**SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-K**
 **Annual
        Report Pursuant to Section 13 or 15(d) of the**
 **Securities
        Exchange Act of 1934**
 
 **For
                  the fiscal year ended**
              
              **Commission
                  file number:****December
                  31, 2005**
              
              **1-10231**
  **MC
        SHIPPING INC.**
 (Exact
        name of the Registrant as specified in its charter)
 
 **LIBERIA**
              
              **98-0101881**State
                  or other jurisdiction of incorporation or organization
              
              (IRS
                  Employer Identification N°)
 
 **Richmond
        House, 12 Par-la-ville Road, Hamilton HM CX, Bermuda**
 (Address
        of principal executive offices)
 **441-295-7933**
 (Registrant's
        telephone number, including area code)
 
 **Securities
        registered pursuant to Section 12(b) of the Act :**
 
 **COMMON
                  STOCK $.01 PAR VALUE**
              
              **AMERICAN
                  STOCK EXCHANGE**(Title
                  of class)
              
              (Name
                  of exchange on which registered)
 
 **Securities
        registered pursuant to Section 12(g) of the Act : NONE**
 
  Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act
 o yes x no
  Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or section 15(d) of the Act
 o yes x no
  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 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.
 x yes o no
  Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K is not contained herein, and will not be contained, to the
        best
        of the registrant's knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K or any amendment
        to this
        Form 10-K. x
 
 Indicate
        by a check mark whether the registrant is a large accelerated filer, an
        accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of
        the
        Exchange Act).
 Large
                  accelerated filero
              Accelerated
                  filero
              Non-accelerated
                  filerx
  Indicate
        by check mark whether the R egistrant
        is a shell company (as defined in Rule 12b-2 of the Act)
 o yes x no
  
 The
        aggregate market value of the voting and non voting equity held by
        non-affiliates of the R egistrant
        computed by reference to the closing American Stock Exchange price on June
        30,
        2005 was: $38,375,865. Excluded from this amount are the shares of Common
        Stock
        beneficially owned by V. Investments, Navalmar and by each officer and director
        of the R egistrant
        in that such companies and persons may be deemed to be affiliates of the
        Registrant. The determination of affiliate status for this purpose is not
        necessarily a conclusive determination for other purposes.
  
 The
        number of shares outstanding of each of the R egistrant's
        classes of common stock as of March 15, 2006 was:
 **Common
        Stock, $.01 par value: 8,915,714**
  
 
 1
 
 Table
                  of contentsPagePART
                  IItem
                  1:
              Business
                  - General
              3Item
                  1A:
              Risk
                  factors
              7Item
                  1B:
              Unresolved
                  staff comments
              9Item
                  2:
              Properties
              10Item
                  3:
              Legal
                  proceedings
              10Item
                  4:
              Submission
                  of matters to a vote of security
                  holders
              10PART
                  IIItem
                  5:
              Market
                  for common equity and related stockholder
                  matters
              11Item
                  6:
              Selected
                  Financial Data
              12Item
                  7:
              Management’s
                  Discussion and Analysis of Financial Condition and
                  results of Operations
              14Item
                  7A:
              Quantitative
                  and Qualitative Disclosures about market
                  Risk
              24Item
                  8:
              Financial
                  Statements and Supplementary Data
              25Item
                  9:
              Changes
                  in and Disagreements with Accountants on Accounting and
                  Financial Disclosure
              48Item9A:
              Controls
                  and procedures
              48Item
                  9B:
              Other
                  Information
              48PART
                  IIIItem
                  10:
              Directors
                  and executive Officers of the
                  Company
              49Item
                  11:
              Executive
                  Compensation
              51Item
                  12:
              Security
                  ownership of certain Beneficial Holders and
                  Management
              52Item
                  13:
              Certain
                  relationships and related
                  Transactions
              53Item
                  14:
              Principal
                  Accounting Fees and Services
              54PART
                  IVItem
                  15:
              Exhibits,
                  Financial Statement schedules and reports on Form
                  8-K
              56EXHIBITSExhibit
                  21 List of subsidiaries
              59Exhibits
                  31 and 32: Certifications
              60
  2
 *Table
            of Contents*
  Certain
        of the information contained in this Form 10-K may constitute “forward-looking
        statements” as that term is defined under United States federal securities laws.
“Forward-looking statements” are subject to risks, uncertainties and other
        factors which could cause actual events to differ materially from those stated
        in such statements, including the identification of suitable vessels for
        purchase, the availability of additional financing for the Company, if needed,
        the cyclical nature of the shipping industry, competition, general economic
        conditions and other risk factors detailed elsewhere herein and in the Company’s
        other filings with the SEC.
 
 
 **PART
        I**
 
 
 **ITEM
                  1:**
              **BUSINESS
                  - GENERAL**
 
 MC
        Shipping Inc. (the “Company”) was incorporated on March 17, 1989, in the
        Republic of Liberia.
 
 Since
        its
        foundation, the Company has been engaged in the business of investing in,
        owning
        and operating second-hand vessels. As of December 31, 2005, the Company's
        fleet
        totaled sixteen ships. The Company fully owned nine liquefied petroleum gas
        (“LPG”) carriers and two coastal bulk carriers as of that date. In  addition,
        the Company had a 50% interest in another LPG carrier and a 25.8% percent
        interest in four containerships as of that date. Each
        of
        the Company’s vessels is owned by a separate wholly owned subsidiary of the
        Company.
 
 An
        LPG
        carrier is designed to carry petroleum gases used primarily as low pollution
        fuels and as feedstock in the petrochemical and fertilizer industries. A
        containership is a vessel designed exclusively to carry containers. A coastal
        bulk carrier (also known as a multipurpose seariver vessel) is a small vessel
        capable of carrying general cargo and/or bulk cargo both on rivers and at
        sea.
 
 The
        Company generally employs its vessels on time charter, bareboat charter or
        voyage charter. With time charters, the Company receives a fixed charterhire
        per
        on-hire day and is responsible for meeting all the operating expenses of
        the
        vessels, such as crew costs, voyage expenses, insurance, repairs and
        maintenance. In the case of bareboat charters, the Company receives a fixed
        charterhire per day for the vessel and the charterer is responsible for all
        the
        costs associated with the vessel's operation during the bareboat charter
        period.
        In the case of voyage charters, the vessel is contracted only for a voyage
        between two or several ports: the Company is paid for the tonnage transported
        and pays all voyage costs.
 
 The
        level
        of the Company's revenues and expenses will vary from year to year depending
        on,
        inter alia, the number of vessels controlled by the Company during each year
        and
        the charter rate of those vessels.
 
 **SHIPPING
        INDUSTRY BACKGROUND**
 
 The
        shipping industry is subject to cyclical fluctuations in charter rates and
        vessel values based on changes in supply and demand. The industry has been
        experiencing volatility in profitability, vessel values and charter rates
        resulting from changes in the supply of, and demand for, shipping capacity.
        The
        demand for ships is influenced by, among other factors, global and regional
        economic conditions, developments in international trade, and changes in
        seaborne and other transportation patterns, weather patterns, crop yields,
        armed
        conflicts, port congestion, canal closures, political developments, conflicts,
        embargoes and strikes. The demand for ships is also influenced by, among
        other
        things, the demand for consumer goods and perishable foodstuffs, dry bulk
        commodities, crude oil and oil products. Demand for such products is affected
        by, among other things, general economic conditions, commodity prices,
        environmental concerns, weather and competition from alternative fuels. The
        supply of shipping capacity is a function of the delivery of new vessels
        and the
        number of older vessels scrapped, converted to other uses, reactivated or
        lost.
        Such supply may be affected by regulation of maritime transportation practices
        by governmental and international authorities. All of these factors which
        affect
        the supply of and demand for vessel capacity are beyond the control of the
        Company. In addition, the nature, timing and degree of changes in the shipping
        markets, in which the Company operates, as well as future charter rates and
        values of its vessels, are not readily predictable.
  3
 *Table
            of Contents*
  **OPERATIONS**
 
 Ship
        owning activities entail three separate functions: (i) the overall strategic
        management function, which is that of an investment manager and includes
        the
        selection, purchase, financing and sale of vessels and overall supervision
        of
        both chartering and vessel technical management; (ii) the technical management
        function, which encompasses the day to day operation, physical maintenance
        and
        crewing of the vessels; and (iii) the commercial management function, which
        involves obtaining employment for the vessels and managing relations with
        the
        charterer.
 
 Management
        exercises direct control over the Company's overall strategic management
        function. The technical management function is sub-contracted to ship managers,
        currently, V.Ships or its affiliates ("V.Ships") for LPG vessels and ARPA
        Shipping BV (“ARPA”)
        for the coastal bulk carriers. Management may use other ship managers if
        the
        price and service is competitive. Management exercises regular controls over
        the
        technical managers of the vessels to ensure that they are properly maintained.
        Management exercises direct control of the commercial management function
        but
        may, on a case-by-case basis, engage the services of independent brokers
        in
        order to obtain employment for the Company’s vessels and to manage its relations
        with its charterers.
 
 The
        Company, via its wholly owned subsidiaries, enters into management agreements
        with managers for the technical operation of the Company's fleet. These
        agreements are “cost-plus” contracts under which the Company reimburses all
        costs incurred by the technical managers for the operation of the Company's
        vessels and the technical managers are paid a fixed management fee. In addition,
        if the Company deems it necessary to employ the services of technical managers
        in the chartering or commercial operation of any of the Company's vessels,
        technical managers are entitled to a commercial chartering commission determined
        in the light of current industry practice. For the rates of fees payable
        to
        V.Ships, see below Compensation to Affiliates.
 
 The
        Company had nine charters covering the year 2005, seven of which commenced
        prior
        to 2005, and three charterers provided revenues exceeding 10% of the Company's
        total revenues. The Company’s coastal bulk carriers were engaged on voyage
        charters in 2005 and are excluded from these statistics.
 
 The
        Company operates as a single segment, as Management internally evaluates
        the
        performance of the enterprise as a whole and not on the basis of separate
        business units or different types of charter.
 
 **COMPENSATION
        TO AFFILIATES**
 
 The
        By-Laws of the Company provide that any of the transactions giving rise to
        potential conflicts of interest are subject to review by the Audit Committee
        of
        the Company's Board of Directors which is also charged with the responsibility
        of monitoring and reviewing transactions to be entered into with affiliates
        (See
        Item 10: Directors and executive officers of the registrant and Item 13:
        Certain
        relationships and Related transactions).
 
 As
        of
        March 1, 2006, Navalmar Transportes Maritimos LDA (“Navalmar”) and V.Investments
        Limited (“V.Investments”) owned respectively 45.2% and 3.2% of the Company.
        Navalmar and V.Investments are deemed to share beneficial ownership of the
        common shares of the Company. Navalmar Transportes Maritimos LDA is a Portuguese
        company which owns and operates a fleet of vessels and is a subsidiary of
        CO.FI.PA. Spa (formerly known as Bogazzi Fimpar Spa). V.Investments is a
        subsidiary of V.Holdings Limited, which operates primarily under the V.Ships
        brand. V.Investments handles the investment activities of the V.Ships
        group.
 
 The
        Company, via its wholly owned subsidiaries, has entered into Management
        Agreements (the "Agreements") with V.Ships for the technical operation of
        some
        of its vessels. The Management Agreements are “cost-plus” contracts under which
        the Company reimburses all costs incurred by V.Ships for the operation of
        the
        Company's vessels and V.Ships is paid a fixed management fee. For
        2005,
        the management fees were fixed at the rate of $9,250 per vessel/per month
        for
        the container ships and the large LPG carriers and at the rate of $9,167
        per
        vessel/per month for the smaller LPG carriers (in 2004, $8,855 and $8,753
        respectively - in 2003, $8,600 and $8,500 respectively). In 2005, the Company
        paid management fees of $1,006,756 to V.Ships (2004 - $1,150,926; 2003 -
        $1,128,000).
  4
 *Table
            of Contents*
 
 The
        Company does not currently employ the services of V.Ships in the chartering
        or
        commercial operation of vessels. In 2005, no commercial chartering commissions
        were paid by the Company to V.Ships (2004 - none; 2003 - $4,500).
 
 If
        the
        Company deems it necessary to employ the services of V.Ships to assist with
        legal work for the acquisition or disposal of vessels, the Company will pay
        legal fees determined in the
        light
        of current industry practice. In 2005, legal fees and expenses totaling $37,876
        were paid by the Company to affiliates of V.Ships (2004 - $33,443; 2003 -
        $17,942).
 
 The
        Company leases office space from and reimburses telecommunication expenses
        to
        various affiliates of V.Ships. In 2005, the rental cost and telecommunications
        expenses paid to affiliates of V.Ships were approximately $104,455 (2004
        -
        $133,416; 2003 - $101,218).
 
 In
        August
        2004, the Company entered into a service agreement with V.Investments whereby
        the Company paid a fee of £10,000 per month in consideration of V.Ships
        permitting the Company’s Chief Executive Officer, who was a full time employee
        of V.Ships, to provide his services on a part time basis to the
        Company **.** V.Ships
        was also entitled to reimbursement of all business expenses incurred by the
        CEO
        in the provision of his services. Such agreement terminated on October 31,
        2005
        when the CEO joined the Company on a full time basis. In
        2005,
        the fees and expenses paid to V.Investments amounted to $203,084.
 
 The
        Company outsources some bookkeeping functions to an affiliate of V.Ships.
        In
        2005, the Company paid a total of approximately $28,833 for such accounting
        services (2004 - $31,000; 2003 - $31,000).
 
 In
        addition, on a case by case basis, as technical manager of the Company’s fleet,
        V.Ships uses on behalf of the Company the services of other V.Ships affiliates
        to arrange for insurance, crew and staff traveling, port agency services,
        manning, safety and training services, and miscellaneous services described
        below. The payments described below represent in part fees and for the most
        part
        payments to third parties.
  T he
        Company currently does not place
        its
        vessel insurance through V.Ships. In 2005,  insurance
        premiums paid by the Company to V.Ships amounted to $3,240 (2004
        -
        $ 706,946 ;
        2003 -
        $919,127). In addition, in 2005, cover for legal expenses in case of commercial
        disputes was dealt with by the way of a retainer amounting to approximately
        $58,793 to a subsidiary of V.Ships specializing in such work.
 
 The
        Company uses, for crew and staff traveling, the services of a company affiliated
        with V.Ships. In 2005, such traveling expenses amounted to approximately
        $ 378,340
        and were included in vessel operating expenses or in general and administrative
        expenses (2004 - $267,670; 2003 - $278,831).
 
 The
        Company uses from time to time the port agency services of various companies
        affiliated with V.Ships. In 2005, the Company paid to these companies
        approximately $278,719 for port and other costs, which were included in vessel
        operating expenses (2004 - $313,754 ; 2003 - $480,660).
 
 The
        Company uses various companies affiliated with V.Ships for manning, safety
        and
        training. In 2005, such expenses amounted to approximately $253,375 and were
        included in vessel operating expenses (2004 - $346,129; 2003 -
        $347,179).
 
 At
        December 31, 2005, the Company had intercompany balances of trade accounts
        receivables of $202,208 due from affiliates ($80,492 in 2004). This
        amount includes $180,789 receivable from MUNIA for the payment of the lube
        oil
        remaining on board at the time of sale of the container vessels. Munia
        Mobiliengesellschaft mbH & Co. KG (“MUNIA”) is a special purpose German KG
        company which purchased four container vessels from the Company in January
        2005
        and which is 25.8% owned by the Company (see Note 4: Investment in Associated
        Companies to the Consolidated Financial Statements in Item 8).
  5
 *Table
            of Contents*
 
 **INSURANCE
        AND CLASSIFICATION**
 
 The
        business of the Company is affected by the risks of mechanical failure of
        the
        Company's vessels, collisions, property losses to the vessels, cargo loss
        or
        damage, and business interruption due to political action in foreign countries
        and labor strikes. In addition, the operation of any ocean-going vessel entails
        an inherent risk of catastrophic marine disaster. The Company maintains Hull
        and
        Machinery Insurance, War Risk Insurance, Protection and Indemnity Insurance,
        Freight Demurrage and Defense Insurance and Loss of Earnings Insurance on
        its
        vessels consistent with industry practice. The Company maintains total or
        constructive total loss coverage for each of its vessels. The insurance
        underwriters may require that additional premiums be paid for Hull and Machinery
        and War Risk Insurance prior to any vessels entering certain geographical
        areas
        subject to unstable political or military conditions. **** Although
        the Company has had no difficulty in obtaining such insurance for its vessels,
        there can be no assurance that the Company will be able to continue to procure
        sufficient amounts of insurance to cover the repair and replacement cost
        of any
        vessel which is damaged or destroyed, loss of earnings on a vessel or the
        Company's liability in the event of a catastrophic marine or ecological
        disaster.
 
 The
        Company's insurers require that the Company's vessels meet certain requirements
        set by maritime classification societies as a condition to obtaining insurance.
        The classification societies determine that the vessels are safe and seaworthy
        in accordance with the International Maritime Organisation and the Safety
        of
        Life at Sea Convention. All LPG carriers, containerships and multipurpose
        carriers are inspected by a surveyor of the classification society every
        year
        (“Annual Survey”), every two and one half years ("Intermediate Survey"), and
        every five years (“Special Survey”). The Company has purchased and intends to
        purchase only vessels which are able to comply with such classification society
        requirements. It is expected that, under classification society rules, the
        Company's vessels will be required to undergo dry-docking at least once every
        three years. Normal dry-docking takes one to two weeks. The Company estimates
        that current dry-docking costs in the geographical areas where the Company
        anticipates having such work performed will vary between approximately $150,000
        and $1,600,000 per vessel, depending upon the size and complexity of the
        vessel
        concerned. This estimate is based on a dry-docking cycle of two and one half
        to
        three years between each visit to a dry-dock facility and assumes regular
        but no
        extraordinary expenses for maintenance and repairs. In addition to dry-docking,
        the Company is required to purchase spare parts and perform repairs on its
        vessels from time to time. In the case of bareboat charter arrangements,
        the
        bareboat charterer undertakes, at its expense, to ensure that the vessel
        is
        regularly dry-docked and is properly maintained.
 
 **REGULATION**
 
 The
        Company's business is materially affected by government regulation in the
        form
        of international conventions, national, state or local laws and regulations,
        and
        laws and regulations of the flag nations of its vessels, including laws relating
        to the discharge of materials into the environment. Because such conventions,
        laws and regulations are often revised, the Company is unable to predict
        the
        ultimate costs of complying with such conventions, laws and regulations.
        Under
        certain regulations, a vessel owner may be liable for property and environmental
        damages and all of its assets could be subject to claim for such damages.
        Moreover, in certain jurisdictions, under the “sister ship” doctrine, all of the
        affiliates in a fleet of ships may be liable for damages caused by, or debts
        incurred with respect to, a ship owned by one affiliate, and the ships and
        other
        assets of all the affiliates may be subject to attachments.
 
 In
        addition, the Company is required by various governmental and quasi-governmental
        agencies to obtain certain permits, licenses and certificates with respect
        to
        its operations. The Company believes that it will readily be able to obtain
        all
        such permits, licenses and certificates as may be required.
 
 Some
        countries have laws or practices which restrict the carriage of cargoes
        depending upon the nationality of a vessel or its crew or the origin or
        destination of the vessel, as well as other considerations relating to
        particular national interests. The Company cannot predict the effect that
        such
        laws or practices may have on its ability to obtain cargoes. It is expected
        that
        the Company's vessels, all of which are non-United States flag vessels, will
        be
        permitted to enter the territorial waters of the United States, but will
        not be
        permitted, under the Merchant Marine Act, 1920 (the Jones Act), to
        transport **** cargoes
        between United States ports. Such restriction is not expected to have a material
        adverse impact on the Company's operations *.* Two
        of
        the Company's vessels made one call and one vessel made two calls to a United
        States port in 2005.
  6
 *Table
            of Contents*
  **COMPETITION**
 
 Competition
        in the operation of LPG carriers is intense. Typically, each of the numerous
        owners of such vessels owns a relatively small number of vessels. However,
        a few
        large and experienced operators, with greater financial resources than those
        of
        the Company, dominate the LPG sector, particularly in the larger ship segments,
        and there is no assurance that the Company will be able to compete successfully
        with other shipping firms.
 
 As
        shipping rates are not materially different among competitors, competition
        is
        based primarily upon the reputation of the vessel and its operators and the
        operator's relationship with charterers.
 
 It
        is the
        opinion of Management that the most effective technique in dealing with
        competitive pressures is to maintain its vessels to a very high standard
        and to
        develop strong long-term relationships with charterers of high standing.
        Management believes that its reputation and extensive experience contributes
        to
        the Company's ability to compete effectively.
 
 **EMPLOYEES**
 
 At
        the
        end of 2005, the Company employed five persons on a full-time basis, three
        of
        whom are officers of the Company.
 
 The
        Company, through its vessel-owning subsidiaries, hires officers and crews
        for
        each of the Company's vessels. Seamen from India, Latvia, Russia, Ukraine,
        Philippines and the United Kingdom currently man the Company's vessels and
        a
        total of approximately two hundred and fifty seafarers currently serve on
        the
        Company’s vessels. These seamen are generally unionized and the Company believes
        its relationships with the seamen who serve on board its vessels are
        good.
 
 
 
 
 **ITEM
                  1A:**
              **RISK
                  FACTORS**
 
 **RISK
        FACTORS RELATING TO OUR BUSINESS AND OPERATIONS**
 
 *Our
        business is subject to the general volatility of the shipping
        market* .
        The
        shipping industry is subject to cyclical fluctuations in charter rates and
        vessel values based on changes in supply and demand. The industry has been
        experiencing volatility in profitability, vessel values and charter rates
        resulting from changes in the supply of, and demand for, shipping capacity.
        The
        factors which affect the supply of and demand for vessel capacity are beyond
        the
        control of the Company. In addition, the nature, timing and degree of changes
        in
        the shipping markets, in which the Company operates, as well as future charter
        rates and values of its vessels, are not readily predictable.
 
 *Our
        business is subject to significant environmental and other
        regulations.* The
        operation of vessels is affected by extensive and changing environmental
        protection and other laws and regulations, compliance with which may entail
        significant expense, including expenses for ship modifications and changes
        in
        operating procedures. Such expense could have a material adverse effect on
        the
        Company at any time.
 
