Directors and was distributed to all employees, directors and
officers. We will also provide any person a hard copy of our code of ethics free
of charge upon written request. Shareholders may direct their requests to the
attention of Ms. Eirini Alexandropoulou at the Company's registered address and
phone numbers.





ITEM
16C.                      PRINCIPAL
AUDITOR FEES AND SERVICES




Aggregate
fees billed to the Company for the years ended December 2008 and 2009 represent
fees billed by the Company's principal accounting firm, Deloitte, the other
member firms of Deloitte Touche Tohmatsu, and their respective affiliates
(collectively, "Deloitte & Touche").





U.S. Dollars in
      thousands,
            
            Year
      Ended2008
            
            
            2009Audit  Fees
            
            
            1,439
            
            
            
            812Tax
      Fees*
            
            
            -
            
            
            
            13Total
      Fees
            
            
            1,439
            
            
            
            825





*
Includes fees for PFIC Tax Services







Our audit
committee pre-approves all audit, audit-related and non-audit services not
prohibited by law to be performed by our independent auditors and associated
fees prior to the engagement of the independent auditor with respect to such
services.





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





See Item
16A above.





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





During
the fourth quarter of 2008, our Board of Directors authorized a share repurchase
program of up to $20 million for a share price of not more than $2.50 per share
for the duration of one year. We began share repurchases during the fourth
quarter of 2008 and the transactions were made in the open market on NASDAQ
under Rule 10b-18 of the Exchange Act.





As at
December 31, 2008 we had repurchased and cancelled an amount of 396,949 shares
from the open market at an average price of $1.82. We continued our repurchase
program until February 3, 2009 and during the first two months of 2009 we
repurchased an amount of 358,601 shares from the open market at an average price
of $2.02. The outstanding amount of 358,601 shares was cancelled effective as of
February 25, 2009.





ITEM
16F.                      CHANGE
IN REGISTRANT'S CERTIFYING ACCOUNTANT





Not
applicable.





ITEM
16G.                      CORPORATE
GOVERNANCE





The
Company has certified to NASDAQ that its corporate governance practices are in
compliance with, and are not prohibited by, the laws of the Republic of the
Marshall Islands. Therefore, the Company is exempt from all of NASDAQ's
corporate governance practices other than the requirements regarding the
disclosure of a going concern audit opinion, notification of material
non-compliance with NASDAQ corporate governance practices, and the establishment
and composition of an audit committee that complies with SEC Rule 10A-3 and a
formal written audit committee charter. The practices followed by the Company in
lieu of NASDAQ's corporate governance rules are described below.


•
              The
      Company holds annual meetings of shareholders under the BCA, similar to
      NASDAQ
      requirements.  •
                In
      lieu of obtaining an independent review of related party transactions for
      conflicts of interests, the disinterested members of the Board of
      Directors approve related party transactions under the
      BCA.
 •
                  In
      lieu of obtaining shareholder approval prior to the issuance of designated
      securities, the Company complies with provisions of the BCA requiring that
      the Board of Directors approves share
      issuances. •
                        The
      Board of Directors does not hold regularly scheduled meetings at which
      only independent directors are
      present.


116


PART
III








ITEM
17.                      FINANCIAL
STATEMENTS





Not Applicable.





ITEM
18.                      FINANCIAL
STATEMENTS





The following financial statements,
together with the report of Deloitte, Hadjipavlou, Sofianos & Cambanis S.A.,
Certified Auditors Accountants S.A., thereon, are filed as part of this
report:








117


TOP
SHIPS INC.





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS








PageReport
      of Independent Registered Public Accounting Firm
            
            F-
      2Consolidated
      Balance Sheets as of December 31, 2008 and 2009
            
            F-3Consolidated
      Statements of Operations
              for
      the years ended December 31, 2007, 2008 and 2009
            
            F-4Consolidated
      Statements of Stockholders' Equity
              for
      the years ended December 31, 2007, 2008 and 2009
            
            F-5Consolidated
      Statements of Cash Flows
              for
      the years ended December 31, 2007, 2008 and 2009
            
            F-6Notes
      to Consolidated Financial Statements
            
            F-8Schedule
      I – Condensed Financial Information of Top Ships Inc. (Parent Company
      Only)
            
            F-51











F-1


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of Top Ships Inc., Majuro, Republic of the
Marshall Islands





We have
audited the accompanying consolidated balance sheets of Top Ships Inc. and
subsidiaries (the "Company") as of December 31, 2008 and 2009, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2009.  Our
audits also included the financial statement schedule listed in the Index at
Item 18.  These financial statements and financial statement schedule
are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Top Ships Inc. and subsidiaries as of
December 31, 2008 and 2009, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2009, in
conformity with accounting principles generally accepted in the United States of
America.  Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects, the information set forth
therein.





The
accompanying consolidated financial statements for the years ended December 31,
2008 and 2009, have been prepared assuming that the Company will continue as a
going concern.  As discussed in Note 3 to the consolidated financial
statements, the Company's inability to comply with financial covenants under its
current loan agreements as of December 31, 2009 and 2008 and its negative
working capital position raise substantial doubt about its ability to continue
as a going concern.  Management's plans concerning these matters are
discussed in Note 3 to the consolidated financial statements.  The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.








/s/
Deloitte. Hadjipavlou, Sofianos, & Cambanis S.A.


Athens,
Greece


June 18,
2010











F-2





TOP
      SHIPS INC.CONSOLIDATED
      BALANCE SHEETSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of U.S. Dollars - except share and per share
      data)  December
      31,
              
              
              December
      31,2008
              
              
              2009ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              46,242
              
              
              $
              -Trade
      accounts receivable, net of provision of $3,275 and $1,949 as of
      December 31, 2008 and 2009, respectively
              
              
              4,208
              
              
              
              328Insurance
      claims
              
              
              173
              
              
              
              183Inventories
      (Note 7)
              
              
              965
              
              
              
              489Advances
      to various creditors
              
              
              776
              
              
              
              403Prepayments
      and other (Note 8)
              
              
              4,724
              
              
              
              2,384Total
      current assets
              
              
              57,088
              
              
              
              3,787FIXED
      ASSETS:Advances
      for vessels under construction (Note 9)
              
              
              159,971
              
              
              
              -Vessels,
      net (Notes 10 and 11)
              
              
              414,515
              
              
              
              642,953Other
      fixed assets, net (Note 5)
              
              
              6,545
              
              
              
              6,165Total
      fixed assets
              
              
              581,031
              
              
              
              649,118OTHER
      NON CURRENT ASSETS:Long-term
      receivables (Note 6)
              
              
              7,681
              
              
              
              -Restricted
      cash (Notes 6 and 12)
              
              
              52,575
              
              
              
              22,244Total
      assets
              
              $
              698,375
              
              
              $
              675,149LIABILITIES AND STOCKHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Current
      portion of long-term debt (Note 12)
              
              $
              342,479
              
              
              $
              399,087Current
      portion of financial instruments (Note 21)
              
              
              16,438
              
              
              
              13,803Accounts
      payable
              
              
              8,968
              
              
              
              3,942Other
      current liabilities (Note 13)
              
              
              5,000
              
              
              
              -Accrued
      liabilities
              
              
              7,435
              
              
              
              5,546Unearned
      revenue
              
              
              6,614
              
              
              
              5,575Total
      current liabilities
              
              
              386,934
              
              
              
              427,953FAIR
      VALUE OF BELOW MARKET TIME CHARTER (Note 11)
              
              
              3,911
              
              
              
              -DEFERRED
      GAIN ON SALE AND LEASEBACK OF VESSELS (Note 6)
              
              
              15,479
              
              
              
              -COMMITMENTS
      AND CONTINGENCIES (Note 14)Total
      liabilities
              
              
              406,324
              
              
              
              427,953STOCKHOLDERS'
      EQUITY:Preferred
      stock, $0.01 par value; 20,000,000 shares authorized; none
      issued
              
              
              -
              
              
              
              -Common
      stock, $0.01 par value; 1,000,000,000 shares authorized; 29,901,048 and
      32,894,696 shares issued and outstanding at December 31, 2008 and
      2009, respectively (Note 15)
              
              
              283
              
              
              
              311Additional
      paid-in capital (Note 15)
              
              
              271,056
              
              
              
              276,305Accumulated
      other comprehensive income
              
              
              24
              
              
              
              88Retained
      earnings / (Accumulated deficit)
              
              
              20,688
              
              
              
              (29,508
              )Total
      stockholders' equity
              
              
              292,051
              
              
              
              247,196Total
      liabilities and stockholders' equity
              
              $
              698,375
              
              
              $
              675,149
  The
      accompanying notes are an integral part of these consolidated financial
      statements.











F-3







TOP
      SHIPS INC.CONSOLIDATED
      STATEMENTS OF OPERATIONSFOR
      THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009(Expressed
      in thousands of U.S. Dollars - except share and per share
      data)  2007
              
              
              2008
              
              
              2009REVENUES:Revenues
      (Notes 4 and 11)
              
              $
              252,259
              
              
              $
              257,380
              
              
              $
              107,979EXPENSES:Voyage
      expenses (Note 18)
              
              
              59,414
              
              
              
              38,656
              
              
              
              3,372Charter
      hire expense (Note 6)
              
              
              94,118
              
              
              
              53,684
              
              
              
              10,827Amortization
      of deferred gain on sale and leaseback of vessels and write-off of
      seller's credit (Note 6)
              
              
              (15,610
              )
              
              
              (18,707
              )
              
              
              (7,799
              )Lease
      termination expense (Note 6)
              
              
              -
              
              
              
              -
              
              
              
              15,391Vessel
      operating expenses (Note 18)
              
              
              67,914
              
              
              
              67,114
              
              
              
              23,739Dry-docking
      costs
              
              
              25,094
              
              
              
              10,036
              
              
              
              4,602Vessel
      depreciation (Note 10)
              
              
              27,408
              
              
              
              32,664
              
              
              
              31,585General
      and administrative expenses
              
              
              25,000
              
              
              
              31,388
              
              
              
              23,835Gain
      on sale of vessels (Note 10)
              
              
              (1,961
              )
              
              
              (19,178
              )
              
              
              -Impairment
      on vessels
              
              
              -
              
              
              
              -
              
              
              
              36,638Operating
      (loss) income
              
              
              (29,118
              )
              
              
              61,723
              
              
              
              (34,211
              )OTHER
      INCOME (EXPENSES):Interest
      and finance costs (Notes 12 and 19)
              
              
              (19,518
              )
              
              
              (25,764
              )
              
              
              (13,969
              )Loss
      on financial instruments (Note 21)
              
              
              (3,704
              )
              
              
              (12,024
              )
              
              
              (2,081
              )Interest
      income
              
              
              3,248
              
              
              
              1,831
              
              
              
              235Other,
      net
              
              
              16
              
              
              
              (127
              )
              
              
              (170
              )Total
      other expenses, net
              
              
              (19,958
              )
              
              
              (36,084
              )
              
              
              (15,985
              )Net
      (loss) income
              
              $
              (49,076
              )
              
              $
              25,639
              
              
              $
              (50,196
              )(Loss)
      earnings per common share, basic and diluted (Note 17)
              
              $
              (4.09
              )
              
              $
              0.97
              
              
              $
              (1.78
              )Weighted
      average common shares outstanding, basic and diluted
              
              
              11,986,857
              
              
              
              25,445,031
              
              
              
              28,230,585
  The
      accompanying notes are an integral part of these consolidated financial
      statements.





F-4








TOP
      SHIPS INC.CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITYFOR
      THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009(Expressed
      in thousands of U.S. Dollars - except share and per share
      data)  Accumulated
              
              
              RetainedAdditional
              
              
              Other
              
              
              Earnings
      /Comprehensive
              
              
              Common
      Stock
              
              
              Paid-in
              
              
              Comprehensive
              
              
              (Accumulated(Loss)
      Income
              
              
              #
      of Shares
              
              
              Par
      Value
              
              
              Capital
              
              
              (Loss)
      Income
              
              
              Deficit)
              
              
              TotalBALANCE,
      December 31, 2006
              
              
              
              
              
              10,809,701
              
              
              $
              108
              
              
              $
              116,971
              
              
              $
              (6
              )
              
              $
              44,125
              
              
              $
              161,198Net
      loss
              
              $
              (49,076
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (49,076
              )
              
              
              (49,076
              )Stock
      based compensation
              
              
              
              
              
              
              213,000
              
              
              
              2
              
              
              
              933
              
              
              
              
              
              
              
              
              
              
              
              935Issuance
      of common stock, net
              
              
              
              
              
              
              9,485,874
              
              
              
              95
              
              
              
              98,246
              
              
              
              
              
              
              
              
              
              
              
              98,341Other
      comprehensive income-
      Accumulated unrecognized actuarial gain
              
              
              10
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              10
              
              
              
              
              
              
              
              10Comprehensive
      loss
              
              $
              (49,066
              )BALANCE,
      December 31, 2007
              
              
              
              
              
              
              20,508,575
              
              
              $
              205
              
              
              $
              216,150
              
              
              $
              4
              
              
              $
              (4,951
              )
              
              $
              211,408Net
      income
              
              $
              25,639
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              25,639
              
              
              
              25,639Stock
      based compensation
              
              
              
              
              
              
              2,521,009
              
              
              
              9
              
              
              
              5,107
              
              
              
              
              
              
              
              
              
              
              
              5,116Cancellation
      of fractional shares
              
              
              
              
              
              
              (279
              )
              
              
              -
              
              
              
              (2
              )
              
              
              
              
              
              
              
              
              
              
              (2
              )Repurchase
      and cancellation of common stock (396.949 shares)
              
              
              
              
              
              
              (396,949
              )
              
              
              (4
              )
              
              
              (727
              )
              
              
              
              
              
              
              
              
              
              
              (731
              )Issuance
      of common stock, net
              
              
              
              
              
              
              7,268,692
              
              
              
              73
              
              
              
              50,528
              
              
              
              
              
              
              
              
              
              
              
              50,601Other
      comprehensive income-
      Accumulated unrecognized actuarial gain
              
              
              20
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              20
              
              
              
              
              
              
              
              20Comprehensive
      income
              
              $
              25,659BALANCE,
      December 31, 2008
              
              
              
              
              
              
              29,901,048
              
              
              $
              283
              
              
              $
              271,056
              
              
              $
              24
              
              
              $
              20,688
              
              
              $
              292,051Net
      loss
              
              $
              (50,196
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (50,196
              )
              
              
              (50,196
              )Stock
      based compensation
              
              
              
              
              
              
              1,122,249
              
              
              
              10
              
              
              
              3,457
              
              
              
              
              
              
              
              
              
              
              
              3,467Cancellation
      of fractional sharesRepurchase
      and cancellation of common stock (358,601 shares)
              
              
              
              
              
              
              (358,601
              )
              
              
              (4
              )
              
              
              (728
              )
              
              
              
              
              
              
              
              
              
              
              (732
              )Issuance
      of common stock, net
              
              
              
              
              
              
              2,230,000
              
              
              
              22
              
              
              
              2,520
              
              
              
              
              
              
              
              
              
              
              
              2,542Other
      comprehensive income-
      Accumulated unrecognized actuarial gain
              
              
              64
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              64
              
              
              
              
              
              
              
              64Comprehensive
      loss
              
              $
              (50,132
              )BALANCE,
      December 31, 2009
              
              
              
              
              
              
              32,894,696
              
              
              $
              311
              
              
              $
              276,305
              
              
              $
              88
              
              
              $
              (29,508
              )
              
              $
              247,196
  The
      accompanying notes are an integral part of these consolidated financial
      statements.





F-5








TOP
      SHIPS INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWSFOR
      THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009(Expressed
      in thousands of U.S. Dollars)  2007
                  
                  
                  2008
                  
                  
                  2009Cash
      Flows (used in) provided by Operating Activities:Net(
      loss) income
                  
                  
                  (49,076
                  )
                  
                  
                  25,639
                  
                  
                  
                  (50,196
                  )Adjustments
      to reconcile net (loss) income to net cash(used
      in) provided by operating activities:Depreciation
                  
                  
                  28,043
                  
                  
                  
                  33,474
                  
                  
                  
                  32,466Amortization
      and write off of deferred financing costs
                  
                  
                  2,081
                  
                  
                  
                  5,131
                  
                  
                  
                  2,539Stock-based
      compensation expense
                  
                  
                  935
                  
                  
                  
                  5,116
                  
                  
                  
                  3,467Change
      in fair value of financial instruments
                  
                  
                  4,904
                  
                  
                  
                  10,650
                  
                  
                  
                  (2,635
                  )Financial
      instrument termination payments
                  
                  
                  -
                  
                  
                  
                  (7,500
                  )
                  
                  
                  -Amortization
      of deferred gain on sale and leaseback of vessels and write-off of
      seller's credit
                  
                  
                  (15,610
                  )
                  
                  
                  (18,707
                  )
                  
                  
                  (7,799
                  )Amortization
      of fair value of below market time charter
                  
                  
                  (1,413
                  )
                  
                  
                  (21,795
                  )
                  
                  
                  (3,911
                  )Loss
      (gain) on sale of other fixed assets
                  
                  
                  69
                  
                  
                  
                  126
                  
                  
                  
                  165Gain
      on sale of vessels
                  
                  
                  (1,961
                  )
                  
                  
                  (19,178
                  )
                  
                  
                  -Impairment
      on vessels
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  36,638Provision
      for doubtful accounts
                  
                  
                  1,302
                  
                  
                  
                  3,142
                  
                  
                  
                  1,017Decrease
      (Increase) in:Trade
      accounts receivable
                  
                  
                  10,701
                  
                  
                  
                  7,834
                  
                  
                  
                  2,863Insurance
      claims
                  
                  
                  (1,656
                  )
                  
                  
                  (3,569
                  )
                  
                  
                  (2,666
                  )Inventories
                  
                  
                  (1,498
                  )
                  
                  
                  6,993
                  
                  
                  
                  476Advances
      to various creditors
                  
                  
                  2,599
                  
                  
                  
                  332
                  
                  
                  
                  373Prepayments
      and other
                  
                  
                  (374
                  )
                  
                  
                  874
                  
                  
                  
                  2,340Increase
      (Decrease) in:Accounts
      payable
                  
                  
                  6,350
                  
                  
                  
                  (12,428
                  )
                  
                  
                  (5,048
                  )Accrued
      liabilities
                  
                  
                  (1,460
                  )
                  
                  
                  (4,451
                  )
                  
                  
                  (2,474
                  )Unearned
      revenue
                  
                  
                  4,774
                  
                  
                  
                  164
                  
                  
                  
                  (1,039
                  )Net
      Cash (used in) provided by Operating Activities
                  
                  
                  (11,290
                  )
                  
                  
                  11,847
                  
                  
                  
                  6,576
    F-6
  TOP
      SHIPS INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWSFOR
      THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009(Expressed
      in thousands of U.S. Dollars)
   Cash
      Flows (used in) provided by Investing Activities:Principal
      payments received under capital lease
                  
                  
                  
                  
                  
                  
                  46,000
                  
                  
                  
                  -Principal
      payments paid under capital lease
                  
                  
                  
                  
                  
                  
                  (68,828
                  )
                  
