UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549








FORM
20-F








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





OR





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


For
the fiscal year ended December 31, 2008





OR





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




For the
transition period
from              to





OR





o SHELL COMPANY REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


Date
      of event requiring this shell company
report





For the
transition period
from              to





Commission
file number 001-32458





DIANA SHIPPING
INC.


(Exact name
of Registrant as specified in its charter)





Diana Shipping
Inc.


(Translation
of Registrant’s name into English)





Republic of The Marshall
Islands


(Jurisdiction
of incorporation or organization)





Pendelis 16, 175 64 Palaio
Faliro, Athens, Greece


(Address of
principal executive offices)





Mr. Ioannis
Zafirakis


Tel:  +
30-210-9470-100, Fax: + 30-210-9470-101


E-mail:
izafirakis@dianashippinginc.com


(Name,
Telephone, E-mail and/or Facsimile number and Address of


Company
Contact Person)





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


Title of each class
              
              Name of each exchange on which
      registeredCommon
      stock, $0.01 par value
              
              New
      York Stock Exchange





Securities
registered or to be registered pursuant to Section 12(g) of
the Act: None





Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None





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





As of December 31, 2008,
there were 75,062,003 shares of the registrant’s common stock
outstanding.





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


x Yes   o No


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


o Yes  x  No


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




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





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





Large
      accelerated filer x
            Accelerated
      filer  oNon-accelerated
      filer   o





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





U.S.
      GAAPx
            International
      Financial Reporting Standards as issued by the International Accounting
      StandardsoOthero





If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to
follow.                                                                                                                                   
o Item
17   o Item
18





If this is
an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange
Act).                                                                                                                                                                      
o Yes  x No











TABLE
OF CONTENTS







FORWARD-LOOKING
      STATEMENTS
            3PART
      I
            
            4Item
      1.
            Identity
      of Directors, Senior Management and Advisers
            4Item
      2.
            Offer
      Statistics and Expected Timetable
            4Item
      3.
            Key
      Information
            4Item
      4.
            Information
      on the Company
            25Item
      4A.
            Unresolved
      Staff Comments
            40Item
      5.
            Operating
      and Financial Review and Prospects
            40Item
      6.
            Directors,
      Senior Management and Employees
            55Item
      7.
            Major
      Stockholders and Related Party Transactions
            59Item
      8.
            Financial
      information
            61Item
      9.
            Listing
      Details
            62Item
      10.
            Additional
      Information
            63Item
      11.
            Quantitative
      and Qualitative Disclosures about Market Risk
            70Item
      12.
            Description
      of Securities Other than Equity Securities
            71PART
      II
            71Item
      13.
            Defaults,
      Dividend Arrearages and Delinquencies
            71Item
      14.
            Material
      Modifications to the Rights of Security Holders and Use of
      Proceeds
            71Item
      15.
            Controls
      and Procedures
            71Item
      16A.
            Audit
      Committee Financial Expert
            72Item
      16B.
            Code
      of Ethics
            73Item
      16C.
            Principal
      Accountant Fees and Services
            73Item
      16D.
            Exemptions
      from the Listing Standards for Audit Committees
            73Item
      16E.
            Purchases
      of Equity Securities by the Issuer and Affiliated
    Purchasers
            73Item
      16G.
            Corporate
      Governance
            74PART
      III
            74Item
      17.
            Financial
      Statements
            74Item
      18.
            Financial
      Statements
            74Item
      19.
            Exhibits
            75






















FORWARD-LOOKING
STATEMENTS




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


Please note in this annual report,“we”,“us”,“our” and“the Company”all refer to Diana Shipping Inc. and
its subsidiaries.




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






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




3







PART
I




Item
1.Identity of Directors, Senior Management and Advisers




Not Applicable.




Item
2.Offer Statistics and Expected Timetable




Not
Applicable.




Item
3.Key Information




A.Selected
      Financial Data




The following table sets forth our
selected consolidated financial data and other operating data. The selected
consolidated financial data in the table as of December 31,2008, 2007,2006, 2005and2004 are derived from our audited
consolidated financial statements and notes thereto which have been prepared in
accordance with U.S. generally accepted accounting principles (“U.S.GAAP”). The following data should be read in
conjunction with Item 5.“Operating and Financial Review and
Prospects”, the consolidated financial statements,
related notes and other financial informationincluded elsewhere in this annual report.




As of and for
      the
                    Year Ended December
      31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004(in thousands of U.S.
      dollars,
                    except for share and per share
      data and average daily results)Income Statement
      Data:Voyage and time charter
      revenues
                  
                  $
                  337,391
                  
                  
                  $
                  190,480
                  
                  
                  $
                  116,101
                  
                  
                  $
                  103,104
                  
                  
                  $
                  63,839Voyage
      expenses
                  
                  
                  15,003
                  
                  
                  
                  8,697
                  
                  
                  
                  6,059
                  
                  
                  
                  6,480
                  
                  
                  
                  4,330Vessel operating
      expenses
                  
                  
                  39,899
                  
                  
                  
                  29,332
                  
                  
                  
                  22,489
                  
                  
                  
                  14,955
                  
                  
                  
                  9,514Depreciation and
      amortization
                  
                  
                  43,259
                  
                  
                  
                  24,443
                  
                  
                  
                  16,709
                  
                  
                  
                  9,943
                  
                  
                  
                  5,087Management
      fees
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  573
                  
                  
                  
                  1,731
                  
                  
                  
                  947Executive management services andrent
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  76
                  
                  
                  
                  455
                  
                  
                  
                  1,528General and administrative
      expenses
                  
                  
                  13,831
                  
                  
                  
                  11,718
                  
                  
                  
                  6,331
                  
                  
                  
                  2,871
                  
                  
                  
                  300Gain on vessel
      sale
                  
                  
                  -
                  
                  
                  
                  (21,504
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Foreign currency losses
      (gains)
                  
                  
                  (438
                  )
                  
                  
                  (144
                  )
                  
                  
                  (52
                  )
                  
                  
                  (30
                  )
                  
                  
                  3Operating
      income
                  
                  
                  225,837
                  
                  
                  
                  137,938
                  
                  
                  
                  63,916
                  
                  
                  
                  66,699
                  
                  
                  
                  42,130Interest and finance
      costs
                  
                  
                  (5,851
                  )
                  
                  
                  (6,394
                  )
                  
                  
                  (3,886
                  )
                  
                  
                  (2,731
                  )
                  
                  
                  (2,165
                  )Interest
      income
                  
                  
                  768
                  
                  
                  
                  2,676
                  
                  
                  
                  1,033
                  
                  
                  
                  1,022
                  
                  
                  
                  136Insurance settlements for vessel
      un-repaired
      damages
                  
                  
                  945
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Gain on vessel’s
      sale
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  19,982Net
      income
                  
                  $
                  221,699
                  
                  
                  $
                  134,220
                  
                  
                  $
                  61,063
                  
                  
                  $
                  64,990
                  
                  
                  $
                  60,083Preferential deemed
      dividend
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  (20,267
                  )
                  
                  $
                  -
                  
                  
                  $
                  -Net income available to commonstockholders
                  
                  $
                  221,699
                  
                  
                  $
                  134,220
                  
                  
                  $
                  40,796
                  
                  
                  $
                  64,990
                  
                  
                  $
                  60,083





4








As of and for
      the
                  Year Ended December
      31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(in thousands of U.S.
      dollars,
                  except for share and per share
      data and average daily results)Earnings per sharebasic and
      diluted
                
                $
                2.97
                
                
                $
                2.11
                
                
                $
                0.82
                
                
                $
                1.72
                
                
                $
                2.17Weighted average basic sharesoutstanding
                
                
                74,375,686
                
                
                
                63,748,973
                
                
                
                49,528,904
                
                
                
                37,765,753
                
                
                