 *Our
        business is subject to*  *government
        regulation which may increase our costs and potential liabilities, including
        for
        the failure to obtain required permits, licenses and certificates and the
        failure to keep up with changing regulations* .
        The
        shipping business is materially affected by government regulation in the
        form of
        international conventions, national, state or local laws and regulations,
        and
        laws and regulations of the flag nations of its vessels, including laws relating
        to the discharge of materials into the environment. Because such conventions,
        laws and regulations are often revised, the Company is unable to predict
        the
        ultimate costs of complying with such conventions, laws and regulations.
        Under
        certain regulations, a vessel owner may be liable for property and environmental
        damages and all of its assets could be subject to claim for such damages.
        Moreover, in certain jurisdictions, under the "sister ship" doctrine, all
        of the
        affiliates in a fleet of ships may be liable for damages caused by, or debts
        incurred with respect to, a ship owned by one affiliate, and the ships and
        other
        assets of all the affiliates may be subject to attachments.
  7
 *Table
            of Contents*
  *Shipping
        is an inherently risky business and our insurance may not be
        adequate.* The
        business of the Company is affected by the risks of mechanical failure of
        the
        Company’s vessels, collisions, property losses to the vessels, cargo loss or
        damage, and business interruption due to political action in foreign countries
        and labor strikes. In addition, the operation of any ocean-going vessel entails
        an inherent risk of catastrophic marine disaster. Any
        of
        these events may result in loss of revenues, increased costs and decreased
        cash
        flows. The
        Company maintains Insurance consistent with industry practice. Nonetheless,
        risks may arise against which we are not adequately insured.  For example,
        a catastrophic event could exceed our insurance coverage and have a material
        adverse effect on our financial condition. Although
        the Company has had no difficulty in obtaining such insurance for its vessels
        in
        the past, there can be no assurance that the Company will be able to continue
        to
        procure sufficient amounts of insurance at
        commercially reasonable rates in the future and we cannot guarantee that
        any
        particular claim will be paid.
 
 *There
        may be risks associated with the purchase and operation of second hand vessels.* The
        economic useful lives of most gas carriers are generally estimated to be
        approximately 30 years, depending on market conditions, the type of cargo
        being
        carried and the level of maintenance. Although
        we inspect second-hand vessels prior to purchase, this does not normally
        provide
        us with the same knowledge about their condition that we would have had if
        such
        vessels had been built for and operated exclusively by us. Second-hand
        vessels carry no warranties from sellers or manufacturers. In general,
        expenditures necessary to maintain a vessel in good operating condition increase
        with the age of the vessel. Second-hand vessels may develop unexpected
        mechanical and operational problems despite adherence to regular survey
        schedules and proper maintenance. Changes in governmental regulations and
        safety
        standards may require expenditures for alterations. The Company’s vessels range
        from 10 to 30 years old. There can be no assurance that market conditions
        will
        justify the level of expenditures necessary to maintain such vessels, to
        comply
        with applicable regulations, to enable the Company to operate such vessels
        profitably during the remainder of such vessels’ useful lives or to sell such
        vessels at prices approaching or in excess of the book value. Therefore,
        our future operating results could be negatively affected if some of the
        vessels
        do not perform as we expect.
 
 *We
        may face unexpected repair costs for our vessels.* **** Repairs
        and maintenance costs are difficult to predict with certainty and may be
        substantial.  Many of these expenses are not covered by our
        insurance.  Large repair expenses could decrease our cash flow and
        profitability and reduce our liquidity.
  *Our
        revenues may be adversely affected if we do not successfully employ our
        vessels* *.* The
        Company’s vessels are currently chartered for periods ranging from three to
        fifty one months. Upon the termination of such charters, the Company may
        seek to
        sell one or more of its vessels, enter into medium- to long-term charters
        or
        trade such vessels in the spot market. If the Company decides to recharter
        the
        vessels, there can be no assurance that it will be able to enter into charters
        for periods and at rates of hire that will be sufficient to enable the Company’s
        vessels to be operated profitably.
 
 *We
        are dependant on a few charterers and i* *f
        we
        lose any of our charterers or a significant portion of our revenues, our
        operating results could be materially adversely affected* .
        The
        Company has derived and is expected to continue to derive, a significant
        portion
        of its revenues from a limited number of charterers. If
        the
        Company loses a significant customer, or if a significant customer decreases
        the
        amount of business it transacts with us, our revenues, cash flows and
        profitability could be materially and adversely affected.
 
 *The
        risks associated with*  *operations
        outside the United States could adversely impact our operating
        results* .
        The
        Company’s operations are conducted worldwide, and may be affected by changing
        economic, political and social conditions in the countries where the Company
        is
        engaged in business or where the Company’s vessels are registered or flagged. In
        particular, the Company’s operations may be affected by war, expropriation of
        vessels, the imposition of taxes, increase regulation or other circumstances,
        and as a consequence the Company may incur higher costs, its assets may be
        impaired or its operations may be curtailed.
  8
 *Table
            of Contents*
  *Our
        operating performance may be materially affected by competition* .
        Competition in the operation of LPG carriers is intense. A few large and
        experienced operators, with greater financial resources than those of the
        Company, dominate the LPG sector, particularly in the larger ship segments,
        and
        there is no assurance that the Company will be able to compete successfully
        with
        other shipping firms.
 
 *Related
        party transactions may materially affect our business* .
        Certain
        of the directors and executive officers of the Company are involved in outside
        business activities similar to those conducted by the Company. As a result
        of
        such affiliations, such persons may experience conflicts of interest in
        connection with the selection, purchase, operation and sale of the Company’s
        vessels and those of other entities affiliated with such persons.
 
 *If
        we
        default under any of our loan agreements, we could forfeit our rights in
        our
        vessels and their charters.* We
        have
        pledged all of our vessels and related collateral as security to the lenders
        under our loan agreements.  Default under any of these loan agreements, if
        not waived or modified, would permit the lenders to foreclose on the mortgages
        over the vessels and the related collateral, and we could lose our rights
        in the
        vessels and their charters.
 
 **RISK
        FACTORS RELATED TO OUR COMMON STOCK**
 
 *You
        may not be able to sell your common stock when you want to and, if you do,
        you
        may not be able to receive the price that you want* .
        Although our common stock trades on the American Stock Exchange, we do not
        know
        if an active trading market for the common stock will continue or, if it
        does,
        at what prices the common stock may trade. During 2005, the reported closing
        prices for our common stock have ranged from a high of $15.82 to a low of
        $3.55.
        In addition, the stock markets in general, including the American Stock
        Exchange, have experienced extreme price and trading volume fluctuations.
        These
        fluctuations have resulted in volatility in the market prices of securities
        that
        has often been unrelated or disproportionate to changes in operating
        performance. These broad market fluctuations may adversely affect the market
        prices of our common stock. Further, possible additional issuances could
        significantly increase the number of shares of our common stock outstanding,
        and
        could result in a decline in the market price of our common stock. Therefore,
        you may not be able to sell our common stock when you want and, if you do,
        you
        may not receive the price you want.
 
 *We
        cannot assure you that we will pay any dividends.* In
        March
        2005, our board of directors initiated a cash dividend policy. The timing
        and amount of dividends, if any, could be affected by factors affecting cash
        flows, results of operations, required capital expenditures, or reserves. 
Maintaining the dividend policy will depend on our cash earnings, financial
        condition and cash requirements and could be affected by factors, including
        the
        loss of a vessel, required capital expenditures, reserves established by
        the
        board of directors, increased or unanticipated expenses, additional borrowings
        or future issuances of securities, which may be beyond our control.
 
 
 **ITEM
                  1B:**
              **UNRESOLVED
                  STAFF COMMENTS**
 
 Not
        applicable.
 
 9
 *Table
              of Contents*
 
 **ITEM
                  2:**
              **PROPERTIES**
 
 The
        Company, through its wholly owned subsidiary MC Shipping S.A.M., directly
        rents
        office space from V.Ships and procures administrative services in Monaco.
        In
        2005, the Company leased office space at a cost of $89,167 (2004 - $87,206;
        2003
        - $76,078). Additionally, the Company has at its disposal office space and
        administrative services in Bermuda.
  At
        December 31, 2005, the Company's fleet consisted of the following
        vessels:
 
 
 **Name**
              
              **Type**
              
              **Year
                  Built**
              
              **DWT**
              
              **%
                  ownership**Deauville
              
              LPG
                  Carrier
              
              1995
              
              2,601
              
              100.0%Auteuil
              
              "****
              
              1995
              
              2,588
              
              100.0%Coniston
              
              "
              
              1991
              
              4,833
              
              100.0%Cheltenham
              
              "
              
              1990
              
              4,318
              
              100.0%Longchamp
              
              "****
              
              1990
              
              4,316
              
              100.0%Malvern
              
              "
              
              1990
              
              4,148
              
              100.0%La
                  Forge
              
              "
              
              1981
              
              45,587
              
              100.0%Chelsea
                  Bridge
              
              "
              
              1987
              
              51,466
              
              100.0%Tower
                  Bridge
              
              "
              
              1991
              
              49,245
              
              100.0%Bay
                  Trader
              
              Coastal
                  Bulk Carrier
              
              1980
              
              1,579
              
              100.0%Link
                  Trader
              
              "
              
              1980
              
              1,579
              
              100.0%Galileo
              
              LPG
                  Carrier****
              
              1983
              
              47,593
              
              50.0%Maersk
                  Belawan
              
              Container
                  Carrier
              
              1983
              
              37,212
              
              25.8%Maersk
                  Brisbane
              
              "
              
              1976
              
              37,129
              
              25.8%Maersk
                  Barcelona
              
              "
              
              1976
              
              37,115
              
              25.8%Ankara
              
              "
              
              1975
              
              37,116
              
              25.8%
 
 
 
 
 **ITEM
                  3:**
              **LEGAL
                  PROCEEDINGS**
 
 The
        Company has no material legal proceedings.
 
 
 
 **ITEM
                  4:**
              **SUBMISSION
                  OF MATTERS TO A VOTE OF
                  SECURITYHOLDERS**
 
 None
 10
 *Table
              of Contents*
 
 **PART
        II**
 
 
 **ITEM
                  5:**
              **MARKET
                  FOR COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS**
 
 
 ***PRICE
        RANGE OF COMMON STOCK***
 
 Since
        May
        31, 1989, the Company's Common Stock has traded on the American Stock Exchange.
        The ticker symbol for the Company's Common Stock is “MCX”. As of February 15,
        2006, there were 60 record holders of Common Stock.
 
 The
        high
        and low sales prices for the Company's Common Stock for the last two fiscal
        years are set forth below:
 
 **Quarter
                  ended**
              
              **2005**
              
              **2004****High**
              
              **Low**
              
              **High**
              
              **Low**March
                  31
              
              
              8.93
              
              
              3.55
              
              
              3.00
              
              
              2.00June
                  30
              
              
              10.11
              
              
              7.59
              
              
              2.90
              
              
              2.16September
                  30
              
              
              10.35
              
              
              8.95
              
              
              4.61
              
              
              1.86December
                  31
              
              
              15.82
              
              
              9.30
              
              
              5.82
              
              
              3.28
 
 
 ***DIVIDENDS***
 
 In
        March
        2006, the Company’s Board of Directors announced a dividend of $0.25 per share
        to be paid in four equal quarterly installments commencing in April 2006
        and a
        stock dividend of one share for every twenty shares owned, rounded up to
        the
        nearest multiple. In March 2005, the Company’s Board of Directors declared a
        dividend of $0.25 per share which was paid in four equal quarterly installments
        commencing in April 2005. In
        March
        2004, the Company's Board of Directors decided to distribute a stock dividend
        of
        1 share for every 20 shares owned, rounded up to the nearest multiple of
        20 and
        415,513 shares were issued to that effect.
 
 The
        Company has been advised that distributions to shareholders who are not citizens
        or residents of Liberia will not be subject to tax by Liberia under its laws
        as
        currently in effect. There is no income tax treaty between Liberia and the
        United States.
 
 
 ***SECURITIES
        AUTHORIZED UNDER EQUITY COMPENSATION PLAN***
 
 As
        of
        December 31, 2005
 Plan
                    category
                (a)
                    Number ofsecurities
                    tobe
                    issued uponexercise
                    ofoutstanding
                    options
                (b)
                    Weighted averageexercise
                    price ofoutstanding
                    options
                (c)
                    Number of securitiesremaining
                    available forfuture
                    issuance under equitycompensation
                    plans(excluding
                    securitiesreflected
                    in column (a)Equity
                    compensation plans approved by security holders
                186,398
                $9.228
                -Equity
                    compensation plans not approved by security holders
                -
                -
                -Total
                186,398
                $9.228
                -
  11
 *Table
            of Contents*
  ***SHARE
        REPURCHASE PROGRAM***
 
 In
        March
        2006, the Company’s Board of Directors extended the authorization to repurchase
        of up to 400,000 shares of its common stock. Shares will be repurchased in
        the
        open market at times and prices considered appropriate by the Company. The
        timing of any purchases and the exact number of shares to be purchased will
        be
        dependent on market conditions. Repurchased stock, if any, will be held in
        treasury. There were no repurchases of common shares in 2005 under the Share
        Repurchase Program.
 
 
 **ITEM
                  6:**
              **SELECTED
                  FINANCIAL DATA**
 
 The
        following selected financial data for the years ended December 31, 2005,
        2004,
        2003, 2002 and 2001 are derived from the Consolidated Financial Statements
        of
        the Company. The Company’s books and records are maintained in U.S. dollars,
        which is the Company’s functional currency. The data should be read in
        conjunction with the Consolidated Financial Statements, related notes and
        other
        information included herein.
 
 The
        Company is in the business of investing in, owning and operating vessels.
        As a
        result, the composition and size of the Company’s fleet varies significantly
        every year (see Note 3: Acquisitions and Sales of Vessels to the Consolidated
        Financial Statements in Item 8).
  12
 *Table
            of Contents*
 
 **Consolidated
        Statements of Operations Data**
 
 **Years
                  ended December 31****2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001**Charterhire
                  and Other Income
              
              $
              35,396,519
              
              $
              31,895,393
              
              $
              35,797,522
              
              $
              41,858,999
              
              $
              44,823,301Commission
                  on Charterhire
              
              
              (532,281
              )
              
              (759,673
              )
              
              (895,394
              )
              
              (1,100,422
              )
              
              (1,223,268
              )Vessel
                  Operating Expenses
              
              
              (13,983,069
              )
              
              (16,821,562
              )
              
              (17,875,984
              )
              
              (19,547,436
              )
              
              (22,321,851
              )Amortization
                  of Dry- docking Costs
              
              
              (808,129
              )
              
              (1,433,150
              )
              
              (1,176,659
              )
              
              (575,185
              )
              
              (895,802
              )Depreciation
              
              
              (8,114,264
              )
              
              (5,140,639
              )
              
              (8,295,583
              )
              
              (9,127,713
              )
              
              (10,761,040
              )General
                  and Administrative Expenses
              
              
              (2,254,864
              )
              
              (2,577,213
              )
              
              (1,419,368
              )
              
              (1,382,587
              )
              
              (1,652,622
              )Impairment
                  Loss
              
              
              -
              
              
              -
              
              
              (2,693,650
              )
              
              (1,687,370
              )
              
              (10,712,007
              )Gain
                  on disposals of vessels
              
              
              -
              
              
              -
              
              
              1,785,253
              
              
              -
              
              
              2,084,283Recognized
                  deferred gain on sale of vessels
              
              
              4,515,383
              
              
              -
              
              
              -
              
              
              -
              
              
              -Operating
                  Income
              
              
              14,219,295
              
              
              5,163,156
              
              
              5,226,137
              
              
              8,438,286
              
              
              (659,006
              )Interest
                  Expense
              
              
              (4,018,670
              )
              
              (3,463,491
              )
              
              (4,866,062
              )
              
              (6,418,537
              )
              
              (7,953,745
              )Interest
                  Income
              
              
              454,037
              
              
              156,964
              
              
              110,603
              
              
              127,559
              
              
              373,589Equity
                  in Gain / (Loss) from Associated Companies
              
              
              113,983
              
              
              -
              
              
              -
              
              
              -
              
              
              (296,378
              )(Loss)/Gains
                  on debt extinguishment
              
              
              -
              
              
              (744,250
              )
              
              2,620,477
              
              
              94,598
              
              
              11,388,757Net
                  Income
              
              
              10,768,645
              
              
              1,112,379
              
              $
              3,091,155
              
              $
              2,241,906
              
              $
              2,853,217Per
                  Share amounts:Basic
                  Net Income
              
              $
              1.22
              
              $
              0.13
              
              $
              0.36
              
              $
              0.26
              
              $
              0.33Diluted
                  Net Income
              
              $
              1.19
              
              $
              0.13
              
              $
              0.35
              
              $
              0.25
              
              $
              0.33
 
 
 **Consolidated
        Balance Sheet Data** ****
 
 **December
                  31****2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001**Current
                  Assets
              
              $
              16,693,433
              
              $
              14,095,193
              
              $
              19,727,175
              
              $
              18,787,275
              
              $
              18,122,265Current
                  Liabilities
              
              $
              17,749,812
              
              $
              11,980,513
              
              $
              11,005,741
              
              $
              21,379,655
              
              $
              16,802,533Total
                  Assets
              
              $
              148,742,523
              
              $
              80,317,068
              
              $
              87,316,016
              
              $
              112,629,237
              
              $
              104,828,997Long-term
                  Debt
              
              $
              77,326,000
              
              $
              37,500,000
              
              $
              47,081,690
              
              $
              65,461,243
              
              $
              64,209,859Shareholders’
                  Equity
              
              $
              40,466,810
              
              $
              30,836,555
              
              $
              29,228,585
              
              $
              25,788,339
              
              $
              23,816,605
 
 
  13
 *Table
            of Contents*
 
 **ITEM7:**
              **MANAGEMENT'S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS**




The
        following discussion and analysis should be read in conjunction with the
        selected consolidated financial data set forth above and the Consolidated
        Financial Statements included elsewhere in this Report.
 
 **OVERVIEW**
 
 ***Revenues
        and Expenses***
 
 Since
        its
        founding, the Company has been engaged in the business of investing in, owning
        and operating second-hand vessels. As of December 31, 2005, the
        Company’s ** fleet
        totaled sixteen ships. The Company fully owns nine liquefied petroleum gas
        (“LPG”) carriers and two coastal bulk carriers. In  addition,
        the Company had a 50% interest in another LPG carrier and a 25.8% percent
        interest in four containerships. Each
        of
        the Company’s vessels is owned by a separate wholly owned subsidiary of the
        Company.
 
 The
        Company generally employs its vessels on time charter, bareboat charter or
        spot
        charter. With time charters, the Company receives a fixed charterhire per
        on-hire day and is responsible for meeting all the operating expenses of
        the
        vessels, such as crew costs, voyage expenses, insurance, repairs and
        maintenance. In the case of bareboat charters, the Company receives a fixed
        charterhire per day for the vessel and the charterer is responsible for all
        the
        costs associated with the vessel's operation during the bareboat charter
        period.
        In the case of voyage charters, the vessel is contracted only for a voyage
        between two ports: the Company is paid for the cargo transported and pays
        all
        voyage costs.
 
 In
        all
        chartering arrangements, both shipowner and charterer will generally employ
        the
        services of one or more brokers, who are paid a commission on the total value
        of
        the daily charterhire or a lump sum payable under the charter party or
        contract.
 
 The
        level
        of the Company's revenues and expenses will vary from year to year depending
        on,
        inter alia, the number of vessels controlled by the Company during each year
        and
        the charter rates of those vessels.
 
 ***Shipping
        markets***
 
 In
        2005,
        the market saw a continuing strong recovery in LPG charter rates. However,
        throughout 2005, most of the Company’s small LPG ships remained under charters
        or options granted under charters initiated in prior years. Such rates reflected
        the then current market conditions and were substantially below those enjoyed
        today. One small LPG tanker was renewed at the end of 2005 at current market
        rate. Four small LPG tankers are due for renewal in the first six-seven months
        of 2006, one in December 2006 and one very large gas carrier (“VLGC”) tanker in
        November 2006: the Company hopes to secure current market rates at renewal.
        The
        Company’s remaining VLGC tankers (including Galileo 50% owned) will continue on
        charter at the rates which were previously agreed.
  In
        general, increased freight rates are driven by increased production linked
        to
        LNG projects which produce LPG as an associated gas, worldwide demand for
        LPG,
        an aging fleet, enhanced industry standards and shipyards’ inability to deliver
        replacement tonnage earlier than in the next 24 months due to prior commitments
        for other ship designs.
 
 The
        main
        LPG trade between Arabian Gulf countries and Japan serves as a market indicator
        and the freight rates on this route are considered the industry benchmark
        for
        VLGCs. The table below demonstrates the recent increase in freight rates
        achieved on this route. The table also shows the evolution of 12-month time
        charter rates for vessels of sizes and types similar to the Company’s
        ships.
  14
 *Table
            of Contents*
 **LPG
                      market**
                  2003
                  2004
                  2005Voyage
                      rates ($/mt) Arabian Gulf/Japan
                  28.73
                  36.15
                  40.5112-month
                      time charter ($/day)78,000
                      m3average daily charter rate
                  22,091
                  27,822
                  33,5383,500
                      m3average daily charter rate
                  4,274
                  6,247
                  7,566
 *Source**s:*
                *©
                    Clarkson Research Services Limited; © Lorentzen & Stemoco; © Barry
                    Rogliano Salles;*
 *©
                  Inge Steensland AS.*
 
 Like
        charter rates, LPG ship values have increased substantially over the last
        twelve
        months, as demonstrated by the appraisals received by the Company for its
        gas
        fleet from leading independent shipbrokers.
 
 In
        2005,
        the market for containerships remained very strong, although the end of the
        year
        showed signs of a decline in rates. However, the four container vessels,
        which
        are 25.8% owned by the Company, are fixed on long term charters with AP Møller
        until February 1 st 2008,
        September 1 st 2008,
        May 15 th 2009 and
        February 1 st 2009,
        respectively, at rates which remain well below current market levels.
 
 ***Market
        value of the fleet***
 
 On
        the
        basis of appraisals received from leading independent shipbrokers, the appraised
        value of the Company’s fully owned fleet in January 2006 was approximately
        $174,675,000 compared to a book value of $121,991,571 on December 31, 2005.
        The
        excess of appraised value over book value was approximately $52.7 million.
        In
        January 2005, the appraised value of the Company’s fleet was approximately
        $91,850,000 compared to a book value of $57,051,369 at December 31, 2004.
        The
        excess of appraised value over book value was approximately $34.8
        million.
 
 ***Accumulated
        Deficit.***
 
 As
        of
        December 31, 2005, the Company's accumulated deficit was $10,024,072. This
        amount consisted of total accumulated losses (net of accumulated profits)
        of
        $1,328,228 since the Company's inception and dividends declared of $8,695,844
        over the same period. An additional $7,140,332 of dividends was accounted
        for as
        a reduction of paid-in capital over the same period. The majority of such
        dividends were paid prior to 1994 when the Company was a self-liquidating
        fund
        with a dividend policy based on cash flow generation. As a result of the
        Company’s accumulated deficit position, the stock dividend declared and issued
        in 2005 was accounted for as a reduction in Additional Paid-in Capital.
 