                  
                  -Advances
      for vessels acquisition / under construction
                  
                  
                  (37,343
                  )
                  
                  
                  (114,260
                  )Vessel
      acquisitions
                  
                  
                  (355,045
                  )
                  
                  
                  (118,142
                  )
                  
                  
                  (136,678
                  )Insurance
      claims recoveries
                  
                  
                  1,852
                  
                  
                  
                  3,447
                  
                  
                  
                  2,656Increase
      in restricted cash
                  
                  
                  -
                  
                  
                  
                  (26,075
                  )
                  
                  
                  -Decrease
      in restricted cash
                  
                  
                  23,500
                  
                  
                  
                  -
                  
                  
                  
                  30,331Net
      proceeds from sale of vessels
                  
                  
                  51,975
                  
                  
                  
                  338,143
                  
                  
                  
                  -Net
      proceeds from sale of fixed assets
                  
                  
                  74
                  
                  
                  
                  58
                  
                  
                  
                  156Acquisition
      of other fixed assets
                  
                  
                  (3,295
                  )
                  
                  
                  (1,792
                  )
                  
                  
                  (836
                  )Net
      Cash (used in) provided by Investing Activities
                  
                  
                  (318,282
                  )
                  
                  
                  58,551
                  
                  
                  
                  (104,371
                  )Cash
      Flows provided by (used in) Financing Activities:Proceeds
      from long-term debt
                  
                  
                  316,851
                  
                  
                  
                  271,156
                  
                  
                  
                  111,670Principal
      payments of long-term debt
                  
                  
                  (26,955
                  )
                  
                  
                  (51,413
                  )
                  
                  
                  (44,774
                  )Prepayment
      of long-term debt
                  
                  
                  (65,582
                  )
                  
                  
                  (317,150
                  )
                  
                  
                  (9,500
                  )Financial
      instrument termination payments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (5,000
                  )Financial
      instrument upfront receipt
                  
                  
                  8,500
                  
                  
                  
                  1,500
                  
                  
                  
                  -Proceeds
      from issuance of common stock, net of issuance costs
                  
                  
                  98,341
                  
                  
                  
                  50,601
                  
                  
                  
                  2,569Cancellation
      of fractional shares
                  
                  
                  -
                  
                  
                  
                  (2
                  )
                  
                  
                  -Repurchase
      and cancellation of common stock
                  
                  
                  
                  
                  
                  
                  (731
                  )
                  
                  
                  (732
                  )Payment
      of financing costs
                  
                  
                  (5,563
                  )
                  
                  
                  (4,129
                  )
                  
                  
                  (2,680
                  )Net
      Cash provided by (used in) Financing Activities
                  
                  
                  325,592
                  
                  
                  
                  (50,168
                  )
                  
                  
                  51,553Net
      (decrease) increase in cash and cash equivalents
                  
                  
                  (3,980
                  )
                  
                  
                  20,230
                  
                  
                  
                  (46,242
                  )Cash
      and cash equivalents at beginning of year
                  
                  
                  29,992
                  
                  
                  
                  26,012
                  
                  
                  
                  46,242Cash
      and cash equivalents at end of year
                  
                  
                  26,012
                  
                  
                  
                  46,242
                  
                  
                  
                  -SUPPLEMENTAL
      CASH FLOW INFORMATIONInterest
      paid net of capitalized interest
                  
                  
                  13,731
                  
                  
                  
                  19,616
                  
                  
                  
                  16,764SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING ACTIVITIESFair
      value of below market time charter
                  
                  
                  30,612
                  
                  
                  
                  12,647
                  
                  
                  
                  -Amounts
      owed for capital expenditures at the end of year
                  
                  
                  1,215
                  
                  
                  
                  55
                  
                  
                  
                  52
  The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-7


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)


1.       Basis of Presentation and General
Information:





The
accompanying consolidated financial statements include the accounts of Top Ships
Inc. (formerly Top Tankers Inc. and Ocean Holdings Inc.) and its wholly owned
subsidiaries (collectively the "Company"). Ocean Holdings Inc. was formed on
January 10, 2000, under the laws of Marshall Islands, was renamed to Top Tankers
Inc. and Top Ships Inc. in May 2004 and December 2007 respectively.





Top Ships
Inc. is the sole owner of all outstanding shares of the following subsidiaries
with vessels in operations and other active companies as of December 31,
2009:








Shipowning
      Companies with vessels in operations at December 31,
      2009
            Date
      of Incorporation
            Country
      of Incorporation
            Vessel1
            Lefka
      Shipping Company Limited ("Lefka")
            March
      2005
            Marshall
      Islands
            Dauntless
      (acquired March 2005)2
            Ilisos
      Shipping Company Limited ("Ilisos")
            April
      2005
            Marshall
      Islands
            Ioannis
      P. (acquired November 2005)3
            Amalfi
      Shipping Company Limited ("Amalfi")
            July
      2007
            Marshall
      Islands
            Amalfi
      (acquired December 2007) (Note 11)4
            Jeke
      Shipping Company Limited ("Jeke")
            July
      2007
            Liberia
            Voc
      Gallant (acquired February 2008) (Note 10, 11)5
            Japan
      I Shipping Company Limited ("Japan I")
            August
      2007
            Liberia
            Pepito
      (acquired March 2008) (Note 10)6
            Japan
      II Shipping Company Limited ("Japan II")
            August
      2007
            Liberia
            Astrale
      (acquired May 2008) (Note 10)7
            Japan
      III Shipping Company Limited ("Japan III")
            August
      2007
            Liberia
            Cyclades
      (acquired December 2007)8
            Warhol
      Shipping Company Limited ("Warhol")
            July
      2008
            Liberia
            Miss
      Marilena (delivered February 2009) (Note 9, 10)9
            Lichtenstein
      Shipping Company Limited ("Lichtenstein")
            July
      2008
            Liberia
            Lichtenstein
      (delivered February 2009) (Note 9, 10)10
            Banksy
      Shipping Company Limited ("Banksy")
            July
      2008
            Liberia
            Ionian
      Wave (delivered March 2009) (Note 9, 10)11
            Indiana
      R Shipping Company Limited ("Indiana R")
            July
      2008
            Liberia
            Tyrrhenian
      Wave (delivered March 2009) (Note 9, 10)12
            Britto
      Shipping Company Limited ("Britto")
            July
      2008
            Liberia
            Britto
      (delivered May 2009) (Note 9, 10)13
            Hongbo
      Shipping Company Limited ("Hongbo")
            July
      2008
            Liberia
            Hongbo
      (delivered August 2009) (Note 9,10)Other
      Companies
            Date
      of Incorporation
            Country
      of Incorporation
            Activity14
            Top
      Tankers (U.K.) Limited
            January
      2005
            England
      and Wales
            Representative
      office in London15
            TOP
      Tanker Management Inc.
            May
      2004
            Marshall
      Islands
            Management
      Company16
            Ierissos
      Shipping Inc
            November
      2008
            Marshall
      Islands
            Cash
      Manager





F-8


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)


1.       Basis
of Presentation and General Information - (continued):





The
Company is an international provider of worldwide seaborne crude oil and
petroleum products transportation services and of drybulk transportation
services, through the ownership and operation of the vessels mentioned
above.





During
2007, 2008, and 2009, two, one and three charterers individually accounted for
more than 10% of the Company's revenues as follows:





Charterer
              
              
              
              Year Ended December
      31,2007
              
              
              2008
              
              
              2009A
              
              
              
              23
              %
              
              
              17
              %
              
              
              22
              %B
              
              
              
              10
              %C
              
              
              
              
              
              
              
              
              
              
              
              18
              %D
              
              
              
              
              
              
              
              
              
              
              
              14
              %





The
Company's Manager





TOP
Tanker Management Inc. (the "Manager") is responsible for all of the chartering,
operational and technical management of the Company's fleet. Each of the
Company's ship-owning subsidiaries have entered into a management agreement with
the Manager, under which management services are provided in exchange for a
fixed monthly fee per vessel.




As of
December 31, 2009, the Manager has subcontracted the day to day technical
management of certain vessels to unaffiliated ship management companies, V.
Ships Management Limited and Interorient Maritime Enterprises Inc. (collectively
the "sub-managers"). The sub-managers provide day to day operational and
technical services to the Company's vessels at a fixed monthly fee per vessel.
Such fees for the years ended December 31, 2007, 2008 and 2009 totaled $1,828,
$1,159 and $419 respectively and are reflected in General and administrative
expenses in the accompanying consolidated statements of operations. At December
31, 2008 and 2009 the amount due to the sub-managers totaled $702 and $306
respectively and is included in Accounts Payable in the accompanying
consolidated balance sheets.


F-9


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)


2.       Significant
Accounting Policies:




(a)
              Principles
      of Consolidation: The accompanying consolidated financial
      statements have been prepared in accordance with U.S generally 
      accepted accounting principles ("US GAAP") and include the accounts and
      operating results of Top Ships Inc. and its wholly-owned subsidiaries
      referred to in Note 1. Intercompany balances and transactions have been
      eliminated in
consolidation.
  (b)
                Use of
      Estimates: The preparation of consolidated financial statements in
      conformity with U.S generally accepted accounting principles requires
      management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and disclosure of contingent assets and
      liabilities at the date of the consolidated financial statements and the
      reported amounts of revenues and expenses during the reporting period.
      Actual results could differ from those estimates. Critical estimates
      mainly include impairment of vessels, vessel useful lives and residual
      values, provision for doubtful accounts and fair values of derivative
      instruments.
  (c)
                  Foreign
      Currency Translation: The Company's functional currency is the U.S.
      Dollar because all vessels operate in international shipping markets, and
      therefore primarily transact business in U.S. Dollars. The Company's books
      of accounts are maintained in U.S. Dollars. Transactions involving other
      currencies during the year are converted into U.S. Dollars using the
      exchange rates in effect at the time of the transactions. At the balance
      sheet dates, monetary assets and liabilities, which are denominated in
      other currencies, are translated to reflect the year-end exchange rates.
      Resulting gains or losses are reflected in General and administrative
      expenses in the accompanying consolidated statements of
      operations.
  (d)
                    Cash and
      Cash Equivalents: The Company considers highly liquid investments
      such as time deposits and certificates of deposit with an original
      maturity of three months or less to be cash
      equivalents.





(e)
            Restricted
      Cash: The Company considers amounts that are pledged, blocked, held
      as cash collateral, required to be maintained with a specific bank or be
      maintained by the Company as an overall cash position as part of a loan
      agreement, as restricted (Notes 6 and
12).





(f)
            Trade
      Accounts Receivable, net: The amount shown as Trade Accounts
      Receivable, net at each balance sheet date, includes estimated recoveries
      from charterers for hire, freight and demurrage billings, net of a
      provision for doubtful accounts. At each balance sheet date, all
      potentially uncollectible accounts are assessed individually, combined
      with the application of a historical recoverability ratio, for purposes of
      determining the appropriate provision for doubtful accounts. Provision for
      doubtful accounts at December 31, 2008 and 2009 totaled $3,275 and $1,949,
      and is summarized as follows:







F-10





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)


2.      
Significant Accounting Policies - (continued):





Provision
      for doubtful accountsBalance,
      December 31, 2006
            283—Additions
            1,302—Reversals
      / write-offs
            (784)Balance,
      December 31, 2007
            801—Additions
            3,866—
      Reversals / write-offs
            (1,392)Balance,
      December 31, 2008
            3,275—Additions
            1,939—
      Reversals / write-offs
            (3,265)Balance,
      December 31, 2009
            1,949




(g)
                Insurance
      Claims: Insurance claims, relating mainly to crew medical expenses
      and hull and machinery incidents are recorded upon collection or agreement
      with the relevant party of the collectible amount when collectibility is
      probable.
  (h)
                    Inventories:
      Inventories consist of bunkers, lubricants and consumable stores which are
      stated at the lower of cost or market. Cost, which consists of the
      purchase price, is determined by the first in, first out
      method.
  (i)
                        Vessel
      Cost:  Vessels are stated at cost, which consists of the
      contract price, pre-delivery costs incurred during the construction of
      newbuildings, capitalized interest and any material expenses incurred upon
      acquisition (improvements and delivery costs). Subsequent expenditures for
      conversions and major improvements are also capitalized when they
      appreciably extend the life, increase the earning capacity or improve the
      efficiency or safety of the vessels. Repairs and maintenance are charged
      to expense as incurred and are included in Vessel operating expenses in
      the accompanying consolidated statements of
      operations.
 (j)
                        Impairment
      of Long-Lived Assets:Long-lived assets
      are reviewed quarterly for impairment or whenever events or changes in
      circumstances indicate that the carrying amount of the asset may not be
      recoverable. If the carrying value of the related asset exceeds its
      undiscounted future net cash flows, excluding interest charges expected to
      be generated by the use of the asset, the carrying value is reduced to its
      fair value. We did not note for 2007 any events or changes in the
      circumstances indicating that the carrying amount of our vessels may not
      be recoverable. Various future looking factors including charter rates and
      vessel operating costs are included in this analysis. The Company
      calculates future estimates based on a set of assumptions that takes into
      account historical and current market data as well historical operating
      information filtered through management's cumulative knowledge and
      experience of the company and the shipping market in general. In the
      fourth quarter of 2008, shipping market conditions deteriorated
      significantly, mainly in the drybulk sector, as a result of the credit
      crisis and the resulting slowdown in world trade.  These are
      conditions that the Company considered to be indicators of potential
      impairment. The Company performed the undiscounted cash flow test as of
      December 31, 2008 and determined that the carrying amounts of its vessels
      held for use were recoverable despite the significant drop in values of
      drybulk vessels. During 2009, the drybulk
      market








F-11


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)


2.      
Significant Accounting Policies - (continued):




stabilized
      and the charter market recovered resulting in a somewhat recovery in asset
      values. On the contrary, the product tanker sector, to which the Company
      is mainly exposed to, experienced a significant drop in charter rates and
      as a result, a quarter on quarter drop in asset values. Despite these
      market conditions, on the back of expectations of a recovery in charter
      rates, similar to the one experienced in the drybulk market in 2009, the
      Company did not record an impairment charge for the first three quarters
      of 2009.
  During
      the fourth quarter of 2009, the Company began exploring the re-chartering
      of its two oldest tanker vessels, M/T Dauntless and M/T Ioannis P, due to
      their upcoming charter expirations. Based on discussions with charterers
      the Company had indications that such vessels would need to be
      re-chartered at significantly lower rates upon expiration of their
      existing charters. As a result, during the fourth quarter of 2009, the
      Company performed the undiscounted cash flow test for all of its vessels
      as of December 31, 2009 and determined that the carrying amounts of these
      two vessels, M/T Dauntless and M/T Ioannis P were not recoverable by their
      undiscounted cash flows indicating impairment. The Company measured the
      impairment loss on the basis of vessels' fair market value determined
      based on a market approach. The resulting impairment charge of $36,638 for
      the year ended December 31, 2009 is included in Impairment on vessels,
      which is separately reflected in the accompanying consolidated statements
      of
operations.
  (k)
                  Assets Held
      for Sale:It is the
      Company's policy to dispose of vessels when suitable opportunities occur
      and not necessarily to keep them until the end of their useful life. The
      Company classifies vessels as being held for sale when: management has
      committed to a plan to sell the vessels; the vessels are available for
      immediate sale in their present condition; an active program to locate a
      buyer and other actions required to complete the plan to sell the vessels
      have been initiated; the sale of the vessels is probable, and transfer of
      the asset is expected to qualify for recognition as a completed sale
      within one year; the vessels are being actively marketed for sale at a
      price that is reasonable in relation to their current fair value and
      actions required to complete the plan to sell indicate that it is unlikely
      that significant changes to the plan will be made or that the plan will be
      withdrawn. Long-lived assets classified as held for sale are measured at
      the lower of their carrying amount or fair value less cost to sell. These
      vessels are not depreciated once they meet the criteria to be classified
      as held for sale. No vessels were determined to be held for sale at
      December 31, 2008 and
  2009.
  (l)
                  Vessel
      Depreciation: Depreciation is calculated using the straight-line
      method over the estimated useful life of the vessels, after deducting the
      estimated salvage value. Each vessel's salvage value is equal to the
      product of its lightweight tonnage and estimated scrap rate. Management
      estimates the useful life of the Company's vessels to be 25 years from the
      date of initial delivery from the shipyard. Second hand vessels are
      depreciated from the date of their acquisition through their remaining
      estimated useful life. When regulations place limitations over the ability
      of a vessel to trade on a worldwide basis, its useful life is adjusted at
      the date such regulations are
      adopted.


F-12


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)


2.       
Significant Accounting Policies - (continued):




(m)
                Other Fixed
      Assets, Net:Other fixed
      assets, net consists of furniture, office equipment, cars and leasehold
      improvements, stated at cost, which consists of the purchase / contract
      price less accumulated depreciation. Depreciation is calculated using the
      straight-line method over the estimated useful life of the assets, while
      leasehold improvements are depreciated over the lease term, as presented
      below:





Description
            Useful Life (years)Leasehold
      improvements
            12Cars
            6Office
      equipment
            5Furniture
      and fittings
            5Computer
      equipment
            3




(n)
                Accounting
      for Dry-Docking Costs: All dry-docking costs are accounted for
      under the direct expense method, under which they are expensed as incurred
      and are reflected separately in the accompanying consolidated statements
      of operations.
  (o)
                  Sale and
      Leaseback Transactions:The gains on sale
      of vessel sale and leaseback transactions are deferred and amortized to
      income over the lease
  period.
  (p)
                    Financing
      Costs: Fees incurred and paid to the lenders for obtaining new
      loans or refinancing existing ones are recorded as a contra to debt and
      such fees are amortized to interest expense over the life of the related
      debt using the effective interest method. Unamortized fees relating to
      loans repaid or refinanced are expensed when a repayment or refinancing is
      made and charged to interest and finance
      costs.
  (q)
                      Pension and
      Retirement Benefit Obligations—Crew:  The ship-owning
      companies included in the consolidation employ the crew on board under
      short-term contracts (usually up to nine months) and accordingly, they are
      not liable for any pension or post retirement
      benefits.
  (r)
                        Staff
      leaving Indemnities – Administrative
      personnel:The Company's employees are entitled to termination
      payments in the event of dismissal or retirement with the amount of
      payment varying in relation to the employee's compensation, length of
      service and manner of termination (dismissed or retired). Employees who
      resign, or are dismissed with cause are not entitled to termination
      payments. The Company's liability on an actuarially determined basis, at
      December 31, 2008 and 2009 amounted to $258 and $266,
      respectively.
  (s)
                          Accounting
      for Revenue and Expenses:Revenues are
      generated from bareboat charter, time charter and voyage charter
      agreements. A bareboat charter is a contract in which the vessel owner
      provides the vessel to the charterer for a fixed period of time at a
      specified daily
rate,





F-13


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)





2.      
Significant Accounting Policies - (continued):





which is
generally payable monthly in advance, and the customer generally assumes all
risk and costs of operation during the charter term. A time charter is a
contract for the use of a vessel for a specific period of time and a specified
daily charter hire rate, which is generally payable monthly in advance. Profit
sharing represents the excess between an agreed daily base rate and the actual
rate generated by the vessel every quarter, if any, and is settled and recorded
on a quarterly basis. Under a voyage charter the revenues, including demurrages
and associated voyage costs, with the exception of port expenses which are
recorded as incurred, are recognized on a proportionate performance method over
the duration of the voyage. A voyage is deemed to commence upon the latest
between the completion of discharge of the vessel's previous cargo and the
charter party date of the current voyage and is deemed to end upon the
completion of discharge of the current cargo. Demurrage income represents
payments by the charterer to the Company when loading or discharging time
exceeded the stipulated time in the voyage charter. Vessel operating expenses
are expensed as incurred. Unearned revenue represents cash received prior to
year-end related to revenue applicable to periods after December 31 of each
year.