                27,625,000Weighted average diluted sharesoutstanding
                
                
                74,558,254
                
                
                
                63,748,973
                
                
                
                49,528,904
                
                
                
                37,765,753
                
                
                
                27,625,000CashDividends declared per
      share
                
                $
                2.71
                
                
                $
                2.05
                
                
                $
                1.50
                
                
                $
                1.60
                
                
                $
                1.85Balance Sheet
      Data:Cash and cash
      equivalents
                
                $
                62,033
                
                
                $
                16,726
                
                
                $
                14,511
                
                
                $
                21,230
                
                
                $
                1,758Total current
      assets
                
                
                68,554
                
                
                
                21,514
                
                
                
                19,062
                
                
                
                26,597
                
                
                
                3,549Vessels,
      Net
                
                
                960,431
                
                
                
                867,632
                
                
                
                464,439
                
                
                
                307,305
                
                
                
                116,703Total
      assets
                
                
                1,057,206
                
                
                
                944,342
                
                
                
                510,675
                
                
                
                341,949
                
                
                
                155,636Total current
      liabilities
                
                
                20,012
                
                
                
                20,964
                
                
                
                7,636
                
                
                
                4,667
                
                
                
                11,344Deferred revenue, non currentportion
                
                
                22,502
                
                
                
                23,965
                
                
                
                146
                
                
                
                -
                
                
                
                -Long-term debt (including currentportion)
                
                
                238,094
                
                
                
                98,819
                
                
                
                138,239
                
                
                
                12,859
                
                
                
                92,246Total stockholders’equity
                
                
                775,476
                
                
                
                799,474
                
                
                
                363,103
                
                
                
                324,158
                
                
                
                59,052Cash Flow
    Data:Net cash flow provided by
      operatingactivities
                
                $
                261,151
                
                
                $
                148,959
                
                
                $
                82,370
                
                
                $
                69,256
                
                
                $
                47,379Net cash flow used in investingactivities
                
                
                (108,662
                )
                
                
                (409,085
                )
                
                
                (193,096
                )
                
                
                (169,241
                )
                
                
                (11,778
                )Net cash flow provided by (used
      in)financing
      activities
                
                
                (107,182
                )
                
                
                262,341
                
                
                
                104,007
                
                
                
                119,457
                
                
                
                (41,284
                )Fleet Data:Average number of
      vessels(1)
                
                
                18.9
                
                
                
                15.9
                
                
                
                13.4
                
                
                
                9.6
                
                
                
                6.3Number of vessels at end of
      period
                
                
                19.0
                
                
                
                18.0
                
                
                
                15.0
                
                
                
                12.0
                
                
                
                7.0Weighted average age of fleet at
      endof period (in
      years)
                
                
                4.3
                
                
                
                3.4
                
                
                
                3.7
                
                
                
                3.8
                
                
                
                3.4Ownership days
      (2)
                
                
                6,913
                
                
                
                5,813
                
                
                
                4,897
                
                
                
                3,510
                
                
                
                2,319Available days
      (3)
                
                
                6,892
                
                
                
                5,813
                
                
                
                4,856
                
                
                
                3,471
                
                
                
                2,319Operating days
      (4)
                
                
                6,862
                
                
                
                5,771
                
                
                
                4,849
                
                
                
                3,460
                
                
                
                2,315Fleet utilization
      (5)
                
                
                99.6
                %
                
                
                99.3
                %
                
                
                99.9
                %
                
                
                99.7
                %
                
                
                99.8
                %Average Daily
      Results:Time charter equivalent (TCE) rate
      (6)
                
                $
                46,777
                
                
                $
                31,272
                
                
                $
                22,661
                
                
                $
                27,838
                
                
                $
                25,661Daily vessel operating expenses
      (7)
                
                
                5,772
                
                
                
                5,046
                
                
                
                4,592
                
                
                
                4,261
                
                
                
                4,103





(1)
                        Average number of vessels is the
      number of vessels that constituted our fleet for the relevant period, as
      measured by the sum of the number of days each vessel was a part of our
      fleet during the period divided by the number of calendar days in the
      period.(2)
                        Ownership days are the aggregate
      number of days in a period during which each vessel in our fleet has been
      owned by us. Ownership days are an indicator of the size of our fleet over
      a period and affect both the amount of revenues and the amount of expenses
      that we record during a
period.
 
 5
  (3)
                Available days are the number of
      our ownership days less the aggregate number of days that our vessels are
      off-hire due to scheduled repairs or repairs under guarantee, vessel
      upgrades or special surveys and the aggregate amount of time that we spend
      positioning our vessels. The shipping industry uses available days to
      measure the number of days in a period during which vessels should be
      capable of generating revenues.(4)
                Operating days are the number of
      available days in a period less the aggregate number of days that our
      vessels are off-hire due to any reason, including unforeseen
      circumstances. The shipping industry uses operating days to measure the
      aggregate number of days in a period during which vessels actually
      generate revenues.(5)
                We calculate fleet utilization by
      dividing the number of our operating days during a period by the number of
      our available days during the period. The shipping industry uses fleet
      utilization to measure a company’s efficiency in finding suitable
      employment for its vessels and minimizing the amount of days that its
      vessels are off-hire for reasons other than scheduled repairs or repairs
      under guarantee, vessel upgrades, special surveys or vessel
      positioning.(6)
                Time charter equivalent rates, or
      TCE rates, are defined as our voyage and time charter revenues less voyage
      expenses during a period divided by the number of our available days
      during the period, which is consistent with industry standards. Voyage
      expenses include port charges, bunker (fuel) expenses, canal charges and
      commissions. TCE rate is anon-GAAP measure, andis a standard shipping industry
      performance measure used primarily to compare daily earnings generated by
      vessels on time charters with daily earnings generated by vessels on
      voyage charters, because charter hire rates for vessels on voyage charters
      are generally not expressed in per day amounts while charter hire ratesfor vessels on time charters are
      generally expressed in such amounts. The following table reflects the
      calculation of our TCE rates for the periods
      presented.




Year Ended December
      31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(in thousands of U.S. dollars,
      except for
                  TCE rates, which are expressed in
      U.S. dollars, and available days)Voyage and time charter
      revenues
                
                $
                337,391
                
                
                $
                190,480
                
                
                $
                116,101
                
                
                $
                103,104
                
                
                $
                63,839Less: voyage
      expenses
                
                
                (15,003
                )
                
                
                (8,697
                )
                
                
                (6,059
                )
                
                
                (6,480
                )
                
                
                (4,330
                )Time charter equivalent
      revenues
                
                $
                322,388
                
                
                $
                181,783
                
                
                $
                110,042
                
                
                $
                96,624
                
                
                $
                59,509Available
    days
                
                
                6,892
                
                
                
                5,813
                
                
                
                4,856
                
                
                
                3,471
                
                
                
                2,319Time charter equivalent (TCE)
      rate
                
                $
                46,777
                
                
                $
                31,272
                
                
                $
                22,661
                
                
                $
                27,838
                
                
                $
                25,661




(7)
            Daily vessel operating expenses, which include
      crew wages and related costs, the cost of insurance, expenses relating to
      repairs and maintenance, the costs of spares and consumable stores,
      tonnage taxes and other miscellaneous expenses, are calculated by dividing
      vessel operating expenses by ownership days for the relevant
      period.


B.Capitalization
      and Indebtedness




Not Applicable.




C.Reasons
      for the Offer and Use of Proceeds




Not
Applicable.




D.Risk
      Factors




Some of the following risks relate
principally to the industry in which we operate and our business in general.
Other risks relate principally to the securities market and ownership of our
common stock. The occurrence of




6


any of the events described in this
section could significantly and negatively affect our business, financial
condition or operating results or the trading price of our common
stock.




Industry
Specific Risk Factors




Charter
hire rates for dry bulk carriers have decreased, which may adversely affect our
earnings.