 
 
 **RESULTS
        OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND DECEMBER 31,
        2004**
 
 ***Significant
        events during 2005***
 
 In
        2005,
        the Company had decided to focus its activities in the LPG sector. In January,
        the Company sold four container vessels, while retaining a 25.8% interest.
        In
        April, the Company bought two very large gas carriers from Bergesen and acquired
        a 50% interest in another one bought from Shell (see in Item 8 the consolidated
        financial statements Note 3: Sale and Purchase of vessels and Note 4:
        Investments in Associated Companies, included elsewhere in this
        document).
 
 Following
        various share transactions that took place in 2005 and that are fully described
        in Note 2:  Related
        Company Transactions to the
        consolidated financial statements in Item 8 ,
        Navalmar now owns approximately 45.2% of the Company while V.Ships owns
        approximately 3.2% of the Company.
  15
 *Table
            of Contents*
  ***Revenue***
 
 The
        Company had gross revenue from charterhire and other sources of $35,396,519
        for
        the year ended December 31, 2005, a 11% increase from gross revenue of
        $31,895,393 in 2004. The revenue increase resulted mainly from a change in
        the
        fleet composition (see Significant Events during 2005).
 
 The
        average rate per day on hire was $10,066 in 2005 ($7,313 in 2004 for all
        vessels). In 2005, the Company's on-hire performance of the vessels on time
        charter excluding the vessels sold in January 2005 was 97.6% on a potential
        3,021 days, (99.4% on a potential 4,026 days in 2004 for all vessels). The
        decrease in on-hire performance was mainly due to the fact that four vessels
        underwent dry-docking in 2005.
 
 In
        2005,
        the vessels on time charter experienced off-hire time for the following reasons:
        (i) 1.99% of the total available days were lost due to dry-docking and
        planned repair time, (ii) 0.38% of the total available days were lost due
        to technical reasons (“operating off-hire”) and (iii) 0.08% % of the total
        available days were lost due to underperformance of the vessel.
 
 ***Costs
        and Expenses***
 
 Commission
        on charterhire was $532,281 in 2005, a 29.9% decrease from the $759,673 incurred
        during 2004. This decrease results principally from the lack of commissions
        on
        the charterhire of the last two vessels acquired.
 
 Vessel
        operating expenses plus amortization of dry-docking costs totaled $14,791,198
        for the year ended December 31, 2005, representing a decrease of 23% from
        2004
        in which vessel operating expenses plus amortization of dry-docking amounted
        to
        $18,254,712. Vessel operating expenses comprise vessel running costs, direct
        costs (such as fuel costs, port charges and canal dues incurred directly
        while
        vessels are unemployed or are employed on voyage charters) and management
        fees.
        As a percentage of revenue, vessel operating expenses plus amortization of
        dry-docking costs were equal to 41.8% in 2005 compared to 57.2% in 2004.
        The
        decrease in vessel operating expenses as a percentage of revenues in 2005
        is due
        to the increase in charterhire. The decrease in operating expenses is due
        to the
        fact that the Company sold four vessels in January and purchased two in
        April.
 
 Depreciation
        was $8,114,264 for the year ended December 31, 2005, compared to $5,140,639
        in
        2004. The
        increase in depreciation is principally due to the purchase of two VLGC vessels
        in April 2005 which was partially offset by the reduction in depreciation
        due to
        the sale of four container vessels in January 2005.
 
 General
        and administrative expenses were $ 2,254,864
        for the year ended December 31, 2005, compared to $2,577,213 in 2004. This
        represented 6.4% of revenue in 2005 as compared to 8.1% of revenue in 2004.
        In
        the second half of 2004, the Company had incurred certain non-recurring expenses
        in relation with the change of ownership of the Company and the offer for
        additional equity received by the Company.
 
 ***Impairment
        Loss***
 
 As
        of
        December 31, 2005, the Company evaluated the recoverability of its vessels
        in
        accordance with FAS 144 and determined that no provision for impairment loss
        was
        required. As of December 31, 2004, the Company also had determined that no
        provision for impairment loss was required.
 
 In
        February 2006, the Company received appraisals for its entire fleet from
        leading
        independent shipbrokers. On this basis, the appraised value of the Company’s
        fully owned fleet as of December 31, 2005 was approximately $174,675,000
        (compared to a book value of $121,991,571 on December 31, 2005).
 
 ***Interest
        Income and Expenses***
 
 Interest
        expense amounted to $4,018,670 for the year ended December 31, 2005 as compared
        to $3,463,491 in 2004, and represented 11.3% of revenue as compared with
        10.8%
        in 2004. The increase in interest expense resulted from the increase in the
        Company’s debt (see Note 6: Long Term Debt to the Consolidated Financial
        Statements in Item 8).
  16
 *Table
            of Contents*
  Interest
        income totaled $454,037 in 2005, a 189% increase from interest income of
        $156,964 in 2004. The increase in interest earnings was due to higher interest
        rates.
 
 ***Deferred
        Income***
 
 Recognized
        deferred gain totaled $4,515,383 in 2005 and represents the portion of Deferred
        Gain on sale of assets recognized as income during the year.
 
 ***Equity
        in Income / (Loss) of associated companies***
 
 Equity
        in
        net income of associated companies totaled $113,983 for the year ended December
        31, 2005 (see Note 4: Investment in associated Companies to the Consolidated
        Financial Statements in Item 8).
 
 The
        Company’s 25.8% share of MUNIA’s net income amounted to $389,764 for the year
        ended December 31, 2005 (see below Liquidity and Sources of Capital - Investing
        activities). The on-hire performance of the container vessels was 99.9% on
        a
        potential 1,460 days in 2005. The Company received dividends of $110,000
        in July
        2005 and $180,000 in January 2006. The operating expenses of the vessels
        were
        approximately at the guaranteed level in 2005 and no payment were made or
        received under the guarantee, except for the expenses accrued in relation
        to the
        Maersk Barcelona incident (see Note 4: Investments in Associated Companies
        to
        the Consolidated Financial Statements in Item 8).
  The
        LPG
        carrier Galileo, owned by Waterloo Shipping Limited (see below Liquidity
        and
        Sources of Capital - Investing activities) has incurred additional operating
        expenses to be brought to a standard the Company believes to be required
        for
        long term safe operation. In addition, the ship has suffered technical off-hire
        during the second and third quarters to allow this work to take place. The
        vessel suffered no off-hire in the fourth quarter of 2005. Management believes
        the Galileo will prove a positive investment going forward and valuations
        have
        shown a fair market value in excess of her current book value. In 2005, the
        on-hire performance of the Galileo was 86.7% on a potential 270 days. Because
        of
        the Galileo’s start up costs, the Company’s 50% portion of Waterloo’s net loss
        amounted to $275,780 for the year ended December 31, 2005. ****
  ***Net
        Income***
 
 Net
        income for the year ended December 31, 2005 was $10,768,645 as compared to
        net
        income of $1,112,379 for the year ended December 31, 2004.
  ***Impact
        of Inflation***
 
 Management
        believes that inflation did not have a material impact on the Company’s business
        during the year ended December 31, 2005.
 
 ***Subsequent
        events***
 
 On
        January 27, 2006, the Company paid the fourth dividend quarterly installment
        of
        $557,104 ($0.0625 per share).
 
 In
        January 2006, the Company opened an office in London. Following the joining
        of
        the Chief Executive Officer on a full time basis in November 2005, it is
        the
        intention of the Company to develop its activities on a global basis. It
        is
        expected that additional staff will be hired both in London and elsewhere.
        The
        annual rental cost of the leased office space is equal to approximately
        $133,000.
 
 In
        March
        2006, the Company signed Memoranda of Agreement for the purchase of two LPG
        vessels from the Bernhard Schulte Group of Germany at a total cost of $11
        million. The vessels, Hermann Schulte (built 1980) and Dorothea Schulte (built
        1981) are semi-refrigerated and of 5,600 cbm capacity each. The acquisition
        will
        be funded with an $ 8 million bank loan facility and for the balance with
        the
        Company’s current cash holdings. Simultaneously with the purchase, they will be
        time-chartered back to the Schulte Group for a minimum period of one year.
        Following a tender aiming to compare experience and cost, the technical
        management of the vessels will be contracted to Wallem Shipmanagement Ltd,
        an
        unrelated technical manager. The vessels are expected to be delivered before
        March 31, 2006. Management will benchmark services and introduce more
        competition between suppliers.
  17
 *Table
            of Contents*
  **RESULTS
        OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND DECEMBER 31,
        2003**
 
 ***Significant
        Events During 2004***
 
 On
        May
        13, 2004, the Vlasov Group sold all of its 4,168,000 shares of Common Stock
        of
        MC Shipping (approximately 47.78%) to V.Investments and Navalmar. As of May
        14,
        2004, V.Investments Limited, V.Ships Group LTD., V.Holdings Limited, Greysea
        Limited, Close Securities Limited, Close Investment Partners Limited, Navalmar
        (UK) Limited, Bogazzi Fimpar SpA, and Enrico Bogazzi filed a joint Form 13D
        to
        report that they might be deemed to have shared beneficial ownership of
        4,308,790 common shares, which represented approximately 49.39% of the common
        stock outstanding. Following the purchase of additional shares in the open
        market by Navalmar in the later part of 2004, V.Investments and Navalmar
        controlled over 50% of the outstanding stock of the Company. As a result
        of the
        above, a number of changes took place in Management and the Board of Directors
        of the Company (see Item 10: Directors and Executive Officers of the Company)
        and the Company incurred significant non-recurring General and Administrative
        Expenses (see below: Costs and Expenses).
 
 On
        October 11, 2004, the Company entered into a $45,000,000 long-term debt
        agreement with Fortis Bank in order to refinance all of its outstanding debt
        including its 11.25% Senior Notes due 2008. Following the prepayment of its
        debt, the Company recorded a net loss on extinguishment of debt of $1,107,369
        in
        the 4 th quarter
        of 2004 (see Note 6: Long term Debt to the consolidated financial statements
        in
        Item 8). The refinancing is expected to provide substantial interest expenses
        savings in the next few years. In 2005, the interest saving will be
        approximately $1,545,615.
 
 ***Revenue***
 
 The
        Company had gross revenue from charterhire and other sources of $31,895,393
        for
        the year ended December 31, 2004, a 10.9% decrease from gross revenue of
        $35,797,522 in 2003. The revenue decrease resulted mainly from the sale of
        four
        vessels in July 2003.
 
 The
        average rate per day on hire (computed as total revenues divided by total
        number
        of days on-hire for the vessels on time charter) was $7,313 in 2004 ($7,437
        in
        2003).  In
        2004,
        the Company's on-hire performance of the vessels on time charter was 99.4%
        on a
        potential 4,026 days (95.1% on a potential 4,015 days in 2003). The increase
        in
        on-hire performance was mainly due to a reduction in the number of dry-docks
        in
        2004: one vessel on time charter was dry-docked in 2004 against eight vessels
        in
        2003.
 
 In
        2004,
        the vessels on time charter experienced off-hire time for the following reasons:
        (i) 0.3% of the total available days were lost due to technical reasons
        (“operating off-hire”) and (ii) 0.3% of the total available days were lost
        due to dry-docking and planned repair time.
 
 ***Costs
        and Expenses***
 
 Commission
        on charterhire was $759,673 in 2004, a 15.1% decrease from the $895,394 incurred
        during 2003. This decrease is a direct result of decreased
        revenues.
  18
 *Table
            of Contents*
  Vessel
        operating expenses plus amortization of dry-docking costs totaled $18,254,712
        for the year ended December 31, 2004, representing a decrease of 4.4% from
        2003
        vessel operating expenses plus amortization of dry-docking which amounted
        to
        $19,052,643. Vessel operating expenses comprise vessel running costs, direct
        costs (such as fuel costs, port charges and canal dues incurred directly
        while
        vessels are unemployed or are employed on voyage charters) and management
        fees.
        As a percentage of revenue, vessel operating expenses plus amortization of
        dry-docking costs were equal to 57.2% in 2004 compared to 53.2% in 2003.
        The
        increase in vessel operating expenses as a percentage of revenues in 2004
        is due
        to the sale of vessels operated on a bareboat basis which do not have any
        operating expenses (see Item 7. Overview).
 
 Depreciation
        was $5,140,639 for the year ended December 31, 2004, compared to $8,295,583
        in
        2003. The reduction resulted from the sale of four vessels in July 2003.
        At the
        beginning of 2004, in view of rising scrap prices in the last years, Management
        decided to increase for accounting purposes the estimated residual values
        of its
        container vessels. The net effect of this change of estimate was to reduce
        depreciation and to increase net income by $327,997 in the first three quarters
        of 2004. Subsequently, the Company reconsidered this change in accounting estimate
        and
        reflected an additional depreciation charge of $327,997 in the first three
        quarters of 2004. There
        will be no effect on the 2005 operating results of the Company as the container
        vessels were sold in January.
 
 General
        and administrative expenses were $2,577,213 for the year ended December 31,
        2004, compared to $1,419,368 in 2003. This represented 8.1% of revenue in
        2004
        as compared to 4.0% of revenue in 2003. The 82% increase in general and
        administrative expenses in 2004 is substantially due to the non-recurring
        legal
        and advisory expenses incurred in relation with the change of ownership of
        the
        Company, the offer for additional equity received by the Company and severance
        payments. In addition, the appreciation of the euro had a negative impact
        on the
        overhead expenses which were denominated in euros.
 
 ***Impairment
        Loss***
 
 As
        of
        December 31, 2004, the Company evaluated the recoverability of its vessels
        in
        accordance with FAS 144 and determined that no provision for impairment loss
        was
        required. In 2003, the Company had recorded a provision for estimated impairment
        loss of $2,693,650.
 
 In
        January 2005, the Company received appraisals for its gas fleet from leading
        independent shipbrokers. The market value of the container vessels was assumed
        to be equal to the sale price received in January 2005. On this basis, the
        appraised value of the Company’s entire fleet was approximately $91,850,000
        compared to a book value of $57,051,369 on December 31, 2004.
 
 If
        there
        are indicators of impairment, evaluating
        recoverability require Management to make estimates and assumptions regarding
        future cash flows (see below: Critical Accounting Policies and Estimates).
        Actual results could differ from those estimates, which could have a material
        effect on the recoverability of vessels. Management
        regularly obtains valuations of its vessels and will continue to monitor
        such
        valuations in order to determine if any indicators of impairment in vessel
        values occur.
 
 ***Other
        Income and Expenses***
 
 Interest
        expense amounted to $3,463,491 for the year ended December 31, 2004 as compared
        to $4,866,062 in 2003, and represented 10.8% of revenue as compared with
        13.6%
        in 2003. The decrease in interest expense resulted from a reduction in the
        Company’s debt.
 
 Interest
        income totaled $156,964 in 2004, a 42% increase from interest income of $110,603
        in 2003. The increase in interest earnings was due to the increased cash
        balances and slightly higher interest rates.
 
 In
        2004,
        the Company recorded a net loss on debt extinguishment of $744,250. This
        amount
        consisted of: (1) a net gain of $363,119 recorded on repurchases in the open
        market of Notes having a total face value $6,540,000 and (2) a net loss of
        $1,107,369 recorded at the time of refinancing in the 4 th quarter
        2004, corresponding the 3.75% call premium of the $21.1 million of Notes
        ($791,250), to the write off of the Notes unamortized issuance costs ($183,938)
        and to the write off of the existing bank debt unamortized issuance costs
        ($132,181). (See Note 6: Long Term Debt to the consolidated financial statements
        in Item 8).
  19
 *Table
            of Contents*
  In
        2003,
        the Company recorded a gain of $2,620,477 on the repurchase of Notes having
        a
        total face value of $7,000,000 and a $1,785,253 gain on the sale of four
        container vessels.
 
 ***Net
        Income***
 
 The
        net
        income for the year ended December 31, 2004 was $1,112,379 as compared to
        a net
        income of $3,091,155, for the year ended December 31, 2003.
  ***Impact
        of Inflation***
 
 Management
        believes that inflation did not have a material impact upon the Company’s
        business during the year ended December 31, 2004.
 
 
 **CRITICAL
        ACCOUNTING POLICIES AND ESTIMATES**
 
 The
        preparation of the Company's financial statements in accordance with accounting
        principles generally accepted in the United States requires that Management
        make
        estimates and assumptions affecting the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. The following is a discussion of the accounting
        policies applied by the Company that are considered to involve a higher degree
        of judgment in their application.
 
 ***Depreciation
        and amortization***
 
 We
        record
        the value of our vessels at their cost (which includes pre-operating costs
        directly attributable to the vessel) less accumulated depreciation. We
        depreciate our LPG vessels on a straight-line basis over their estimated
        useful
        lives, estimated to be 30 years from date of initial delivery from the shipyard.
        Depreciation is based on cost less the estimated residual scrap value. For
        the
        larger vessels, we estimate residual scrap value as the lightweight tonnage
        of
        each vessel multiplied by $175 scrap value per ton, which management estimates
        to approximate the historical average price of scrap steel. For the smaller
        vessels, Management’s estimates of the residual scrap value range from zero to
        $200,000. An increase in the useful life of a vessel would have the effect
        of
        decreasing the annual depreciation charge and extending it into later periods.
        An increase in the residual scrap value would decrease the amount of the
        annual
        depreciation charge. A decrease in the useful life of a vessel would have
        the
        effect of increasing the annual depreciation charge. A decrease in the residual
        scrap value would increase the amount of the annual depreciation
        charge.
 
 ***Deferred
        dry dock cost***
 
 Our
        vessels are dry-docked approximately every 30 to 60 months for major repairs
        and
        maintenance that cannot be performed while the vessels are operating. We
        capitalize the costs associated with the dry-docks as they occur and amortize
        these costs on a straight line basis over the period between dry-docks. Costs
        capitalized as part of the dry dock include actual costs incurred at the
        dry-dock yard; cost of fuel consumed between the vessel’s last discharge port
        prior to the dry dock and the time the vessel leaves the dry dock yard; cost
        of
        hiring riding crews to effect repairs on a ship and parts used in making
        such
        repairs that are reasonably made in anticipation of reducing the duration
        or
        cost of the dry dock; cost of travel, lodging and subsistence of our personnel
        sent to the dry dock site to supervise; and the cost of hiring a third party
        to
        oversee a dry dock. We believe that these criteria are consistent with GAAP
        guidelines and industry practice, and that our policy of capitalization reflects
        the economics and market values of the vessels.
  20
 *Table
            of Contents*
  ***Impairment
        of long-lived assets***
 
 In
        accordance with SFAS 144 “Accounting for the Impairment or Disposal of
        Long-Lived Assets”, the Company’s vessels are regularly reviewed for impairment.
        The Company performs the impairment valuations at the individual vessel level
        pursuant to paragraph 10 of SFAS 144.
 
 To
        consider whether there is an impairment indicator, the Company compares the
        book
        value and the market value of each vessel at the end of each quarterly reporting
        period. At year end, the market value used by the Company is equal to the
        average of the appraisals provided by two leading independent shipbrokers.
        Appraisals are based on the technical specifications of each vessel, but
        are not
        based on a physical inspection of the vessel. At quarter end, the market
        values
        are assessed by the Chief Executive Officer on the basis of market information,
        shipping newsletters, sale of comparable vessels reported in the press, informal
        discussions with shipbrokers or unsolicited proposals received from third
        parties for the vessels.
 
 Whenever
        a vessel market value is above its book value, the Company considers there
        is no
        indication of impairment. Whenever a vessel market value is below its book
        value, the Company considers there is a potential impairment and performs
        a
        recoverability test. The Company estimates the undiscounted future cash flows
        attributable to the vessel in order to determine if the book value of such
        vessel is recoverable.
 
 The
        assumptions used to determine whether the sum of undiscounted cash flows
        expected to result from the use and eventual disposition of the vessel exceeds
        the carrying value involve a considerable degree of judgment on the part
        of
        Management. Actual results could differ from those estimates, which could
        have a
        material effect on the recoverability of the vessels. The most significant
        assumptions are:
 
 -
              The
                  time of final disposal corresponds to the estimated useful life
                  of the
                  vessel: 25 years for a container vessel or 30 years for a gas vessel.
                  These assumptions are identical to the ones used for depreciation
                  purposes.
 -
              The
                  estimated value at time of disposal is the estimated scrapping
                  price,
                  calculated as lightweight of the vessel in tons times a certain
                  price per
                  ton, conservatively estimated by Management relative to market
                  price.
 -
              The
                  projected increase in costs and in revenues is equal to the current
                  inflation rate.
 -
              The
                  charter rates used in such computations are estimated by the Chief
                  Executive Officer on the basis of past historical rates and modulated
                  by
                  his assessment of current and expected future economic and industry
                  trends. They are subjective as they correspond to the company’s best
                  estimate of an average long term
                  rate.
 -
              The
                  maintenance of the vessel is estimated at one dry-dock every 2.5
                  years,
                  alternating intermediate and special survey dry-docks,
 -
              Days
                  on hire are estimated at a level consistent with the Company’s on-hire
                  statistics (see Management’s discussion and Analysis of Financial
                  Condition and Results of operations - Results of Operations - revenue).
 
 If
        the
        book value of the vessel exceeds the estimated undiscounted future cash flows
        attributable to the vessel, the Company recognizes an impairment loss equal
        to
        the excess of the book value over the market value as defined
        above.
 
 The
        Company’s investment in MUNIA is also reviewed for impairment at year end and at
        each quarter end. To consider whether there is an indication of impairment,
        the
        Company compares the fair market value or estimated scrap value of each
        container vessel at the end of the reporting period with the minimum threshold
        of $4.9 million, which corresponds to a full recovery of the investment (see
        Note 4: Investment in Associated Companies to the consolidated financial
        statements in Item 8). Whenever the fair market value or estimated scrap
        value
        (corresponding to a price of scrap of $314 per ton) of a vessel is below
        $4.9
        million, the Company considers there is a potential impairment and performs
        a
        recoverability test. To perform the recoverability test, the Company estimates
        the undiscounted future cash flows attributable to the investment in order
        to
        determine if the book value of such investment is recoverable. If the book
        value
        of the investment exceeds the estimated undiscounted future cash flows
        attributable to the investment, the Company recognizes an impairment loss
        equal
        to the excess of the book value over the scrap value.
  21
 *Table
            of Contents*
  **LIQUIDITY
        AND SOURCES OF CAPITAL**
 
 ***Liquidity***
 
 The
        Company had $12,292,015 in cash available on December 31, 2005 as compared
        to
        $11,629,896 at December 31, 2004. In addition, on December 31, 2005, deposits
        totaling $1,759,237 (December 31, 2004 - $5,000,000) were pledged to guarantee
        the Company’s performance under the Fortis loan agreement. Fortis bank released
        a $5,000,000 deposit on January 20, 2005 following the prepayment of $15,000,000
        under the Fortis loan Agreement on such date. It should be noted that $557,680
        were deposited in vessel operating accounts which are directly operated by
        the
        vessel technical managers ($1,255,280 in 2004).
 