When
vessels are acquired with time charters attached and the rates on such charters
are below market on the acquisition date, the Company allocates the total cost
between the vessel and the fair value of below market time charter based on the
relative fair values of the vessel and the liability acquired. The fair value of
the attached time charter is computed as the present value of the difference
between the contractual amount to be received over the term of the time charter
and management's estimates of the market time charter rate at the time of
acquisition. The fair value of below market time charter is amortized over the
remaining period of the time charter as an increase to revenues (Note
11).
  As is
common in the drybulk and tanker shipping industries, we pay commissions
ranging from 1.25% to 6.25% of the total daily charter hire rate of each charter
to ship brokers associated with the charterers.


(t)
                  Stock Incentive Plan:All share-based compensation related to the grant of restricted
      and/or unrestricted shares provided to employees and to non-employee
      directors, for their services as directors, is included in General and
      administrative expenses in the consolidated statements of operations. The
      shares that do not contain any future service vesting conditions are
      considered vested shares and recognized in full on the grant date. The
      shares that contain a time-based service vesting condition are considered
      non-vested shares on the grant date and recognized on a straight-line
      basis over the vesting period. The shares, vested and non-vested are
      measured at fair value, which is equal to the market value of the
      Company's common stock on the grant
      date.
  (u)
                      Earnings /
      (Loss)  per Share: Basic earnings per share are computed
      by dividing net income or loss available to common stockholders' by the
      weighted average number of common shares deemed outstanding during the
      year. Diluted earnings per share reflect the potential dilution that could
      occur if securities or other contracts to issue common stock were
      exercised.
 (v)
                          Related
      Parties:The Company
      considers as related parties the affiliates of the Company; entities for
      which investments are accounted for by the equity method; principal owners
      of the Company; its management; members of the immediate families of
      principal owners of the Company; and other parties with which the Company
      may deal if one party controls or can significantly influence the
      management or operating policies of the other to an extent that one of the
      transacting parties might be prevented from fully pursuing its own
      separate interests. Another party also is a related party if it can
      significantly influence the management or operating policies of the
      transacting parties and can significantly influence the other to an extent
      that one or more of the transacting parties might be prevented from fully
      pursuing its
  own


F-14


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)


2.  Significant
Accounting Policies - (continued):




separate
      interests. An Affiliate is a party that, directly or indirectly through
      one or more intermediaries, controls, is controlled by, or has common
      control with the Company. Control is the possession, direct or indirect,
      of the power to direct or cause the direction of the management and
      policies of an enterprise through ownership, by contract and otherwise.
      Immediate Family is family members whom a principal owner or a member of
      management might control or influence or by whom they might be controlled
      or influenced because of the family relationship. Management is the
      persons who are responsible for achieving the objectives of the Company
      and who have the authority to establish policies and make decisions by
      which those objectives are to be pursued. Management normally includes
      members of the board of directors, the CEO, the CFO, Vice President in
      charge of principal business functions and other persons who perform
      similar policy making functions. Persons without formal titles may also be
      members of management. Principal owners are owners of record or known
      beneficial owners of more than 10% of the voting interests of the
      Company.


(w)
                    Derivatives and
      Hedging:  The Company records every derivative instrument
      (including certain derivative instruments embedded in other contracts) in
      the balance sheet as either an asset or liability measured at its fair
      value, with changes in the derivatives' fair value recognized currently in
      earnings unless specific hedge accounting criteria are met. The Company
      has not applied hedge accounting for its derivative instruments during the
      periods
  presented.




The
      fair value of derivative liabilities was not adjusted for nonperformance
      risk as the Company, as one of the parties to a derivative transaction
      expects to be able to perform under the contractual terms of its
      derivative agreements, such as making cash payments at periodic net
      settlement dates or upon
      termination.
 (x)
                      Segment
      Reporting:. The Company has determined that it operates under two
      reportable segments, based on the way the Company's CEO reviews operating
      results, as a provider of international seaborne transportation services,
      carrying petroleum products and crude oil ("Tanker Fleet") and, drybulk
      commodities for the steel, electric utility, construction and agri-food
      industries ("Drybulk Fleet"). The accounting policies applied to the
      reportable segments are the same as those used in the preparation of the
      Company's consolidated financial
      statements.
  The
      Company reports financial information and evaluates its operations by
      charter revenues and not by the length of ship employment for its
      customers (i.e., spot or time charters) or by geographical region as the
      charterer is free to trade the vessel worldwide and, as a result, the
      disclosure of geographic information is impracticable. The Company does
      not have discrete financial information to evaluate the operating results
      for each such type of charter. Although revenue can be identified for
      these types of charters, management cannot and does not identify expenses,
      profitability or other financial information for these
      charters.


(aa)
            Recent
      Accounting Pronouncements:


(a)
              Fair Value Measurements and
      Disclosures:Was issued in September 2006 and it addresses
      standardizing the measurement of fair value for companies that are
      required to use a fair value measure of recognition for recognition or
      disclosure purposes. The fair value is defined as "the price that would be
      received to sell an asset or paid to transfer a liability in an orderly
      transaction between market participants at the measure date". Fair Value
      Measurement is effective for financial statements issued for fiscal years
      beginning after





F-15


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)











2.       
Significant Accounting Policies - (continued):


November
      15, 2007. The Company has adopted Fair Value Measurement effective January
      1, 2008 and the adoption of this statement did not have a material effect
      on the Company's financial position, results of operations and cash flows.
      In February 2008, the effective datewas
      delayed for non financial assets and liabilities, except for items
      recognized or disclosedat
      fair value at least once a year, to fiscal years beginning after November
      15, 2008. Furthermore, it was amended to cover interim periods within the
      fiscal years for items within its scope. The Company has adopted the
      amendment of Fair Value Measurement in the first quarter of 2009, which
      did not have a material effect on the Company's financial position,
      results of operations and cash flows. On October 10, 2008, Fair Value
      Measurement was further amended to clarify the application of Fair Value
      Measurements, in a market that is not active and provides an example to
      illustrate key considerations in determining the fair value of a financial
      asset when the market for that financial asset is not active. The
      amendment was effective upon issuance including prior periods for which
      financial statements have not been issued. The Company has incorporated
      this new guidance as it relates to the Company's derivative instruments
      and impaired vessels (Note 21). The adoption of this amendment did not
      have a material impact on the Company's financial
      statements.




(b)
                  Earnings per share ("EPS"):Was issued in June 2008 and it clarifies that all outstanding
      non-vested share-based payment awards that contain rights to non
      forfeitable dividends participate in undistributed earnings with common
      shareholders. Awards of this nature are considered participating
      securities, and the two-class method of computing basic earnings per share
      must be applied. The Company determined that restricted share units
      granted under its equity incentive plan are participating securities
      because the restricted share units participate in dividends. The guidance
      is effective for fiscal years beginning after December 15, 2008, and
      interim periods within those years. Early application is prohibited. It
      also requires that all prior-period EPS data be adjusted retroactively.
      The Company has adopted these requirements effective January 1, 2009 and
      the adoption resulted in a decrease of $0.04 in the basic and diluted
      earnings per share for the year ended December 31, 2008. When it was
      retroactively applied to the year ended December 31, 2007 EPS data was not
      affected due to the fact that the Company incurred net loss and non-vested
      shares do not participate in
losses.
  (c)
                    Derivatives and Hedging:Was issued in March 2008 and is intended to provide users of
      financial statements with enhanced understanding of derivative instruments
      and hedging activities by requiring qualitative disclosures about
      objectives and strategies for using derivatives, quantitative disclosures
      about fair value amounts of and gains and losses on instruments, and
      disclosures about credit-risk-related contingent features in derivative
      agreements. The guidance is effective for financial statements issued for
      fiscal years and interim periods beginning after November 15, 2008 and it
      does not require comparative disclosures for earlier periods at initial
      adoption. The Company adopted the relevant guidance in the first quarter
      of 2009 and provided relevant disclosures in Note
    21.
  (d)
                      FASB Accounting Standards
      Codification:Was issued in June 2009 and identifies the sources of
      accounting principles and the framework for selecting the principles used
      in the preparation of financial statements by establishing two levels of
      US GAAP: authoritative and nonauthoritative. This is accomplished by
      authorizing the "FASB Accounting Standards Codification".  On
      June, 2009, the "FASB Accounting Standards Codification" became the single
      source of authoritative nongovernmental US GAAP, superseding existing
      FASB,


F-16


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)








2.      
Significant Accounting Policies - (continued):




American
      Institute of Certified Public Accountants (AICPA), Emerging Issues Task
      Force
                      (EITF),
      and related literature. After that date, only one level of authoritative
      GAAP exists. All other literature is considered
      non-authoritative.  The Codification does not change US GAAP;
      instead, it introduces a new structure-one that is organized in an easily
      accessible, user-friendly online research system. This new guidance is
      effective for financial statements issued for interim and annual periods
      ending after September 15, 2009 The Company has adopted the new "FASB
      Accounting Standards Codification of US GAAP" in the third quarter of 2009
      and revised references to US GAAP in these consolidated financial
      statements to reflect the guidance in the
      Codification.


(e)
                  Consolidation of variable
      interest entities ("VIE").Was issued in June 2009 and responds to
      concerns about the application of certain key provisions of then
      applicable FASB interpretation, including those regarding the transparency
      of the involvement with VIEs. The new guidance revises the approach to
      determining the primary beneficiary of a VIE to be more qualitative in
      nature and requires companies to more frequently reassess whether they
      must consolidate a VIE. Specifically, the new guidance requires a
      qualitative approach to identifying a controlling financial interest in a
      VIE and requires ongoing assessment of whether an entity is a VIE and
      whether an interest in a VIE makes the holder the primary beneficiary of
      the VIE. In addition, the standard requires additional disclosures about
      the involvement with a VIE and any significant changes in risk exposure
      due to that involvement. The guidance is effective as of the beginning of
      the first fiscal year that begins after November 15, 2009 and early
      adoption is prohibited. The Company is evaluating the impact of this
      guidance on its consolidated financial
      statements.




3.      
 Going Concern:





As of
December 31, 2008, the Company was in breach of the minimum asset cover ratio
and other vessel value related covenants contained in the Company's loan
agreements. As a result of these covenant breaches and cross-default provisions,
the Company has classified all its debt as current to the consolidated financial
statements. During 2009, the Company received waivers for minimum asset cover as
defined by each bank, as well as for adjusted net worth, EBITDA, minimum
liquidity and leverage ratio with certain banks, until March 31, 2010, and has
amended the terms of its loans.





As of
December 31, 2009, the Company was in breach of loan covenants relating to
EBITDA, overall cash position (minimum liquidity covenants), adjusted net worth,
net asset value and asset cover of product tankers with certain banks not
previously waived. As a result of these covenant breaches with all the banks,
the Company has classified all its debt and financial instruments as current.
The amount of long term debt and financial instruments that have been
reclassified and presented together with current liabilities amounts to $351,202
and $9,916, respectively (Note 12).







F-17


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)




3.     
  Going Concern – (continued):








Based on
projections for 2010, the Company does not expect that existing cash reserves
and cash generated from operations will be sufficient to pay loan installments
and accumulated or accrued interest as they fall due under the existing credit
facilities. The main reason for this shortfall is the increased loan repayments,
including the repayment in July 2010 of a bridge loan provided by DVB bank for
the financing of the delivery installment of M/T Hongbo. Had it not been for the
bridge loan, which as of December 31, 2009 amounted to $11,200, cash from
operations would have been sufficient to cover working capital requirements and
service the debt. As of the date of this annual report, the Company is in
discussions with DVB in order to defer part or whole of the bridge loan for at
least one year, in which case the Company expects it will meet all its
obligations as they fall due. In addition to DVB, the Company is also in
discussions with various other financiers that can refinance part or whole of
the bridge loan. In the case where the Company is not able to extend or
refinance the bridge loan, it will consider whether a sale of an asset is
required. The sale and purchase market has been very liquid as of the date of
this annual report, and management expects that it will continue being so in the
foreseeable future, and given the high quality of assets and charters that the
Company has in its portfolio, the sale of a vessel provides with a realistic
alternative to the extension or refinancing of the bridge loan.





The
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. Accordingly, the financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts the amounts and classification of liabilities, or any
other adjustments that might result should the Company be unable to continue as
a going concern, except for the current classification of debt and financial
instruments.





The
Company believes that it will be able to make loan installments and accumulated
or accrued interest payments as they fall due under the existing senior credit
facilities and, therefore, its lenders will not demand payment of the loans
before their maturity, due to covenant breaches.





4.       Segment
Reporting:





The
following tables present segment results for the years ended December 31, 2007,
2008 and 2009 respectively:





Year
      ended December 31, 2007
            
            Tanker
      Fleet
            
            
            Drybulk
      Fleet
            
            
            Unallocated
      (1)
            
            
            TotalREVENUES:Revenues
            
            
            248,944
            
            
            
            1,902
            
            
            
            1,413
            
            
            
            252,259EXPENSES:Voyage
      expenses
            
            
            59,253
            
            
            
            161
            
            
            
            -
            
            
            
            59,414Charter
      hire expense
            
            
            94,118
            
            
            
            -
            
            
            
            -
            
            
            
            94,118Amortization
      of deferred gain on sale and leaseback of vessels
            
            
            (15,610
            )
            
            
            -
            
            
            
            -
            
            
            
            (15,610
            )Vessel
      operating expenses
            
            
            67,225
            
            
            
            689
            
            
            
            -
            
            
            
            67,914Dry-docking
      costs
            
            
            25,094
            
            
            
            -
            
            
            
            -
            
            
            
            25,094Vessel
      depreciation
            
            
            26,560
            
            
            
            848
            
            
            
            -
            
            
            
            27,408General
      and administrative expenses
            
            
            24,550
            
            
            
            274
            
            
            
            176
            
            
            
            25,000







F-18
 NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)




Gain
      on sale of vessels
              
              
              (1,961
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,961
              )Operating
      (loss) income
              
              
              (30,285
              )
              
              
              (70
              )
              
              
              1,237
              
              
              
              (29,118
              )Interest
      and finance costs
              
              
              (17,464
              )
              
              
              (2,054
              )
              
              
              -
              
              
              
              (19,518
              )Segment
      (loss) income
              
              
              (47,749
              )
              
              
              (2,124
              )
              
              
              1,237
              
              
              
              (48,636
              )Fair
      value change of financial instruments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,704
              )Interest
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,248Other,
      net
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              16Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (49,076
              )
  (1)
      Unallocated amounts relate to the drybulk vessels' amortization of the
      fair value of below market time charter contracts acquired of $1,413 less
      the foreign currency losses, net of $176. These amounts are unallocated as
      they are not included in the financial information used by the chief
      operating decision maker to allocate the Company's resources.








F-19


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)


4.   
    Segment Reporting – (continued):


Year
      ended December 31, 2008
              
              Tanker
      Fleet
              
              
              Drybulk
      Fleet
              
              
              Unallocated
      (1)
              
              
              TotalREVENUES:Revenues
              
              
              163,995
              
              
              
              71,590
              
              
              
              21,795
              
              
              
              257,380EXPENSES:Voyage
      expenses
              
              
              34,215
              
              
              
              4,441
              
              
              
              -
              
              
              
              38,656Charter
      hire expense
              
              
              53,684
              
              
              
              -
              
              
              
              -
              
              
              
              53,684Amortization
      of deferred gain on sale and leaseback of vessels
              
              
              (18,707
              )
              
              
              -
              
              
              
              -
              
              
              
              (18,707
              )Vessel
      operating expenses
              
              
              56,272
              
              
              
              10,842
              
              
              
              -
              
              
              
              67,114Dry-docking
      costs
              
              
              9,450
              
              
              
              586
              
              
              
              -
              
              
              
              10,036Vessel
      depreciation
              
              
              13,867
              
              
              
              18,797
              
              
              
              -
              
              
              
              32,664General
      and administrative expenses
              
              
              23,554
              
              
              
              7,935
              
              
              
              (101
              )
              
              
              31,388Gain
      on sale of vessels
              
              
              (21,347
              )
              
              
              2,169
              
              
              
              -
              
              
              
              (19,178
              )Operating
      income
              
              
              13,007
              
              
              
              26,820
              
              
              
              21,896
              
              
              
              61,723Interest
      and finance costs
              
              
              (11,888
              )
              
              
              (13,876
              )
              
              
              -
              
              
              
              (25,764
              )Segment
      income
              
              
              1,119
              
              
              
              12,944
              
              
              
              21,896
              
              
              
              35,959Fair
      value change of financial instruments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (12,024
              )Interest
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,831Other,
      net
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (127
              )Net
      Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              25,639
  (1)
      Unallocated amounts relate to the drybulk vessels' amortization of the
      fair value of below market time charter contracts acquired of $21,795, the
      management fees related to the management of third party vessels of $16
      less the foreign currency gains, net of $85. These amounts are unallocated
      as they are not included in the financial information used by the chief
      operating decision maker to allocate the Company's resources.






F-20


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)





4.     
  Segment Reporting – (continued):




Year
      ended December 31, 2009
              
              Tanker
      Fleet
              
              
              Drybulk
      Fleet
              
              
              Unallocated
      (1)
              
              
              TotalREVENUES:Revenues
              
              
              47,353
              
              
              
              56,715
              
              
              
              3,911
              
              
              
              107,979EXPENSES:Voyage
      expenses
              
              
              1,118
              
              
              
              2,254
              
              
              
              -
              
              
              
              3,372Charter
      hire expense
              
              
              10,827
              
              
              
              -
              
              
              
              -
              
              
              
              10,827Amortization
      of deferred gain on sale and leaseback of vessels and write-off of
      seller's credit
              
              
              (7,799
              )
              
              
              -
              
              
              
              -
              
              
              
              (7,799
              )Lease
      Termination expense
              
              
              15,391
              
              
              
              
              
              
              
              
              
              
              
              15,391Vessel
      operating expenses
              
              
              15,032
              
              
              
              8,707
              
              
              
              -
              
              
              
              23,739Dry-docking
      costs
              
              
              4,543
              
              
              
              59
              
              
              
              -
              
              
              
              4,602Vessel
      depreciation
              
              
              12,580
              
              
              
              19,005
              
              
              
              -
              
              
              
              31,585General
      and administrative expenses
              
              
              15,252
              
              
              
              8,518
              
              
              
              65
              
              
              
              23,835Impairment
      on vessels
              
              
              36,638
              
              
              
              -
              
              
              
              -
              
              
              
              36,638Operating
      (loss) income
              
              
              (56,229
              )
              
              
              18,172
              
              
              
              3,846
              
              
              
              (34,211
              )Interest
      and finance costs
              
              
              (7,692
              )
              
              
              (5,519
              )
              
              
              (758
              )
              
              
              (13,969
              )Segment
      (loss) income
              
              
              (63,921
              )
              
              
              12,653
              
              
              
              3,088
              
              
              
              (48,180
              )Loss
      on financial instruments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,081
              )Interest
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              235Other,
      net
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (170
              )Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (50,196
              )
  (1)
      Unallocated amounts relate to the drybulk vessels' amortization of the
      fair value of below market time charter contracts acquired of $3,911,
      bridge loan fees for working capital purposes of $758, less the foreign
      currency losses, net of $65. These amounts are unallocated as they are not
      included in the financial information used by the chief operating decision
      maker to allocate the Company's resources.