The
dry bulk shipping industry is cyclical with attendant volatility in charter hire
rates and profitability. For example, the degree of charter hire rate volatility
among different types of dry bulk carriers has varied widely. After reaching
historical highs in mid-2008, charter hire rates for Panamax and Capesize dry
bulk carriers have reached near historically low levels. Because we charter some
of our vessels pursuant to short-term time charters, we are exposed to changes
in spot market and short-term charter rates for dry bulk carriers and such
changes may affect our earnings and the value of our dry bulk carriers at any
given time. We cannot assure you that we will be able to successfully charter
our vessels in the future or renew existing charters at rates sufficient to
allow us to meet our obligations or pay any dividends in the future. Because the
factors affecting the supply and demand for vessels are outside of our control
and are unpredictable, the nature, timing, direction and degree of changes in
industry conditions are also unpredictable.




Factors
that influence demand for vessel capacity include:




Ÿ
            supply
      and demand for energy resources, commodities, semi-finished and finished
      consumer and industrial products;




Ÿ
            changes
      in the exploration or production of energy resources, commodities,
      semi-finished and finished consumer and industrial
    products;




Ÿ
            the
      location of regional and global exploration, production and manufacturing
      facilities;




Ÿ
            the
      location of consuming regions for energy resources, commodities,
      semi-finished and finished consumer and industrial
    products;




Ÿ
            the
      globalization of production and
manufacturing;




Ÿ
            global
      and regional economic and political conditions, including armed conflicts
      and terrorist activities; embargoes and
strikes;




Ÿ
            developments
      in international trade;




Ÿ
            changes
      in seaborne and other transportation patterns, including the distance
      cargo is transported by sea;




Ÿ
            environmental
      and other regulatory developments;




Ÿ
            currency
      exchange rates; and




Ÿ
            weather.




The
factors that influence the supply of vessel capacity include:




Ÿ
            the
      number of newbuilding deliveries;




Ÿ
            port
      and canal congestion;




Ÿ
            the
      scrapping rate of older vessels;




Ÿ
            vessel
      casualties; and




7


Ÿ
            the
      number of vessels that are out of
service.




We
anticipate that the future demand for our dry bulk carriers will be dependent
upon continued economic growth in the world’s economies, including China and
India, seasonal and regional changes in demand, changes in the capacity of the
global dry bulk carrier fleet and the sources and supply of dry bulk cargo to be
transported by sea. The capacity of the global dry bulk carrier fleet seems
likely to increase and there can be no assurance that economic growth will
continue. Adverse economic, political, social or other developments could have a
material adverse effect on our business and operating results.




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




We
anticipate a significant number of the port calls made by our vessels will
continue to involve the loading or discharging of dry bulk commodities in ports
in the Asia Pacific region. As a result, negative changes in economic conditions
in any Asia Pacific country, particularly in China, may exacerbate the effect of
recent slowdowns in the economies of the United States and the European Union
and may have a material adverse effect on our business, financial condition and
results of operations, as well as our future prospects. In recent years, China
has been one of the world’s fastest growing economies in terms of gross domestic
product, which has had a significant impact on shipping demand. Through the end
of the third quarter of 2008, China’s gross domestic product was approximately
2.3% lower than it was during the same period in 2007, and it is likely that
China and other countries in the Asia Pacific region will continue to experience
slowed or even negative economic growth in the near future. Moreover, the
current economic slowdown in the economies of the United States, the European
Union and other Asian countries may further adversely affect economic growth in
China and elsewhere. China has recently announced a $586.0 billion stimulus
package aimed in part at increasing investment and consumer spending and
maintaining export growth in response to the recent slowdown in its economic
growth. Our business, financial condition and results of operations, as well as
our future prospects, will likely be materially and adversely affected by a
further economic downturn in any of these countries.




Changes in the economic and
political environment in China and policies adopted by the government to
regulate its economy may have a material adverse effect on our business,
financial condition and results of operations.




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




8


The
market values of our vessels have decreased, which could limit the amount of
funds that we can borrow under our credit facilities.




The
fair market values of our vessels have generally experienced high volatility.
The market prices for secondhand Panamax and Capesize dry bulk carriers are near
historically low levels. You should expect the market value of our vessels to
fluctuate depending on general economic and market conditions affecting the
shipping industry and prevailing charter hire rates, competition from other
shipping companies and other modes of transportation, types, sizes and age of
vessels, applicable governmental regulations and the cost of newbuildings. Now
that the market value of our fleet has declined, we may not be able to draw down
the full amount of our credit facilities and we may not be able to obtain other
financing or incur debt on terms that are acceptable to us or at
all.




The
market values of our vessels have decreased, which could cause us to breach
covenants in our credit facilities and adversely affect our operating
results.




We
believe that the market value of the vessels in our fleet is in excess of
amounts required under our credit facilities. However, if the market values of
our vessels, which are near historically low levels, decrease further, we may
breach some of the covenants contained in the financing agreements relating to
our indebtedness at the time, including covenants in our credit facilities. If
we do breach such covenants and we are unable to remedy the relevant breach, our
lenders could accelerate our debt and foreclose on our fleet. In addition, if
the book value of a vessel is impaired due to unfavorable market conditions or a
vessel is sold at a price below its book value, we would incur a loss that could
adversely affect our operating results.




An over-supply of dry bulk carrier
capacity may lead to reductions in charter hire rates and
profitability.




The
market supply of dry bulk carriers has been increasing, and the number of dry
bulk carriers on order is near historic highs. These newbuildings were delivered
in significant numbers starting at the beginning of 2006 and continuing through
2008. As of December 2008, newbuilding orders had been placed for an aggregate
of more than 72% of the existing global dry bulk fleet, with deliveries expected
during the next 36 months.  An over-supply of dry bulk carrier
capacity may result in a reduction of charter hire rates. If such a reduction
occurs, upon the expiration or termination of our vessels’ current charters we
may only be able to re-charter our vessels at reduced or unprofitable rates or
we may not be able to charter these vessels at all.




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




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




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




9


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




Acts of piracy have historically
affected ocean-going vessels trading in regions of the world such as the South
China Sea and in the Gulf of Aden off the coast of
Somalia.  Throughout 2008 and early 2009, the frequency of piracy
incidents has increased significantly, particularly in the Gulf of Aden off the
coast of Somalia.  If these piracy attacks result in regions in which
our vessels are deployed being characterized by insurers as“war risk”zones, as the Gulf of Aden temporarily
was in May 2008, or Joint War Committee (JWC)“war and strikes”listed areas, premiums payable for such
coverage could increase significantly and such insurance coverage may be more
difficult to obtain.  In addition, crew costs, including due to
employing onboard security guards, could increase in such
circumstances.  We may not be adequately insured to cover losses from
these incidents, which could have a material adverse effect on us.  In
addition, detention hijacking as a result of an act of piracy against our
vessels, or an increase in cost, or unavailability of insurance for our vessels,
could have a material adverse impact on our business, financial condition and
results of operations.




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




The
United States and other parts of the world are exhibiting deteriorating economic
trends and have been in a recession. For example, the credit markets in the
United States have experienced significant contraction, deleveraging and reduced
liquidity, and the United States federal government and state governments have
implemented and are considering a broad variety of governmental action and/or
new regulation of the financial markets. Securities and futures markets and the
credit markets are subject to comprehensive statutes, regulations and other
requirements. The SEC, other regulators, self-regulatory organizations and
exchanges are authorized to take extraordinary actions in the event of market
emergencies, and may effect changes in law or interpretations of existing
laws.




Recently,
a number of financial institutions have experienced serious financial
difficulties and, in some cases, have entered bankruptcy proceedings or are in
regulatory enforcement actions. The uncertainty surrounding the future of the
credit markets in the United States and the rest of the world has resulted in
reduced access to credit worldwide. As of December 31, 2008, we have total
outstanding indebtedness of $238.8 million (of principal balance) under our
credit facilities.