 The
        ratio
        of current assets to current liabilities decreased from 1.18 at December
        31,
        2004 to 0.9 4
        at
        December 31, 2005. The reduction is mainly due to the fact that, upon the
        acquisition of two vessels in April 2005, the Company's current portion of
        long
        term debt increased by $7,116,000 after the drawdown of the Scotia loan (See
        Note 6 to the consolidated financial statements: Long Term Debt). However,
        the
        cash flows from the purchased vessels, which are employed under five year
        time
        charters at fixed charter rates, are expected to be more than sufficient
        to
        cover the expected interest and principal repayments of such loan.
 
 ***Operating
        activities***
 
 The
        Company generated cash flows from operations of $14,437,039 in 2005 compared
        to
        $6,521,090 in 2004. The increase is due to higher charter rates and a change
        in
        the fleet composition resulting in higher income. In 2005, the Company
        dry-docked four vessels for a total cost of $1,920,922. In 2004, the Company
        dry-docked three vessels for a total cost of $368,579. The cost of a dry-dock
        depends on the size and age of the vessel.
 
 ***Investing
        activities***
 
 On
        January 20, 2005 the Company sold four container vessels to MUNIA, a special
        purpose German KG company formed by the German finance house KGAL for net
        proceeds of $29.8 million. As part of the transaction, the Company guarantees
        certain levels of operating expenses and of employment for a fee. Concurrently,
        the Company invested $4 million in Munia for a 25.8% equity
        participation.
 
 In
        April
        2005, the Company acquired two very large gas carriers (“VLGCs”) from the Bergesen Group of Norway. The vessels, Tower Bridge (ex Berge
        Flanders) of 75,000 m 3 capacity
        (built 1991) and Chelsea Bridge (ex Berge Kobe) of 77,000 m 3 capacity
        (built 1987) were acquired for considerations of $50,717,250 and $32,260,000,
        respectively. The vessels are time-chartered to the Bergesen Group for a
        minimum
        period of five years. The acquisitions were funded with a $68 million loan
        from
        Scotiabank Europe PLC and for the balance with internal cash resources.
 
 In
        April
        2005, Waterloo Shipping Limited (“Waterloo”), a joint venture company set up on
        a 50/50 basis by the Company and Petredec Limited (“Petredec”), a leading LPG
        trading and shipping company, acquired the 1983-built, 59,725 m 3 ,
        LPG
        carrier Galileo for a total consideration of $16 million and chartered the
        vessel to Petredec for a period of four years. The Company and Petredec each
        advanced an amount of $2,481,923 to Waterloo and Waterloo borrowed $11.2
        million
        from Danmarks Skibskreditfond. The bank loan bears interest at LIBOR plus
        1.05%
        and is repayable in 16 equal quarterly installments of $610,156 plus a balloon
        of $1,437,504. The loan is non-recourse to the joint venture partners, except
        for a corporate guarantee limited to $850,000 for each joint venture
        partner.
  22
 *Table
            of Contents*
  ***Financing
        activities***
 
 The
        Company's long term debt (including the current portion) increased from
        $45,000,000 as of December 31, 2004 to $89,442,000 as of December 31, 2005.
        As
        of December 31, 2005, the Company's contractual obligations were as
        follows:
  Payments
        due by period
 Total
                Less
                    than 1 year
                1-3
                    years
                3-5
                    years
                More
                    than 5 yearsFortis
                    loan due 2010
                $
                    25,000,000
                $
                    5,000,000
                $
                    10,000,000
                $
                    10,000,000
                -Scotia
                    loan due 2016
                $
                    64,442,000
                $
                    7,116,000
                $
                    14,232,000
                $
                    14,232,000
                $
                    28,862,000Total
                $
                    89,442,000
                $
                    12,116,000
                $
                    24,232,000
                $
                    24,232,000
                $
                    28,862,000
 
 In
        April
        2005, the Company borrowed $68 million to partially finance the acquisition
        of
        two vessels. The debt service of this loan during the first five years is
        more
        than adequately supported by time charters.
 
 During
        2005, the Company repaid net borrowings of $23,558,000. These repayments
        consisted of: (i) $8,558,000 of normal scheduled repayments and (ii) $15,000,000
        of prepayment.
 
 ***Dividend***
 
 The
        Company paid a dividend of $0.25 per share in 2005 in four equal quarterly
        installments for a total of $1,662,771. The last installment of $0.0625 per
        share amounting to $557,104 was paid on January 27, 2006.
 
 ***Future
        cash requirements***
 
 In
        2006,
        the Company will have to dry-dock three vessels for an estimated total cost
        of
        approximately $3,000,000. The Company has agreed to purchase two LPG vessels
        from the Bernhard Schulte Group of Germany at a total cost of $11 million
        before
        March 31, 2006. The acquisition of these vessels will be funded with an $8
        million bank loan facility and for the balance with the Company’s current cash
        holdings. Management believes that the net cash provided by operating activities
        will provide sufficient funds to enable the Company to meet its liquidity
        requirements throughout 2006.
 
 **Guarantees**
 
 The
        Company has issued guarantees in relation to the Fortis and Scotia Loans.
        In
        addition, the Company has issued a guarantee of $850,000 in relation with
        the
        loan granted by Danmarks Skibskreditfond to Waterloo.
 
 In
        connection with the sale of the container vessels in January 2005, the Company
        has agreed to guarantee to the purchaser certain levels of operating expenses
        and of employment for the vessels until February 1 st 2008,
        September 1 st 2008,
        May 15 th 2009 and
        February 1 st 2009,
        for each vessel (or earlier in case of sale or total loss of a vessel). As
        a
        result, the excess or surplus of operating expenses, up to a certain extent,
        will be absorbed by the Company. As compensation for issuing such guarantee,
        the
        Company receives a daily guarantee fee for each vessel, which is included
        in
        Revenues. On September 20, 2005, the m/v ‘Maersk Barcelona’ owned by MUNIA
        suffered a malfunction of her oily water separator, which may have resulted
        in
        an accidental overboard discharge of oil-contaminated water off the coast
        of
        France. The Company has a potential liability corresponding to the amount
        of the
        bail (EUR 500,000) from potential fine and court fees. However, all expenses
        to
        be incurred under the MUNIA guarantee were accrued for in the third quarter
        and
        the Company expects that costs beyond the deductible will be covered by
        insurance, as any discharge was not deliberate.
 
 **Share
        Repurchase Program**
 
 The
        Company’s Share Repurchase Program (see Note 8: Changes in Shareholders’ Equity
        to the Consolidated Financial Statements in Item 8) is not expected to have
        a
        material impact on the Company’s liquidity. The timing and the exact number of
        shares to be purchased will be dependent on market conditions. The share
        repurchase program is designed as one of the tools to enhance shareholder
        value
        and will not replace or repress the strategy in place to grow the
        Company.
  23
 *Table
            of Contents*
 
 **Off-Balance
        Sheet Financial Arrangements**
 
 The
        Company had no off-balance sheet financial arrangements as of December 31,
        2005.
  **Contingencies**
 
 The
        Company had no contingencies as of December 31, 2005 other than as discussed
        in
        the Guarantees section above.
 
 
 
 **ITEM7A:**
              **QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK**
 
 The
        Company operates internationally and is exposed to certain market risks that,
        in
        the normal course of business, include fluctuations in interest rates and
        currency exchange rates. While the Company occasionally uses derivative
        financial instruments to reduce these risks, the Company does not enter into
        derivative financial instruments for trading or speculative
        purposes.
 
 ***Impact
        of Interest Rate fluctuations***
  As
        of
        December 31, 2005, the Company had $89,442,000 of debt outstanding at variable
        rates, which have been fixed through the use of interest rate swap agreements
        as
        detailed below.
 As
                    of December 31, 2005
                Notional
                    amount
                Fair
                    value
                Interest
                    rate
                ExpirationFirst
                    swap / Fortis loan
                $
                    25,000,000
                $
                    629,000
                3.075%
                October
                    2007Second
                    swap / Scotia loan
                $
                    39,227,500
                $
                    130,188
                4.580%
                April
                    2010Third
                    swap / Scotia loan
                $
                    25,214,500
                $
                    201,117
                4.545%
                April
                    2010Total
                $
                    89,442,000
                $
                    960,305
 
 As
        a
        result as of December 31, 2005, the Company had no variable interest debt
        whose
        interest rates have not been fixed.
 
 
 ***Impact
        of currency fluctuations***
 
 The
        Company’s functional currency is the US dollar; however, a number of trade
        transactions related to normal vessel operations are performed in other
        currencies. Trade payables and accrued expenses as well as cash and trade
        receivables in foreign currencies are converted at year end exchange rates
        and
        therefore recorded at fair value. The Company does not hold any other assets
        or
        liabilities denominated in foreign currencies.
 
 
  24
 *Table
            of Contents*
  **ITEM
                  8:**
              **FINANCIAL
                  STATEMENTS AND SUPPLEMENTARY
                  DATA**
 
 
 **Page**Report
                  of Independent Registered Public Accounting Firm
              26Financial
                  Statements:Consolidated
                  Balance Sheets at December 31, 2005 and December 31, 2004
              27Consolidated
                  Statements of Income for the Years ended December 31, 2005, 2004
                  and
                  2003
              29Consolidated
                  Statements of Shareholders’ Equity for the Years ended December 31, 2005,
                  2004 and 2003
              30Consolidated
                  Statements of Cash Flows for the Years ended December 31, 2005,
                  2004 and
                  2003
              31Notes
                  to Consolidated Financial Statements
              32Financial
                  Statements ScheduleSchedule
                  II - Valuation and Qualifying Accounts
              47
 
 
 
 All
        other
        schedules for MC Shipping Inc. and subsidiaries have been omitted since the
        required information is not present or not present in amounts sufficient
        to
        require submission of the schedule, or because the information required is
        included in the respective financial statements or notes thereto.
 
 
 25
 *Table
            of Contents*
  
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 
 To
        the
        Shareholders and Board of Directors
 MC
        Shipping Inc.
 
 
 We
        have
        audited the accompanying consolidated balance sheets of MC Shipping Inc.
        and
        subsidiaries as of December 31, 2005 and 2004, and the related consolidated
        statements of income, shareholders’ equity and cash flows for each of the three
        years in the period ended December 31, 2005. Our audits also included the
        financial statement schedule listed in the index at Item 15(a)(2) of Form
        10-K.
        These financial statements and schedule are the responsibility of the Company’s
        management. Our responsibility is to express an opinion on these financial
        statements and 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 audit 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 includes examining,
        on a test basis, evidence supporting the amounts and disclosures in the
        financial statements. An audit also includes assessing the accounting principles
        used and significant estimates made by management, as well as evaluating
        the
        overall financial statement presentation. We believe that our audits provide
        a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the consolidated financial position of MC Shipping
        Inc. and subsidiaries as of December 31, 2005 and 2004 and the consolidated
        results of their operations and their cash flows for each of the three years
        in
        the period ended December 31, 2005 in conformity with accounting principles
        generally accepted in the United States. Also, in our opinion, the related
        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.
 
 
 
 Moore
        Stephens Hays LLP
 
 
 New
        York,
        NY
 March
        1,
        2006
  26
 *Table
            of Contents*
  **MC
        SHIPPING INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
 
 **ASSETS****DECEMBER
                  31**
                **2005**
              
              **DECEMBER
                  31**
                **2004**CURRENT
                  ASSETSCash
              
              $
              12,292,015
              
              $
              11,629,896Restricted
                  cash
              
              
              1,759,237
              
              
              -Hire
                  receivables
              
              
              13,583
              
              
              4,835Recoverable
                  from insurers, net
              
              
              68,807
              
              
              55,529Inventories
              
              
              406,643
              
              
              1,044,353Receivables
                  from affiliates
              
              
              202,208
              
              
              80,492Prepaid
                  expenses and other current assets
              
              
              1,950,940
              
              
              1,280,088TOTAL
                  CURRENT ASSETS
              
              
              16,693,433
              
              
              14,095,193VESSELS,
                  AT COST
              
              
              155,406,193
              
              
              109,303,246Less
                  - Accumulated depreciation
              
              
              (33,414,622
              )
              
              (52,251,877
              )121,991,571
              
              
              57,051,369OTHER
                  ASSETSInvestments
                  in associated companies
              
              
              6,485,906
              
              
              -Furniture
                  and equipment (net of accumulated depreciation of $13,596 at December
                  31,
                  2005 and $30,645 at December 31, 2004)
              
              
              3,139
              
              
              -Dry-docking
                  costs (net of accumulated amortization of $1,772,673 in 2005 and
                  $3,439,685 in 2004)
              
              
              3,139,184
              
              
              3,829,590Restricted
                  cash
              
              
              -
              
              
              5,000,000Debt
                  issuance cost (net of accumulated amortization of $68,511 in 2005
                  and
                  $10,323 in 2004)
              
              
              429,290
              
              
              340,916TOTAL
                  ASSETS
              
              $
              148,742,523
              
              $
              80,317,068
 
 THE
        ACCOMPANYING NOTES ARE AN INTEGRAL
 PART
        OF
        THESE CONSOLIDATED FINANCIAL STATEMENTS.
 27
 *Table
              of Contents*
  **MC
        SHIPPING INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
 
 **LIABILITIES
        AND SHAREHOLDERS’ EQUITY**
 
 DECEMBER
                  31
                2005
              
              DECEMBER
                  31
                2004CURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              747,692
              
              $
              529,960Hire
                  received in advance
              
              
              801,043
              
              
              584,843Accrued
                  expenses
              
              
              2,466,845
              
              
              3,045,787Accrued
                  interest
              
              
              1,061,128
              
              
              319,923Dividend
                  payable
              
              
              557,104Current
                  portion of long term debt
              
              
              12,116,000
              
              
              7,500,000TOTAL
                  CURRENT LIABILITIES
              
              
              17,749,812
              
              
              11,980,513LONG
                  TERM DEBTSecured
                  loans
              
              
              77,326,000
              
              
              37,500,000DEFERRED
                  GAIN ON SALE OF VESSELS
              
              
              13,199,901TOTAL
                  LIABILITIES
              
              
              108,275,713
              
              
              49,480,513COMMITMENT
                  AND CONTINGENCIESSHAREHOLDERS’
                  EQUITYCommon
                  stock, $.01 par value - 20,000,000 shares authorized 8,913,658
                  shares
                  issued and outstanding at December 31, 2005 (8,765,974 at December
                  31,
                  2004)
              
              
              89,137
              
              
              87,660Additional
                  paid-in capital
              
              
              49,411,285
              
              
              51,280,010Accumulated
                  deficit
              
              
              (10,024,072
              )
              
              (20,792,717
              )Accumulated
                  other comprehensive income
              
              
              990,460
              
              
              261,602TOTAL
                  SHAREHOLDERS’ EQUITY
              
              
              40,466,810
              
              
              30,836,555TOTAL
                  LIABILITIES AND SHAREHOLDERS’ EQUITY
              
              $
              148,742,523
              
              $
              80,317,068
 
 THE
        ACCOMPANYING NOTES ARE AN INTEGRAL
 PART
        OF
        THESE CONSOLIDATED FINANCIAL STATEMENTS.
 28
 *Table
              of Contents*
  **MC
        SHIPPING INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF INCOME**
 
 FOR
                  THE YEARS ENDED DECEMBER 312005
              
              2004
              
              2003CHARTERHIRE
                  AND OTHER INCOME
              
              $
              35,396,519
              
              $
              31,895,393
              
              $
              35,797,522COSTS
                  AND EXPENSES / INCOMECommission
                  on charterhire
              
              
              (532,281
              )
              
              (759,673
              )
              
              (895,394
              )Vessel
                  operating expenses
              
              
              (13,983,069
              )
              
              (16,821,562
              )
              
              (17,875,984
              )Amortization
                  of dry-docking costs
              
              
              (808,129
              )
              
              (1,433,150
              )
              
              (1,176,659
              )Depreciation
              
              
              (8,114,264
              )
              
              (5,140,639
              )
              
              (8,295,583
              )General
                  and administrative expenses
              
              
              (2,254,864
              )
              
              (2,577,213
              )
              
              (1,419,368
              )Impairment
                  loss on vessels
              
              
              -
              
              
              -
              
              
              (2,693,650
              )Gains
                  on disposals of vessels
              
              
              -
              
              
              -
              
              
              1,785,253Recognized
                  deferred gain on sale of vessels
              
              
              4,515,383
              
              
              -
              
              
              -Equity
                  in income of associated companies
              
              
              113,983
              
              
              -
              
              
              -OPERATING
                  INCOME
              
              
              14,333,278
              
              
              5,163,156
              
              
              5,226,137OTHER
                  INCOME/(EXPENSES)Interest
                  expense
              
              
              (4,018,670
              )
              
              (3,463,491
              )
              
              (4,866,062
              )Interest
                  income
              
              
              454,037
              
              
              156,964
              
              
              110,603(Loss)/gain
                  on debt extinguishment
              
              
              -
              
              
              (744,250
              )
              
              2,620,477NET
                  INCOME
              
              $
              10,768,645
              
              $
              1,112,379
              
              $
              3,091,155EARNINGS
                  PER SHARE:Basic
                  earnings per share
              
              $
              1.22
              
              $
              0.13
              
              $
              0.36Diluted
                  earnings per share
              
              
              1.19
              
              
              0.13
              
              
              0.35Basic
                  weighted average number of shares outstanding
              
              
              8,847,195
              
              
              8,737,627
              
              
              8,669,287Diluted
                  weighted average number of shares outstanding
              
              
              9,014,913
              
              
              8,843,004
              
              
              8,810,562
   THE
        ACCOMPANYING NOTES ARE AN INTEGRAL
 PART
        OF
        THESE CONSOLIDATED FINANCIAL STATEMENTS.
  29
 *Table
            of Contents*
  **MC
        SHIPPING INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS’ EQUITY**
 
 **No.
                  of**
                **Shares**
                **Issued**
              
              **Common**
                **Stock
                  par**
                **Value**
              
              **Treasury**
                **Stock**
                **At
                  cost**
              
              **Additional**
                **Paid-in**
                **Capital**
              
              **Accumulated**
                **Deficit**
              
              **Accumulated**
                **Other**
                **Comprehensive**
                **Income**
              
              **Shareholders’**
                **Equity****December
                  31, 2002**
              
              
              **8,481,624**
              
              **$**
              **84,816**
              
              **$**
              **(971,185**
              **)**
              **$**
              **52,165,202**
              ****
              **$**
              **(24,996,251**
              **)**
              **$**
              **(494,243**
              **)**
              **$**
              **25,788,339**Net
                  Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,091,155
              
              
              
              
              
              3,091,155Other
                  comprehensive income:Foreign
                  currency Translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              75,579
              
              
              75,579Unrealized
                  gains on cash flow hedges
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              223,273
              
              
              223,273Total
                  Comprehensive Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,091,155
              
              
              298,852
              
              
              3,390,007Issuance
                  of stock to Directors
              
              
              
              
              
              
              
              
              79,379
              
              
              (59,379
              )
              
              
              
              
              
              
              
              20,000Issuance
                  of stock related to compensation plans
              
              
              48,614
              
              
              486
              
              
              
              
              
              29,753
              
              
              
              
              
              
              
              
              30,239**December
                  31, 2003**
              
              
              **8,530,238**
              
              
              **85,302**
              
              
              **(891,806**
              **)**
              ****
              **52,135,576**
              ****
              ****
              **(21,905,096**
              **)**
              ****
              **(195,391**
              **)**
              
              **29,228,585**Net
                  Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,112,379
              
              
              
              
              
              1,112,379Other
                  comprehensive income:Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (39,231
              )
              
              (39,231
              )Unrealized
                  gains on cash flow hedges
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              371,724
              
              
              371,724Realization
                  of accumulated unrealized losses on cancelled cash flow
                  hedges
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              124,500
              
              
              124,500Total
                  Comprehensive Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,112,379
              
              
              456,993
              
              
              1,569,372Issuance
                  of stock to Directors
              
              
              12,052
              
              
              121
              
              
              
              
              
              19,879
              
              
              
              
              
              
              
              
              20,000Issuance
                  of stock related to compensation plans
              
              
              29,901
              
              
              299
              
              
              
              
              
              18,299
              
              
              
              
              
              
              
              
              18,598Stock
                  dividend declared
              
              
              193,783
              
              
              1,938
              
              
              891,806
              
              
              (893,744
              )
              
              
              
              
              
              
              
              -**December
                  31, 2004**
              
              
              **8,765,974**
              
              
              **87,660**
              
              
              **-**
              ****
              ****
              **51,280,010**
              ****
              ****
              **(20,792,717**
              **)**
              
              **261,602**
              
              
              **30,836,555**Net
                  Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              10,768,645
              
              
              
              
              
              10,768,645Other
                  comprehensive income:Foreign
                  currency
                translation
                  adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (22,117
              )
              
              (22,117
              )Unrealized
                  gains on cash flow hedges
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              750,975
              
              
              750,975Total
                  Comprehensive Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              10,768,645
              
              
              728,858
              
              
              11,497,503Stock
                  based employee compensation
              
              
              
              
              
              
              
              
              
              
              
              74,932
              
              
              
              
              
              
              
              
              74,932Issuance
                  of stock to Directors
              
              
              4,766
              
              
              48
              
              
              
              
              
              14,952
              
              
              
              
              
              
              
              
              15,
                  000Issuance
                  of stock related to compensation plans
              
              
              142,918
              
              
              1,429
              
              
              
              
              
              261,266
              
              
              
              
              
              
              
              
              262,695Dividend
              
              
              
              
              
              
              
              
              
              
              
              (2,219,875
              )
              
              
              
              
              
              
              
              (2,219,875
              )**December
                  31, 2005**
              
              
              **8,913,658**
              
              
              **89,137**
              
              
              **-**
              ****
              ****
              **49,411,285**
              ****
              ****
              **(10,024,072**
              **)**
              
              **990,460**
              
              
              **40,466,810**
 
 THE
        ACCOMPANYING NOTES ARE AN INTEGRAL
 PART
        OF
        THESE CONSOLIDATED FINANCIAL STATEMENTS.
  30
 *Table
            of Contents*
  **MC
        SHIPPING INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOW** **S**
 
 FOR
                  THE YEARS ENDED DECEMBER 31
              
              2005
              
              2004
              
              2003NET
                  INCOME
              
              $
              10,768,645
              
              $
              1,112,379
              
              $
              3,091,155Adjustments
                  to reconcile Net Income to net cash provided by operating
                  activities:Depreciation
              
              
              8,114,264
              
              
              5,140,639
              
              
              8,295,583Recognized
                  deferred gain on sale of vessels
              
              
              (4,515,383
              )
              