A
reconciliation of segment cash flows to amounts presented in the consolidated
cash flow statements is as follows for the year ended December 31,
2007:





Year
      ended December 31, 2007
            
            Tanker
      Fleet
            
            
            Drybulk
      Fleet
            
            
            Unallocated
      (1)
            
            
            TotalCash
      paid for vessels
            
            
            187,360
            
            
            
            167,685
            
            
            
            -
            
            
            
            355,045Cash
      paid for advances for vessel acquisition
            
            
            17,028
            
            
            
            20,315
            
            
            
            
            
            
            
            37,343





A
reconciliation of segment assets, liabilities and cash flows to amounts
presented in the consolidated balance sheets and cash flow statements is as
follows for the years ended December 31, 2008 and 2009
respectively:





Year
      ended December 31, 2008
            
            Tanker
      Fleet
            
            
            Drybulk
      Fleet
            
            
            Unallocated
      (1)
            
            
            TotalTrade
      accounts receivable, net
            
            
            4,418
            
            
            
            (210
            )
            
            
            -
            
            
            
            4,208Vessels,
      net
            
            
            79,056
            
            
            
            335,459
            
            
            
            -
            
            
            
            414,515








F-21


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)





Current
      portion of long-term debt
              
              
              165,965
              
              
              
              176,514
              
              
              
              -
              
              
              
              342,479Total
      assets at December 31, 2008
              
              
              275,932
              
              
              
              351,331
              
              
              
              71,112
              
              
              
              698,375Cash
      paid for vessels
              
              
              -
              
              
              
              118,142
              
              
              
              -
              
              
              
              118,142Cash
      paid for advances for vessel acquisition
              
              
              114,260
              
              
              
              -
              
              
              
              -
              
              
              
              114,260
  (1)
            Unallocated
      mainly relates to cash and cash equivalents and restricted cash of $61,389
      and other fixed assets of $6,545, which are not allocated to individual
      segments.





Year
      ended December 31, 2009
              
              Tanker
      Fleet
              
              
              Drybulk
      Fleet
              
              
              Unallocated
      (1)
              
              
              TotalTrade
      accounts receivable, net
              
              
              318
              
              
              
              10
              
              
              
              -
              
              
              
              328Vessels,
      net
              
              
              326,500
              
              
              
              316,453
              
              
              
              -
              
              
              
              642,953Current
      portion of long-term debt
              
              
              254,547
              
              
              
              141,654
              
              
              
              2,886
              
              
              
              399,087Total
      assets at December 31, 2009
              
              
              337,770
              
              
              
              326,270
              
              
              
              11,109
              
              
              
              675,149Cash
      paid for vessels
              
              
              136,678
              
              
              
              -
              
              
              
              -
              
              
              
              136,678
  (1)
            Unallocated
      mainly relates to cash and cash equivalents (including restricted cash) of
      $2,974, other fixed assets of $6,165, and bridge loan balance for working
      capital purposes of $2,886, which are not allocated to individual
      segments.





5.
            Transactions
      with Related Parties:






(a)
            Pyramis Technical Co.
      S.A.: Pyramis Technical Co. S.A., is wholly owned by the
      father of the Company's Chief Executive Officer and has been responsible
      for the renovation of the Company's premises. As of December 31, 2008, the
      total contracted cost amounted to Euro 2,959 or $4,112 (based on the U.S.
      Dollar/Euro exchange rate as of December 31, 2008), out of which Euro
      3,402 or $4,555 (based on the U.S. Dollar/Euro exchange rate as of
      December 31, 2008) was paid up to December 31, 2008 and is included in the
      $4,698 renovation works. As of December 31, 2009, the total contracted
      cost amounted to Euro 3,110 or $4,487 (based on the U.S. Dollar/Euro
      exchange rate as of December 31, 2009), out of which Euro 3,599 or $5,193
      (based on the U.S. Dollar/Euro exchange rate as of December 31, 2009) was
      paid up to December 31, 2009 and is included in the Euro 3,701 or $5,340
      (based on the U.S. Dollar/Euro exchange rate as of December 31, 2009)
      renovation works. The renovation works are included in Other fixed assets,
      net, which are separately presented in the accompanying December 31, 2009
      consolidated balance sheet and are depreciated over the lease period,
      which is 12 years.Cardiff Marine Inc.
      ("Cardiff"):Both Cardiff and Sphinx Investment Corp. are
      controlled by Mr. George Economou who has been a related party since April
      2008, when the Company privately placed $7.3 million with various
      investors (Note 15). As of December 31, 2009, Sphinx Investment Corp.
      holds approximately 12.56% of the Company's outstanding common stock.
      Cardiff provides the Company with chartering and sale and purchase
      brokerage services. During the twelve months ended December 31, 2008 and
      2009, Cardiff charged the Company $4,245 and $0 for commissions for
      vessels' acquisitions, included in Vessels, net. During the twelve months
      ended December 31, 2008 and 2009, Cardiff charged the Company $570 and
      $862 for chartering services, included in Voyage expenses. As of December
      31, 2008, the amount due to Cardiff was $197, which is included in Accrued
      Liabilities. As of December 31, 2009 the amount due to Cardiff was $82 out
      of which $33 is included in Accounts Payable and $49 is included in
      Accrued Liabilities.







F-22





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)





6.       Leases:





A.
LEASE ARRANGEMENTS, UNDER WHICH THE COMPANY ACTS AS THE LESSEE





i)
            Sale
      and Leaseback of Vessels:





The
Company entered into sales and leaseback transactions in 2005 and 2006 as
follows:




a)
                  In
      2005, the Company sold vessels M/T Restless, M/T Sovereign, M/T
      Relentless, M/T Invincible and M/T Victorious. The Company entered into
      bareboat charter agreements to leaseback the same five vessels for a
      period of seven years. The Company and the owner/lessor of vessels M/T
      Invincible, M/T Victorious, M/T Restless and M/T Sovereign mutually agreed
      to terminate the bareboat charters, following the sale of vessels to third
      parties. The termination of the bareboat charters became effective upon
      the vessels' delivery to their new owners, on July 11, 2007, August 27,
      2007, September 17, 2007 and August 14, 2008,
      respectively.
  b)
                    In
      2006, the Company sold vessels M/T Flawless, M/T Timeless, M/T Priceless,
      M/T Stopless, M/T Doubtless, M/T Vanguard, M/T Faithful, M/T Spotless, M/T
      Limitless, M/T Endless, M/T Stainless, M/T Faultless and M/T Noiseless to
      three unrelated parties (buyers/lessors) for $550,000; of which 90% or
      $495,000 was received upon closing of the sale. Simultaneous with the sale
      of the vessels, the Company entered into bareboat charter agreements to
      leaseback the same vessels for a period of five to seven years with no
      lease renewal option. In June 2006 another unrelated party assumed the
      rights and obligations of one of the buyers/lessors through a novation
      agreement with no other changes to the terms and conditions of the
      agreements.




Based on
the Memorandum of Agreement dated March 6, 2008, the owner and lessor of M/T
Faultless agreed to sell the vessel to a third party. The Company and the lessor
mutually agreed to terminate the bareboat charter, on March 31, 2008, upon the
vessel's delivery to its new owners.





Based on
the Memoranda of Agreement dated July 31, 2008, the owners and lessors of M/T
Flawless, M/T Timeless, M/T Priceless and M/T Stopless agreed to sell the
vessels to a third party. The Company and the lessors mutually agreed to
terminate the bareboat charters, on September 18, 2008, upon the vessels'
deliveries to their new owners.





Following
the sale of M/T Faultless, the Company received part of the seller's credit.
Following the sale of M/T Flawless, M/T Timeless, M/T Stopless and M/T
Priceless, the Company received part of the seller's credit. Following the
termination of the bareboat charters for Limitless, Endless, Stainless,
Faultless, Noiseless, Flawless, Timeless, Priceless and Stopless a portion of
the sales price (representing 10% of the gross aggregate sales price of the
remaining vessels sold and leased back in 2006), has been withheld by the
buyers/lessors and to be paid to the Company not later than three months after
the end of bareboat charter period or upon the resale of the vessels, if
earlier. Consequently, such unpaid sales price was recorded as a receivable at
its discounted value. The discount was accreted through deferred gain on sale
and leaseback of vessels over the period of the bareboat charter agreements or
through the date of the resale of the vessels, if earlier.








F-23


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)





6.      
Leases-(continued):





On June
24, 2009, the Company terminated the bareboat charters, initially entered into
as part of the sale and leaseback deal in 2006, and redelivered tanker vessels
M/T Faithful, the M/T Doubtless, the M/T Spotless and the M/T Vanguard to their
owners after paying $11,750 in termination fees and expenses. In addition to the
termination fees and expenses, the Company also paid bareboat hire up to July
15, 2009 of an amount of $1,109 and forfeited its right to receive the Seller's
credit, amounting to $7,911 as of the date of termination, which would have been
received upon expiration of the bareboat charters in 2011, and the Company has
undertaken to pay for the dry-dock of the M/T Spotless which was completed
during July 2009. The Company remained the manager of M/T Faithful until April
30, 2010, little after the expiration of its time charter and was reimbursed by
the owners for all expenses incurred. The lease termination payments of $11,750
and bareboat hire paid for the period subsequent to the termination of $1,109
are included in the Lease Termination Expenses in the accompanying consolidated
statements of operations.





On July
3, 2009 the Company redelivered the tanker vessel M/T Relentless to its owners
and paid a termination fee of $2,500 pursuant to a termination agreement signed
in April 2009 to terminate the bareboat charter initially entered into as part
of the sale and leaseback deal in 2005. In addition to the termination fee the
Company had undertaken to perform certain works on the vessel prior to its
redelivery which involved additional costs. The termination fee of $2,500 is
included in the Lease Termination Expenses in the accompanying consolidated
condensed statements of operations. This was the last leased vessel in the
Company's fleet.





The
bareboat charter agreements the Company entered into in 2005 and 2006 were
accounted for as operating leases and the gain on the sale was deferred and was
amortized to income over the lease period. The deferred gain was calculated by
deducting from the sales price the carrying amount of the vessels, the expenses
related to the sale and the unpaid sales price (which is treated as a residual
value guarantee and will be recognized in income upon collection).





The
amortization of the deferred gain on sale and leaseback of vessels and write-off
of seller's credit of $15,610, $18,707 and $7,799 for the years ended December
31, 2007, 2008 and 2009, respectively, is separately reflected in the
accompanying consolidated statements of operations. For the twelve months ended
December 31, 2007, this amount includes accelerated amortization of deferred
gain for vessels M/T Restless, M/T Victorious, M/T Invincible of $8,248. The
amount also includes $7,362 scheduled amortization of deferred gain on sale and
leaseback of the vessels. For the twelve months ended December 31, 2008, this
amount includes net expenses related to the sale of the M/T Faultless, M/T
Flawless, M/T Priceless, M/T Stopless, M/T Sovereign and M/T Timeless of $12,799
and accelerated amortization of deferred gain for the same vessels of $27,245.
The amount also includes $4,431 scheduled amortization of deferred gain from
sale and leaseback of vessels and $170 other expenses. For the twelve months
ended December 31, 2009 this amount includes $271 of scheduled amortization of
deferred gain on sale and leaseback of M/T Relentless and $1,372 of accelerated
amortization of deferred gain due to lease termination of M/T Relentless. For
the twelve months ended December 31, 2009 the amount also includes $1,348
amortization of deferred gain on sale and leaseback for vessels M/T Faithful,
M/T Doubtless, M/T Spotless and M/T Vanguard and $12,719 of accelerated
amortization of deferred gain on sale and leaseback of these vessels offset by
write-off of the seller's credit of $7,911, due to lease termination effective
June, 24, 2009.








F-24


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)


6.       
Leases-(continued):





During
the years ended December 31, 2007, 2008 and 2009, lease payments relating to the
bareboat charters of the vessels were $94,118, $53,684 and $10,827, respectively
and are separately reflected as Charter hire expense in the accompanying
consolidated statements of operations.





Certain
of the sale and leaseback transactions entered into in 2006 contained a
requirement to maintain a minimum amount of cash on deposit by the Company
during the bareboat charter period. Specifically, the Company maintained
consolidated cash balances of $20,000 as at December 31, 2008. On January 8,
2009, the Company entered into a supplemental agreement relevant to the sale and
leaseback transactions' financial covenants. Specifically, it was agreed that
minimum cash of $5,000 shall be maintained on deposit by the Company, which was
released on June 24, 2009, following the termination of the bareboat charters of
M/T Faithful, the M/T Doubtless, the M/T Spotless and the M/T
Vanguard.





ii)    
Office lease:





In
January 2006, the Manager entered into an agreement to lease office space in
Athens, Greece, with an unrelated party. The office is located at 1, Vassilisis
Sofias & Megalou Alexandrou Street, 151 24 Maroussi, Athens, Greece. The
agreement is for duration of twelve years beginning May 2006 with a lessee's
option for an extension of ten years. As of December 31, 2007, the monthly rent
was Euro 120 or $177 (based on the U.S. Dollar/Euro exchange rate as of December
31, 2007) adjusted annually for inflation increase plus 1%. In November 2007,
the agreement was amended and the new monthly rent starting February 2008 became
Euro 116 or $167 (based on the U.S. Dollar/Euro exchange rate as of December 31,
2009) with all other terms remaining unchanged. General and administrative
expenses for the years ended December 31, 2007, 2008 and 2009 include $2,097,
$2,405 and $2,041, respectively, for rent expense.





In
February 2007, Top Tankers (U.K) Limited entered into a lease agreement for
office space in London. The agreement was for duration of 9 months ending
November 2007. The monthly lease was GBP 5 or $10 (based on the U.S. Dollar/GBP
exchange rate as of December 31, 2007), payable monthly in advance. In May 2007,
Top Tankers (U.K) Limited entered into a new lease agreement for office space in
London. The previous lease agreement was early terminated and therefore the
lease was payable up to August 2007. The new lease agreement is valid from June
2007 and shall continue until either party shall give to the other one calendar
month written notice. The new annual lease is GBP 20 or $32 (based on the U.S.
Dollar/GBP exchange rate as of December 31, 2009), payable quarterly in advance.
General and administrative expenses for the years ended December 31, 2007, 2008
and 2009 include $129, $38 and $31, respectively, for rent expense.





In
November 2009, Top Ships Inc. entered into a lease agreement for office space in
London. The agreement is for duration of one year from and including November
15, 2009 to and including November 14, 2010. As of December 31, 2009, the
monthly rent is GBP 26 or $42 (based on the U.S. Dollar/GBP exchange rate as of
December 31, 2009). General and administrative expenses for the year ended
December 31, 2009 include $66, for rent expense.











F-25


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)








6.      
Leases-(continued):





iii)  
Future minimum lease payments:





The
Company's future minimum lease payments required to be made after December 31,
2009, related to the existing at December 31, 2009 office lease are as
follows:





Year
      ending December 31,
            
            Office
      Lease2010
            
            2,0812011
            
            2,0812012
            
            2,0812013
            
            2,0812014
            
            2,0812015
      and thereafter
            
            6,93317,338





B.
LEASE ARRANGEMENTS, UNDER WHICH THE COMPANY ACTS AS THE LESSOR





i)     
Charter agreements:





All of
the Company's time charters and bareboat charters are classified as operating
leases. Revenues under operating leases are recognized when a charter agreement
exists, charter rate is fixed and determinable, the vessel is made available to
the lessee and collection of related revenue is reasonably assured.





As of
December 31, 2009, the Company operated thirteen owned vessels. As of December
31, 2009, five of the vessels were operating under long-term time charters, one
under short-tem time charter and seven under bareboat charters.





Future
minimum time-charter receipts, based on vessels committed to non-cancellable
time and bareboat charter contracts that expire in more than one year, as of
December 31, 2009, are as follows:





Year
      ending December 31,
            
            Time
      Charter receipts2010
            
            85,4902011
            
            68,9352012
            
            46,7202013
            
            35,2352014
            
            31,6272015
      and thereafter
            
            104,223372,230





On
January 11, 2010, the Company announced that it had received from the bareboat
charterer of the M/T Ionian Wave and the M/T Tyrrhenian Wave, a reduced charter
hire rate of $10,000 per day, rather than the $14,300 per day on a bareboat
basis that is set forth in the charter agreement.  The Company has
been examining this unilateral reduction and intends to take all necessary steps
to recover the amounts owed since the said charterer is considered to be in
breach of the charter.











F-26


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)


7.  
     Inventories:





The
amounts shown in the accompanying consolidated balance sheets are analyzed as
follows:





December
      31, 2008
            
            December
      31, 2009Lubricants
            
            795
            
            427Consumable
      stores
            
            170
            
            62965
            
            489





8.     
  Prepayments and Other:





The amounts shown in the accompanying consolidated balance sheets are analyzed
as follows:





December
      31, 2008
            
            December
      31, 2009Prepaid
      expenses
            
            1,087
            
            310Other
      receivables
            
            3,637
            
            2,0744,724
            
            2,384





9.
            Advances
      for Vessels under Construction:





In
October 2006, the Company entered into an agreement for the construction of six
Handymax Product / Chemical tankers. The total contract price was $285,365 and
was payable in five installments as follows: 15% was payable upon arrangement of
the refund guarantee, 15% was payable upon commencement of steel cutting, 20%
was payable upon keel laying, 20% was payable upon launching and 30% upon
delivery of the vessel. The vessels' construction was partially financed from
long-term bank financing discussed in Note 12. The first installment for the six
vessels of $42,807 was paid in December 2006 and January 2007. The second
installment for all vessels, the third installment for five vessels and the
fourth installment for two vessels in an aggregate amount of $109,229 was paid
during 2008. The third installment for one vessel, the fourth installment for
four vessels and the delivery installment for six vessels in an aggregate amount
of $133,329, was paid during 2009. All vessels were delivered as of December 31,
2009.