We
face risks attendant to changes in economic environments, changes in interest
rates, and instability in the banking and securities markets around the world,
among other factors. Major market disruptions and the current adverse changes in
market conditions and regulatory climate in the United States and worldwide may
adversely affect our business or impair our ability to borrow amounts under our
credit facilities or any future financial arrangements. We cannot predict how
long the current market conditions will last. However, these recent and
developing economic and governmental factors, together with the concurrent
decline in charter rates and vessel values, may have a material adverse effect
on our results of operations, financial condition or cash flows, have caused the
price of our common stock on the New York Stock Exchange to decline and could
cause the price of our common stock to decline further.




Our
operating results are subject to seasonal fluctuations, which could affect our
operating results and the amount of available cash with which we could pay
dividends, if declared.




We
operate our vessels in markets that have historically exhibited seasonal
variations in demand and, as a result, in charter hire rates. This seasonality
may result in quarter-to-quarter volatility in our operating results which could
affect the amount of dividends that we may pay to our stockholders from quarter
to quarter, if declared. The dry bulk carrier market is typically stronger in
the fall and winter months in anticipation of increased consumption of coal and
other raw materials in the northern hemisphere during the winter months. In
addition, unpredictable weather patterns in these months tend to disrupt vessel
scheduling and supplies of certain commodities. As a result, our revenues have
historically been weaker during the fiscal quarters ended June 30 and September
30, and, conversely, our revenues have historically been stronger in fiscal
quarters ended December 31 and March 31. While this seasonality has not
materially affected our operating results and cash available for distribution to
our stockholders as dividends, it could materially affect our operating results
in the future.




10






Fuel,
or bunker prices, may adversely affect profits.




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




We
are subject to complex laws and regulations, including environmental regulations
that can adversely affect the cost, manner or feasibility of doing
business.




Our
operations are subject to numerous laws and regulations in the form of
international conventions and treaties, national, state and local laws and
national and international regulations in force in the jurisdictions in which
our vessels operate or are registered, which can significantly affect the
ownership and operation of our vessels. These requirements include, but are not
limited to, the International Convention on Civil Liability for Oil Pollution
Damage of 1969, the International Convention for the Prevention of Pollution
from Ships of 1975, the International Maritime Organization, or IMO,
International Convention for the Prevention of Marine Pollution of 1973, the IMO
International Convention for the Safety of Life at Sea of 1974, the
International Convention on Load Lines of 1966, the U.S. Oil Pollution Act of
1990, or OPA, the U.S. Clean Air Act, U.S. Clean Water Act and the U.S. Marine
Transportation Security Act of 2002. Compliance with such laws, regulations and
standards, where applicable, may require installation of costly equipment or
operational changes and may affect the resale value or useful lives of our
vessels. We may also incur additional costs in order to comply with other
existing and future regulatory obligations, including, but not limited to, costs
relating to air emissions, the management of ballast waters, maintenance and
inspection, elimination of tin-based paint, development and implementation of
emergency procedures and insurance coverage or other financial assurance of our
ability to address pollution incidents. These costs could have a material
adverse effect on our business, results of operations, cash flows and financial
condition. A failure to comply with applicable laws and regulations may result
in administrative and civil penalties, criminal sanctions or the suspension or
termination of our operations. Environmental laws often impose strict liability
for remediation of spills and releases of oil and hazardous substances, which
could subject us to liability without regard to whether we were negligent or at
fault. Under OPA, for example, owners, operators and bareboat charterers are
jointly and severally strictly liable for the discharge of oil within the
200-mile exclusive economic zone around the United States. An oil spill could
result in significant liability, including fines, penalties and criminal
liability and remediation costs for natural resource damages under other
federal, state and local laws, as well as third-party damages. We are required
to satisfy insurance and financial responsibility requirements for potential oil
(including marine fuel) spills and other pollution incidents. Although we have
arranged insurance to cover certain environmental risks, there can be no
assurance that such insurance will be sufficient to cover all such risks or that
any claims will not have a material adverse effect on our business, results of
operations, cash flows and financial condition and our ability to pay
dividends.




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




The
operation of our vessels is affected by the requirements set forth in the United
Nation’s International Maritime Organization’s International Management Code for
the Safe Operation of Ships and Pollution Prevention, or the ISM Code. The ISM
Code requires shipowners, ship managers and bareboat charterers to develop and
maintain an extensive “Safety Management System” that includes the adoption of a
safety and environmental protection policy setting forth instructions and
procedures for safe operation and describing procedures for dealing with
emergencies. The failure of a shipowner or bareboat charterer to comply with the ISM
Code may subject it to increased liability, may invalidate existing insurance or
decrease available insurance coverage for the affected vessels and may result in
a denial of access to, or detention in, certain ports.  Each of the
vessels that has been delivered to us is ISM Code-certified and we expect that
each other vessel that we have agreed to purchase will be ISM Code-certified
when delivered to us.


11




In
addition, vessel classification societies also impose significant safety and
other requirements on our vessels. In complying with current and future
environmental requirements, vessel-owners and operators may also incur
significant additional costs in meeting new maintenance and inspection
requirements, in developing contingency arrangements for potential spills and in
obtaining insurance coverage. Government regulation of vessels, particularly in
the areas of safety and environmental requirements, can be expected to become
stricter in the future and require us to incur significant capital expenditures
on our vessels to keep them in compliance.




The
operation of our vessels is also affected by other government regulation in the
form of international conventions, national, state and local laws and
regulations in force in the jurisdictions in which the vessels operate, as well
as in the country or countries of their registration. Because such conventions,
laws, and regulations are often revised, we cannot predict the ultimate cost of
complying with such conventions, laws and regulations or the impact thereof on
the resale prices or useful lives of our vessels. Additional conventions, laws
and regulations may be adopted which could limit our ability to do business or
increase the cost of our doing business and which may materially adversely
affect our operations. We are required by various governmental and
quasi-governmental agencies to obtain certain permits, licenses, certificates,
and financial assurances with respect to our operations.




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




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




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




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




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




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




A
government could requisition one or more of our vessels for title or for hire.
Requisition for title occurs when a government takes control of a vessel and
becomes her owner, while requisition for hire occurs when a government takes
control of a vessel and effectively becomes her charterer at dictated charter
rates. Generally, requisitions occur during periods of war or emergency,
although governments may elect to requisition vessels in other circumstances.
Although we would be entitled to compensation in the event of a requisition of
one or more
of our vessels, the amount and timing of payment would be uncertain. Government
requisition of one or more of our vessels may negatively impact our revenues and
reduce the amount of cash we may have available for distribution as dividends to
our stockholders, if any such dividends are declared.


12




Company
Specific Risk Factors




We
charter some of our vessels on short-term time charters in a volatile shipping
industry and the decline in charter hire rates could affect our results of
operations and ability to pay dividends again.




We
charter certain of our vessels pursuant to short-term time charters, although we
have also entered into long-term time charters ranging in duration from 17
months to 62 months and we may in the future employ additional vessels on longer
term time charters. Currently, four of our vessels are employed on time charters
scheduled to expire within the next six months, at which time we expect to enter
into new charters for those vessels. Although significant exposure to short-term
time charters is not unusual in the dry bulk shipping industry, the short-term
time charter market is highly competitive and spot market charter hire rates
(which affect time charter rates) may fluctuate significantly based upon
available charters and the supply of, and demand for, seaborne shipping
capacity. While the short-term time charter market may enable us to benefit in
periods of increasing charter hire rates, we must consistently renew our
charters and this dependence makes us vulnerable to declining charter rates. As
a result of the volatility in the dry bulk carrier charter market, we may not be
able to employ our vessels upon the termination of their existing charters at
their current charter hire rates. The dry bulk carrier charter market is
volatile, and in the recent past, short-term time charter and spot market
charter rates for some dry bulk carriers declined below the operating costs of
those vessels before rising. We cannot assure you that future charter hire rates
will enable us to operate our vessels profitably, or to pay dividends
again.