              -
              
              
              -Amortization
                  of dry-docking costs
              
              
              808,129
              
              
              1,433,150
              
              
              1,176,659Amortization
                  of issuance costs
              
              
              58,188
              
              
              128,092
              
              
              233,660Impairment
                  loss on vessels
              
              
              -
              
              
              -
              
              
              2,693,650Gains
                  on disposals of vessels
              
              
              -
              
              
              -
              
              
              (1,785,253
              )Loss
                  / (gain) on debt extinguishment
              
              
              -
              
              
              744,250
              
              
              (2,620,477
              )Equity
                  in income of associated companies
              
              
              (113,983
              )
              
              -
              
              
              -Share-based
                  compensation to Directors
              
              
              15,000
              
              
              20,000
              
              
              20,000Share-based
                  employee compensation
              
              
              74,932
              
              
              -
              
              
              -Changes
                  in Operating Assets and Liabilities:Hire
                  receivables
              
              
              (8,748
              )
              
              8,276
              
              
              (4,551
              )Recoverable
                  from insurers
              
              
              (13,278
              )
              
              752,001
              
              
              138,917Inventories
              
              
              637,710
              
              
              (461,965
              )
              
              (75,987
              )Receivables
                  from affiliates
              
              
              (121,716
              )
              
              (4,398
              )
              
              4,424Prepaid
                  expenses and other current assets
              
              
              (670,852
              )
              
              (94,073
              )
              
              (3,876
              )Dry-docking
                  costs capitalized
              
              
              (1,920,922
              )
              
              (368,579
              )
              
              (4,791,608
              )Accounts
                  payable
              
              
              217,732
              
              
              (82,799
              )
              
              (37,415
              )Accrued
                  expenses and hire received in advance
              
              
              (362,742
              )
              
              (1,389,379
              )
              
              (1,065,543
              )Accrued
                  interest and comprehensive income
              
              
              1,470,063
              
              
              (416,504
              )
              
              (183,041
              )**CASH
                  PROVIDED BY OPERATING ACTIVITIES**
              
              
              14,437,039
              
              
              6,521,090
              
              
              5,086,297**INVESTING
                  ACTIVITIES**Purchases
                  of vessels
              
              
              (82,977,250
              )
              
              -
              
              
              -Pre-operating
                  costs capitalized
              
              
              (243,399
              )
              
              -
              
              
              -Investments
                  in associated companies
              
              
              (6,371,924
              )
              
              -
              
              
              -Proceeds
                  from disposals of vessels
              
              
              29,802,138
              
              
              -
              
              
              20,335,693Purchase
                  of furniture and equipment
              
              
              (3,531
              )
              
              (197
              )
              
              (1,737
              )Decrease
                  / (increase) in restricted cash
              
              
              3,240,763
              
              
              (4,384,545
              )
              
              1,386,304**NET
                  CASH (USED IN) / PROVIDED BY INVESTING ACTIVITIES**
              
              
              (56,553,203
              )
              
              (4,384,742
              )
              
              21,720,260**FINANCING
                  ACTIVITIES**Repayments
                  of long-term debt
              
              
              (23,558,000
              )
              
              (23,621,243
              )
              
              (20,168,616
              )Proceeds
                  from long term debt
              
              
              68,000,000
              
              
              45,000,000
              
              
              -Payment
                  of debt issuance costs
              
              
              (263,641
              )
              
              (351,239
              )
              
              -Payments
                  for repurchases of Notes
              
              
              -
              
              
              (27,999,150
              )
              
              (4,283,050
              )Proceeds
                  from issuance of stock
              
              
              262,695
              
              
              18,598
              
              
              30,240Dividends
                  paid
              
              
              (1,662,771
              )
              
              -
              
              
              -**NET
                  CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES**
              
              
              42,778,283
              
              
              (6,953,034
              )
              
              (24,421,426
              )**NET
                  INCREASE / (DECREASE) IN CASH**
              
              
              662,119
              
              
              (4,816,686
              )
              
              2,385,131**CASH
                  AT BEGINNING OF YEAR**
              
              
              11,629,896
              
              
              16,446,582
              
              
              14,061,451**CASH
                  AT END OF YEAR**
              
              
              12,292,015
              
              $
              11,629,896
              
              $
              16,446,582
 
 THE
        ACCOMPANYING NOTES ARE AN INTEGRAL
 PART
        OF
        THESE CONSOLIDATED FINANCIAL STATEMENTS.
  31
 *Table
            of Contents*
 
 **MC
        SHIPPING INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                  1:**
              **ORGANIZATION
                  AND SIGNIFICANT ACCOUNTING
                  POLICIES**
 
 ***BASIS
        OF PRESENTATION*** **:** MC
        Shipping Inc. is incorporated in the Republic of Liberia and, through its
        subsidiaries, owns and operates second-hand vessels that as of December 31,
        2005
        formed a fleet of 11 wholly owned vessels, comprised of nine LPG carriers
        and
        two coastal bulk carriers. In  addition,
        the Company has a 25.8% percent interest in an entity that owns and operates
        four containerships and a 50% interest in another entity that owns and operates
        a LPG carrier. The
        accompanying consolidated financial statements include the accounts of MC
        Shipping Inc. and its wholly owned subsidiaries (the "Company") and have
        been
        prepared in conformity with accounting principles generally accepted in the
        United States (“US GAAP”). The preparation of consolidated financial statements
        in conformity with US GAAP 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 revenue and expenses during the
        reporting period. Actual results could differ from those estimates. Although
        the
        Company's fleet operates under the Bahamas and the St. Vincent & the
        Grenadines flags, its books and records are maintained in US Dollars, which
        is
        the Company's functional currency.
 
 ***PRINCIPLES
        OF CONSOLIDATION:*** The
        consolidated financial statements include the accounts of MC Shipping Inc.
        and
        its wholly owned subsidiaries. All inter-Company accounts and transactions
        have
        been eliminated in consolidation. Investments
        of 20-50% ownership in associated companies are accounted for under the equity
        method.
 
 ***FOREIGN
        CURRENCY TRANSLATION:*** The
        Company’s books and records are maintained in US Dollars. The functional
        currency of the Company is the U.S. Dollar because the Company’s vessels operate
        in international shipping markets, which primarily transact business in U.S.
        Dollars. A number
        of trade transactions related to normal vessel operations performed in other
        currencies during
        the year are converted into U.S. Dollars using the exchange rates in effect
        at
        the time of the transactions. The resulting gains or losses from these
        transactions are recorded in vessel operating expenses. At the balance sheet
        dates, t rade
        payables and accrued expenses as well as cash and trade receivables in foreign
        currencies are converted at year end exchange rates. The resulting
        gains or losses from this translation are recorded as other comprehensive
        income
        or loss.
 
 ***REVENUE
        RECOGNITION*** **:** The
        Company generally employs its vessels on time charter, bareboat charter or
        voyage charter. With time charters, the Company receives a fixed charterhire
        per
        on-hire day and is responsible for meeting all the operating expenses of
        the
        vessels, such as crew costs, voyage expenses, insurance, repairs and
        maintenance. In the case of bareboat charters, the Company receives a fixed
        charterhire per day for the vessel and the charterer is responsible for all
        the
        costs associated with the vessel's operation during the bareboat charter
        period.
        In the case of voyage charters, the vessel is contracted only for a voyage
        between two or several ports: the Company is paid for the cargo transported
        and
        pays all voyage costs.
 
 Time
        and
        bareboat charter revenue is recognized on an accrual basis and is recorded
        over
        the term of the charter as service is provided. Voyage charter revenue and
        related expenses are recorded based on the percentage of service completed
        at
        the balance sheet date, gross of voyage expenses. Hire received in advance
        represents cash received prior to year-end related to revenue applicable
        to
        periods after December 31 of each year. Other income represents approximately
        1%
        of total revenues and consists of demurrage, pooling of income or lumpsum
        expenses, guarantee fees **** and **** is
        recognized as received, which approximates when it is earned.
 
 ***VESSEL
        REPAIR AND OVERHAUL*** **:** Normal
        vessel repair and maintenance costs are charged to expense when incurred.
        Costs
        incurred during periodic inspections for regulatory and insurance purposes
        are
        deferred and charged to income ratably over the period of five years to the
        next
        intermediate or special survey dry-docking. For vessels that are earmarked
        for
        sale, dry-docking expenses are charged to expense when
        incurred.
  32
 *Table
            of Contents*
  ***VESSELS
        AND DEPRECIATION*** **:** Vessels
        are stated at cost, which includes contract price and other direct costs
        relating to acquiring and placing the vessels in service. Depreciation is
        calculated, based on cost, less estimated residual value, using the
        straight-line method, over the remaining economic life of each vessel. The
        economic life of LPG carriers is assumed to extend from the date of their
        construction to the date of the final special survey which is closest to
        30
        years from the date of their construction. During
        the 4th quarter of 2005, the Company re-estimated the economic life of one
        of
        its LPG vessels from 27 years to 30 years based upon the Company's expected
        charter renewal for this vessel beyond its next special survey date. This
        change
        in accounting estimate resulted in a decrease to depreciation expense of
        approximately $400,000 in 2005 ($0.04 per basic earnings per share) and it
        is
        anticipated to have a similar effect on net income and earnings per share
        for
        each of the quarterly periods ending through March 31, 2008. The
        economic life of other vessels is assumed to extend from the date of their
        construction to the date of the fifth special survey, which is closest to
        25
        years from the date of their construction. If a ship is used beyond its fifth
        special survey, its economic life is assumed to extend to the end of its
        current
        charter.
 
 ***IMPAIRMENT
        OF LONG-LIVED ASSETS*** *:* In
        accordance with SFAS 144 “Accounting for the Impairment or Disposal of
        Long-Lived Assets”, the Company’s long lived assets are regularly reviewed for
        impairment (see Note 5. Impairment of Long Lived Assets).
 
 ***SEGMENT
        REPORTING:*** The
        Company operates as a single segment, as Management internally evaluates
        the
        performance of the enterprise as a whole and not on the basis of separate
        business units or different types of charter.
 
 ***DEBT
        ISSUANCE COSTS*** **:** Debt
        issuance costs are being amortized, using the interest method, over the terms
        of
        the long-term credit facilities. Amortization of debt issuance costs, included in Interest Expense, amounted
        to
        $58,188 in 2005, $128,092 in 2004 and $233,660 in 2003.
 
 In
        2005,
        an amount of $116,194 representing the unamortized balance of the debt issuance
        costs incurred in 2004 in connection with the $15 million prepaid under the
        Fortis Loan was written off and recorded as a reduction of the Deferred Gain
        on
        sale of vessels. In
        2003
        and 2004, debt issuance costs of $96,473 and $385,101 respectively, were
        written
        off as a result of the Company’s repurchases of Notes and debt
        refinancing and
        recorded as a reduction of gains on debt extinguishment. In 2003, an amount
        of
        $156,952, representing the unamortized balance of the debt issuance costs
        incurred in 2002, was written off following the sale of the vessels securing
        the
        related debt and recorded as a reduction of the gain on the disposal.
 
 ***INTEREST
        RATE SWAPS:*** SFAS 133
“Accounting for Derivative Instruments and Hedging Activities” requires the
        Company to recognize its derivative instruments as either assets or liabilities
        in the balance sheet at fair value. The accounting for changes in the fair
        value
        of a derivative instrument depends on whether it has been designated and
        qualifies as part of a hedging relationship and further, on the type of hedging
        relationship. For those derivative instruments that are designated and qualify
        as hedging instruments, the Company must designate the hedging instrument,
        based
        upon the exposure being hedged, as a fair value hedge, cash flow hedge or
        a
        hedge of a net investment in a foreign operation.
 
 The
        Company enters from time to time into interest-rate swap agreements to modify
        the interest characteristics of its outstanding debt (See Note 6. Long-term
        Debt). Each interest-rate swap agreement is designated with all of the principal
        balance and term of a specific debt obligation. These agreements involve
        the
        exchange of amounts based on a fixed interest rate for amounts based on variable
        interest rates over the life of the agreement.
 
 The
        Company’s interest-rate swaps are designated and qualify as cash flow hedges. As
        a result, the fair value of the interest rate swaps is included in the
        accompanying balance sheets in prepayments and other assets. The effective
        portion of the gain or loss on the interest rate swaps is reported as an
        increase or decrease in other comprehensive income. The gains or losses on
        these
        instruments are reclassified into earnings in the same line item associated
        with
        the forecasted transaction in the same period during which the hedged
        transaction affects earnings.
  33
 *Table
            of Contents*
  ***INVENTORIES*** **:** Inventories
        primarily consists of lubricating oil and victualling and are stated at the
        lower of cost or market, and are accounted for on a first-in, first-out
        basis.
 
 ***STOCK-BASED
        COMPENSATION:*** The
        Company has a stock-based employee compensation plan, which is described
        more
        fully in Note 9. The Company accounts for this plan under the recognition
        and
        measurement principles of APB Opinion No. 25, Accounting for Stock Issued
        to
        Employees, and related interpretations. The Company has adopted the
        disclosure-only provisions of FASB Statement No. 123, Accounting for Stock-Based
        Compensation for stock based grants issued to its employees.
 
 ***RECENT
        STATEMENTS OF FINANCIAL ACCOUNTING STANDARD*** **:** On
        December 16, 2004, the Financial Accounting Standards Board (FASB) issued
        FASB
        Statement No. 123 (Revised 2004), Share-Based Payment, which requires all
        share-based payments to employees, including grants of employee stock options,
        to be recognized as compensation expense in the income statement based on
        estimated fair value at issue date. Pro forma disclosure will no longer be
        an
        alternative. The Company adopted Statement 123(R) on January 1, 2006 using
        the
“modified prospective” method. Under his method, awards that are granted,
        modified, or settled after January 1, 2006, will be measured and accounted
        for
        in accordance with SFAS 123(R). The adoption of this Statement is not expected
        to have a material impact on the Company’s financial position or results of
        operations.
 
 ***RESTRICTED
        CASH:*** Certain
        cash balances are pledged to guarantee the Company’s performance under the loan
        agreements. They are classified as Current Assets or Other Assets depending
        on
        the expected length of time of the restriction.
 
 ***EARNINGS
        PER SHARE*** **:** Basic
        and
        diluted earnings per share are calculated in accordance with FASB Statement
        No.
        128, Earnings per Share. Basic earnings per share are computed by dividing
        net
        income available to common stockholders by the weighted-average number of
        common
        shares outstanding for the period. Diluted earnings per share reflect the
        potential dilution that could occur if outstanding options were exercised
        or
        converted into common stock. All prior period basic and diluted earnings
        per
        share calculations presented have been restated to reflect the impact of
        the
        stock dividend declared in April 2004.
 
 
 **Earnings
                  Per Share**
              
              **Year
                  Ended**
                **December
                  31,**
                **2005**
              
              **Year
                  Ended**
                **December
                  31,**
                **2004**
              
              **Year
                  Ended**
                **December
                  31,**
                **2003**Numerator:Net
                  income available to common stockholders
              
              $
              10,768,645
              
              $
              1,112,379
              
              $
              3,091,155Denominator:Weighted
                  average number of common shares
              
              
              8,847,195
              
              
              8,737,627
              
              
              8,669,287Dilutive
                  effect of employee stock options
              
              
              167,718
              
              
              105,377
              
              
              141,275Diluted
                  average number of common shares
              
              
              9,014,913
              
              
              8,843,004
              
              
              8,810,562Earnings
                  per common share:-
                  Basic earnings per share
              
              
              1.22
              
              
              0.13
              
              
              0.36-
                  Diluted earnings per share
              
              
              1.19
              
              
              0.13
              
              
              0.35
 
 There
        were no options that could potentially dilute basic EPS in the future that
        were
        not included in the computation of diluted EPS for each period
        presented.
 
 ***TAXATION*** **:** The
        Company is not subject to corporate income taxes in Liberia because its income
        is derived from non-Liberian sources. Additionally, the Company believes
        that it
        is not subject to corporate income taxes in other jurisdictions, including
        the
        United States.
  34
 *Table
            of Contents*
  ***RECEIVABLE
        FROM INSURANCE:*** Insurance
        receivables correspond to amounts recoverable under either Hull & Machinery
        insurance or Loss of Earnings insurance. Hull & Machinery insurance covers
        repair costs beyond a certain deductible and Loss of Earnings insurance covers
        the loss in revenues resulting from the immobilization of the vessel beyond
        a
        certain number of days. The vessel values covered and the values of the
        deductibles are negotiated every year with the insurance companies and the
        premiums are fixed accordingly. The Company’s insurance claims are handled by
        the insurance experts of the technical managers’ insurance department. The
        technical manager’s insurance department liaises on a regular basis with the
        underwriters prior to and during the submission of a claim. The submission
        of an
        insurance claim following the occurrence of an incident or accident is always
        decided on a case by case basis by the Company’s Management after discussion
        with the technical manager’s insurance department and/or the Insurance
        Adjusters. Upon submission of an insurance claim, the Company immediately
        records the loss corresponding to the deductible in the operating expenses
        of
        the vessel. The repair costs incurred by the Company or the insured hire
        are
        recorded as receivable from insurers; such amounts are based on discussions
        between the Company technical managers and the insurance underwriters which
        indicate that the recovery is probable. Such amounts never include contingent
        gains as the Insurers repay the costs incurred on the basis of invoices after
        deduction of a deductible. The Receivable from Insurance are reviewed by
        Management and the Technical Managers insurance department and /or insurance
        adjusters at least on a quarterly basis and adjusted if necessary.
 
 ***LOSSES
        / GAINS ON DEBT EXTINGUISHMENT:*** Losses
        or Gains on repurchases of Notes, if any, were calculated as the face value
        of
        the Notes repurchased, less amount paid for the Notes, brokerage commission,
        if
        any, and write off of the corresponding portion of issuance costs.
  ***DEFERRED
        GAIN ON SALE OF VESSELS*** **:** The
        deferred gain on sale of vessels was calculated as the sale price of the
        vessels, less book value of the vessels and of the unamortized dry-dock costs
        at
        the time of sale, transaction costs, and write off of the unamortized balance
        of
        the debt issuance costs incurred in 2004 in connection with the Fortis Loan
        corresponding to the $15 million prepayment. The deferred gain on sale of
        vessels amounted to $17,715,284 in January 2005; it is recognized as income
        by
        the Company on a prorata temporis basis until February 1 st 2008,
        September 1 st 2008,
        May 15 th 2009 and
        February 1 st 2009 for
        the respective vessel after deduction of payments, if any, made under the
        Performance Guarantee in such quarter (see Item 2 - Management’s Discussion -
        Guarantees).
 
 ***RECLASSIFICATIONS:*** Certain
        reclassifications have been made to the accompanying consolidated financial
        statements in prior years to conform to the current presentation.
 
 **NOTE
                  2:**
              **RELATED
                  COMPANY TRANSACTIONS**
 
 As
        of May
        13, 2004, V.Investments Limited, V.Ships Group LTD., V.Holdings Limited,
        Greysea
        Limited, Close Securities Limited, Close Investment Partners Limited, Navalmar
        (UK) Limited, Bogazzi Fimpar SpA, and Enrico Bogazzi purchased 4,168,000
        common
        shares of the Company from the Vlasov Investment Corporation and filed a
        joint
        Form 13D to report that they might be deemed to have shared beneficial ownership
        of 4,308,790 common shares, which represented approximately 49.39% of the
        common
        stock outstanding.
 
 On
        October 5, 2005, Navalmar Transportes Maritimos LDA, a sister company to
        Navalmar (UK) Limited, purchased 1,780,000 common shares of the Company from
        V.Investments Limited.
 
 On
        November 30, 2005, Navalmar Transportes Maritimos LDA purchased 2,800,744
        common
        shares of the Company from Navalmar (UK) Limited.
 
 On
        December, 15 2005, Navalmar Transportes Maritimos LDA sold 555,555 common
        shares
        of the Company to a non affiliated third party.
 
 As
        of
        March 1, 2006, Navalmar Transportes Maritimos LDA (“Navalmar”) and V.Investments
        Limited (“V.Investment”) owned respectively 45.2% and 3.2% of the Company.
        Navalmar and V.Investments are deemed to share beneficial ownership of the
        common shares of the Company. Navalmar Transportes Maritimos LDA is a Portuguese
        company that owns and operates a fleet of vessels and is a subsidiary of
        CO.FI.PA Spa (formerly known as Bogazzi Fimpar Spa). V.Investments is a
        subsidiary of V.Holdings Limited, which operates primarily under the V.Ships
        brand. V.Investments handles the investment activities of the V.Ships
        group.
  35
 *Table
            of Contents*
  Certain
        of the directors and executive officers of the Company are involved in business
        activities similar to those conducted by the Company. Mr. Antony Crawford
        (Chief
        Executive Officer, President and Director) was until November 2005 the Chief
        Executive Officer of V.Investments Limited and a Director and minority
        shareholder of V.Holdings Limited, the holding company of the V.Ships group.
        He
        is joint managing director of AL Ships, a marketing company jointly owned
        by
        V.Ships and KGAL and was a director of Finship, a Rotterdam based financial
        advisory company jointly owned by V.Ships and HVB Bank. Mr. Biggi (Director)
        is
        the President and Chief Executive Officer of V.Holdings Limited and an executive
        officer of its principal subsidiaries which provide management related services
        to the Company. Mr. Biggi is also a shareholder of Greysea, which owns a
        participation in V.Ships. Mr. Bogazzi (Director) is involved in the business
        of
        purchasing, owning and selling cargo vessels through the Bogazzi / Navalmar
        Group of shipping companies. As a result of these affiliations, such persons
        may
        experience conflicts of interest in connection with the selection, purchase,
        operation and sale of the Company's vessels and those of other entities
        affiliated with such persons.
 
 The
        By-Laws of the Company provide that any of the transactions giving rise to
        potential conflicts of interest are subject to review by the Audit Committee
        of
        the Company's Board of Directors which is also charged with the responsibility
        of monitoring and reviewing transactions to be entered into with affiliates
        .
 
 The
        Company, via its wholly owned subsidiaries, has entered into Management
        Agreements (the "Agreements") with V.Ships for the technical operation of
        some
        of its vessels. The Management Agreements are “cost-plus” contracts under which
        the Company reimburses all costs incurred by V.Ships for the operation of
        the
        Company's vessels and V.Ships is paid a fixed management fee. For
        2005,
        the management fees were fixed at the rate of $9,250 per vessel/per month
        for
        the container ships and the large LPG carriers and at the rate of $9,167
        per
        vessel/per month for the smaller LPG carriers (in 2004, $8,855 and $8,753
        respectively - in 2003, $8,600 and $8,500 respectively). In 2005, the Company
        paid management fees of $1,006,756 to V.Ships (2004 - $1,150,926; 2003 -
        $1,128,000).
 
 The
        Company does not currently employ the services of V.Ships in the chartering
        or
        commercial operation of vessels. In 2005, no commercial chartering commissions
        were paid by the Company to V.Ships (2004 - none; 2003 - $4,500).
 