The
advances for vessels acquisitions / under construction as of December 31, 2007,
2008 and 2009 are analyzed as follows:





Construction
      installments
            
            
            Acquisitions
            
            
            Capitalized
      interest
            
            
            Capitalized
      costs
            
            
            TotalBalance,
      December 31, 2007
            
            
            42,807
            
            
            
            20,250
            
            
            
            2,695
            
            
            
            274
            
            
            
            66,026-
      Transfer to vessel cost / obligations under capital lease
            
            
            -
            
            
            
            (20,250
            )
            
            
            -
            
            
            
            (65
            )
            
            
            (20,315
            )-
      Additions
            
            
            109,229
            
            
            
            -
            
            
            
            3,873
            
            
            
            1,158
            
            
            
            114,260Balance,
      December 31, 2008
            
            
            152,036
            
            
            
            -
            
            
            
            6,568
            
            
            
            1,367
            
            
            
            159,971-
      Transfer to vessel cost
            
            
            (285,365
            )
            
            
            
            
            
            
            (8,029
            )
            
            
            (3,267
            )
            
            
            (296,661
            )-
      Additions
            
            
            133,329
            
            
            
            
            
            
            
            1,461
            
            
            
            1,900
            
            
            
            136,690Balance,
      December 31, 2009
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -






F-27


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)


10.     Vessels,
net:





The
amounts in the accompanying consolidated balance sheets are analyzed as
follows:





Vessel
      Cost
            
            
            Accumulated
                Depreciation
            
            
            Net
      Book
                ValueBalance,
      December 31, 2007
            
            
            598,266
            
            
            
            (44,375
            )
            
            
            553,891—Acquisitions
            
            
            219,934
            
            
            
            -
            
            
            
            219,934—Disposals
            
            
            (371,039
            )
            
            
            44,393
            
            
            
            (326,646
            )—Depreciation
            
            
            -
            
            
            
            (32,664
            )
            
            
            (32,664
            )Balance,
      December 31, 2008
            
            
            447,161
            
            
            
            (32,646
            )
            
            
            414,515—Acquisitions
            
            
            296,661
            
            
            
            
            
            
            
            296,661—Depreciation
            
            
            
            
            
            
            (31,585
            )
            
            
            (31,585
            )—Impairment
            
            
            (56,257
            )
            
            
            19,619
            
            
            
            (36,638
            )Balance,
      December 31, 2009
            
            
            687,565
            
            
            
            (44,612
            )
            
            
            642,953





On April
1, 2008, the Company entered into an agreement to sell the vessel M/V Bertram to
an unrelated party for a consideration of $46,500. The vessel was delivered to
its new owners on April 16, 2008. A loss from the sale of $2,169 was recognized
upon vessel's delivery.





On May 1,
2008, the Company took delivery of the drybulk vessel M/V Astrale.





On June
23, 2008, the Company entered into an agreement to sell the vessel M/T Stormless
to an unrelated party for consideration of $47,000. The vessel was delivered to
its new owners on June 26, 2008. A gain from the sale of $1,787 was recognized
upon vessel's delivery.





In June
2008, the Company entered into agreements to sell vessels M/T Edgeless, M/T
Ellen P, M/T Limitless and M/T Endless to unrelated parties for a total
consideration of $193,000. The M/T Edgeless was delivered to its new owners on
July 10, 2008, while the remaining three vessels were delivered to their new
owners in early September 2008. A gain from these sales of $19,439 was
recognized upon vessels' deliveries.





During
2009, the Company took delivery of six product / chemical tankers M/T Miss
Marilena, M/T Lichtenstein, M/T Ionian Wave, M/T Tyrrhenian Wave, M/T Britto,
and M/T Hongbo for a total book value of $296,661.





During
the year ended December 31, 2009, the Company recorded an impairment charge of
$36,638 relating to vessels M/T Dauntless and M/T Ioannis P.








11.
            Fair
      Value Of Below Market Time Charter:





In
November and December 2007 and February 2008, the Company acquired drybulk
vessels M/V Bertram, M/V Amalfi and M/V Voc Gallant, respectively, with attached
time charter contracts. As a result, the purchase price of the vessels was
allocated between vessel cost and the fair value of the time charter contracts,
totaling in aggregate $43,259, which is reflected in Fair Value of Below Market
Time Charter on the accompanying consolidated balance sheets. The liability is
amortized to revenues over the remaining period of the time charter contracts on
a straight-line basis. Following the sale of the M/V Bertram, on April 16, 2008,
the then unamortized fair value of below market time charter of $16,140 was
written-off to the loss from the sale of vessel. For the year ended December 31,
2007, 2008 and 2009, the amortization of the fair value of the time charter
contracts totaled $1,413, $21,795 and $3,911, respectively and is included in
Revenues in the accompanying consolidated statement of operations.






F-28


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)










12.     Long-term
Debt:





The
amounts in the accompanying consolidated balance sheets are analyzed as
follows:





Borrower
      / Vessel(s)
            
            December
      31,
            
            
            December
      31,2008
            
            
            2009RBSThe
      Company /  Dauntless, Ioannis P
            
            
            60,599
            
            
            
            50,466HSHAmalfi
      / Amalfi
            
            
            24,570
            
            
            
            22,461Jeke
      / Papillon (ex VOC Gallant)
            
            
            28,074
            
            
            
            23,991Warhol
      / Miss Marilena
            
            
            22,697
            
            
            
            37,907Indiana
      / Tyrrhenian Wave
            
            
            16,266
            
            
            
            27,525Britto
      / Britto
            
            
            16,266
            
            
            
            33,714DVBBanksy
      / Ionian Wave
            
            
            16,169
            
            
            
            32,132Hongbo
      / Hongbo
            
            
            9,479
            
            
            
            25,534Hongbo
      / Bridge Loan
            
            
            -
            
            
            
            10,374Japan
      II / Astrale
            
            
            40,532
            
            
            
            27,458ALPHAJapan
      III / Cyclades
            
            
            36,816
            
            
            
            27,854Lichtenstein
      / Lichtenstein
            
            
            24,489
            
            
            
            36,896EMPORIKIJapan
      I / Pepito
            
            
            46,522
            
            
            
            39,889CAPE
      MANUEL SHIPPING COMPANY LIMITEDThe
      Company
            
            
            -
            
            
            
            2,886Total
            
            
            342,479
            
            
            
            399,087Less-current
      portion
            
            
            (342,479
            )
            
            
            (399,087
            )Long-term
      portion
            
            
            -
            
            
            
            -








F-29




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)





12.
            Long-term
      Debt-(continued):





(a)    
RBS:





At
December 31, 2009, the Company had a revolving credit facility outstanding of
$50,777, maturing in August 2013, excluding unamortized financing fees of $311,
with no undrawn amount. The revolving credit facility bears interest at LIBOR
plus a margin (as of December 31, 2009 the margin was 2.5%). The applicable
interest rate as of December 31, 2009 is 2.75%.





The
facility contained various covenants, including (i) security value maintenance
whereby the market value of the vessels and the market value of any additional
security is required to be greater than or equal to 130% of the
outstanding loan and the fair value of outstanding swaps, (ii) market value
adjusted net worth required to be greater than or equal to $250,000 and greater
than to 35% of total assets, and (iii) EBITDA required to be greater than 120%
of fixed charges, (iv) minimum liquid funds of $10,000 or $500 per group vessel
and (v) a minimum balance of $5,000 to be maintained in the operating
accounts.





On July
31, 2009, the Company amended the loan with RBS to (i) waive the minimum
security covenant until March 31, 2010, (ii) amend the repayment schedule, (iii)
decrease the operating account balance to be maintained with RBS from $5,000 to
$200, (iv) amend the definition of the EBITDA waiver to exclude one-off lease
termination fees, (v) adjust the margin to 2.5% and (vi) add a cash sweep
mechanism whereby a certain amount of cash earned by M/T Ioannis P and M/T
Dauntless will be applied in the inverse order of maturity to the amount
outstanding under the loan agreement.





On August
28, 2009 the Company signed a side letter to the agreement with RBS whereby, at
any time after June 29, 2009, the group liquidity should not be less than
$15,000, of which a minimum of $5,000 or $385 per group vessel should be
unencumbered.





As of
December 31, 2009, the Company was not in compliance with the security value
maintenance covenant, for which it has received a waiver until March 31, 2010,
the EBITDA covenant and the minimum liquid funds covenant. The Company is
currently in discussions with the bank in relation to these
breaches





(b)    
HSH:





As of
December 31, 2009, the Company's subsidiaries had a total outstanding balance
with HSH of $147,401, excluding unamortized financing fees of $1,803, under two
facilities (bulker financing and product tanker financing), as
follows:





Bulker
Financing





Amalfi: At
December 31, 2009, Amalfi had a loan outstanding of $22,658, maturing in
December 2014, excluding unamortized financing fees of $197, which bears
interest at LIBOR plus a margin (as of December 31, 2009 the margin was 2.5%).
The applicable interest rate as of December 31, 2009 is 2.75%.





Jeke: At
December 31, 2009, Jeke had a loan outstanding of $24,282, maturing in February
2015, excluding unamortized financing fees of $291,which bears interest at LIBOR
plus a margin (as of







F-30


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)





12.
            Long-term
      Debt-(continued):





December
31, 2009 the margin was 2.5%). The applicable interest rate as of December 31,
2009 is 2.78%.





The
facility contained various covenants, including (i) asset maintenance whereby
the fair market value of the vessel and the fair value of any additional
security is required to be greater than or equal to a required percentage of the
outstanding loan and the fair value of the outstanding swaps. As per the initial
loan agreement the minimum required percentage had been set at 130% for the
first four years and 135% from then on until maturity. During 2008 these figures
were adjusted to 140% and 145% respectively as a result of waiver received for a
breach of the EBITDA covenant, (ii) market value adjusted net worth required to
be greater than or equal to $250,000 and greater than 35% of total assets, and
(iii) EBITDA greater than 120% of fixed charges, (iv) minimum liquid funds of
$25,000 or $500 per group vessel. During 2008 minimum liquid funds were adjusted
to $30,000 as a result of waiver received for a breach of the EBITDA covenant,
(v) No dividend payout in excess of 70% of net income per year and full dividend
restriction in case of breach of covenant.





On May
11, 2009, the Company amended the loan with HSH. The loan amendment, among other
things, provides for the following: (i) The Company to maintain a pledged amount
of $6,549, which is applied against future installments of the bulker
financing starting from August 2009; 50% pro rata against the 12 installments
starting from August 2009, and 50% pro rata against all remaining installments
of the facility including the balloon payment, starting from August 2009. This
pledge, amounted to $4,807 and $3,784 as of December 31, 2009 and as of June 16,
2010, respectively (ii) increase in margin of bulker financing from 1.35% to
2.50% from March 24, 2009 until March 31, 2010 and after March 31, 2010, (1)
1.00% while each of the Vessels are employed under time charter party agreements
acceptable to the Agent for periods of at least twelve months and (2) 1.125% at
all other times. As of the date of this annual report, due to covenant breaches,
the margin continues being 2.5%. Once covenant breaches have been rectified, the
margin will be reset to the loan agreement levels, (iii) waiver for asset
maintenance until March 31, 2010. Thereafter, the required percentage will be
adjusted to that of the initial loan agreement, (iv) amendment of adjusted net
worth up to March 31, 2010 and replacement of the minimum of $250,000 by
$125,000 and the minimum of 35% by 15%, (v) waiver for EBITDA to fixed charges
until March 31, 2010 and at all times thereafter, EBITDA greater than 120% of
fixed charges, (vi) amendment of minimum liquid funds to $25,000 until March 31,
2010, inclusive of all pledged deposits and cash held with all banks and
afterwards minimum liquid funds of $25,000 or $500 per group vessel, (vii) cross
collateralization of the two facilities.





As of
December 31, 2009, the Company was not in compliance with the asset maintenance
and the EBITDA covenant, for which it has received a waiver until March 31,
2010. Furthermore, the Company was not in compliance with the adjusted net worth
and the minimum liquid funds covenants. The facility provides that default rate
of two percent (2%) on top of the applicable rate shall apply for as long as
there is an event of default. As of the date of this annual report, HSH has not
imposed such a rate on any of the two facilities.





The
Company is currently in discussions with the bank in relation to these
breaches.











F-31





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)











12.    
Long-term Debt-(continued):





Product
Tanker Financing





Warhol:At December 31, 2009,
Warhol had a loan outstanding of $38,345, maturing in February 2019, excluding
unamortized financing fees of $438,which bears interest at LIBOR plus a margin
(as of December 31, 2009 the margin was 2.0%). The applicable interest rate as
of December 31, 2009 is 2.58%.





Indiana:At December 31, 2009,
Indiana had a loan outstanding of $27,957, maturing in March 2019, excluding
unamortized financing fees of $432, which bears interest at LIBOR plus a margin
(as of December 31, 2009 the margin was 2.0%). The applicable interest rate as
of December 31, 2009 is 2.65%.





Britto:At
December 31, 2009, Britto had a loan outstanding of $34,159, maturing in May
2019, excluding unamortized financing fees of $445, which bears interest at
LIBOR plus a margin (as of December 31, 2009 the margin was 2.0%). The
applicable interest rate as of December 31, 2009 is 2.56%.





The
facility contained various covenants, including (i) asset maintenance whereby
the fair market value of the vessel and vessels and of any additional security
is required to be greater than or equal to a required percentage of the
outstanding loan and the fair value of outstanding swaps. As per the initial
loan agreement the minimum required percentage had been set at 120% for the
first four years and 125% from then on until maturity. During 2008, these
initial required percentage was adjusted to 125% as a result of waiver received
for a breach of the EBITDA covenant, (ii) market value adjusted net worth
required to be greater than or equal to $250,000 and greater than or equal to
35% of total assets, and (iii) EBITDA required to be greater than 120% of fixed
charges, (iv) minimum liquid funds of $25,000 or $500 per group
vessel.





During
2008 minimum liquid funds were adjusted to $30,000 as a result of waiver
received for a breach of the EBITDA covenant v) No dividend payout in excess of
70% of net income per year and full dividend restriction in case of breach of
covenant.





On May
11, 2009, the Company amended the loan with HSH. The loan amendment, among other
things, provides for the following: i) amendment of the minimum required
percentage, which has been set at 125% until March 31, 2010, at 120% from April
1, 2010 until the fourth anniversary of this Credit Facility Agreement (October
2012) and at 125% at all times thereafter, ii) amendment of the market value
adjusted net worth to $125,000 up to March 31, 2010 and to 15% of total assets
up to March 31, 2010, iii) waiver of EBITDA covenant up to March 31, 2010, iv)
amendment of the minimum liquid funds to $25,000 until March 31, 2010, inclusive
of all pledged deposits and cash held with all banks and afterwards minimum
liquid funds of $25,000 or $500 per group vessel, v) increase in margin of
Product Tanker Financing from 1.75% to 2.0% until 31 March 31, 2010, thereafter
the margin will be reduced to 1.75% until maturity of the loan while each of the
vessels is employed under time charter party agreements acceptable to the lender
for periods of at least twelve (12) months and 1.125% per annum at all other
times. As of the date of this annual report, due to covenant breaches, the
margin continues being 2.0%. Once covenant breaches have been rectified, the
margin will be reset to the loan agreement levels, vi) a restructuring fee of
$150.








F-32


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)








12.    
Long-term Debt-(continued):





As of
December 31, 2009, the Company was not in compliance with the EBITDA covenant,
for which it has received a waiver until March 31, 2010. Furthermore, the
Company was not in compliance with the asset maintenance, the adjusted net worth
and the minimum liquid funds covenants.  The facility provides that
default rate of two percent (2%) on top of the applicable rate shall apply for
as long as there is an event of default. As of the date of this annual report,
HSH has not imposed such a rate on any of the two facilities.





The
Company is currently in discussions with the bank in relation to these
breaches.





(c)    
DVB:





As of
December 31, 2009, the Company's subsidiaries had a total outstanding balance
with DVB of $98,051, excluding unamortized financing fees of $2,553, under two
facilities (bulker financing and product tanker financing).





Bulker
Financing





Japan
II:At
December 31, 2009, Japan II had a loan outstanding of $28,000, maturing in
October 2015, excluding unamortized financing fees of $542, which bears interest
at LIBOR plus a margin (as of December 31, 2009 the margin was 1.5%). The
applicable interest rate as of December 31, 2009 is 2.12%.





The
facility contained various covenants, including (i) asset maintenance whereby
the fair market value of the vessel and of any additional security is required
to be greater than or equal to 140% of the outstanding loan and swaps for the
first two years and 130% thereafter, (ii) a Net Asset Value that is required to
be greater than 125,000, (iii) Stockholder's equity required to be greater than
$100,000, and (iv) minimum cash balances of $25,000.





On March
24, 2009, the Company signed a waiver letter and on July 31, 2009 the Company
signed an amendment to its $80,000 newbuildings loan which contained certain
provisions affecting the drybulk facility. This waiver letter and the amendment
of the $80,000 loan agreement, among other things, provide for the following:
(i) asset maintenance whereby the fair market value of the mortgaged vessels
under the bulker and the product tanker financing and of any additional security
is required to be greater than or equal to 100% until March 31, 2010, 105% until
March 31, 2011, 110% until March 31, 2012 and 120% thereafter of the outstanding
loan (excluding Top Up Loan) and the fair value of the outstanding swaps (ii)
amendment of Net Asset Value covenant to $0 up to March 31, 2010, to be
calculated on an annual basis (every 31st of
December) except for June 30, 2010, (iii) minimum cash balance of $20,000 as per
the waiver letter dated March 24, 2009, which then became $5,000 unencumbered up
to September, 30, 2010 and thereafter $25,000 or $500 per vessel ($250 per
vessel as cash in hand may be included), according to the amendment of the
newbuildings loan, (iv) a cash sweep mechanism for the period commencing after
the end of April 2010 until the maturity of the loan agreement whereby 60% of
any excess cash earned by the M/V Astrale will be applied in the inverse order
of maturity to the amount outstanding under the loan agreement. Excess cash is
defined as net earnings less: (i) aggregate operating expenses and general and
administrative capped at $10,000 per day as adjusted for an annual increase of
3%, (ii) scheduled installment repayments and (iii) interest costs. The cash
sweep mechanism will cease to apply in the event the








F-33


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)


12.    
Long-term Debt-(continued):





ratio of
the vessel's charter free fair market value over the outstanding loan is equal
or greater than 140% for a period of more than 3 consecutive months, v) change
in the repayment schedule of the loan, vi) a restructuring fee of $80 on top of
the $240 fee provided in the loan agreement for renewing the
drybulk  facility.





As of
December 31, 2009, the Company was not in compliance with the net asset value
and the minimum cash balance covenants. The Company is currently in discussions
with the bank in relation to these breaches.





Product
Tanker Financing





Banksy:At December 31, 2009,
Banksy had a loan outstanding of $32,695, excluding unamortized financing fees
of $563, which bears interest at LIBOR plus a margin (as of December 31, 2009
the margin was 1.75%). The applicable interest rate as of December 31, 2009 is
2.35%.





Hongbo:At December 31, 2009,
Hongbo had a loan outstanding of $26,156, excluding unamortized financing fees
of $622, which bears interest at LIBOR plus a margin (as of December 31, 2009
the margin was 1.55%). The applicable interest rate as of December 31, 2008 is
2.15%.