Our
earnings, and the amount of dividends if paid in the future, may be adversely
affected if we are not able to take advantage of favorable charter
rates.




We
charter certain of our dry bulk carriers to customers pursuant to short-term
time charters that range in duration from 11 to 14 months. However, as part of
our business strategy, we have also entered into long-term time charters
ranging in duration from 17 months to 62 months. We may extend the charter
periods for additional vessels in our fleet, including additional dry bulk
carriers or container vessels that we may purchase in the future, to take
advantage of the relatively stable cash flow and high utilization rates that are
associated with long-term time charters. While we believe that long-term
charters provide us with relatively stable cash flows and higher utilization
rates than shorter-term charters, our vessels that are committed to long-term
charters may not be available for employment on short-term charters during
periods of increasing short-term charter hire rates when these charters may be
more profitable than long-term charters.




Investment
in derivative instruments such as freight forward agreements could result in
losses.




From
time to time, we may take positions in derivative instruments including freight
forward agreements, or FFAs. FFAs and other derivative instruments may be used
to hedge a vessel owner’s exposure to the charter market by providing for the
sale of a contracted charter rate along a specified route and period of time.
Upon settlement, if the contracted charter rate is less than the average of the
rates, as reported by an identified index, for the specified route and period,
the seller of the FFA is required to pay the buyer an amount equal to the
difference between the contracted rate and the settlement rate, multiplied by
the number of days in the specified period. Conversely, if the contracted rate
is greater than the settlement rate, the buyer is required to pay the seller the
settlement sum. If we take positions in FFAs or other derivative instruments and
do not correctly anticipate charter rate movements over the specified route and
time period, we could suffer losses in the settling or termination of the FFA.
This could adversely affect our results of operations and cash
flows.




13


Our
board of directors has determined to suspend the payment of cash dividends as a
result of market conditions in the international shipping industry. We cannot
assure you that our board of directors will reinstate dividends in the future,
or when such reinstatement might occur.




As
a result of market conditions in the international shipping industry and in
order to position us to take advantage of market opportunities, our board of
directors, beginning with the fourth quarter of 2008, has suspended our common
stock dividend. Our dividend policy will be assessed by the board of directors
from time to time. We believe that this suspension will enhance our future
flexibility by permitting cash flow that would have been devoted to dividends to
be used for opportunities that may arise in the current marketplace, such as
funding our operations, acquiring vessels or servicing our debt.




Our
policy, historically, was to declare quarterly distributions to stockholders by
each February, May, August and November substantially equal to our available
cash from operations during the previous quarter after cash expenses and
reserves for scheduled drydockings, intermediate and special surveys and other
purposes as our board of directors may from time to time determine are required,
and after taking into account contingent liabilities, the terms of our credit
facilities, our growth strategy and other cash needs and the requirements of
Marshall Islands law. The declaration and payment of dividends, if any, will
always be subject to the discretion of our board of directors. The timing and
amount of any dividends declared will depend on, among other things, our
earnings, financial condition and cash requirements and availability, our
ability to obtain debt and equity financing on acceptable terms as contemplated
by our growth strategy and provisions of Marshall Islands law affecting the
payment of dividends. In addition, other external factors, such as our lenders
imposing restrictions on our ability to pay dividends under the terms of our
credit facilities, may limit our ability to pay dividends.  Further,
we may not be permitted to pay dividends if we are in breach of the covenants
contained in our loan agreements.




Our
growth strategy contemplates that we will finance the acquisition of additional
vessels through a combination of debt and equity financing on terms acceptable
to us. If financing is not available to us on acceptable terms, our board of
directors may determine to finance or refinance acquisitions with cash from
operations, which could also reduce or even eliminate the amount of cash
available for the payment of dividends.




Marshall
Islands law generally prohibits the payment of dividends other than from surplus
(retained earnings and the excess of consideration received for the sale of
shares above the par value of the shares) or while a company is insolvent or
would be rendered insolvent by the payment of such a dividend. We may not have
sufficient surplus in the future to pay dividends. We can give no assurance that
we will reinstate our dividends in the future or when such reinstatement might
occur.




We
may have difficulty effectively managing our planned growth, which may adversely
affect our earnings.




Since
the completion of our initial public offering in March 2005, we have taken
delivery of five Panamax dry bulk carriers and six Capesize dry bulk carriers,
sold one of our Capesize dry bulk carriers, and have agreed to purchase two
additional Capesize dry bulk carriers, which are expected to be delivered in the
second quarter of 2010.  The addition of these vessels to our fleet
has resulted in a significant increase in the size of our fleet and imposes
significant additional responsibilities on our management and staff. While we
expect our fleet to grow further, this may require us to increase the number of
our personnel. We will also have to increase our customer base to provide
continued employment for the new vessels.




Our
future growth will primarily depend on our ability to:




·
            locate
      and acquire suitable vessels;




·
            identify
      and consummate acquisitions or joint
ventures;




·
            enhance
      our customer base;




14







·
            manage
      our expansion; and




·
            obtain
      required financing on acceptable
terms.




Growing
any business by acquisition presents numerous risks, such as undisclosed
liabilities and obligations, the possibility that indemnification agreements
will be unenforceable or insufficient to cover potential losses and difficulties
associated with imposing common standards, controls, procedures and policies,
obtaining additional qualified personnel, managing relationships with customers
and integrating newly acquired assets and operations into existing
infrastructure. We cannot give any assurance that we will be successful in
executing our growth plans or that we will not incur significant expenses and
losses in connection with our future growth.




We
cannot assure you that we will be able to borrow amounts under our credit
facilities and restrictive covenants in our credit facilities may impose
financial and other restrictions on us.




We
entered into a $230 million secured revolving credit facility with The Royal
Bank of Scotland Plc in February 2005, amended in May 2006 to increase the
facility amount to $300.0 million. In January 2007 we entered into a
supplemental loan agreement for an additional credit facility with the Royal
Bank of Scotland Plc. We have also entered into a loan agreement with Fortis
Bank for a secured term loan of $60.2 million, which we intend to use to finance
the pre-delivery installments of two newbuilding Capesize dry bulk carriers that
we expect to take delivery of during the second quarter of 2010. As of December
31, 2008, we had $238.8 million outstanding under our facilities. We have used
and intend to use our facilities in the future to finance future vessel
acquisitions and our working capital requirements. Our ability to borrow amounts
under the credit facilities is subject to the execution of customary
documentation relating to the facilities, including security documents,
satisfaction of certain customary conditions precedent and compliance with terms
and conditions included in the loan documents. Prior to each drawdown, we are
required, among other things, to provide the lender with acceptable valuations
of the vessels in our fleet confirming that the vessels in our fleet have a
minimum value and that the vessels in our fleet that secure our obligations
under the facilities are sufficient to satisfy minimum security requirements. To
the extent that we are not able to satisfy these requirements, including as a
result of a decline in the value of our vessels, we may not be able to draw down
the full amount under the credit facilities without obtaining a waiver or
consent from the lender. We will also not be permitted to borrow amounts under
the facilities if we experience a change of control.




The
credit facilities also impose operating and financial restrictions on us. These
restrictions may limit our ability to, among other things:




·
            pay
      dividends or make capital expenditures if we do not repay amounts drawn
      under our credit facilities, if there is a default under the credit
      facilities or if the payment of the dividend or capital expenditure would
      result in a default or breach of a loan
  covenant;




·
            incur
      additional indebtedness, including through the issuance of
      guarantees;




·
            change
      the flag, class or management of our
vessels;




·
            create
      liens on our assets;




·
            sell
      our vessels;




·
            enter
      into a time charter or consecutive voyage charters that have a term that
      exceeds, or which by virtue of any optional extensions may exceed, 13
      months;




·
            merge
      or consolidate with, or transfer all or substantially all our assets to,
      another person; and




15




·
            enter
      into a new line of business.