 If
        the
        Company deems it necessary to employ the services of V.Ships to assist with
        legal work for the acquisition or disposal of vessels, the Company will pay
        legal fees determined in the
        light
        of current industry practice. In 2005, legal fees and expenses totaling $37,876
        were paid by the Company to affiliates of V.Ships (2004 - $33,443; 2003 -
        $17,942).
 
 The
        Company leases office space from and reimburses telecommunication expenses
        to
        various affiliates of V.Ships. In 2005, the rental cost and telecommunications
        expenses paid to affiliates of V.Ships were approximately $104,455 (2004
        -
        $133,416; 2003 - $101,218).
 
 In
        August
        2004, the Company entered into a service agreement with V.Investments whereby
        the Company paid a fee of £10,000 per month in consideration of V.Ships
        permitting the Company’s Chief Executive Officer, who was a full time employee
        of V.Ships, to provide his services on a part time basis to the
        Company **.** V.Ships
        was also entitled to reimbursement of all business expenses incurred by the
        CEO
        in the provision of his services. Such agreement terminated on October 31,
        2005
        when the CEO joined the Company on a full time basis. In
        2005,
        the fees and expenses paid to V.Investments amounted to $203,084.
 
 The
        Company outsources some bookkeeping functions to an affiliate of V.Ships.
        In
        2005, the Company paid a total of approximately $28,833 for such accounting
        services (2004 - $31,000; 2003 - $31,000).
  36
 *Table
            of Contents*
  In
        addition, on a case by case basis, as technical manager of the Company’s fleet,
        V.Ships uses on behalf of the Company the services of other V.Ships affiliates
        to arrange for insurance, crew and staff traveling, port agency services,
        manning, safety and training services, and miscellaneous services described
        below. The payments described below represent in part fees and for the most
        part
        payments to third parties.
 
 T he
        Company currently does not place
        its
        vessel insurance through V.Ships. In 2005,  insurance
        premiums paid by the Company to V.Ships amounted to $3,240 (2004
        -
        $ 706,946 ;
        2003 -
        $919,127). In addition, in 2005, cover for legal expenses in case of commercial
        disputes was dealt with by the way of a retainer amounting to approximately
        $58,793 to a subsidiary of V.Ships specializing in such work.
 
 The
        Company uses, for crew and staff traveling, the services of a company affiliated
        with V.Ships. In 2005, such traveling expenses amounted to approximately
        $ 378,340
        and were included in vessel operating expenses or in general and administrative
        expenses (2004 - $267,670; 2003 - $278,831).
 
 The
        Company uses from time to time the port agency services of various companies
        affiliated with V.Ships. In 2005, the Company paid to these companies
        approximately $278,719 for port and other costs, which were included in vessel
        operating expenses (2004 - $313,754 ; 2003 - $480,660).
 
 The
        Company uses various companies affiliated with V.Ships for manning, safety
        and
        training. In 2005, such expenses amounted to approximately $253,375 and were
        included in vessel operating expenses (2004 - $346,129; 2003 -
        $347,179).
 
 At
        December 31, 2005, the Company had intercompany balances of trade accounts
        receivables of $202,208 due from affiliates ($80,492 in 2004). This
        amount includes $180,789 receivable from Munia Mobiliengesellschaft mbH &
Co. KG (“MUNIA”) for the payment of the lube oil remaining on board at the time
        of sale of the container vessels. MUNIA is a special purpose German KG company
        formed by the German finance house KGAL, a German KG, which purchased four
        container vessels from the Company in January 2005 and which is 25.8% owned
        by
        the Company.
 
 
 **NOTE
                  3:**
              **ACQUISITIONS
                  AND SALES OF VESSELS**
 
 In
        July
        2003, the Company sold four second-hand container vessels to a non-affiliated
        party for net proceeds of $20,335,693 and recorded a gain of $1,785,253.
  On
        January 20, 2005, the Company sold another four container
        vessels to MUNIA for
        $29,843,360 **.** After
        repayment of $15 million under the Fortis Loan (see Note 6. Long Term Debt),
        the
        sale generated a cash surplus of approximately $14.8 million, of which $4
        million was reinvested in Munia for a 25.8% equity participation (see Note
        4
        Investment in Associated Companies). The sale generated a net accounting
        gain of
        $17,715,284, which was recorded as a deferred gain on sale of vessels. As
        part
        of the transaction, the Company has agreed to guarantee certain levels of
        operating expenses and of employment for the vessels (see Note 4: Investment
        in
        Associated Companies).
  In
        April
        2005, the Company acquired two very large gas carriers (“VLGCs”) from the
        Bergesen Group of Norway. The vessels, Tower Bridge (ex Berge Flanders) of
        75,000 m 3 capacity
        (built 1991) and Chelsea Bridge (ex Berge Kobe) of 77,000 m 3 capacity
        (built 1987) were acquired for considerations of $50,717,250 and $32,260,000,
        respectively. The vessels are time-chartered to the Bergesen Group for a
        minimum
        period of five years. The acquisitions were funded with a $68 million loan
        from
        Scotiabank Europe PLC and the balance with the Company’s cash
        resources.
 
 
 **NOTE
                  4:**
              **INVESTMENT
                  IN ASSOCIATED COMPANIES**
 
 In
        January 2005, the Company invested $4 million in MUNIA. In January 2005,
        MUNIA
        purchased four container vessels from MC Shipping for approximately $29.8
        million and chartered them to AP Møller until February 1 st 2008,
        September 1 st 2008,
        May 15 th 2009 and
        February 1 st 2009,
        for each vessel respectively. MUNIA contracted the technical management of
        the
        vessels to V.Ships.
  37
 *Table
            of Contents*
  MUNIA
        is
        a limited partnership with equity in the amount of $15.5 million as of December
        31, 2005. The limited partners of MUNIA include the Company with an equity
        contribution of $4 million (25.8%) and TERTIA Beteiligungstreuhand GmbH
        (“TERTIA”) with an equity contribution of $15,500,000 (74.2%). TERTIA is a
        fiduciary partner who holds in trust the limited partnership interests held
        by
        German individual investors (the “Individual Investors”) and the participations
        of V.Ships (1%) and ALCAS GmbH, a subsidiary of KGAL (1%). The Company’s
        investment in MUNIA was $4,279,764 at December 31, 2005.
 
 MUNIA
        borrowed $18 million from Danmarks Skibskreditfond to finance the balance
        of the
        purchase price of the vessels and the working capital. The bank loan bears
        interest at LIBOR plus 1.05% and consists of four advances of $4.5 million
        each.
        Each advance is repayable in equal semi-annual installments of $450,000 plus
        a
        balloon payment due on February 1 st 2008,
        September 1 st 2008,
        May 15 th 2009 and
        February 1 st 2009,
        for each vessel respectively. The loan is secured by mortgages on the vessels
        and is non-recourse to the partners of MUNIA. Swap agreements were concurrently
        entered into, as a result of which the interest rate has been effectively
        fixed
        at rates ranging from 4.73 to 4.85% depending on the final maturity of each
        advance.
 
 The
        managing partner is MUNIA Mobilien-Verwaltungsgesellschaft mbH (the “Managing
        Partner”). The Managing Partner has sole power of representation toward third
        parties and manages the business affairs of MUNIA. V.Ships received a fee
        of
        $230,000 from MUNIA as a broker fee on the acquisition of the
        vessels.
 
 The
        Company participates for 25.8% in the profits and losses of MUNIA and will
        receive the following percentages of the net sale proceeds of each of the
        ships:
        0% of the first $3.9 million, 100% of the next $1 million and 40% of any
        amount
        in excess of $4.9 million. The 25.8% share of net income of MUNIA included
        in
        the Company's financial statements was $389,764 for the year ended December
        31,
        2005. MUNIA expects to pay dividends on a semi-annual basis. The Company
        received the first dividend installment of $110,000 in July 2005.
 
 As
        part
        of the transaction, the Company has agreed to guarantee certain levels of
        operating expenses and of employment for the vessels until February
        1 st 2008,
        September 1 st 2008,
        May 15 th 2009 and
        February 1 st 2009,
        for each vessel (or earlier in case of sale or total loss of a vessel) (“MUNIA
        guarantee”). As a result, the off hire and the excess or surplus of operating
        expenses, up to a certain extent, will be absorbed by the Company. As
        compensation for issuing such guarantee, the Company receives a daily guarantee
        fee for each vessel, which is included in Charterhire and Other Income. The
        Company cannot estimate the amount of any future payments required under
        this
        guarantee at this time.
 
 For
        the
        year ended December 31, 2005, the operating expenses of the vessels were
        approximately at the guaranteed level and no payment required under the
        guarantee, except for the expenses accrued in relation to the Maersk Barcelona
        incident described below.
 
 On
        September 20, 2005, the Maersk Barcelona, owned by MUNIA, suffered a malfunction
        of her oily water separator which may have resulted in an accidental overboard
        discharge of oil-contaminated water off the coast of France. The Company
        has a
        potential liability corresponding to the amount of the bail (EUR 500,000)
        from
        potential fine and court fees, but the Company expects that costs beyond
        the
        deductible of $15,000 will be covered by insurance, as any discharge was
        not
        deliberate. All the expenses incurred in relation with the incident were
        accrued
        for in 2005.
 
 In
        April
        2005, Waterloo Shipping Limited (“Waterloo”), a joint venture company owned
        on
        a 50/50 basis by the Company and Petredec Limited, a leading LPG trading
        and
        shipping company, acquired the 1983-built, 59,725cbm, LPG carrier Galileo
        (ex
        Isomeria) for $16 million and chartered the vessel to Petredec for a period
        of
        four years. The Company and Petredec each advanced an amount of $2,481,923
        to
        Waterloo and Waterloo borrowed $11.2 million from Danmarks Skibskreditfond.
        The
        bank loan bears interest at LIBOR plus 1.05% and is repayable in 16 equal
        quarterly installments of $610,156 plus a balloon payment of $1,437,504.
        The
        loan is non-recourse to the joint venture partners, except for a corporate
        guarantee limited to $850,000 for each joint venture partner. As of December
        31,
        2005, the amount outstanding under this loan was $9,979,688. The Company
        accounts for its investment in Waterloo using the equity method of accounting.
        The share of the net loss of Waterloo included in the Company's financial
        statements was $275,781 for the year ended December 31, 2005 as the LPG carrier
        Galileo incurred additional costs to improve her technical condition and
        therefore incurred additional technical off-hire to bring the ship up to
        standard. The Company’s investment in Waterloo was $2,206,143 at December 31,
        2005.
  38
 *Table
            of Contents*
 
 **NOTE
                  5:**
              **IMPAIRMENT
                  OF LONG LIVED ASSETS**
 
 As
        of
        December 31, 2005, the Company evaluated the recoverability of its vessels
        in
        accordance with FAS 144 and determined that no provision for impairment loss
        was
        required.  In
        January and February 2006, the Company received appraisals for its gas fleet
        from leading independent shipbrokers. On this basis, the appraised value
        of the
        Company’s fully owned fleet was approximately $174,675,000 compared to a book
        value of $121,991,571 on December 31, 2005.
 
 As
        of
        December 31, 2004, the Company evaluated the recoverability of its vessels
        in
        accordance with FAS 144 and determined that no provision for impairment loss
        was
        required.
 
 The
        provision for estimated impairment loss recorded in 2003 was $2,693,650.
        In
        March 2003, the Board approved the sale of two vessels which were written
        down
        to the lower of book value or fair market value less costs to sell. Since
        these
        vessels were not sold, they were subsequently reclassified from "held for
        sale"
        to "held and used" at the end of 2003 and reinstated at the lower of (1)
        carrying amount before it was classified as held for sale, adjusted for any
        depreciation expense that would have been recognised had the vessels been
        continuously classified as held and used or (2) fair value at year end. As
        of
        December 31, 2003, the Company evaluated the recoverability of its vessels
        in
        accordance with FAS 144 and determined that no further provision for impairment
        loss was required.
 
 In
        accordance with SFAS 144 “Accounting for the Impairment or Disposal of Long
        Lived Assets”, the Company’s vessels are regularly reviewed for impairment. The
        Company performs the impairment valuations at the individual vessel level
        pursuant to paragraph 10 of SFAS 144.
 
 To
        consider whether there is an impairment indicator, the Company compares the
        book
        value and the market value of each vessel at the end of each quarterly reporting
        period. At year end, the market value used by the Company is equal to the
        average of the appraisals provided by two leading independent shipbrokers.
        Appraisals are based on the technical specifications of each vessel, but
        are not
        based on a physical inspection of the vessel. At quarter end, the market
        values
        are assessed by the President on the basis of market information, shipping
        newsletters, sale of comparable vessels reported in the press, informal
        discussions with shipbrokers or unsolicited proposals received from third
        parties for the vessels. If a vessel is in the process of being sold, the
        sale
        price is its market value and no broker appraisals are made.
 
 Whenever
        a vessel market value is above its book value, the Company considers there
        is no
        indication of impairment. Whenever a vessel market value is below its book
        value, the Company considers there is a potential impairment and performs
        a
        recoverability test. The Company estimates the undiscounted future cash flows
        attributable to the vessel in order to determine if the book value of such
        vessel is recoverable.
 
 The
        assumptions used to determine whether the sum of undiscounted cash flows
        expected to result from the use and eventual disposition of the vessel exceeds
        the carrying value involve a considerable degree of judgment on the part
        of
        management. Actual results could differ from those estimates, which could
        have a
        material effect on the recoverability of the vessels.
  39
 *Table
            of Contents*
  The
        most
        significant assumptions are:
 
 -
              The
                  time of final disposal corresponds to the estimated useful life
                  of the
                  vessel: 25 years for a container vessel or 30 years for a gas vessel.
                  These assumptions are identical to the ones used for depreciation
                  purposes.
 -
              The
                  estimated value at time of disposal is the estimated scrapping
                  price,
                  calculated as lightweight of the vessel in tons times a certain
                  price per
                  ton, conservatively estimated by Management relative to market
                  price.
 -
              The
                  projected increase in costs and in revenues is equal to the current
                  inflation rate.
 -
              The
                  charter rates are estimated by the President on the basis of past
                  historical rates and modulated by his assessment of current economic
                  and
                  industry trends. They are subjective as they correspond to the
                  company’s
                  best estimate of an average long term
                  rate.
 -
              The
                  maintenance of the vessel is estimated at one dry-dock every 2.5
                  years,
                  alternating intermediate and special survey dry-docks,
 -
              Days
                  on hire are estimated at a level consistent with the Company’s on-hire
                  statistics (see Management’s discussion and Analysis of Financial
                  Condition and Results of operations - Results of Operations -
                  Revenue).
 
 If
        the
        book value of the vessel exceeds the estimated undiscounted future cash flows
        attributable to the vessel, the Company recognizes an impairment loss equal
        to
        the excess of the book value over the market value.
 
 The
        Company’s investment in MUNIA is also reviewed for impairment at year end and at
        each quarter end in
        accordance with the Company’s impairment review policies. To consider whether
        there is an indication of impairment, the Company compares the fair market
        value
        or the estimated scrap value of each container vessel at the end of the
        reporting period with the minimum threshold of $4.9 million, which corresponds
        to a full recovery of the investment (see Note 4. Investment in Associated
        Companies). Whenever the fair market value or the estimated scrap value
        (corresponding to a price of scrap of $314 per ton) of a vessel is below
        $4.9
        million, the Company considers there is a potential impairment and performs
        a
        recoverability test. To perform the recoverability test, the Company estimates
        the undiscounted future cash flows attributable to the investment in order
        to
        determine if the book value of such investment is recoverable. If the book
        value
        of the investment exceeds the estimated undiscounted future cash flows
        attributable to the investment, the Company recognizes an impairment loss
        equal
        to the excess of the book value over the scrap value. As of December 31,
        2005,
        the Company evaluated the recoverability of its investment in Munia in
        accordance with FAS 144 and determined that no provision for impairment loss
        was
        required.
 
 
 **NOTE
                  6:**
              **LONG-TERM
                  DEBT**
 
 Long-term
        debt consisted of the following at December 31, 2005 and 2004:
 
 2005
              
              2004(in
                  thousands $)Scotiabank
                  amortizing loan due 2016
              
              
              64,442
              
              
              -Fortis
                  amortizing loan due 2010
              
              
              25,000
              
              
              45,00089,442
              
              
              45,000less
                  current portion
              
              
              12,116
              
              
              7,500Long
                  term debt
              
              
              77,326
              
              
              37,500
 
 In
        March
        1998, the Company issued $100,000,000 of 10-year Senior Notes (the “Notes”). The
        Notes were issued pursuant to an Indenture (the “Indenture”) between the Company
        and Bankers Trust Company as trustee. Interest on the Notes was payable
        semi-annually in arrears on March 1 and September 1 at a rate of 11.25% per
        annum. The Company’s obligations under the Indenture were guaranteed on a senior
        unsecured basis by substantially all of the Company’s existing vessel-owning
        subsidiaries. The Indenture contained various business and financial covenants.
        The Board of Directors had authorized Management to repurchase Notes in the
        open
        market at times, prices and volumes, which Management deemed appropriate.
        In
        2003, the Company repurchased Notes having a total face value of $7,000,000
        for
        a cash outlay of approximately $4,283,000 and recorded a net gain of $2,620,477
        on the transactions. In 2004, the Company repurchased Notes having a total
        face
        value of $6,540,000 for a cash outlay of approximately $6,107,900 and recorded
        a
        net gain of $363,119 on the transactions. The repurchased Notes were retired. In
        2003
        and 2004, debt issuance costs of $96,473 and $385,101 respectively, were
        written
        off as a result of the Company’s repurchases of Notes and debt
        refinancing and
        recorded as a reduction of gains on debt extinguishment.
  40
 *Table
            of Contents*
 
 On
        September 30, 2004 the Company called the remaining $21.1 million of Notes
        outstanding. The date fixed for redemption was November 1, 2004 and the
        redemption price was 103.75% in accordance with the terms of the Indenture.
        The
        Company recorded a net loss of $975,918, corresponding to the call premium
        for
        $791,250 and the write off of the Notes issuance costs for
        $183,938.
 
 In
        June
        1998, the Company entered into a long-term debt agreement with Fortis Bank
        and
        Banque Nationale de Paris. The facility bore interest at LIBOR plus 1.25%
        and
        the final repayment date was fixed at June 30, 2006. The vessel-owning
        subsidiaries had granted ship mortgages over their vessels as security for
        the
        advances and the Company had issued a guarantee in relation to the facility.
        Repayment schedules (consisting of semi-annual instalments plus a balloon)
        were
        determined in relation to each drawing at the time the advances are made
        by
        reference to the ages and to the types of vessels acquired. The outstanding
        amount of this facility $14,729,815 was fully repaid on October 27, 2004
        as part
        of the refinancing of the Company’s debt described below.
 
 In
        September 2001, the Company had been granted a $17,700,000 credit facility
        by
        Scotiabank. The facility consisted of two advances, bore interest at LIBOR
        plus
        2% and was non-recourse to the Company. A first advance of $13,462,500 was
        drawn
        to finance the acquisition of a second-hand LPG vessel. This first advance
        was
        repayable over five years in equal quarterly instalments. A swap agreement
        was
        concurrently entered into with Scotiabank, as a result of which the variable
        rate on the loan, exclusive of margin, has been effectively fixed at 4.595%.
        The
        swap’s notional amount and duration followed the scheduled repayments of the
        underlying loan. On September 30, 2004, the swap was cancelled at a cost
        of
        $124,500 and the cancellation cost was recorded as interest expense. The
        outstanding amount of this advance $5,385,000 was fully repaid on October
        27,
        2004 as part of the refinancing of the Company’s debt described below. A second
        advance of $4,237,500 had been drawn by two of the Company’s wholly owned
        subsidiaries, to refinance second-hand containerships acquired in 1998. The
        outstanding amount of this advance $1,059,375 was fully prepaid on March
        24,
        2003 and the corresponding swap cancelled.
 
 On
        October 11, 2004, the Company entered into a $45,000,000 loan agreement with
        Fortis Bank in order to refinance all of its outstanding debt (the “Fortis
        Loan”). The facility bears interest at LIBOR plus 1.25% and is repayable over
        six years in equal quarterly installments. The borrowers are the then existing
        vessel-owning subsidiaries, except for the coastal bulker subsidiaries. The
        Company used the proceeds of this facility to repay all its outstanding long
        term debt. Concurrently, the Company entered into an interest rate swap
        agreement to hedge the Company’s interest rate exposure associated with a
        portion of the Fortis Loan. As of December 31, 2005, the swap agreement had
        a
        notional amount of $25,000,000, a fair value of $629,000 in favor of the
        Company
        and an interest rate of 3.075% (excluding the margin). It will expire in
        October
        2007.
 
 On
        January 20, 2005, upon the sale of the container vessels to MUNIA, the Company
        repaid $15 million under the Fortis Loan and the repayment schedule of the
        remaining loan was reduced proportionately.  An
        amount
        of $116,194 representing the unamortized balance of the debt issuance costs
        incurred in 2004 in connection with the prepaid portion of the Fortis Loan
        was
        written off and recorded as a reduction of the Deferred Gain on sale of vessels.
        Concurrently with such prepayment, cash balances of $5 million held as
        collateral by Fortis Bank were released. As of December 31, 2005, the amount
        outstanding under the Fortis Loan was $25,000,000.
  41
 *Table
            of Contents*
  In
        April
        2005, the Company entered into a $68,000,000 loan agreement with Scotiabank
        (the
“Scotia Loan”) in order to partially fund the acquisition of two vessels. The
        loan consists of two advances, bears interest at LIBOR plus 0.85% and is
        guaranteed by the Company:
 
 **-**
              the
                  first advance of $41 million was drawn by one of the Company’s wholly
                  owned subsidiaries, to finance the acquisition of the Tower Bridge.
                  This
                  advance is repayable over eleven years in twenty two equal semi-annual
                  installments of $1,772,500 plus a balloon payment of $2,005,000
                  in April
                  2016.
 
 **-**
              the
                  second advance of $27 million was drawn by another of the Company’s wholly
                  owned subsidiaries in order to finance the acquisition of the Chelsea
                  Bridge. This advance is repayable over seven years in fourteen
                  equal
                  semi-annual installments of $1,785,500 plus a balloon payment of
                  $2,003,000 in April 2012.
 
 Swap
        agreements were concurrently entered into with Scotiabank, as a result of
        which
        the variable rate, exclusive of margin, has been effectively fixed for the
        first
        five years at 4.58 % and 4.545% respectively for the first and second advance.
        As of December 31, 2005, the swap agreements had notional amounts of $39,227,500
        and $25,214,500, respectively, and fai r
        values
        of $130,188 and $201,117, respectively, in favor of the Company. They will
        expire in October 2010. As of December 31, 2005, the amount outstanding under
        the Scotia Loan was $64,442,000. Under the Scotiabank agreement, monthly
        transfers are made to the retention accounts, which are applied in discharge
        of
        the next principal and interest payment due under the loan.
 