Top Up
Loan:On
July 31, 2009, the Company amended its $80,000 product tanker facility with DVB
in order to take account of a bridge loan of $12,512 used in the financing of
the delivery installment of the M/T Hongbo. As of December 31, 2009 the
outstanding amount was $11,200, excluding unamortized financing fees of $826,
which bears interest at LIBOR plus a margin (as of December 31, 2009 the margin
was 6%). The applicable interest rate as of December 31, 2009 is 6.6%. The
bridge loan is payable in full on July 30, 2010. Furthermore, the facility
includes a cash sweep mechanism whereby 100% of the aggregate of any excess cash
being hire earned by M/T Hongbo and M/T Ionian Wave above capital repayments in
connection with the relevant loan tranches and interest expenses in connection
with relevant tranches and the Top Up Loan, is applied on a quarterly basis as
prepayment against the outstanding Top Up Loan, starting on September 16,
2009.





During
2009, the Company has prepaid a total amount of $1,313 of the Top Up Loan in
accordance with the cash sweep mechanism. In March and June 2010, the Company
prepaid an additional amount of $550 and $587, respectively.





In
connection with this amendment and bridge loan, we issued 12,512,400 common
shares to Hongbo Shipping Company Limited, our wholly owned subsidiary, who
pledged these shares in favor of DVB. This pledge was granted as security and
must remain in an amount equal to 180% of the outstanding bridge loan, which
amount will be tested at the end of each quarter. We also agreed to file a
registration statement for the resale of the Hongbo Shipping shares and use our
best efforts to keep the registration statement effective during the security
period. Based on fair value of Company's common stock and outstanding balance of
the loan measured at December 31, 2009, the Company is required to issue and
pledge 7,447,756 additional shares of common stock. As of March 31, 2010, this
amount increased to 9,756,488.











F-34


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)





12.     Long-term
Debt-(continued):





The
facility contained various covenants, including (i) asset maintenance whereby
the fair market value of the vessel is required to be greater than or equal to
110% of the outstanding loan for the predelivery period, 115% for the first five
years and 125% thereafter, (ii) a Net Asset Value that is required to be greater
than $225,000, (iii) Stockholder's equity required to be greater than $180,000,
(iv) minimum cash balances of the higher of $25,000 or $500 per group vessel,
and (v) Interest cover ratio of no less than 1.2 times (defined as EBITDA
divided by interest expense) pre delivery and 1.5 times post
delivery.





On March
24, 2009, the Company signed a waiver letter and on July 31, 2009 the Company
signed an amendment to its $80,000 newbuildings loan. This waiver letter and the
amendment of the $80,000 loan agreement, among other things, provides for the
following: (i) asset maintenance whereby the fair market value of the mortgaged
vessels and of any additional security is required to be greater than or equal
to 115% for the first five years, up to August, 2014 and 125% thereafter of the
outstanding loan (excluding Top Up Loan) and the fair value of the outstanding
swaps. In case of breach of the minimum security cover, the borrowers would be
obliged to reduce the tranche relating to M/T Ionian Wave and M/T Hongbo by 55%
and 45% of shortfall respectively and increase the Top Up Loan by the shortfall.
Thereafter, in case the security cover shows an excess by at least $1 million,
the tranche relating to M/T Ionian Wave and M/T Hongbo to be increased by 55%
and 45% of the shortfall and the Top Up Loan to be reduced by the shortfall,
(ii) amendment of Net Asset Value covenant to $0 up to March 31, 2010, to be
calculated on an annual basis (every 31st of
December) except for June 30, 2010, (iii) minimum cash balance of $20,000 as per
the waiver letter dated March 24, 2009, which then became $5,000 unencumbered up
to September, 30, 2010 and thereafter $25,000 or $500 per vessel ($250 per
vessel as cash in hand may be included), according to the amendment of the
newbuildings loan, (iv) amendment of Interest cover ratio.





According
to notice received from DVB, as of March 16, 2010, the Company was not in
compliance with the minimum security cover for an amount of $2,959 based on
valuations dated December 31, 2009. The Company reduced the tranche relating to
M/T Ionian Wave by $1,627 and the tranche relating to M/T Hongbo by $1,332
representing the 55% and the 45% of shortfall respectively and increased the Top
Up Loan by $2,959.





Additionally,
as of December 31, 2009, the Company was not in compliance with the net asset
value and the minimum cash balance covenants. The Company is currently in
discussions with the bank in relation to these breaches.





(d)    
ALPHA:





As of
December 31, 2009, the Company's subsidiaries had a total outstanding balance
with ALPHA of $65,200, excluding unamortized financing fees of $450 under two
facilities (bulker financing and product tanker financing).





Bulker
Financing





Japan
III:At
December 31, 2009, Japan III had a loan outstanding of $28,000, maturing in
December 2015, excluding unamortized financing fees of $146 , which bears
interest at LIBOR plus a margin (as of December 31, 2009 the margin was 3.0%).
The applicable interest rate as of December 31, 2009 is 3.31%.








F-35


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)


12.     Long-term
Debt-(continued):





The
facility contained various covenants, including (i) asset maintenance whereby
the fair market value of the vessel and any additional security is required to
be greater than or equal to 130% of the outstanding loan, (ii) market value
adjusted net worth greater than or equal to $250,000 (iii) book equity (total
assets less consolidated debt) required to be greater than $100,000, and (iv)
minimum cash balances of $25,000.





On April
3, 2009, the Company signed a supplemental agreement with Alpha. The
supplemental agreement, among other things, provides for the following: (i) a
cash pledge of $4,000 to be maintained with the lender; this amount will be
applied towards the financing in case of renegotiation or cancellation of the
existing time charter agreement of M/V Cyclades. $2,000 of the pledged cash will
be released on December 31, 2009 subject to the above and no other event of
default. The remaining $2,000 will be released on March 31, 2010 given that: a)
no renegotiation or cancellation of the existing time charter agreement will be
effected until then, b) no event of default has occurred in the respective loan
facility. As of the date of this annual report, due to covenant breaches, the
cash pledge has not been released, (ii) increase in margin from 1.30% to 2.50%,
(iii) minimum liquidity is reduced to $15,000 from $25,000 until March 31, 2010,
(iv) waivers of the asset maintenance and the adjusted net worth covenants up to
March 31, 2010, (v) cross collateralization of this facility with the facility
under (g).





On May
21, 2009, the Company signed a second supplemental agreement with Alpha, whereby
Alpha agreed to replace the requirement contained in the first supplemental
agreement regarding the registration of a second mortgage over the M/T
Lichtenstein with an addendum to such mortgage.





On
November 25, 2009, the Company signed a third supplemental agreement with Alpha.
The third supplemental agreement mainly provides for the following: i) increase
in margin from 2.5% to 3% from September 17, 2009 up to March 31, 2010.
Thereafter, the margin would be adjusted to 2.25%. As of the date of this annual
report, due to covenant breaches, the margin continues being 3%, ii) minimum
liquidity is waived from the date of this agreement up to March 31,
2010.





As of
December 31, 2009, the Company was not in compliance with the asset maintenance,
the adjusted net worth and the minimum cash balance covenants, for which it has
received waivers until March 31, 2010. The Company is currently in discussions
with the bank in relation to these breaches.





Product
Tanker Financing





Lichtenstein:
At December 31, 2009, Lichtenstein had a loan outstanding of $37,200, maturing
in February 2019, excluding unamortized financing fees of $304, which bears
interest at LIBOR plus a margin (as of December 31, 2009 the margin was 3.0%).
The applicable interest rate as of December 31, 2009 is 3.31%.





The
facility contained various covenants, including (i) asset maintenance whereby
the fair market value of the vessel and any additional security is required to
be greater than or equal to 130% of the outstanding loan, (ii) market value
adjusted net worth required to be greater than or equal to $250,000 (iii) book
equity (total assets less consolidated debt) required to be greater than
$100,000, and (iv) minimum cash balances of $25,000.











F-36


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)


12.     Long-term
Debt-(continued):





On
February 23, 2009, the Company signed a first supplemental agreement with Alpha
to take account of the replacement of the initial bareboat charterer (Daelim
H&L Co., Ltd.) by Daelim Corporation following the latter's merger
..





On April
3, 2009, the Company signed a second supplemental agreement with Alpha. The
second supplemental agreement, among other things, provides for the following:
i) increase in margin from 1.65% to 2.25%, iii) minimum liquidity is reduced to
$15,000 from $25,000 until March 31, 2010, iv) waivers of the asset maintenance
and the adjusted net worth covenants up to March 31, 2010, v) cross
collateralization of  this facility with the facility under
(c).





On
November 25, 2009, the Company signed a third supplemental agreement with Alpha.
The third supplemental agreement mainly provides for the following: i) increase
in margin from 2.25% to 3% from October 26, 2009 up to March 31, 2010.
Thereafter, the margin would be adjusted to 2.25%, As of the date of this annual
report, due to covenant breaches, the margin continues being 3%, ii) minimum
liquidity is waived from the date of this agreement up to March 31,
2010.





As of
December 31, 2009, the Company was not in compliance with the asset maintenance,
the adjusted net worth and the minimum cash balance covenants, for which it has
received waivers until March 31, 2010. The Company is currently in discussions
with the bank in relation to these breaches





(e)     EMPORIKI:





At
December 31, 2009, Japan I had a loan outstanding of $39,988, maturing in March
2015, excluding unamortized financing fees of $99, which bears interest at LIBOR
plus a margin (as of December 31, 2009 the margin was 2.5%). The applicable
interest rate as of December 31, 2009 is 2.76%.





The
facility contained various covenants, including (i) asset maintenance whereby
the fair market value of the vessel and of any additional security is required
to be greater than or equal to 125% of the outstanding loan ad swap, (ii)
leverage ratio (total liabilities divided by total assets adjusted for fair
market values of vessels) required to be less than 75% (iii) Interest cover
ratio of no less than 2.5 times, (iv) minimum cash balances of no less than the
aggregate of next 6 months of senior debt principal payments and (v) maintenance
in the earnings account of average monthly balances of $1,000.





On August
5, 2009, the Company signed a supplemental agreement with Emporiki. The
supplemental agreement, among other things, provides for the following: i)
waiver of the minimum security requirement up to March 31, 2010, ii) waiver of
the maximum leverage ratio up to March 31, 2010, iii) increase in margin from
1.1 to 2.5% from March 31, 2009 until March 31, 2010 and to 1.75% thereafter. As
of the date of this annual report, due to covenant breaches, the margin
continues being 2.5%.





As of
December 31, 2009, the Company was not in compliance with the asset maintenance
and the minimum leverage ratio covenants, for which it has received waivers
until March 31, 2010 and the minimum liquid funds covenant. The Company is
currently in discussions with the bank in relation to these
breaches.











F-37


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)


12.     Long-term
Debt-(continued):





Other
loans





On July
27, 2009, the Company entered into an unsecured bridge loan financing facility
with an unrelated party. The purpose of this loan was to provide working capital
financing due to the temporary liquidity shortage experienced following the
termination of the leases and the delivery of six newbuilding vessels during
2009. The loan was of a principal amount of Euro 2,500 or $3,607 (based on the
U.S. Dollar/Euro exchange rate as of December 31, 2009), had a term of three
months and carried a margin of 9.0% per annum. On July 29, 2009 an amount of
Euro 1,000 or $1,443 (based on the U.S. Dollar/Euro exchange rate as of December
31, 2009) was drawn down.  On September 14, 2009, the Company amended
the bridge loan financing facility by changing the drawdown schedule of the
principal amount and undertaking to repay each advance along with relevant
interest and fees accrued in connection with the facility within three months
from its drawdown. On September 24, 2009 an amount of Euro 1,000 or $1,443
(based on the U.S. Dollar/Euro exchange rate as of December 31, 2009) was draw
down. On October 29, 2009, the Company further amended the bridge loan financing
facility by changing the repayment schedule and undertaking to repay the first
advance including relevant interest and fees accrued, on January 29, 2009. As of
December 31, 2009 the Company had
an undrawn amount ofEuro 500 or $721 (based on the U.S. Dollar/Euro
exchange rate as of December 31, 2009) to be drawn within three months from the
second advance. On January 14, 2010, the loan was further amended by changing
the loan principal to Euro 4,000 or $5,771(based on the U.S. Dollar/Euro
exchange rate as of December 31, 2009), by allowing an additional drawdown of
$1,500. The repayment schedule of the loan was also amended to allow repayment
of all outstanding advances along with accrued interest and finance costs by
April 15, 2010 in cash or shares or combination as demanded by lender. On April
15, 2010, the Company repaid the first advance of Euro 1,000 or $1,364 (based on
the U.S. Dollar/Euro exchange rate as of April 15, 2010) along with all accrued
interest and finance costs by then. Finally, the repayment of the second
drawdown and relevant accrued interest from April 15, 2010 was extended up to
July 31, 2010.





As of
December 31, 2009, an amount of Euro 460 or $664 (based on the U.S. Dollar/Euro
exchange rate as of December 31, 2009) related to fees connected with the loan
is included in the interest and finance costs in the accompanying consolidated
statements of operations.




Loans
Securities: The loans are secured as follows:





· Mortgages
over the Company's vessels;


· Assignments
of insurance and earnings of the mortgaged vessels;


· Corporate
guarantee of TOP Ships Inc;


· Pledge
over the earnings accounts of the vessels.





Debt
Covenants:





As of
December 31, 2008, the Company was not in compliance with certain covenants. In
accordance with guidance relating to Debt and more specifically "Classification
of Obligations that are Callable by the Creditor", the Company has classified
all its debt and financial instruments as








F-38


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)


12.     Long-term
Debt-(continued):





current
at December 31, 2008 as a result of noncompliance with loan covenants and cross
default provisions included in guarantees provided by the Company to financing
institutions in favor of its subsidiaries. A cross default provision means that
if the Company defaults on one loan it immediately defaults on all loans that
contain such a provision. As of December 31, 2009, the Company was in breach of
loan covenants relating to EBITDA, overall cash position (minimum liquidity
covenants), adjusted net worth, the net asset value and the asset cover of
product tankers with certain banks.  As a result of these covenant
breaches with all the banks, the Company has classified again all its debt and
financial instruments as current.





Interest
Expense: Interest expense for the years ended December 31, 2007, 2008 and
2009, amounted to $16,562, $18,270 and $11,009 respectively and is included in
interest and finance costs in the accompanying consolidated statements of
operations (Note 19).





Financing Costs:The additions in deferred financing costs amounted to $4,129 and $3,219
during the years ended December, 31 2008 and 2009. For 2009 this figure is
mainly due to obtaining loan covenant waivers.





The
weighted average interest rates, as of December 31 2008 and 2009, excluding all
swaps, were 4.41% and 2.84%, respectively.





Scheduled
      Principal Repayments: The annual principal payments required to be
      made after December 31, 2009, are as
follows:





Year
      ending December 31,
            
            Amount2010
            
            404,303Excluding
      unamortized financing fees
            
            (5,216)399,087





13.
            Other
      current Liabilities:





Interest Rate
Derivative Product: In November 2007, the Company entered into an
interest rate derivative product. Under this agreement, the Company received an
upfront payment of $8,500 and would have to pay five annual interest payments on
a notional amount of $85,000. Based on the cumulative performance of a portfolio
of systematic foreign exchange trading strategies, the interest payments would
have a minimum floor at 0.00% and a cap at 7.50%.





On
September 15, 2008, the parent company of the counterparty in this derivative
product, announced its intention to file a petition under Chapter 11 of the U.S.
Bankruptcy Code with the United States Bankruptcy Court for the Southern
District of New York.





On
December 30, 2008, the Company signed an agreement with the counterparty
terminating the interest rate derivative product against a one-off termination
payment of $5,000 by the Company. As of December 31, 2008 the Company classified
the $5,000 termination payment within its current liabilities representing the
fair value of the interest rate derivative product as of that date. This payment
was made on January 5, 2009 (Note 21).








14.     Commitments
and Contingencies:





Various
claims, suits, and complaints, including those involving government regulations
and product liability, arise in the ordinary course of the shipping business. In
addition, losses may arise from disputes with charterers, agents, insurance and
other claims with suppliers relating to the operations of the Company's vessels.
Currently, management is not aware of any such claims or contingent liabilities,
which should be disclosed, or for which a provision should be established in the
accompanying consolidated financial statements.






F-39


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)


14.     Commitments
and Contingencies-(continued):


The
Company accrues for the cost of environmental liabilities when management
becomes aware that a liability is probable and is able to reasonably estimate
the probable exposure. Currently, management is not aware of any such claims or
contingent liabilities, which should be disclosed, or for which a provision
should be established in the accompanying consolidated financial statements. A
minimum of up to $1 billion of the liabilities associated with the individual
vessels actions, mainly for sea pollution, are covered by the Protection and
Indemnity (P&I) Club insurance.





15.     Common
Stock and Additional Paid-In Capital:





Reverse Stock
Split: On March 20, 2008, the Company effected a 1-for-3 reverse stock
split of its common stock. There was no change in the number of authorized
common shares of the Company.





Private
placement: In April 2008, the Company privately placed 7,268,692 common
unregistered shares for aggregate net proceeds of $50,601 with various
investors. The shares were sold for $7.00 per share, which represents a discount
of 15.5 percent based on the closing share price of $8.28 on April 23, 2008. On
July 3, 2008 the Company filed a registration statement on form F-3 to register
those shares, which was declared effective on July 15, 2008.





Share Repurchase
Program:During
the fourth quarter of 2008, the Board of Directors authorized a share repurchase
program up to $20 million for a share price of not more than $2.50 per share
with a duration of one year.





Share
repurchases started during the fourth quarter of 2008 and the transactions were
open market based through the NASDAQ under Rule 10b-18 of the Exchange
Act.





As at
December 31, 2008, the Company has repurchased and cancelled an amount of
396,949 shares from the open market. As a result, the Company's common stock and
additional paid-in capital were reduced by $4 and $727
respectively.





The
Company continued its repurchase program until February 3, 2009. During the
first two months of 2009 the Company repurchased an amount of 358,601 shares
from the open market. As a result, the Company's common stock and additional
paid-in capital were reduced by $4 and $728 respectively





All the
outstanding shares that have been repurchased under this program are held
initially as treasury stock and are subsequently cancelled. Consequently, the
outstanding amount of 358,601 shares was cancelled effective as of February 25,
2009.














F-40


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)








15.     Common
Stock and Additional Paid-In Capital – (continued):





Issuance of
common stock: On July 1, 2009, the Company entered into a standby equity
distribution agreement (the "SEDA") with YA Global Master SPV Ltd.





Under the
SEDA the Company issued an amount of 2,230,000 shares of common stock. As a
result, the Company's common stock and additional paid-in capital were increased
by $22 and $2,520, respectively as of December 31, 2009, net of issuance costs.
The total net proceeds, after commissions, amounted to $2,936.





16.     Stock
Incentive Plan:





Starting
on July 1, 2005 and on various grant dates (the "grant dates") thereafter, as
outlined below, the Company granted shares pursuant to the Company's 2005 Stock
Incentive Plan as from time to time amended ("the Plan"), which was adopted in
April 2005 to provide certain key persons (the "Participants"), on whose
initiatives and efforts the successful conduct of the Company's business
depends, and who are responsible for the management, growth and protection of
the Company's business, with incentives to: (a) enter into and remain in the
service of the Company, a Company's subsidiary, or Company's joint venture, (b)
acquire a proprietary interest in the success of the Company, (c) maximize their
performance, and (d) enhance the long-term performance of the Company (whether
directly or indirectly) through enhancing the long-term performance of a Company
subsidiary or Company joint venture. The granted shares have no exercise price
and constitute a bonus in nature.