Therefore,
we may need to seek permission from our lenders in order to engage in some
corporate actions. Our lenders’ interests may be different from ours and we
cannot guarantee that we will be able to obtain our lenders’ permission when
needed. This may limit our ability to pay any dividends to you, finance our
future operations, make acquisitions or pursue business
opportunities.




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




We
intend to finance our future vessel acquisitions with net proceeds of future
equity offerings and with secured indebtedness drawn under our credit
facilities. While our current policy is to refinance amounts in excess of $150.0
million drawn under our credit facilities with the net proceeds of future equity
offerings, we cannot assure you that we will be able to do so on terms that are
acceptable to us or at all. If we are not able to refinance these amounts with
the net proceeds of equity offerings on terms acceptable to us or at all, we
will have to dedicate a greater portion of our cash flow from operations to pay
the principal and interest of this indebtedness than if we were able to
refinance such amounts. If we are not able to satisfy these obligations, we may
have to undertake alternative financing plans. The actual or perceived credit
quality of our charterers, any defaults by them, and the market value of our
fleet, among other things, may materially affect our ability to obtain
alternative financing. In addition, debt service payments under our credit
facilities or alternative financing may limit funds otherwise available for
working capital, capital expenditures and other purposes. If we are unable to
meet our debt obligations, or if we otherwise default under our credit
facilities or an alternative financing arrangement, our lenders could declare
the debt, together with accrued interest and fees, to be immediately due and
payable and foreclose on our fleet, which could result in the acceleration of
other indebtedness that we may have at such time and the commencement of similar
foreclosure proceedings by other lenders.




If
the delivery of either of the two vessels that have not yet been delivered to us
is delayed or either of the vessels is delivered with significant defects, our
earnings and financial condition could suffer.




We
have assumed shipbuilding contracts for two Capesize dry bulk carriers that we
expect to be delivered to us during the second quarter of 2010. A delay in the
delivery of either of these vessels, or other vessels that we may enter into
agreements to acquire in the future, to us or the failure of the contract
counterparty to deliver such vessels to us at all could adversely affect our
earnings and our financial condition.




Purchasing
and operating secondhand vessels may result in increased operating costs and
reduced fleet utilization.




While
we have the right to inspect previously owned vessels prior to our purchase of
them and we intend to inspect all secondhand vessels that we acquire in the
future, such an inspection does not provide us with the same knowledge about
their condition that we would have if these vessels had been built for and
operated exclusively by us. A secondhand vessel may have conditions or defects
that we were not aware of when we bought the vessel and which may require us to
incur costly repairs to the vessel. These repairs may require us to put a vessel
into drydock which would reduce our fleet utilization. Furthermore, we usually
do not receive the benefit of warranties on secondhand vessels.




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




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




16






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




We
employ our vessels in a highly competitive market that is capital intensive and
highly fragmented. Competition arises primarily from other vessel owners, some
of whom have substantially greater resources than we do. Competition for the
transportation of dry bulk cargo by sea is intense and depends on price,
location, size, age, condition and the acceptability of the vessel and its
operators to the charterers. Due in part to the highly fragmented market,
competitors with greater resources could enter the dry bulk shipping industry
and operate larger fleets through consolidations or acquisitions and may be able
to offer lower charter rates and higher quality vessels than we are able to
offer.




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




Our
success depends to a significant extent upon the abilities and efforts of our
management team. We have entered into employment contracts with our Chairman and
Chief Executive Officer, Mr. Simeon Palios, our President, Mr. Anastassis
Margaronis, our Chief Financial Officer and Treasurer, Mr. Andreas Michalopoulos
and our Executive Vice President, Mr. Ioannis Zafirakis. Our success will depend
upon our ability to retain key members of our management team and to hire new
members as may be necessary. The loss of any of these individuals could
adversely affect our business prospects and financial condition. Difficulty in
hiring and retaining replacement personnel could have a similar effect. We do
not currently, nor do we intend to, maintain “key man” life insurance on any of
our officers or other members of our management team.




Risks
associated with operating ocean-going vessels could affect our business and
reputation, which could adversely affect our revenues and stock
price.




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




·
            marine
      disaster;




·
            environmental
      accidents;




·
            cargo
      and property losses or damage;




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




·
            piracy.




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




17


The
shipping industry has inherent operational risks that may not be adequately
covered by our insurance.




We
procure insurance for our fleet against risks commonly insured against by vessel
owners and operators. Our current insurance includes hull and machinery
insurance, war risks insurance and protection and indemnity insurance (which
includes environmental damage and pollution insurance). We can give no assurance
that we are adequately insured against all risks or that our insurers will pay a
particular claim. Even if our insurance coverage is adequate to cover our
losses, we may not be able to timely obtain a replacement vessel in the event of
a loss. Furthermore, in the future, we may not be able to obtain adequate
insurance coverage at reasonable rates for our fleet. We may also be subject to
calls, or premiums, in amounts based not only on our own claim records but also
the claim records of all other members of the protection and indemnity
associations through which we receive indemnity insurance coverage for tort
liability. Our insurance policies also contain deductibles, limitations and
exclusions which, although we believe are standard in the shipping industry, may
nevertheless increase our costs.




Our
vessels may suffer damage and we may face unexpected drydocking costs, which
could adversely affect our cash flow and financial condition




If
our vessels suffer damage, they may need to be repaired at a drydocking
facility. The costs of drydock repairs are unpredictable and can be substantial.
The loss of earnings while a vessel is being repaired and repositioned, as well
as the actual cost of these repairs not covered by our insurance, would decrease
our earnings and cash available for dividends, if declared. We may not have
insurance that is sufficient to cover all or any of the costs or losses for
damages to our vessels and may have to pay drydocking costs not covered by our
insurance.




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




In
general, the cost of maintaining a vessel in good operating condition increases
with the age of the vessel. Currently, our fleet consists of 13 Panamax dry bulk
carriers and six Capesize dry bulk carriers having a combined carrying capacity
of 2.0 million dead weight tons (dwt) and a weighted average age of 4.4 years.
As our fleet ages, we will incur increased costs. Older vessels are typically
less fuel efficient and more costly to maintain than more recently constructed
vessels due to improvements in engine technology. Cargo insurance rates increase
with the age of a vessel, making older vessels less desirable to charterers.
Governmental regulations and safety or other equipment standards related to the
age of vessels may also require expenditures for alterations or the addition of
new equipment to our vessels and may restrict the type of activities in which
our vessels may engage. We cannot assure you that, as our vessels age, market
conditions will justify those expenditures or enable us to operate our vessels
profitably during the remainder of their useful lives.




We
are exposed to U.S. dollar and foreign currency fluctuations and devaluations
that could harm our reported revenue and results of operations.




We
generate all of our revenues in U.S. dollars but currently incur over half of
our operating expenses and the majority of our general and administrative
expenses in currencies other than the U.S. dollar, primarily the Euro. Because a
significant portion of our expenses are incurred in currencies other than the
U.S. dollar, our expenses may from time to time increase relative to our
revenues as a result of fluctuations in exchange rates, particularly between the
U.S. dollar and the Euro, which could affect the amount of net income that we
report in future periods. While we historically have not mitigated the risk
associated with exchange rate fluctuations through the use of financial
derivatives, we may employ such instruments from time to time in the future in
order to minimize this risk. Our use of financial derivatives would involve
certain risks, including the risk that losses on a hedged position could exceed
the nominal amount invested in the instrument and the risk that the counterparty
to the derivative transaction may be unable or unwilling to satisfy its
contractual obligations, which could have an adverse effect on our
results.