 The
        Company has issued guarantees in relation to both loans and the borrowers
        have
        granted ship mortgages over their vessels as security. Both loan agreements
        contain debt covenants related to minimum liquidity reserves of $5,000,000,
        minimum value clauses for the vessels, minimum interest coverage of 2:1 and
        minimum tangible net worth. As of December 31, 2005, tangible net worth exceeded
        the minimum requirement by $6,515,180. The Company has complied with all
        applicable debt covenants for all periods presented **.**
 
 Aggregate
        maturities of long-term debt in each of the five years subsequent to December
        31, 2005 are as follows:
 
 2006
              
              $
              12,116,0002007
              
              
              12,116,0002008
              
              
              12,116,0002009
              
              
              12,116,0002010
                  and thereafter
              
              
              40,978,000Total
              
              $
              89,442,000
 
 The
        interest rates applicable to the Company's long-term debt as of December
        31,
        2005 ranged from 4.325% to 5.43%. During the year ended December 31, 2005,
        interest paid in relation to the long-term debt totaled
        $3,211,999 (2004 - $4,208,195; 2003 - $5,114,613).
  42
 *Table
            of Contents*
  **NOTE
                  7:**
              **FAIR
                  VALUE OF FINANCIAL
                  INSTRUMENTS**
 
 At
        December 31, 2005 and 2004, financial instruments had the following
        values:
 
 2005
              
              2004Fair
                  Value
              
              Book
                  Value
              
              Fair
                  Value
              
              Book
                  ValueCash
              
              
              (a)
              
              
              12,292,015
              
              
              12,292,015
              
              
              11,629,896
              
              
              11,629,896Restricted
                  Cash
              
              
              (a)
              
              
              1,759,237
              
              
              1,759,237
              
              
              5,000,000
              
              
              5,000,000Long-term
                  debt:
              
              
              (b)Current
                  portion
              
              
              
              
              
              12,116,000
              
              
              12,116,000
              
              
              7,500,000
              
              
              7,500,000Non-current
                  portion:
              
              
              
              
              
              77,326,000
              
              
              77,326,000
              
              
              37,500,000
              
              
              37,500,000Interest
                  rate swaps
              
              
              (c)
              
              
              960,305
              
              
              960,305
              
              
              209,330
              
              
              209,330
  a)
              Carrying
                  value approximates fair value due to short term
                  maturities.
 b)
              Carrying
                  value approximates fair value as variable interest rate approximates
                  market rates.
 c)
              The
                  fair
                  values of the interest rate swaps are based on independent valuations.
                  They estimate the amount the Company would have received or paid,
                  had the
                  interest rate swaps been terminated on the balance sheet
                  date.
 
 
 **NOTE
                  8:**
              **CHANGES
                  IN SHAREHOLDERS' EQUITY**
 
 In
        March
        2006, the Company’s Board of Directors announced a dividend of $0.25 per share
        to be paid in four equal quarterly installments commencing in April 2006
        and a
        stock dividend of one share for every twenty shares owned, rounded up to
        the
        nearest multiple. In 2005, the Company declared a dividend of $0.25 per share
        that was paid in four equal installments and recorded
        as a reduction of Additional paid-in capital .
        The
        final payment of $557,104, which was accrued at December 31, 2005 was paid
        January 2006. In
        April
        2004, the Company distributed a stock dividend of 1 share for every 20 shares
        owned, rounded up to the nearest multiple of 20 and 415,513 shares were issued
        to that effect.
 
 In
        March
        2006, the Company’s Board of Directors extended the authorization to repurchase
        up to 400,000 shares of its common stock. Shares will be repurchased in the
        open
        market at times and prices considered appropriate by the Company. The timing
        of
        any purchases and the exact number of shares to be purchased will be dependent
        on market conditions. Repurchased stock, if any, will be held in
        treasury.
 
 Directors,
        who are not officers of the Company or of an affiliated Company, each receive
        $5,000 of their total annual compensation by the allotment of shares of the
        Company’s common stock of equivalent value. Further shares will be similarly
        granted in future years. Pursuant to this arrangement, the following allotments
        have been made:
 
 Total
                  number of shares allotted
              Total
                  compensation in USD
              Period
              Ending12,052
              $20,000
              12
                  months
              March
                  31, 20044,766
              $15,000
              9
                  months
              December
                  31, 20042,056(1)
              $20,000
              12
                  months
              December
                  31, 2005
 (1)
              The
                  shares allotted for 2005 were issued in January
                  2006.
 
 In
        2005,
        142,918 shares were issued and 186,398 options granted under the stock option
        plan (Note 9).
 
 Accumulated
        comprehensive income consists of currency translation adjustments and unrealized
        gains or losses on cash flow hedges as follows:
  43
 *Table
            of Contents*
 
 2005
              
              2004
              
              2003Currency
                  translation adjustments
              
              $
              30,155
              
              $
              52,272
              
              $
              91,503Unrealized
                  gains / (losses) on cash flow hedges
              
              
              960,305
              
              
              209,330
              
              
              (286,894
              )Accumulated
                  Comprehensive Income / (loss)
              
              $
              990,460
              
              $
              261,602
              
              $
              (195,391
              )
 
 Treasury
        stock, at cost, amounted to $971,185 at December 31, 2003 and represented
        221,730 shares. All these shares were re-issued by the Company in 2004 at
        the
        time of the stock dividend.
 
 **NOTE
                  9:**
              **STOCK
                  OPTION PLAN**
 
 On
        June
        20, 2001, the shareholders authorized the creation of a Stock Option Plan
        for
        the Company’s employees. A maximum of 407,871 shares or 5% of the Company’s
        outstanding shares were authorized for issuance under this stock option plan.
        Under the terms of the plan, the options give the right to purchase one share
        per option; they expire ten years after the creation of the plan, on June
        20,
        2011, regardless of the grant date. Options granted under this plan are granted
        with an exercise price equal to the average of the Company’s stock price over
        the ten days prior to the grant date. At the inception of the plan, the options
        vested 25% per annum, commencing one year after the grant date of the respective
        option. As of June 14, 2005, the Board modified the vesting conditions of
        the
        stock options under the terms of the plan in order to provide management
        with
        additional incentive. The options now vest 100% on the day following the
        grant
        date.
 
 On
        June
        20, 2001, the Company’s Board of Directors approved the issuance of 163,148
        options at an exercise price of $0.622 per share. The intrinsic value of
        these
        options on the grant date was $0.128 per share. On September 17, 2004, the
        Company’s Board of Directors approved the issuance of 100,000 options at an
        exercise price of $2.36 per share. The intrinsic value of these options on
        the
        grant date was $0.44 per share. On June 14, 2005, the Company’s Board of
        Directors approved the issuance of 186,398 options at an exercise price of
        $9.228 per share. The intrinsic value of these options on the grant date
        was
        $0.402 per share. There are no more options to be granted under the
        plan.
 
 The
        following table summarizes the activity under the stock plan:
 
 2005
              2005
              2004
              2004
              2003
              2003Number
                  of
                shares
              Weighted
                average
                exercise
                price
              Number
                  of
                shares
              Weighted
                average
                exercise
                price
              Number
                  of
                shares
              Weighted
                average
                exercise
                priceOptions
                  outstanding at the beginning of the year
              142,918
              1.84
              101,499
              .622
              163,655
              .622Options
                  granted
              186,398
              9.228
              100,000
              2.36
              -
              -Options
                  exercised
              142,918
              1.84
              29,901
              .622
              48,614
              .622Options
                  forfeited
              -
              -
              28,680
              .622
              13,542
              .622Options
                  outstanding at the end of the year
              -
              -
              142,918
              1.84
              101,499
              .622Options
                  exercisable at the end of the year
              186,398
              9.228
              19,729
              .622
              26,443
              .622
 
 As
        of
        December 31, 2005, the options outstanding had an exercise price of $9.228
        per
        share and a remaining contractual life of 5.47 years.
 
 In
        connection with the granting of the options in June 2005, the Company has
        recognized non-cash compensation expense of $74,932 which is equal to the
        amount
        of the intrinsic value of the options, under FASB Interpretation No. 28,
        “Accounting for Stock Appreciation Rights and Other Variable Stock Option
        Award
        Plans”. The Company had not recognized compensation expense in connection with
        the issuance of the options in prior years, as the amounts of amortization
        of
        the intrinsic value of the options to be recorded as expense over the options’
vesting period were immaterial.
  44
 *Table
            of Contents*
  FASB
        Statement No. 123, Accounting for Stock Based Compensation (SFAS 123) requires
        the disclosure of pro forma net income and earnings per share information
        computed as if the Company had accounted for its employee stock options under
        the fair value method set forth in SFAS 123. The fair value for the options
        granted was estimated at the date of grant using a Black-Scholes option pricing
        model with the following assumptions.
 
 **Options
                  granted in year**
              **2005**
              **2004**
              **2001**Risk-free
                  interest rate
              3.70%
              3.6%
              5%Volatility
              54%
              58%
              180.3%Expected
                  option term (in years)
              2
              4
              7Dividend
                  yield
              2.50%
              3.50%
              0.00%Fair
                  value of options granted
              $2.96
              $1.23
              $0.74
 
 The
        weighted average fair values of stock options granted during the years ended
        December 31, 2005 and 2004, were $2.96 and $1.23 per share, respectively.
        For
        purposes of pro forma disclosures, prior to June 14, 2005, the options vested
        on
        a pro-rata basis and the estimated fair value of the options was amortized
        to
        expense over the options’ vesting period in accordance with the accelerated
        expense attribution method under FASB Interpretation No. 28. After June 14,
        2005, the options vested 100% on the day following the grant date and the
        estimated intrinsic value of the options was expensed in full on the day
        after
        the grant.
 
 The
        following table illustrates the effect on net income and earnings per share
        if
        the Company had applied the fair value recognition provisions of FASB Statement
        No. 123, Accounting for Stock-Based Compensation, to stock-based employee
        compensation.
  **Year
                  ended**
                **December
                  31**
                **2005**
              
              **Year
                  ended**
                **December
                  31**
                **2004**
              
              **Year
                  ended**
                **December
                  31**
                **2003**Net
                  income, as reported
              
              
              10,768,645
              
              $
              1,112,379
              
              $
              3,091,155Add:
                  Stock-based employee compensation expense included in reported
                  net
                  income
              
              
              74,932
              
              
              -
              
              
              -Deduct:
                  total stock-based employee compensation expense determined under
                  fair
                  value based method for all awards
              
              
              (642,875
              )
              
              (32,787
              )
              
              (10,157
              )Proforma
                  net income
              
              
              10,200,702
              
              
              1,079,592
              
              
              3,080,998Earnings
                  per share:Basic
                  - as reported
              
              
              1.22
              
              $
              0.13
              
              $
              0.36Basic
                  - pro forma
              
              
              1.15
              
              
              0.12
              
              
              0.36Diluted
                  - as reported
              
              
              1.19
              
              $
              0.13
              
              $
              0.35Diluted
                  - pro forma
              
              
              1.13
              
              
              0.12
              
              
              0.35
 
 
 **NOTE
                  10:**
              **CHARTERS**
 
 The
        Company employs its vessels on time charter, bareboat charter or voyage charter.
        With time charters, the Company receives a fixed charterhire per on-hire
        day and
        is responsible for meeting all the operating expenses of the vessels, such
        as
        crew costs, voyage expenses, insurance, repairs and maintenance. In the case
        of
        bareboat charters, the Company receives a fixed charterhire per day for the
        vessel and the charterer is responsible for all the costs associated with
        the
        vessel's operation during the bareboat charter period. In the case of voyage
        charters, the vessel is contracted only for a voyage between two or several
        ports: the Company is paid for the tonnage transported and pays all voyage
        costs.
  45
 *Table
            of Contents*
  Nine
        out
        of the Company's eleven vessels are currently fixed on time charters. Future
        minimum revenues from these non-cancelable charters are as follows:
 
 2006
              
              $
              29,800,0002007
              
              $
              19,150,6252008
              
              $
              16,980,0002009
              
              $
              16,980,0002010
              
              $
              4,245,000
 
 The
        Company performs ongoing evaluations of the credit risk of its
        charterers.
 
 In
        2005,
        the Company had three charterers from which revenues exceeded 10% of total
        revenues from charter hires.
        Revenues from these charterers amounted to $12,481,360, $9,731,326 and
        $9,052,303 respectively representing 35.3%, 27.5% and 25.6% of total revenues.
        In 2004, the Company had three charterers from which revenues exceeded 10%
        of
        total revenues from charterhire. Revenues from these charterers amounted
        to
        $12,202,388, $8,817,095 and $8,281,170 respectively representing 38.3%, 27.6%
        and 26.0% of total revenues from charterhire. In 2003, the Company had four
        charterers from which revenues exceeded 10% of total revenues from charterhire.
        Revenues from these charterers amounted to $12,811,153, $7,716,061, $7,605,471
        and $4,692,500 respectively representing 35.8%, 21.6%, 21.2% and 13.1% of
        total
        revenues.
 
 
 **NOTE
                  11:**
              **2005
                  AND 2004 QUARTERLY RESULTS OF OPERATIONS
                  (UNAUDITED)**
 
 
 2005
              
              March
                  31
              
              June
                  30
              
              September
                  30
              
              December
                  31Charterhire
                  and Other Revenue
              
              $
              6,238,486
              
              $
              9,628,735
              
              $
              9,796,898
              
              
              9,732,400Recognized
                  deferred gain on sale of vessels
              
              
              926,567
              
              
              1,187,572
              
              
              1,189,597
              
              
              1,200,622Net
                  Income
              
              
              2,046,755
              
              
              2,861,999
              
              
              2,921,619
              
              
              2,938,272Basic
                  per share amountsNet
                  Income
              
              $
              0.23
              
              $
              0.33
              
              $
              0.33
              
              $
              0.33
 
 2004
              
              March
                  31
              
              June
                  30
              
              September
                  30
              
              December
                  31Charterhire
                  and Other Revenue
              
              $
              7,895,776
              
              $
              7,881,660
              
              $
              8,127,173
              
              $
              7,990,784Gain
                  / (loss) on debt extinguishment
              
              
              423,595
              
              
              (20,355
              )
              
              (40,121
              )
              
              (1,107,369
              )Net
                  Income / (loss)
              
              
              800,398
              
              
              536,445
              
              
              359,482
              
              
              (583,946
              )Basic
                  per share amountsNet
                  Income
              
              $
              0.10
              
              $
              0.08
              
              $
              0.06
              
              
              -
 
 
 **NOTE
                  12:**
              **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.
        Management believes that all such matters are either adequately covered by
        insurance or are not expected to have a material adverse effect on the
        Company.
  46
 *Table
            of Contents*
  **NOTE
                  1****3:**
              **CASH
                  FLOW SUPPLEMENTARY
                  INFORMATION**
 
 As
        supplementary information to the consolidated statement of cash flows, the
        following payments were made in the last three years:
 
 2005
              2004
              2003Interest
                  paid in relation to long term debt
              $
                  3,211,999
              $
                  4,208,195
              $
                  5,114,613Income
                  tax paid
              15,290
              18,306
              14,981
 
 
 **NOTE
                  14:**
              **SUBSEQUENT
                  EVENTS**
 
 On
        January 27, 2006, the Company paid the fourth dividend quarterly installment
        of
        $557,104 ($0.0625 per share).
 
 In
        January 2006, the Company opened an office in London. Following the joining
        of
        the Chief Executive Officer on a full time basis in November 2005, it is
        the
        intention of the Company to develop its activities in London closer to the
        international shipping and financial centers. It is expected that additional
        staff will be hired in London. The cost of the leased office space is equal
        to
        approximately $133,000 per year.
 
 In
        March
        2006, the Company signed Memoranda of Agreement for the purchase of two LPG
        vessels from the Bernhard Schulte Group of Germany at a total cost of $11
        million. The vessels, Hermann Schulte (built 1980) and Dorothea Schulte (built
        1981) are semi-refrigerated and of 5,600 cbm capacity each. The acquisition
        will
        be funded with an $ 8 million bank loan facility and for the balance with
        the
        Company’s current cash holdings. Simultaneously with the purchase, they will be
        time-chartered back to the Schulte Group for a minimum period of one year.
        The
        technical management of the vessels will be contracted to Wallem, an unrelated
        technical manager, following a tender aiming to compare experience and cost.
        The
        vessels are expected to be delivered before March 31, 2006.
 
 
 
 
 
 **SCHEDULE
        II - VALUATION AND QUALIFYING ACCOUNTS**
 **Year
                    ended**
                
                **Balance
                    at**
                  **Beginning**
                  **Of
                    Period**
                
                **Charged
                    to Costs**
                  **And
                    Expenses**
                
                **Credited
                    to**
                  **Costs**
                  **And
                    Expenses**
                
                **Balance
                    at**
                  **End
                    of**
                  **Period**Reserves
                    and allowances deducted from asset accounts:**DECEMBER
                    31, 2003**Allowance
                    for insurance receivables
                
                $110,000
                
                
                
                
                
                $110,000**DECEMBER
                    31, 2004**
                
                -
                
                
                
                
                
                -Allowance
                    for insurance receivables
                
                $110,000
                
                
                
                
                
                $110,000**DECEMBER
                    31, 2005**Allowance
                    for insurance receivables
                
                $110,000
                
                
                
                $(20,600)
                
                $89,400
 
 
  47
 *Table
            of Contents*
  **ITEM
                  9:**
              **CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE**
 
 The
        Company advises that, as of March 22, 2005, it dismissed the Company’s
        independent accountant, Ernst & Young, Chartered Accountants (the “Former
        Accountant”) and further states that:
 -
              there
                  was no adverse opinion or disclaimer of opinion in the Former Accountant’s
                  report on the Company’s financial statements for either of the past two
                  years, nor was any such report qualified, modified as to uncertainty,
                  audit scope or accounting
                  principles;
 -
              the
                  decision to change accountants was approved by the Company’s Audit
                  Committee;
 -
              there
                  were no disagreements with the Former Accountant during the two
                  most
                  recent fiscal years on any matter of accounting principles or practices,
                  financial statement disclosure, or auditing scope of
                  procedure.
 
 
 
 
 
 **ITEM
                  9A:**
              **CONTROLS
                  AND PROCEDURES**
 
 ***Evaluation
        of disclosure controls and procedures.***
 
 The
        Company’s Chief Executive Officer and Chief Financial Officer have evaluated the
        effectiveness of the Company’s “disclosure controls and procedures” (as defined
        in the Securities and Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e))
        as of
        December 31, 2005 (the “Evaluation Date”). These controls and procedures were
        designed to ensure that material information relating to the Company and
        its
        subsidiaries is communicated to the Chief Executive Officer and to the Chief
        Financial Officer. Based on such review, they have concluded that, as of
        the
        Evaluation Date, the Company’s disclosure controls and procedures were effective
        to ensure that material information relating to the Company and its consolidated
        subsidiaries would be made known to them by others within those
        entities.
 
 ***Changes
        in internal controls.***
 
 There
        were no significant changes in the Company’s internal controls or, to the
        knowledge of the Company’s Chief Executive Officer and Chief Financial Officer,
        in other factors that could significantly affect the Company’s internal
        disclosure controls and procedures subsequent to the Evaluation
        Date.
 
 
 **ITEM
                  9B:**
              **OTHER
                  INFORMATION**
 
 Not
        applicable
 **______________________________**
  48
 *Table
            of Contents*
 
 **PART
        III**
 
 **ITEM10:**
                **DIRECTORS
                    AND EXECUTIVE OFFICERS OF THE
                    COMPANY**
 
 The
        directors and executive officers of the Company are as follows:
 
 **Name**
              
              **Age**
              
              **Position**Charles
                  B. Longbottom
              
              75
              
              Chairman
                  of the Board of DirectorsAntony
                  Crawford
              
              49
              
              Chief
                  Executive Officer and PresidentDominique
                  Sergent
              
              51
              
              Vice
                  President, Chief Financial Officer and TreasurerGraham
                  G. Pimblett
              
              51
              
              Vice
                  President, Chief Operating OfficerEnrico
                  Bogazzi
              
              65
              
              DirectorJohn
                  H. Blankley
              
              58
              
              DirectorAnton
                  Pardini
              
              42
              
              DirectorHorst
                  Schomburg
              
              76
              
              DirectorTullio
                  Biggi
              
              66
              
              Director
 
 There
        are
        no family relationships between any of the directors and executive
        officers.
 
 Mr.
        Longbottom has
        been
        a director of the Company since 1989 and was elected Chairman of the Board
        of
        the Company in May 2004 .
        Messrs.
        Blankley and Schomburg were originally elected as directors at the 1995 annual
        meeting. Mr. Crawford and Bogazzi were elected as directors at the 2004 annual
        meeting. Messrs. Pardini and Biggi were appointed as directors in September
        and
        November 2004.
 
 Under
        the
        Company's Articles of Incorporation, the Board of Directors is divided into
        two
        classes of at least three persons, each of whom is elected for a two-year
        term.
        Messrs. Longbottom, Pardini, Schomburg and Crawford are Class "A" directors
        and
        Messrs . Biggi,
        Bogazzi and Blankley are Class "B" directors. The Class "A" directors were
        re-elected at the 2004 Annual Meeting and serve until the 2006 Annual Meeting.
        The Class "B" directors were re-elected at the 2005 Annual Meeting and serve
        until the 2007 Annual Meeting. Officers are appointed by the Board of Directors
        and serve until their successors are appointed and qualified. The Articles
        of
        Incorporation and By-laws of the Company provide that the Company will, to
        the
        full extent authorized by the Business Corporation Act of Liberia, indemnify
        each of its officers and directors against judgments, fines, amounts paid
        in
        settlement, and expenses incurred in the defense of any action commenced
        against
        any such officer or director by reason of the fact that he is or was an officer
        or director of the Company.
 
 Section
        3.11 of the By-Laws of the Company provides that there shall be an Audit
        Committee of the Board of Directors (the "Committee") consisting of three
        or
        more directors, a majority of whom are not officers of the Company and are
        not
        currently and have not previously been employees of the Company, Navalmar,
        V.Ships or their respective affiliates. The Committee is currently comprised
        of
        Messrs. Longbottom, Schomburg, Pardini and Blankley, all of whom are independent
        directors. Section 3.11, which may not be amended or repealed except upon
        approval of the holders of two-thirds of the outstanding shares of Common
        Stock,
        provides that the Committee shall review the following matters and advise
        and
        consult with the entire Board of Directors with respect thereto:
 
 (i)
              the
                  preparation of the Company's annual financial statements in collaboration
                  with the Company's independent certified
                  accountants;
 (ii)
              the
                  sale or other disposition of the Company's
                  vessels;
 (iii)
              the
                  mortgaging of any of the Company's vessels as security for indebtedness
                  of
                  the Company or any of its
                  subsidiaries;
 (iv)
              the
                  performance by V.Ships of its obligations under the management
                  agreements;
                  and
 (v)
              all
                  agreements between the Company and V.Ships, any officer of the
                  Company, or
                  affiliates of V.Ships or any such
                  officer.
  49
 *Table
            of Contents*
  The
        Company's board of directors has determined that the Company has at least
        one
        audit committee financial expert serving on its audit committee. The audit
        committee financial expert is Mr. Blankley. Mr. Blankley is an independent
        director and served as Chief Financial Officer of BP North America Inc.,
        Stolt-Nielsen Inc., Harris Chemical Group Inc. and Hvide Marine Inc. between
        1983 and 1999.
 