In the
case where restricted shares were granted, there were signed "Restricted Stock
Agreements" between the Company and the Participants on the respective grant
dates. Under these agreements, the Participants have the right to receive
dividends and the right to vote the shares, subject to the following
restrictions:





i.
            Grants
      to Company's CEO. The Company's CEO shall not sell, assign, exchange,
      transfer, pledge, hypothecate or otherwise dispose of or encumber any of
      the shares other than to a company, which is wholly owned by the Company's
      CEO. The restrictions lapse on the earlier of (i) the time specified in
      the relevant Restricted Stock Agreement or (ii) the termination of the
      Company's CEO employment with the Company for any reason. As the shares
      granted to the Company's CEO do not contain any future service vesting
      conditions, all such shares are considered vested shares on the grant
      date.





ii.
            Grants
      to Other Participants. The Participants (officers, independent and
      executive members of the Board, Company's employees and consultants) shall
      not sell, assign, exchange, transfer, pledge, hypothecate or otherwise
      dispose of or encumber any of the shares. The restrictions lapse on the
      time specified in the relevant Restricted Stock Agreement conditioned upon
      the Participant's continued employment with the Company from the date of
      the agreement until the date the restrictions lapse (the "vesting
      period").





In the
event the Participant's employment with the Company terminates for any reason
before the end of the vesting period, that Participant shall forfeit all rights
to all Shares that have not yet vested as of such date of termination. Dividends
earned during the vesting period will not be returned to the Company, even if
the unvested shares are ultimately forfeited. As these Shares granted to other
than








F-41


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)


16.
            Stock
      Incentive Plan – (continued):





the CEO
Participants contain a time-based service vesting condition, such shares are
considered non-vested shares on the grant date.





On
January 3, 2006, the Company's Board of Directors identified 29 key persons
(including the Company's CEO and other 8 officers and independent members of the
Board) to whom shares of restricted common stock of the Company were granted.
For this purpose 41,666 new shares were granted, out of which 26,666 shares were
granted to the Company's CEO, 12,666 shares to 8 officers and independent
members of the Board and the remaining 2,334 shares were granted to 20
employees. From the total of 15,000 shares granted to officers, independent
members of the Board and employees, 366 shares were forfeited prior to the
vesting date.





On July
6, 2006, the Company's Board of Directors identified 60 key persons (including
the Company's CEO and other 8 officers and independent members of the Board) to
whom shares of restricted common stock of the Company were granted. For this
purpose 106,666 new shares were granted, out of which 73,750 shares were granted
to the Company's CEO, 22,666 shares to 8 officers and independent members of the
Board and the remaining 10,250 shares were granted to 51 employees. From the
total of 32,916 shares granted to officers, independent members of the Board and
employees, 916 shares were forfeited prior to the vesting date.





On July
11, 2007, the Company granted 213,333 restricted shares pursuant to the Plan. Of
the 213,333 new shares granted, 113,333 shares were granted to 6 Directors and
the remaining 100,000 shares were granted to 2 officers and
employees.





The
shares vest proportionally over a period of 4 years in equal
installments.





On
January 22, 2008, the Company granted 197,560 restricted shares pursuant to the
Plan. These Shares were granted to two officers and employees and proportionally
vest over a period of four years in equal annual installments.





On July
1, 2008, 500,000 restricted shares were granted to the Company's CEO. 125,000
shares were vested on the grant date and the remainders of the shares are vested
over a period of three years in equal annual installments beginning one year
from the grant date. However, as the shares granted to our CEO do not contain
any future service vesting conditions, all such shares are considered
vested shares on the grant date.





On July
10, 2008, the Company granted to an officer 2,666 restricted shares pursuant to
the Plan. The shares vested over a period of 6 months.





On
September 2, 2008, the Company granted to an officer 2,666 restricted shares
pursuant to the Plan. The shares vested over a period of 6 months.





On
September 2, 2008, the Company granted to an employee 10,000 restricted shares
pursuant to the Plan. The shares vest over a period of 3 years.





On
September 2, 2008, the Company granted to the non-executive directors 375,000
restricted shares pursuant to the Plan. The shares vest over a period of 5
years.








F-42


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)





16.    
Stock Incentive Plan – (continued):





On
September 4, 2008, the Company's CEO waived his right to receive pursuant to his
employment contract with the Company three years' annual base salary in the
event of a change in control of the Company, in exchange for receiving 1,472,438
shares, which are restricted shares and which will vest in  the event
of such change of control. Consequently, the compensation expense for these
shares will not be recognized until the vesting becomes probable. In addition,
the dividends that might be declared in the future on those shares will be
recognized in the consolidated financial statements as additional compensation
expense in the consolidated statement of operations, since the vesting period of
those shares is indefinite.




On
October 21, 2009, the Company granted to an officer 30,326 unrestricted shares
pursuant to the Plan. The shares vested immediately.





On
December 21, 2009, the Company granted 150,000 restricted shares to each of the
Company's two new non-executive directors pursuant to the Plan. The shares vest
over a period of 5 years.





On
December 21, 2009, the Company granted to the CEO 500,000 Shares, pursuant to
the Plan with a vesting period of six months. However, as the shares granted to
our CEO do not contain any future service vesting conditions, all such shares
are considered vested shares on the grant date





On
December 21, 2009, the Company granted 300,000 Shares to the CFO, pursuant to
the Company's Plan out of which 100,000 shares vested immediately, and the
remainder of the shares vest over a period of 2 years.





All share
amounts have been adjusted for the 1:3 reverse stock split effected on March 20,
2008.





A summary
of the status of the Company's non-vested shares as of December 31, 2009 and
movement during the year ended December 31, 2009, is presented
below:





Non-vested
      Shares
            
            Weighted
      average grant date fair valueAs
      of January 1, 2009
            2,077,264
            $6.42Granted
            1,130,326
            $0.98Vested
            (958,404)
            $3.63Forfeited
            (8,077)
            $12.45As
      of December 31, 2009
            2,241,109
            $4.85








The
compensation expense recognized in the years ended December 31, 2007, 2008 and
2009 was $935, $5,116 and $3,467 and is included in General and administrative
expenses in the consolidated statements of operations. As of December 31, 2009,
the total unrecognized








F-43


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)





16.
            Stock
      Incentive Plan – (continued):





compensation
cost related to non-vested share awards is $2,812, which is expected to be
recognized by December 31, 2014.





The total
fair value of shares vested during the years ended December 31, 2007, 2008 and
2009 was $978, $3,770 and $1,115 respectively.





The
Company estimates the future forfeitures of non-vested shares to be immaterial.
The Company will, however, re-evaluate the reasonableness of its assumption at
each reporting period.





No
dividends were paid in the years ended December 31, 2007, 2008 and
2009.





17.     Earnings
(loss) Per Common Share:





All
shares issued (including non-vested shares issued under the Plan) are the
Company's common stock and have equal rights to vote and participate in
dividends and in undistributed earnings. Non-vested shares do not have a
contractual obligation to share in the losses. Dividends declared during the
period for non-vested common stock as well as undistributed earnings allocated
to non-vested stock are deducted from net income / (loss) attributable to common
shareholders for the purpose of the computation of basic earnings per share in
accordance with two-class method as required by relevant guidance. The
denominator of the basic earnings per common share excludes any non-vested
shares as such are not considered outstanding until the time-based vesting
restriction has elapsed.





On
January 1, 2009, the Company adopted the requirements of the guidance related to
Earnings per share, which clarifies that non-vested share-based payment awards
that contain rights to receive non forfeitable dividends or dividend equivalents
(whether paid or unpaid) are participating securities, and thus, should be
included in the two-class method of computing earnings per share. This standard
was applied retroactively to all periods presented. Non-vested, participating
shares did not impact basic and diluted loss per share for the periods ended
December 31, 2007 and 2009 due to losses. However, the adoption resulted in a
decrease of $0.04 in the basic and diluted earnings per share for the year ended
December 31, 2008 once retroactively adjusted in 2009. Refer to Note 2 (aa),
"Recently Issued Accounting Pronouncements," for additional information related
to Earnings per share guidance.





For
purposes of calculating diluted earnings per share the denominator of the
diluted earnings per share calculation includes the incremental shares assumed
issued under the treasury stock method weighted for the period the non-vested
shares were outstanding, with the exception of the 1,472,438 shares, granted to
the Company's CEO, which will vest in  the event of change of control.
Consequently, those shares are excluded from the remaining non-vested
shares.











F-44


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)





17.     Earnings
(loss) Per Common Share – (continued):





The
components of the calculation of basic and diluted earnings per share for the
years ended December 31, 2007, 2008 and 2009 are as follows:





Year Ended December 31,2007
            
            
            2008
            
            
            2009Net
      (loss) income
            
            $
            (49,076
            )
            
            $
            25,639
            
            
            $
            (50,196
            )Less:
      Undistributed earnings allocated to non-vested shares
            
            $
            -
            
            
            $
            (912
            )
            
            $
            -Net
      (loss) income available to common shareholders
            
            $
            (49,076
            )
            
            $
            24,727
            
            
            $
            (50,196
            )Weighted
      average common shares outstanding, basic and diluted
            
            $
            11,986,857
            
            
            $
            25,445,031
            
            
            $
            28,230,585(Loss)
      income per common share, basic and diluted
            
            $
            (4.09
            )
            
            $
            0.97
            
            
            $
            (1.78
            )





For the
years ended December 31 2007, 2008 and 2009, 213,333, 2,077,264 and 2,241,109,
shares respectively, which constitute the number of non-vested shares as at the
end of each year, were not included in the computation of diluted earnings per
share because to do so would have been antidilutive for the periods
presented.





18.     Voyage
and Vessel Operating Expenses:





The
amounts in the accompanying consolidated statements of operations are as
follows:








Voyage
      Expenses
            
            
            Year
      Ended December 31,2007
            
            
            2008
            
            
            2009Port
      charges
            
            
            15,473
            
            
            
            5,377
            
            
            
            24Bunkers
            
            
            36,867
            
            
            
            23,877
            
            
            
            (12
            )Commissions
            
            
            7,074
            
            
            
            9,402
            
            
            
            3,360Total
            
            
            59,414
            
            
            
            38,656
            
            
            
            3,372








Vessel
      Operating Expenses
            
            
            Year
      Ended December 31,2007
            
            
            2008
            
            
            2009Crew
      wages and related costs
            
            
            27,721
            
            
            
            26,673
            
            
            
            11,439Insurance
            
            
            6,191
            
            
            
            7,210
            
            
            
            3,021Repairs
      and maintenance
            
            
            18,758
            
            
            
            19,791
            
            
            
            4,323Spares
      and consumable stores
            
            
            15,177
            
            
            
            13,294
            
            
            
            4,832Taxes
      (Note 20)
            
            
            67
            
            
            
            146
            
            
            
            124Total
            
            
            67,914
            
            
            
            67,114
            
            
            
            23,739








19.     Interest
and Finance Costs:





The
amounts in the accompanying consolidated statements of operations are analyzed
as follows:






F-45


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)





Interest
      and Finance Costs
            
            Year
      Ended December 31,2007
            
            
            2008
            
            
            2009Interest
      on long-term debt (Note 12)
            
            
            19,223
            
            
            
            22,143
            
            
            
            12,470Less:
      Capitalized interest (Note 9)
            
            
            (2,661
            )
            
            
            (3,873
            )
            
            
            (1,461
            )Interest
      on capital leases
            
            
            -
            
            
            
            1,219
            
            
            
            -Commitment
      fees
            
            
            
            
            
            
            392
            
            
            
            153Bank
      charges
            
            
            875
            
            
            
            752
            
            
            
            382Amortization
      and write-off of financing fees
            
            
            2,081
            
            
            
            5,131
            
            
            
            2,425Total
            
            
            19,518
            
            
            
            25,764
            
            
            
            13,969





20.     Income
Taxes:





Marshall
Islands, Cyprus and Liberia do not impose a tax on international shipping
income. Under the laws of Marshall Islands, Cyprus and Liberia, the countries of
the companies' incorporation and vessels' registration, the companies are
subject to registration and tonnage taxes, which have been included in vessels'
operating expenses in the accompanying consolidated statements of
operations.





Pursuant
to the United States Internal Revenue Code of 1986, as amended (the "Code"),
U.S. source income from the international operations of ships is generally
exempt from U.S. tax if the company operating the ships meets both of the
following requirements, (a) the Company is organized in a foreign country that
grants an equivalent exception to corporations organized in the United States
and (b) either (i) more than 50% of the value of the Company's stock is owned,
directly or indirectly, by individuals who are "residents" of the Company's
country of organization or of another foreign country that grants an "equivalent
exemption" to corporations organized in the United States (50% Ownership Test)
or (ii) the Company's stock is "primarily and regularly traded on an established
securities market" in its country of organization, in another country that
grants an "equivalent exemption" to United States corporations, or in the United
States (Publicly-Traded Test).





Under the
regulations, a Company's stock will be considered to be "regularly traded" on an
established securities market if (i) one or more classes of its stock
representing more than 50 percent of its outstanding shares, by voting power and
value, is listed on the market and is traded on the market, other than in
minimal quantities, on at least 60 days during the taxable year; and (ii) the
aggregate number of shares of stock traded during the taxable year is at least
10% of the average number of shares of the stock outstanding during the taxable
year.





The
Marshall Islands, Cyprus and Liberia, the jurisdictions where the Company and
its ship-owning subsidiaries are incorporated, grant an "equivalent exemption"
to United States corporations. Therefore, the Company is exempt from United
States federal income taxation with respect to U.S.-source shipping income if
either the 50% Ownership Test or the Publicly-Traded Test is met. The Company
believes that for periods prior to its initial public offering in July 2004, it
satisfied the 50% Ownership Test. The Company also believes that for periods
subsequent to its initial public offering, it satisfies the Publicly-Traded Test
on the basis that more than 50% of the value of its stock is primarily and
regularly traded on the Nasdaq National Market and, therefore, the Company and its
subsidiaries are entitled to exemption from U.S. federal income tax, in respect
of their U.S. source shipping income.







F-46


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)


21.      Financial
Instruments:
 The
principal financial assets of the Company consist of cash on hand and at banks
and accounts receivable due from charterers. The principal financial liabilities
of the Company consist of long-term loans, accounts payable due to suppliers,
interest rate swap agreements and an interest rate derivative
product.




a)
            Interest
      rate risk:The Company is
      subject to market risks relating to changes in interest rates because it
      has floating rate debt outstanding under its loan agreements on which it
      pays interestbased on LIBOR, or cost of funds for certain banks,
      plus a margin. In order to manage part or whole of its exposure to changes
      in interest rates due to this floating rate indebtedness, the Company
      might enter into interest rate swap
  agreements.





b)
            Concentration
      of Credit risk:Financial instruments, which potentially subject
      the Company to significant concentrations of credit risk, consist
      principally of cash and trade accounts
  receivable.





The
Company places its temporary cash investments, consisting mostly of deposits,
with high credit qualified financial institutions. The Company performs periodic
evaluations of the relative credit standing of those financial institutions with
which it places its temporary cash investments. The Company limits its credit
risk with accounts receivable by performing ongoing credit evaluations of its
customers' financial condition and generally does not require collateral for its
accounts receivable.





c)
            Fair
      value: The carrying values of cash and cash equivalents, accounts
      receivable and accounts payable are reasonable estimates of their fair
      value due to the short-term nature of these financial instruments. The
      carrying amount of the Company's credit facilities (as further discussed
      in Note 12) approximates its fair value. The fair value of the interest
      rate swaps, except the swap under viii below, was determined using a
      discounted cash flow method based on market-based LIBOR swap yield curves,
      taking into account current and future interest rates and the
      creditworthiness of both the financial instrument counterparty and the
      Company. The fair value of the derivative product and the swap under viii
      below is the amount the Company would pay to terminate
  it.








The
estimated fair values of the Company's derivatives, seen below, equal carrying
values.





SWAP
            Notional Amount
            Period
            Effective Date
            Interest Rate Payable
            Fair Value - Asset
    (Liability)December 31, 2009
            
            
            
            December 31, 2008
            December 31, 20091
            
            4
      years
            June
      30, 2005
            4.66%
            ($270)
            -2
            $9,923
            2
      years
            December
      12, 2008
            4.80%
            ($701)
            ($444)3
            $9,923
            2
      years
            December
      12, 2008
            4.80%
            ($701)
            ($444)4
            $9,923
            2
      years
            December
      12, 2008
            4.80%
            ($701)
            ($444)5
            $10,000
            7
      years
            September
      30, 2006
            4.23%
            ($1,852)
            ($907)6
            $10,000
            7
      years
            September
      30, 2006
            4.11%
            ($1,812)
            ($869)7
            $10,000
            7
      years
            July
      3, 2006
            4.76%
            ($1,650)
            ($1,090)8
            $11,938
            5
      years
            March
      27, 2008
            4.60%
            ($732)
            ($620)9
            $6,798
            5
      years
            March
      27, 2008
            4.60%
            ($468)
            ($320)10
            $20,000
            7
      years
            May
      15, 2008
            10.85%
            ($3,944)
            ($5,975)11
            $12,345
            7
      years
            July
      15, 2008
            5.55%
            ($2,344)
            ($1,316)12
            $15,108
            4
      years
            June
      28, 2010
            4.73%
            ($1,263)
            ($921)13
            $32,695
            3
      years
            March
      19, 2009
            2.095%
            -
            ($453)($16,438)
            ($13,803)









F-47


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)





21.    
Financial Instruments – (continued):





The
Company enters into interest rate swap transactions to manage interest costs and
the risk associated with changing interest rates with respect to its variable
interest rate loans and credit facilities. These interest rate swap transactions
fix the interest rates based on predetermined ranges in current LIBOR rates. As
of December 31, 2009, the Company's outstanding interest rate swaps had a
combined notional amount of $158,653.





The
Company follows the accounting guidance for Fair Value Measurements and
Disclosures. This guidance enables the reader of the financial statements to
assess the inputs used to develop those measurements by establishing a hierarchy
for ranking the quality and reliability of the information used to determine
fair values. The statement requires that assets and liabilities carried at fair
value should be classified and disclosed in one of the following three
categories:





Level 1:
Quoted market prices in active markets for identical assets or
liabilities;





Level 2:
Observable market based inputs or unobservable inputs that are corroborated by
market data;





Level 3:
Unobservable inputs that are not corroborated by market data.





The
Company pays a fixed rate and receives a variable rate for its interest rate
swaps. The variable rate is based on the LIBOR swap rates. LIBOR swap rates are
observable at commonly quoted intervals for the full terms of the swaps and
therefore are considered Level 2 items. The fair values of those
derivatives determined through Level 2 of the fair value hierarchy are derived
principally from or corroborated by observable market data. Inputs include
quoted prices for similar assets, liabilities (risk adjusted) and
market-corroborated inputs, such as market comparables, interest rates, yield
curves and other items that allow value to be determined.