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




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




18







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




We
have historically derived a significant part of our revenues from a small number
of charterers. During 2008, approximately 31% of our revenues derived from two
charterers. During 2007, approximately 49% of our revenues derived from three
charterers. During 2006, approximately 50% of our revenues derived from three
charterers. If one or more of our charterers chooses not to charter our vessels
or is unable to perform under one or more charters with us and we are not able
to find a replacement charter, we could suffer a loss of revenues that could
adversely affect our financial condition and results of operations.




We
are a holding company, and we depend on the ability of our subsidiaries to
distribute funds to us in order to satisfy our financial
obligations.




We
are a holding company and our subsidiaries conduct all of our operations and own
all of our operating assets. We have no significant assets other than the equity
interests in our subsidiaries. As a result, our ability to satisfy our financial
obligations depends on our subsidiaries and their ability to distribute funds to
us. If we are unable to obtain funds from our subsidiaries, we may not be able
to satisfy our financial obligations.




As
we expand our business, we may need to improve our operating and financial
systems and will need to recruit suitable employees and crew for our
vessels.




Our
current operating and financial systems may not be adequate as we expand the
size of our fleet and our attempts to improve those systems may be ineffective.
In addition, as we expand our fleet, we will need to recruit suitable additional
seafarers and shoreside administrative and management personnel. While we have
not experienced any difficulty in recruiting to date, we cannot guarantee that
we will be able to continue to hire suitable employees as we expand our fleet.
If we or our crewing agent encounter business or financial difficulties, we may
not be able to adequately staff our vessels. If we are unable to grow our
financial and operating systems or to recruit suitable employees as we expand
our fleet, our financial performance may be adversely affected, among other
things.




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




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




We expect that we and each of our
subsidiaries qualify for this statutory tax exemption for the 2008 taxable year
and we will take this position for United States federal income tax return
reporting purposes.  However, there are factual circumstances beyond
our control that could cause us to lose the benefit of this tax exemption in
future years and thereby become subject to United States federal income tax on
our United States source income.  For example, at December 31, 2008,
our 5% shareholders owned approximately 19.30% of our outstanding
stock.  There is a risk that we could no longer qualify for exemption
under Code section 883 for a particular taxable year if other shareholders with
a five percent or greater interest in our stock were, in combination with our
existing 5% shareholders, to own 50% or more of our outstanding shares of our
stock on more than half the days during the taxable year.  Due to the
factual nature of the issues involved, we can give no assurances on our
tax-exempt status or that of any of our subsidiaries.




If we or our subsidiaries are not
entitled to this exemption under Section 883 for any taxable year, we or our
subsidiaries would be subject for those years to a 4% United States federal
income tax on our U.S.-source shipping income. The imposition of this taxation
could have a negative effect on our business and would result in decreased
earnings available for distribution to our stockholders. For the 2008 taxable
year, we estimate that our maximum United States federal income
tax liability would be immaterial if we were to be subject to this taxation.
Please see the section of this annual report entitled“Taxation”underItem 10E for a more comprehensive
discussion of the United States federal income tax
consequences.


19




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




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




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




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




If the IRS were to find that we are or
have been a PFIC for any taxable year, our United States stockholders will face
adverse United States tax consequences. Under the PFIC rules, unless those
stockholders make an election available under the Code (which election could
itself have adverse consequences for such stockholders, such stockholders would
be liable to pay United States federal income tax at the then prevailing income
tax rates on ordinary income plus interest upon excess distributions and upon
any gain from the disposition of our common stock, as if the excess distribution
or gain had been recognized ratably over the stockholder’s holding period of our common stock.Please see the section of
this annual report entitled“Taxation”underItem10E for a more comprehensive discussion
of the United States federal income tax consequences if we were to be treated as
a PFIC.




Risks
Relating to Our Common Stock




There
is no guarantee that there will continue to be an active and liquid public
market for you to resell our common stock in the future.




The
price of our common stock may be volatile and may fluctuate due to factors such
as:




·
            actual
      or anticipated fluctuations in our quarterly and annual results and those
      of other public companies in our
industry;




·
            mergers
      and strategic alliances in the dry bulk shipping
  industry;




·
            market
      conditions in the dry bulk shipping
industry;




20







·
            changes
      in government regulation;




·
            shortfalls
      in our operating results from levels forecast by securities
      analysts;




·
            announcements
      concerning us or our competitors;
and




·
            the
      general state of the securities
market.




The
dry bulk shipping industry has been highly unpredictable and volatile. The
market for common stock in this industry may be equally volatile.




We
are incorporated in the Marshall Islands, which does not have a well-developed
body of corporate law.




Our
corporate affairs are governed by our amended and restated articles of
incorporation and bylaws and by the Marshall Islands Business Corporations Act,
or the BCA. The provisions of the BCA resemble provisions of the corporation
laws of a number of states in the United States. However, there have been few
judicial cases in the Marshall Islands interpreting the BCA. The rights and
fiduciary responsibilities of directors under the laws of the Marshall Islands
are not as clearly established as the rights and fiduciary responsibilities of
directors under statutes or judicial precedent in existence in the United
States. The rights of stockholders of the Marshall Islands may differ from the
rights of stockholders of companies incorporated in the United States. While the
BCA provides that it is to be interpreted according to the laws of the State of
Delaware and other states with substantially similar legislative provisions,
there have been few, if any, court cases interpreting the BCA in the Marshall
Islands and we cannot predict whether Marshall Islands courts would reach the
same conclusions as United States courts. Thus, you may have more difficulty in
protecting your interests in the face of actions by the management, directors or
controlling stockholders than would stockholders of a corporation incorporated
in a United States jurisdiction which has developed a relatively more
substantial body of case law.




Certain
existing stockholders will be able to exert considerable control over matters on
which our stockholders are entitled to vote.




As
of the date of this report Mr. Simeon Palios, our Chairman and Chief Executive
Officer, beneficially owns 14,593,210 shares, or approximately 19.35% of our
outstanding common stock, the vast majority of which is held indirectly through
entities over which he exercises sole voting power. Please see Item 7.A. “Major
Stockholders.” While Mr. Palios and the non-voting shareholders of these
entities have no agreement, arrangement or understanding relating to the voting
of their shares of our common stock they are able to influence the outcome of
matters on which our stockholders are entitled to vote, including the election
of directors and other significant corporate actions. The interests of these
stockholders may be different from your interests.




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




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




We
intend to issue additional shares of our common stock in the future to refinance
indebtedness in excess of $150.0 million incurred in connection with the
acquisition of vessels, and our stockholders may elect to sell large numbers of
shares held by them from time to time. Our amended and restated articles of
incorporation authorize us to issue up to 200,000,000 shares of common stock, of
which as of December 31, 2008, 75,062,003 shares were outstanding. The number of
shares of common stock available for sale in the public market is limited by
restrictions applicable under securities laws and agreements that we and our
executive officers, directors and principal stockholders have entered
into.




21







Prior
to our initial public offering, we entered into a registration rights agreement
with Corozal Compania Naviera S.A., Ironwood Trading Corp. and Zoe S. Company
Ltd., certain of our stockholders, pursuant to which we have granted them, their
affiliates (including Mr. Simeon Palios, Mr. Anastassis Margaronis and Mr.
Ioannis Zafirakis) and certain of their transferees, the right, under certain
circumstances and subject to certain restrictions, to require us to register
under the Securities Act of 1933, as amended, or the Securities Act, shares of
our common stock held by them for resale. Under the registration rights
agreement, these persons have the right to request us to register the sale of
shares held by them on their behalf and may require us to make available shelf
registration statements permitting sales of shares into the market from time to
time over an extended period. In addition, these persons have the ability to
exercise certain piggyback registration rights in connection with registered
offerings requested by stockholders or initiated by us. Registration of such
shares under the Securities Act would, except for shares purchased by
affiliates, result in such shares becoming freely tradable without restriction
under the Securities Act immediately upon the effectiveness of such
registration. In addition, shares not registered pursuant to the registration
rights agreement may, subject to any applicable lock-up agreement in effect at
such time, be resold pursuant to an exemption from the registration requirements
of the Securities Act, including the exemptions provided by Rule 144 and
Regulation S under the Securities Act.