 The
        Company has adopted a Code of Ethics that applies to the Company's directors,
        officers and employees. The Code of Ethics is displayed on the Company’s
        website: www.mcshipping.com.
 
 The
        Nominating and Corporate Governance Committee consists
        of three or more Independent Directors. Its
        members are currently the same as the Audit Committee. The
        purpose of the Nominating and Corporate Governance Committee is to:
 
 (i)
              Identify
                  individuals qualified to become members of the Board of Directors
                  of the
                  Company and recommend to the Board nominees for election as Directors
                  ;
 (ii)
              Maintain
                  oversight of the operation and effectiveness of the Board and the
                  corporate governance and Management of the Company
                  ;
 (iii)
              Develop,
                  update as necessary and recommend to the Board corporate governance
                  principles and policies applicable to the Company, including the
                  Company’s
                  Corporate Governance Guidelines ;
                  and
 (iv)
              Monitor
                  compliance with such corporate governance principles and
                  policies.
 
 **Antony
        S. Crawford** was
        appointed Chief Executive Officer, President, Chief Operating Officer and
        a
        Director of the Company in August 2004. He became a full time Chief Executive
        Officer in November 2005. Mr. Crawford was until November 2005 a director
        and
        minority shareholder of V.Holdings Limited and the Chief Executive Officer
        of V.
        Investments Limited. From 1983 to 2005, Mr. Crawford was a director and finally
        Chief Executive Officer of V.Ships PLC (formerly Silver Line Ltd), which
        he had
        joined in 1983 as a ship-broker, when it was an affiliate of the Vlasov Group.
        From 1978 to 1983, Mr. Crawford worked as chartering manager with Euro Canadian
        Group, a container bulk operator, and from 1973 to 1978 as a shipbroker with
        shipbrokers Lambert Brothers Limited.
 
 **Dominique
        Sergent** was
        appointed Vice President and Chief Financial Officer in 2000 after joining
        the
        Company in 1997 as Treasurer. Her
        prior
        career includes positions as Vice President in the Capital Markets Group
        of
        Bankers Trust in New York, Vice President in the investment banking division
        of
        E.F. Hutton and in the international department of Banque Worms. Ms. Sergent
        holds an MBA degree from Harvard Business School.
 
 **Graham
        G. Pimblett** was
        appointed Vice President, Operations of the Company in 1996 and Chief Operating
        Officer in 2005. Mr.
        Pimblett has been with the Company from its foundation in 1989. Prior to
        that,
        he has worked within the Vlasov Group since 1971 and has held various
        operational positions during that period.
 
 **Charles
        B. Longbottom** is
        the former
        Chairman of Seascope Shipping Limited and of Seascope Insurance Services
        Limited. He is also the former Chairman of Austin & Pickersgill
        Shipbuilders, A&P Appledore International, and of Illingworth Morris Pension
        Trustees Limited. Mr. Longbottom was previously a non-executive director
        of
        Newman Martin & Buchan Ltd. and a part-time member of the Board of British
        Shipbuilders. Mr. Longbottom is a former Member of the British Parliament.
 
 **Enrico
        Bogazzi** is the
        Chief
        Executive Officer of and a majority shareholder in CO.FI.PA Spa (formerly
        known
        as Bogazzi Fimpar Spa), which in turn is a controlling shareholder in Navalmar
        Transportes Maritimos LDA, a major shareholder in the Company. He has
        directorships in a number of private shipping and shipping related companies
        in
        Europe. He holds a law degree from the University of Pisa.
 
 **John
        H. Blankley** is the
        owner
        of Seafirst Capital, an independent consulting and investing Company, which
        he
        established in 1994. He is the former director and Chief Financial Officer
        of
        Hvide Marine Inc. Mr. Blankley was Chief Financial Officer and a director
        of BP
        North America Inc., he was also an Executive Vice President and Chief Financial
        Officer of Stolt-Nielsen Inc., and director and Chief Financial Officer of
        Harris Chemicals Group Inc .
  50
 *Table
            of Contents*
  **Horst
        Schomburg** is the Managing
        Director of MPC Steamship GmbH. He was previously the Chairman of the Advisory
        Board of Hamburg Südamerikanische Dampfschiffahrts Gesellschaft Eggert &
Amsinck (Hamburg South American Shipping Company - "Hamburg-Süd"). Mr. Schomburg
        is also the former President and Chief Executive Officer, and a member of
        the
        Managing Board of Hamburg-Süd.
 
 **Tullio
        Biggi** is
        President and Chief Executive Officer of V.Holdings Limited and an executive
        officer of its principal subsidiaries which provide technical management
        services to the Company. V.Holdings Limited is the parent company of
        V.Investments Limited, a shareholder in the Company. Mr. Biggi holds a Bachelor
        of Economics degree from the University of Genoa.
 
 **Anton
        Pardini** is President and Chief Executive Officer of Schnitzer Investment Corp. He was
        previously President and Chief Executive Officer of Lasco Shipping Co., and
        prior to that General Counsel for the Schnitzer Group of Companies, which
        then
        included Schnitzer Steel, Schnitzer Investment Corp., Lasco Shipping and
        several
        other companies.
 
 (See
        also
        I tem
        13:
        Certain relationships and related transactions)
 
 
 **ITEM
                  11:**
              **EXECUTIVE
                  COMPENSATION**
 
 The
        cash
        compensation paid by the Company and its subsidiaries for services to the
        Company and its subsidiaries in all capacities to all executive officers
        of the
        Company (three individuals) in respect of the fiscal year ended December
        31,
        2005 was $669,874 including bonuses and the consideration paid to V.Investments
        Limited for the services of the Chief Executive Officer (see Note 2: Related
        Company transactions to the Consolidated Financial Statements in Item 8).
        In
        addition, such executive officers received an aggregate amount of 151,000
        stock
        options in 2005 at an exercise price of $9.228, which options have an expiration
        date of June 14, 2011 (see Note 9: Stock Options to the Consolidated Financial
        Statements in Item 8).
 
 Name
                  and title
              Cash
                  compensation
                paid
                  in 2005
              Stock
                  options
                ranted
                  in 2005Antony
                  CrawfordCEO,
                  President
              $152,010(1)
              57,000Dominique
                  SergentCFO
              $178,864
              47,000Graham
                  PimblettCOO
              $157,042
              47,000
 
 (1)
        from
        November 7, 2005. This amount does not include the consideration of $181,958
        paid to V.Investments Limited up to October 31, 2005 for which Mr. Crawford
        did
        not receive any direct benefit (see Note 2: Related Company transactions
        to the
        Consolidated Financial Statements in Item 8).
 
 In
        2001,
        the Company initiated a Stock Option Plan for the benefit of all its
        employees. As of December 31, 2005, all the stock options available under
        this
        plan were granted to employees. (See Note 9: Stock Option Plan to the
        Consolidated Financial Statements in Item 8).
 
 In
        2005,
        the independent Directors’ compensation was $35,000 per year, with the exception
        of Mr. Longbottom’s compensation which
        was
        $45,000 per year as Chairman of the Board. The compensation is payable in
        cash
        and as to $5,000 by the allotment of shares of the Company’s Common Stock of
        equivalent value. For the year ended December 31, 2005, 2,056 shares were
        distributed in total in January 2006 for an aggregate amount of
        $20,000.
  51
 *Table
            of Contents*
  Certain
        directors and executive officers of the Company may receive additional
        compensation indirectly as a result of shareholdings in V.Ships. Mr. Biggi
        is
        the President and Chief executive Officer of V.Holdings Limited and an executive
        officer of its principal subsidiaries which provide management related services
        to the Company. Mr. Biggi is also a shareholder of Greysea, a company which
        owns
        a participation in V.Ships. Mr. Antony Crawford (Chief Executive Officer,
        President and Director) was until November 2005 the Chief Executive Officer
        of
        V.Investments Limited and a Director and minority shareholder of V.Holdings
        Limited. See Item 1: Business - Compensation to affiliates and Item 13: Certain
        relationships and related transactions.
 
 In
        accordance with section 3.12 of the Company's By-Laws, the board of directors
        has designated from among its members a Compensation Committee, consisting
        of
        the independent directors, which reviews all matters related to executive
        compensation. The Committee is currently comprised of Messrs. Longbottom,
        Blankley, Schomburg and Pardini.
 
 The
        Company has in force a policy of directors' and officers' liability insurance
        in
        the amount of $10,000,000 for the benefit of the directors and officers of
        the
        Company. The premium paid by the Company in respect of directors and officers
        as
        a group for the policy year ending June 30, 2006 was $65,650.
 
 No
        officer was indebted to the Company at any time since the beginning of the
        fiscal year 2005.
 
  **ITEM
                  12:**
              **SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT**
 
 The
        following table sets forth the number of shares of Common Stock of the Company
        beneficially owned as of March 1, 2006 **** by
        (i)
        each beneficial owner of more than 5% of the outstanding shares of the Company's
        Common Stock, (ii) each of the Company's directors, nominees for director
        and
        executive officers and (iii) for all executive officers and directors of
        the
        Company as a group. Except as otherwise indicated, each of the persons named
        below has sole voting and investment power with respect to the shares of
        Common
        Stock beneficially owned by them.
 **Name**
                **Amount
                    of**
                  **Beneficial
                    ownership**
                **Percent**Navalmar
                    Transportes Maritimos LDA(1)
                  Rua
                    Dos Murcas 15 - 2ndAndar, Sala G
                  9000058
                    Funchal S1 - Madeira
                4,025,189
                45.2Weco-Rederi
                    A/S
                  Rungsted
                    Strandvej 113
                  Rungsted
                    Kyst - G7
                  Denmark
                    - 2960
                555,555
                6.2V.Investments
                    and Greysea (1)
                281,752
                3.2Charles
                    B. Longbottom
                37,447
                *John
                    H. Blankley
                38,257
                *Horst
                    Schomburg
                32,087
                *Graham
                    Pimblett
                56,968
                *Dominique
                    Sergent
                66,935
                *Tullio
                    Biggi (2)
                5,282
                *Antony
                    Crawford
                157,000
                1.6Anton
                    Pardini
                851
                *All
                    officers and directors as a Group (8 persons)
                **391,645**
                **4.4**
  52
 *Table
            of Contents*
  *
              Less
                  than 1%
 
 (1)
              Navalmar
                  Transportes Maritimos LDA and V.Investments Limited are deemed
                  to share
                  beneficial ownership of the common shares of the
                  Company.
 (2)
              Through
                  Greysea (a company which also owns a participation in
                  V.Ships)
 
 Statements
        contained in the above table and in the footnotes thereto as to securities
        beneficially owned by directors, executive officers or shareholders or over
        which they exercise control or direction are, in each instance, based upon
        information obtained from such persons and/or, in the case of 5% shareholders,
        from Schedule 13Ds, 13Gs or other beneficial ownership disclosure filed with
        Securities and Exchange Commission by such shareholder. Amounts beneficially
        owned include any shares the person has the right to acquire within 60 days
        through the exercise of options, warrants or other convertible security.
        All
        executive officers and directors of the Company may be deemed to be affiliates
        of the Company.
 
 
 ***SECURITIES
        AUTHORISED UNDER EQUITY COMPENSATION PLAN***
 
 As
        of
        December 31, 2005
 
 Plan
                  category
              (a)
                  Number ofsecurities
                  tobe
                  issued uponexercise
                  ofoutstanding
                  options
              (b)
                  Weighted averageexercise
                  price ofoutstanding
                  options
              (c)
                  Number of securitiesremaining
                  available forfuture
                  issuance under equitycompensation
                  plans(excluding
                  securitiesreflected
                  in column (a)Equity
                  compensation plans approved by security holders
              186,398
              $9.228
              -Equity
                  compensation plans not approved by security holders
              -
              -
              -Total
              186,398
              $9.228
              -
 
 
 
 **ITEM
                  13:**
              **CERTAIN
                  RELATIONSHIPS AND RELATED
                  TRANSACTIONS**
 
 As
        of May
        13, 2004, V.Investments Limited, V.Ships Group LTD., V.Holdings Limited,
        Greysea
        Limited, Close Securities Limited, Close Investment Partners Limited, Navalmar
        (UK) Limited, Bogazzi Fimpar SpA, and Enrico Bogazzi purchased 4,168,000
        common
        shares of the Company from the Vlasov Investment Corporation and filed a
        joint
        Form 13D to report that they might be deemed to have shared beneficial ownership
        of 4,308,790 common shares, which represented approximately 49.39% of the
        common
        stock outstanding.
 
 On
        October 5, 2005, Navalmar Transportes Maritimos LDA, a sister company to
        Navalmar (UK) Limited, purchased 1,780,000 common shares of the Company from
        V.Investments Limited.
 
 On
        November 30, 2005, Navalmar Transportes Maritimos LDA purchased 2,800,744
        common
        shares of the Company from Navalmar (UK) Limited.
 
 On
        December, 15 2005, Navalmar Transportes Maritimos LDA sold 555,555 common
        shares
        of the Company to a non affiliated third party.
  53
 *Table
            of Contents*
  As
        of
        March 1, 2006, Navalmar Transportes Maritimos LDA and V.Investments Limited
        owned respectively 45.2 and 3.2% of the Company. Navalmar Transportes Maritimos
        LDA and V.Investments Limited are deemed to share beneficial ownership of
        the
        common shares of the Company. Navalmar Transportes Maritimos LDA is a Portuguese
        company that owns and operate a fleet of vessels; it is a subsidiary of CO.FI.PA
        Spa (formerly Bogazzi Fimpar Spa). V.Investments Limited is a subsidiary
        of
        V.Holdings Limited, which handles the investment activities of the V.Ships
        group
 
 Certain
        of the directors and executive officers of the Company are involved in outside
        business activities similar to those conducted by the Company. Mr. Antony
        Crawford (Chief Executive Officer, President and Director) was until November
        2005 the Chief Executive Officer of V.Investments Limited and a Director
        and
        minority shareholder of V.Holdings Limited, the holding company of the V.Ships
        group. He is joint managing director of AL Ships, a marketing company jointly
        owned by V.Ships and KGAL and was a director of Finship, a Rotterdam based
        financial advisory company jointly owned by V.Ships and HVB Bank. Mr. Biggi
        (Director) is the President and Chief Executive Officer of V.Holdings Ltd
        and an
        executive officer of its principal subsidiaries which provide management
        related
        services to the Company. Mr. Biggi is also a shareholder of Greysea, which
        owns
        a participation in V.Ships. Mr. Bogazzi (Director) is involved in the business
        of purchasing, owning and selling cargo vessels through the Bogazzi / Navalmar
        Group of shipping companies. As a result of these affiliations, such persons
        may
        experience conflicts of interest in connection with the selection, purchase,
        operation and sale of the Company's vessels and those of other entities
        affiliated with such persons.
 
 The
        By-Laws of the Company provide that many of the transactions giving rise
        to
        potential conflicts of interest are subject to review by the Audit Committee
        of
        the Company's Board of Directors which is also charged with the responsibility
        of monitoring and reviewing transactions to be entered into with
        affiliates. The
        Audit Committee believes that the terms of all the transactions described
        herein
        with V.Ships were fair to the Company.
 
 If
        the
        Company deems it necessary to employ the services of V.Ships as technical
        managers, V.Ships is entitled to remuneration determined in the light of
        current
        industry practice. For the rates of fees payable to V.Ships, see Item 1:
        Business - Compensation to Affiliates and Note 2: Related Company Transactions
        of the consolidated financial statements in Item8.
 
 
 **ITEM14:**
              **PRINCIPAL
                  ACCOUNTING FEES AND
                  SERVICES**
 
 **Audit
        fees**
 
 Audit
        fees amounted to approximately USD 111,374 ($115,260 in 2004). Our auditors
        also
        provided tax related advice.
 
 Year
                  ended December 31
              2005
              2004Audit
                  fees
              $25,721
              $65,260Audit
                  related fees
              $
                  54,647
              $50,000Tax
                  advice fees
              $
                  31,006
              -All
                  other fees
              -
              -Total
              $111,374
              $115,260
 
 54
 *Table
              of Contents*
 **Audit
        Committee’s Pre-approval Policies and Procedures**
 
 Before
        the Company or its subsidiaries engage an accountant to render services,
        the
        engagement must be (i) approved by the Audit Committee; or (ii) entered into
        pursuant to pre-approval policies and procedures, detailed as to particular
        service, established by the Audit Committee. The Audit Committee shall
        pre-approve all permissible non-audit services and all audit, review or attest
        engagements on the part of the Company's auditors, except pre-approval for
        (i)
        all such services which, in the aggregate, do not constitute more than 5%
        of the
        total amount of revenues paid by the audit client to its accountant in the
        fiscal year services are provided; (ii) such services which were not recognized
        by the Company as non-audit services at the time of the engagement; and (iii)
        such services which are promptly brought to the attention of the Audit Committee
        and approved prior to the completion of the audit by the Audit Committee
        or one
        or more designated representatives.  The
        Audit
        Committee must be informed of each service and may not delegate its
        responsibilities to the Company's Management. All the services, for which
        the
        above-described audit-related fees and tax advice fees were paid, were
        pre-approved by the Audit Committee.
  55
  **PART
        IV**
 
 
 **ITEM15:**
              **EXHIBITS,
                  FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
                  8-K**
 
 **(a)(1)**
              **Financial
                  Statements**
 
 The
        following consolidated statements of MC Shipping Inc. and subsidiaries are
        included in ITEM 8:
 
 (i)
              Report
                  of Independent Registered Public Accounting
                  Firm;
 
 (ii)
              Consolidated
                  Balance Sheets at December 31, 2005 and
                  2004;
 
 (iii)
              Consolidated
                  Statements of Income for the Years ended December 31, 2005, 2004
                  and
                  2003;
 
 (iv)
              Consolidated
                  Statements of Cash Flows for the Years ended December 31, 2005,
                  2004 and
                  2003;
 
 (v)
              Consolidated
                  Statements of Shareholders’ Equity for the Years ended December 31, 2005,
                  2004 and 2003; and
 
 (vi)
              Notes
                  to Consolidated Financial
                  Statements.
 
 **(a)(2)**
              **Financial
                  Statement Schedule**
 
 (i)
              Schedule
                  II - Valuation and Qualifying
                  Accounts
 
  **(a)(3)**
              **Exhibits**
 
 3.1
              -
              Articles
                  of Incorporation, as amended, of the Company (incorporated by reference
                  to
                  the Company's Form 8-K filed on January 7,
                  2003).
 3.2
              -
              By-Laws
                  of the Company (incorporated by reference to Exhibit 3.2 to Amendment
                  No.1
                  to the Company's Registration Statement on Form S-1
                  (33-27847)).
 4.1
              -
              Specimen
                  Common Stock Certificate (incorporated by reference to Exhibit
                  4.1 of the
                  Company's Registration Statement on Form S-1
                  (33-27847)).
 10.1
              -
              Loan
                  and Guarantee Agreement with Fortis Bank dated October 11, 2004
                  (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-K for
                  the year ended December 31, 2004).
 10.2
              -
              Agreements
                  for the sale of containerships Maersk Barcelona, Ankara, Belawan
                  and
                  Brisbane and Guarantee agreement(incorporated
                  by reference to Exhibits 10.1 to 10.5 to the Company’s Form 10-Q for the
                  quarter ended March 31, 2005).
 10.3
              -
              Amended
                  Partnership Agreement, dated as of March 31, 2005, signed on June
                  7, 2005
                  (non-binding translation) (incorporated by reference to Exhibit
                  10.3 to
                  the Company’s Form 10-Q for the quarter ended June 30,
                  2005).
 10.4
              -
              Agreements
                  for the purchase of Berge Kobe and Berge Flanders (incorporated
                  by
                  reference to Exhibits 10.1 and 10.2 to the Company’s Form 10-Q for the
                  quarter ended June 30, 2005).
  56
 *Table
            of Contents*
 10.5
              -
              Loan
                  Agreement with Scotia Bank and Guarantee Agreement dated March
                  30, 2005
                  (incorporated by reference to Exhibit 10.4 to the Company’s Form 10-Q for
                  the quarter ended June 30, 2005).
 10.6
              -
              Agreements
                  for the purchase of Hermann Schulte and Dorothea Schulte dated
                  February
                  24, 2006.
 21
              -
              List
                  of Subsidiaries.
 31
              -
              Certifications
                  provided by the Chief Executive Officer and the Chief Financial
                  Officer of
                  the Company pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.
 32
              -
              Certifications
                  provided by the Chief Executive Officer and the Chief Financial
                  Officer of
                  the Company pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.
 
 
 The
        Company will furnish to its shareholders copies of any exhibits to this Form
        10-K upon request to the Secretary of the Company for a fee limited to the
        duplicating and postage costs associated with any such mailing.
 
 
 **(b)**
              **Reports
                  on Form 8-K filed after December 31,
                  2005:**
 
 None
  57
 *Table
            of Contents*
  **SIGNATURES**
 
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the Registrant has duly caused this Report to be signed on its behalf
        by
        the undersigned, thereunto duly authorized.
 
 
 MC
                  SHIPPING INC.(Company)Date:
                  March 17, 2006
              /S/
                  ANTONY S CRAWFORDAntony.
                  S. CrawfordChief
                  Executive Officer and President
 
 
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this Report has
        been
        signed below by the following persons on behalf of the Registrant and in
        the
        capacities and on the dates indicated.
 
 
 **Name**
              
              **Title**
              
              **Date**/S/
                  DOMINIQUE SERGENT
              
              Vice
                  President, Chief Financial
              
              March
                  17, 2006Dominique
                  Sergent
              
              Officer
                  and Treasurer(Principal
                  Accounting Officer)/S/
                  CHARLES B. LONGBOTTOM
              
              Chairman
                  of the Board
              
              March
                  17, 2006Charles
                  B. Longbottom/S/
                  ENRICO BOGAZZI
              
              Director
              
              March
                  17, 2006Enrico
                  Bogazzi/S/
                  JOHN H. BLANKLEY
              
              Director
              
              March
                  17, 2006John
                  H. Blankley/S/
                  ANTON PARDINI
              
              Director
              
              March
                  17, 2006Anton
                  Pardini/S/
                  HORST SCHOMBURG
              
              Director
              
              March
                  17, 2006Horst
                  Schomburg/S/
                  TULLIO BIGGI
              
              Director
              
              March
                  17, 2006Tullio
                  Biggi




58