As of
December 31, 2009, no fair value measurements for assets or liabilities under
Level 1 or level 3 were recognized in the Company's consolidated financial
statements.





The
following table summarizes the valuation of our financial instruments as of
December 31, 2009:





Fair
      Value Measurement at Reporting Date Using Quoted Prices
    inTotal
            Active
              Markets
      for
              Identical
      Assets
              (Level
      1)
            Significant
              Other
              Observable
              Inputs
              (Level
      2)
            Significant
              Other
              Unobservable
              Inputs
              (Level
      3)Interest rate swaps
            $13,803
            -
            $13,803
            -





The
following table summarizes the valuation of our assets measured at fair value on
a non-recurring basis as of the valuation date:








F-48


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)








21.    
Financial Instruments – (continued):





Items
      Measured at Fair Value on a Nonrecurring
Basis  Fair
      Value MeasurementsQuoted
      prices
              Significant
      otherin
      active markets
              observable
              Unobservable


December
      31, 2009
            
            for
      identical assets
            inputs
            Inputs
            Gains/Non
      – Recurring Measurements:
            
            
            
            Level
      1
            Level
      2
            Level
      3
            (Losses)Long-lived
      assets held and used
            $38,000
            
            
            $38,000
            
            $36,638





In
accordance with the provisions of relevant guidance, long-lived assets held and
used with a carrying amount of  $74,638 were written down to their
fair value of $38,000, resulting in an impairment charge of $36,638, which was
included in the accompanying consolidated statement of operations for December
31, 2009 (Note 10).





The fair
value of the impaired vessels was determined based on a market approach, which
consisted of quotations from well respected brokers regarding vessels with
similar characteristics as compared to our vessels. As a result, the Company has
classified long-lived assets held and used as Level 2.





The
Company's interest rate swaps did not qualify for hedge accounting. The Company
marks to market the fair market value of the interest rate swaps at the end of
every period and reflects the resulting unrealized gain or loss during the
period in "Gain / (loss) on financial instruments" in its consolidated statement
of operations as well as presents the fair value at the end of each period in
the balance sheet. Information on the location and amounts of derivative fair
values in the consolidated balance sheets and derivative losses in the
consolidated statements of operations are presented below:








Liability DerivativesDecember 31, 2008
            December 31, 2009Derivatives not designated as hedging
      instrumentsBalance Sheet Location
            Fair Value
            Balance Sheet Location
            Fair ValueInterest rate swaps
            Current
      liabilities – Current portion of financial instruments
            $16,438
            Current
      liabilities – Current portion of financial instruments
            $13,803Total
      Derivatives not designated as hedging instruments
            
            $16,438
            
            $13,803






F-49


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
      31, 2008 AND 2009(Expressed
      in thousands of United States Dollars – except share and per share data,
      unless otherwise stated)







21.     Financial
Instruments – (continued):





Amount of (Loss) or Gain Recognized in Statement
      of Operations




Derivative Instruments not designated as hedging
      instruments
            Location of (Loss) or Gain  recognized
      in Income  on Derivative
            December 31, 2007
            December 31, 2008
            December 31,
2009





Interest rate swaps
            (Loss)
      / gain on financial instruments
            $2,728
            $16,326
            ($2,635)Interest rate derivative
      product
            (Loss)
      / gain on financial instruments
            $2,176
            ($5,676)
            -Total
      (Loss)  / Gain on Derivatives
            
            $4,904
            $10,650
            ($2,635)








22.    
Subsequent Events:





(a)
            New Time
      Charter: In March 2010, the Company's vessel M/T Dauntless entered
      into a time charter agreement for two years, starting in March 2010, at a
      gross daily rate of $10,500 plus 50/50 profit share with a first class
      charterer.








F-50


Schedule
I- Condensed Financial Information of Top Ships Inc. (Parent Company
Only)


Balance
      Sheets


December
      31, 2008 and 2009


(Expressed
in thousands of U.S. Dollars – except for share and per share data)





December
      31,2008
            
            
            2009ASSETSCURRENT
      ASSETSCash
      and cash equivalents
            
            
            49,154
            
            
            
            -Due
      from subsidiaries
            
            
            301,543
            
            
            
            330,109Other
      current assets
            
            
            686
            
            
            
            248Total
      current assets
            
            
            351,383
            
            
            
            330,357NON
      CURRENT ASSETSInvestments
      in subsidiaries
            
            
            311,178
            
            
            
            328,826Restricted
      cash
            
            
            5,081
            
            
            
            473Other
      non-current assets
            
            
            118
            
            
            
            99Total
      non-current assets
            
            
            316,377
            
            
            
            329,398Total
      assets
            
            
            667,760
            
            
            
            659,755LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESCurrent
      portion of long term debt
            
            
            60,599
            
            
            
            53,351Due
      to subsidiaries
            
            
            302,862
            
            
            
            354,121Current
      portion of financial instruments
            
            
            5,584
            
            
            
            2,866Other
      current liabilities
            
            
            6,623
            
            
            
            2,166Total
      current liabilities
            
            
            375,668
            
            
            
            412,504NON
      CURRENT LIABILITIESOther
      non-current liabilities
            
            
            41
            
            
            
            55Total
      non-current liabilities
            
            
            41
            
            
            
            55STOCKHOLDERS'
      EQUITYPreferred
      stock, $0.01 par value; 20,000,000 shares authorized; none
      issued
            
            
            -
            
            
            
            -Common
      stock $0.01 par value; 1,000,000,000 shares authorized29,901,048
      and 32,894,696 shares issued and outstanding at December 31, 2008 and
      2009
            
            
            283
            
            
            
            311Additional
      paid-in capital
            
            
            271,056
            
            
            
            276,305Accumulated
      other comprehensive income
            
            
            24
            
            
            
            88Retained
      earnings / Accumulated deficit
            
            
            20,688
            
            
            
            (29,508
            )Total
      stockholders' equity
            
            
            292,051
            
            
            
            247,196Total
      liabilities and stockholders' equity
            
            
            667,760
            
            
            
            659,755






F-51








Schedule
I- Condensed Financial Information of Top Ships Inc. (Parent Company
Only)


Statements
      of Operations


For
      the years ended December 31, 2007, 2008 and
2009


(Expressed
in thousands of U.S. Dollars – except for share and per share data)








December
      31,2007
            
            
            2008
            
            
            2009EXPENSESGeneral
      and administrative expenses
            
            
            9,493
            
            
            
            14,365
            
            
            
            12,910Foreign
      currency losses / (gains), net
            
            
            49
            
            
            
            (96
            )
            
            
            (17
            )Operating
      loss
            
            
            (9,542
            )
            
            
            (14,269
            )
            
            
            (12,893
            )OTHER
      INCOME / (EXPENSES)Interest
      and finance costs
            
            
            (11,264
            )
            
            
            (6,896
            )
            
            
            (2,457
            )Loss
      / (gain) on financial instruments
            
            
            (3,704
            )
            
            
            (3,701
            )
            
            
            1,439Interest
      income
            
            
            2,142
            
            
            
            1,252
            
            
            
            148Other,
      net
            
            
            -
            
            
            
            -
            
            
            
            46Total
      Other (expenses), net
            
            
            (12,826
            )
            
            
            (9,345
            )
            
            
            (824
            )Equity
      in (loss) / earnings of subsidiaries
            
            
            (26,708
            )
            
            
            49,253
            
            
            
            (36,479
            )Net
      (loss) / income
            
            
            (49,076
            )
            
            
            25,639
            
            
            
            (50,196
            )(Loss)
      / earnings per common share, basic and diluted
            
            
            (4.09
            )
            
            
            0.97
            
            
            
            (1.78
            )Weighted
      average common shares outstanding, basic and diluted
            
            
            11,986,857
            
            
            
            25,445,031
            
            
            
            28,230,585


F-52





Schedule
I- Condensed Financial Information of Top Ships Inc. (Parent Company
Only)


Statements
      of Cash Flows


For
      the years ended December 31, 2007, 2008 and
2009


(Expressed
      in thousands of U.S. Dollars)











December
      31,2007
            
            
            2008
            
            
            2009Net
      cash (used in) Operating Activities
            
            
            (45,569
            )
            
            
            (77,474
            )
            
            
            (11,006
            )Cash
      flows from Investing ActivitiesReturn
      of investment from subsidiaries
            
            
            75,954
            
            
            
            243,531
            
            
            
            -Investment
      in subsidiaries
            
            
            (129,272
            )
            
            
            (64,213
            )
            
            
            (32,181
            )Decrease
      (Increase) in Restricted cash
            
            
            -
            
            
            
            10,000
            
            
            
            4,608Acquisition
      of fixed assets
            
            
            -
            
            
            
            (112
            )
            
            
            -Net
      cash (used in) / provided by Investing Activities
            
            
            (53,318
            )
            
            
            189,206
            
            
            
            (27,573
            )Cash
      flows from Financing ActivitiesProceeds
      from long-term debt
            
            
            10,000
            
            
            
            30,000
            
            
            
            2,886Principal
      payments of long-term debt
            
            
            (34,080
            )
            
            
            (164,994
            )
            
            
            (10,149
            )Issuance
      of common stock, net of issuance costs
            
            
            98,341
            
            
            
            50,601
            
            
            
            2,569Repurchase
      and cancellation of common stock
            
            
            -
            
            
            
            (733
            )
            
            
            (732
            )Financial
      instrument termination payments
            
            
            -
            
            
            
            -
            
            
            
            (5,000
            )Financial
      instrument upfront receipt
            
            
            8,500
            
            
            
            -
            
            
            
            -Payment
      of financing costs
            
            
            -
            
            
            
            -
            
            
            
            (149
            )Net
      cash provided by / (used in) Financing Activities
            
            
            82,761
            
            
            
            (85,126
            )
            
            
            (10,575
            )Net
      (decrease) / increase in cash and cash equivalents
            
            
            (16,126
            )
            
            
            26,606
            
            
            
            (49,154
            )Cash
      and cash equivalents at beginning of year
            
            
            38,674
            
            
            
            22,548
            
            
            
            49,154Cash
      and cash equivalents at end of year
            
            
            22,548
            
            
            
            49,154











F-53








Schedule
I- Condensed Financial Information of Top Ships Inc. (Parent Company
Only)


(Figures
in thousands of U.S. Dollars)





In the
condensed financial information of the Parent Company, the Parent Company's
investment in subsidiaries is stated at cost plus equity in undistributed
earnings of subsidiaries less equity in undistributed loss of subsidiaries,
distributions from subsidiaries as return on investment and return of
investment.





The
Parent Company's subsidiaries made the following distributions to the Parent
Company during the years ended December 31, 2007, 2008 and 2009:





Return
      on Investment
            19,456
            96,774
            1,549Return
      of Investment
            75,954
            243,531Total
      cash from subsidiaries
            95,410
            340,305
            1,549











The
Parent Company is a borrower under the RBS and the Cape Manuel facilities and
guarantor under the remaining loans outstanding at December 31, 2009. Refer to
Note 12 "Long-term Debt" to the consolidated financial statements.





The
principal payments required to be made after December 31, 2009 for these are as
follows:





Year
      ending December 31, 2010
            53,662Less
      financing fees
            (311)53,351





The
vessel-owning subsidiary companies with outstanding loans had restricted net
assets amounting to $100,175 and $151,571 as of December 31, 2008 and 2009,
respectively.





The
condensed financial information of the Parent Company should be read in
conjunction with the Company's consolidated financial statements.







F-54


ITEM  19.           
EXHIBITS




Number
            Description of Exhibits1.1
            Second
      Amended and Restated Articles of Incorporation of TOP SHIPS
      INC.1.2
            Amended
      and Restated By-Laws of the Company, as adopted on February 28, 2007
      (1)2.1
            Form
      of Share Certificate (2)4.1
            TOP
      SHIPS INC. Amended and Restated 2005 Stock Incentive Plan4.2
            Credit
      Facility between the Company and the Royal Bank of Scotland dated November
      1, 2005 (3)4.3
            Supplement
      to Credit Facility between the Company and the Royal Bank of Scotland
      dated December 21, 2006 (4)4.4
            Shareholder
      Rights Agreement with Computershare Investor Services, LLC, as Rights
      Agent as of August 19, 2005 (5)4.5
            Credit
      Facility between Jeke Shipping Company Limited, Noir Shipping S.A., Amalfi
      Shipping Company Limited and HSH Nordbank AG, dated November 8, 2007
      (6)4.6
            Secured
      Loan Agreement between Japan III Shipping Company Limited and Alpha Bank
      A.E, dated December 17, 2007 (7)4.7
            Supplemental
      Agreement between Japan III Shipping Company Limited, Lichtenstein
      Shipping Company Limited and Alpha Bank A.E., dated April 3, 2009,to
      Secured Loan Facility Agreement dated December 17, 2007 (8)4.8
            Loan
      Agreement between Emporiki Bank of Greece S.A. and Japan I Shipping
      Company Limited, dated March 5, 2008 (9)4.9
            Supplemental
      Agreement, dated March 26, 2008 to Facilities Agreement between TOP SHIPS
      INC. and the Royal Bank of Scotland plc, dated November 1, 2005
      (10)4.10
            Loan
      Agreement between Japan II Shipping Company Limited, TOP SHIPS INC., DVB
      Bank AG and DVB Bank America N.V., dated April 24, 2008 (11)4.11
            Secured
      Loan Agreement between Lichtenstein Shipping Company Limited and Alpha
      Bank A.E., dated August 18, 2008 (12)   
   4.12
            First
      Supplemental Agreement between Lichtenstein Shipping Company Limited and
      Alpha Bank A.E, dated February 23, 2009, to Secured Loan Agreement dated
      August 18, 2008 (13)4.13
            Second
      Supplemental Agreement between Lichtenstein Shipping Company, Japan III
      Shipping Company Limited and Alpha Bank A.E., dated April 3, 2009, to
      Secured Loan Agreement dated August 18, 2008 (14)4.14
            Credit
      Facility between Warhol Shipping Company Limited, Indiana R Shipping
      Company Limited, Britto Shipping Company Limited and HSH Nordbank AG,
      dated October 1, 2008 (15)4.15
            Loan
      Agreement between Banksy Shipping Company Limited, Hongbo Shipping Company
      Limited and DVB Bank America N.V., dated October 6, 2008 (16)4.16
            Amendment
      Letter between Banksy Shipping Company Limited, Hongbo Shipping Company
      Limited and DVB Bank America N.V. dated July 31, 2009, to Loan Agreement
      dated October 6, 20084.17
            Fourth
      Supplemental Agreement between The Royal Bank of Scotland plc and TOP
      Ships Inc. dated July 30, 2009, to Facilities Agreement dated November 1,
      20054.18
            Second
      Supplemental Agreement between Japan III Shipping Company Limited,
      Lichtenstein Shipping Company Limited and Alpha Bank A.E., dated May 21,
      2009, to Secured Loan Facility Agreement dated December 17,
      20074.19
            Third
      Supplemental Agreement between Japan III Shipping Company Limited,
      Lichtenstein Shipping Company Limited and Alpha Bank A.E., dated November
      25, 2009, to Secured Loan Facility Agreement dated December 17,
      20074.20
            Third
      Supplemental Agreement between Lichtenstein Shipping Company Limited and
      Alpha Bank A.E, dated November 25, 2009, to Secured Loan Agreement dated
      August 18, 20084.21
            First
      Supplemental Agreement, between Emporiki Bank of Greece S.A. and Japan I
      Shipping Company Limited, dated August 5, 2009, to Loan Agreement dated
      March 5, 20084.22
            Amendment
      No. 1 between Jeke Shipping Company Limited, Noir Shipping S.A., Amalfi
      Shipping Company Limited and HSH Nordbank AG, dated May 11, 2009, to
      Credit Facility dated November 8, 20074.23
            Amendment
      No. 1 between Warhol Shipping Company Limited, Indiana R Shipping Company
      Limited, Britto Shipping Company Limited and HSH Nordbank AG, dated May
      11, 2009, to Credit Facility dated October 1, 20084.24
            Loan
      Agreement between Top Ships Inc. and Cape Manuel Shipping Company Limited,
      dated July 27, 20098.1
            List
      of subsidiaries of the Company12.1
            Rule
      13a-14(a)/15d-14(a) Certification of the Company's Principal Executive
      Officer12.2
            Rule
      13a-14(a)/15d-14(a) Certification of the Company's Principal Financial
      Officer13.1
            Certification
      of the Company's Principal Executive Officer pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002   
   13.2
            Certification
      of the Company's Principal Financial Officer pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.15.1
            Consent
      of Independent Registered Public Accounting
  Firm










(1) Incorporated
by reference from Exhibit 2.1 to the Company's Annual Report on Form 20-F, filed
on June 29, 2009 (File No. 000-50859).





(2) Incorporated
by reference from the Company's 6-K filed on March 9, 2007.





(3) Incorporated
by reference from Exhibit 4.4 to the Company's Annual Report on Form 20-F, filed
on April 13, 2006 (File No. 000-50859)





(4) Incorporated
by reference from Exhibit 4.4.1 to the Company's Annual Report on Form 20-F,
filed on April 20, 2007 (File No. 000-50859)





(5) Incorporated
by reference to Exhibit 4.1 to the Company's Registration Statement on Form 8A
(File No. 000-50859).





(6) Incorporated
by reference from exhibit 4.72 to the Company's Annual Report on Form 20-F,
filed on June 29, 2009 (File No. 000-50859)





(7) Incorporated
by reference from exhibit 4.73 to the Company's Annual Report on Form 20-F,
filed on June 29, 2009 (File No. 000-50859)





(8) Incorporated
by reference from exhibit 4.74 to the Company's Annual Report on Form 20-F,
filed on June 29, 2009 (File No. 000-50859)





(9) Incorporated
by reference from exhibit 4.75 to the Company's Annual Report on Form 20-F,
filed on June 29, 2009 (File No. 000-50859)





(10) Incorporated
by reference from exhibit 4.76 to the Company's Annual Report on Form 20-F,
filed on June 29, 2009 (File No. 000-50859)





(11) Incorporated
by reference from exhibit 4.77 to the Company's Annual Report on Form 20-F,
filed on June 29, 2009 (File No. 000-50859)





(12) Incorporated
by reference from exhibit 4.78 to the Company's Annual Report on Form 20-F,
filed on June 29, 2009 (File No. 000-50859)





(13) Incorporated
by reference from exhibit 4.79 to the Company's Annual Report on Form 20-F,
filed on June 29, 2009 (File No. 000-50859)





(14) Incorporated
by reference from exhibit 4.80 to the Company's Annual Report on Form 20-F,
filed on June 29, 2009 (File No. 000-50859)





(15) Incorporated
by reference from exhibit 4.81 to the Company's Annual Report on Form 20-F,
filed on June 29, 2009 (File No. 000-50859)





(16) 
Incorporated by reference from exhibit 4.82 to the Company's Annual Report on
Form 20-F, filed on June 29, 2009 (File No. 000-50859)








SIGNATURES





The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.





TOP
      SHIPS INC.(Registrant)Date:
      June 18, 2010
            
            By:
            
            /s/
      Evangelos PistiolisEvangelos
      PistiolisPresident,
      Chief Executive Officer, and
Director











SK 23116 0001
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