Anti-takeover
provisions in our organizational documents could make it difficult for our
stockholders to replace or remove our current board of directors or have the
effect of discouraging, delaying or preventing a merger or acquisition, which
could adversely affect the market price of our common stock




Several
provisions of our amended and restated articles of incorporation and bylaws
could make it difficult for our stockholders to change the composition of our
board of directors in any one year, preventing them from changing the
composition of management. In addition, the same provisions may discourage,
delay or prevent a merger or acquisition that stockholders may consider
favorable.




These
provisions include:




·
            authorizing
      our board of directors to issue “blank check” preferred stock without
      stockholder approval;




·
            providing
      for a classified board of directors with staggered, three year
      terms;




·
            prohibiting
      cumulative voting in the election of
directors;




·
            authorizing
      the removal of directors only for cause and only upon the affirmative vote
      of the holders of a majority of the outstanding shares of our common stock
      entitled to vote for the directors;




·
            prohibiting
      stockholder action by written
consent;




·
            limiting
      the persons who may call special meetings of stockholders;
    and




·
            establishing
      advance notice requirements for nominations for election to our board of
      directors or for proposing matters that can be acted on by stockholders at
      stockholder meetings.




In
addition, we have adopted a stockholder rights plan pursuant to which our board
of directors may cause the substantial dilution of any person that attempts to
acquire us without the approval of our board of directors.




These
anti-takeover provisions, including provisions of our stockholder rights plan,
could substantially impede the ability of public stockholders to benefit from a
change in control and, as a result, may adversely affect the market price of our
common stock and your ability to realize any potential change of control
premium.




22







Item
4.Information on the Company




A.History
      and development of the Company




Diana ShippingInc.isa holding company incorporated under
the laws of Liberia in March 1999 as Diana Shipping Investments Corp. In
February 2005, the Company’s articles of incorporation were
amended. Under the amended articles of incorporation,the Company was renamed Diana Shipping
Inc. and was redomiciled from the Republic of Liberia to the Marshall
Islands.  Our executive offices are located at Pendelis 16, 175 64 Palaio Faliro,
Athens,Greece. Our telephone
numberat this
addressis
+30-210-947-0100.Our agent
and authorized representative in the United States is our wholly-owned
subsidiary, Bulk Carriers (USA) LLC, established inSeptember
2006,
in the State of Delaware, which is located at 2711 Centerville Road, Suite 400,
Wilmington, Delaware 19808.




Capital Expendituresand Divestitures




In January and August 2006,we took delivery oftwo newly builtPanamax dry bulk carriers, theCoronisandtheNaiasfor the purchase price of $42.0 million
and $39.6 million, respectively, and in November 2006 we took delivery of our
newly builtCapesize dry
bulk carrier, theSideris
GSfor the purchase price
of $91.0 million. We
financedpart of the
acquisition costof
theCoronis, theNaiasand theSideris
GSwithproceeds under our revolving credit
facility amounting to $38.5 million, $39.6 million and $75.0 million,
respectively.




Effective April 1, 2006, we acquired our
fleet manager, Diana Shipping Services, S.A. for the price of $20.0 million,
which was financed with proceeds under our revolving credit facility.InJune 2006, we repaid all loans
outstandingas of that
date, amounting to
$71.4millionplus interestwith the proceeds obtained fromour secondarypublic offeringin June 2006.




In September2006,we entered intonovationagreements toassume the shipbuilding contracts for
the construction of two 177,000 dwt Capesize dry bulk carriers for the contract
price of $60.2 million each. We expect to take delivery of the vessels in the
second quarter of 2010. In November 2006, we paid the first installment for the
construction of the vessels amounting to $12.04 million for each vessel,
representing 20% of their contract price. We financed the first predelivery
installments with funds under our loan facility with Fortis.




In February 2007, we entered into a
memorandum of agreement to acquire one newly built Capesize dry bulk carrier,
theSemiriothat was under construction at the
Shanghai Waigaoqiao Shipbuilding Co. Ltd., in China, for the price of $98.0
million. We paid a 20% advance, amounting to $19.6 million, on signing of the
agreement and the balance of the purchase price of $78.4 million was paid on the
delivery of the vessel to us in June 2007. We financed $92.0 million of the
purchase price with proceeds from our revolving credit facility with the Royal
Bank of Scotland and the remaining balance with cash on
hand.




In February 2007, we entered into a
memorandum of agreement to sell thePantelis
SPfor the price of $81.0
million less 2.5% commission. On signing of the agreement, the buyers of the
vessels paid a 10% advance of the purchase price, amounting to $8.1 million,
which was released to us together with the balance of the purchase price on
delivery of the vessel to its new buyers in July 2007. We used the proceeds from
the sale of thePantelis
SPto repay $90.0 million
of the then outstanding debt with the Royal Bank of Scotland amounting to $109.0
million.




In March 2007, we entered into a
memorandum of agreement to acquire one second hand Capesize dry bulk carrier,
theAliki, for the price of $110.0 million. We
paid a 10% advance, amounting to $11.0 million, on signing of the agreement with
cash on hand. The balance of the purchase price, amounting to $99.0 million, was
paid on the delivery of the vessel to us in April 2007 and was partly funded
with an $87.0 million loan drawn under our revolving credit facility with the
Royal Bank of Scotland.




23







In April 2007, we completed a public
offering of an aggregate of 9,825,500 shares of our common stock at a price of
$17.00 per share, resulting in net proceeds to us of $159.3
million.  In the same offering, certain of our shareholders sold an
additional 2,250,000 shares of our common stock, for which we did not receive
any proceeds.  As described below, we used a portion of the net
proceeds ofthis
offeringto repay
outstanding indebtedness and we used the balance to fund a portion of the
acquisition costs of the vesselsSemirioandAliki.




In April 2007, we drew down an amount of
$22.0 million under our revolving credit facility to fund part of the advances
paid for the vessels’SemirioandAliki. During the same month, we repaid in
full the then outstanding balance under our revolving credit facility withthe
Royal Bank of Scotland,amounting to $136.6 million plus interest and costs, partly with the proceeds of
our public offering that was completed in the same month.




In April 2007, we entered into a
memorandum of agreement to acquire one newly built Capesize dry bulk carrier,
theBoston, for the purchase price of $110.0
million. On signing of the agreement, we paid a 20% advance, amounting to $22.0
million, with available cash on hand and in May 2007 we drew down an amount of
$22.0 million under our revolving credit facility to finance the advance. We
paid the balance of the purchase price of $88.0 million on the vessel’s delivery
to us in November 2007, with the proceeds from our September 2007 public
offering, discussed below.




In September 2007,we completed
a public offering of an aggregate of11,500,000 shares of common stock at a
price of $25.00 per share,resulting innet proceedsto usof$273.7 million. We used a portion of the
net proceeds of this offering to repay the $100.8 million outstanding under our
revolving credit facility with the Royal Bank of Scotland, plus interest and
costs. We also used a portion of the proceeds of this offering to fund a portion
of the purchase price of theBoston.




In October2007,we entered into aMemorandumof Agreementto acquire one secondhand Capesize dry
bulk carrier, theSalt Lake
City,for a total consideration of$140.0 million.On signing of the agreement,wepaid 20% of the respectivepurchase priceamounting to $28.0 million. The balance
of the purchase price was paid on the delivery of the vessel to us in December
2007. In December 2007, we drew down an amount of $75.0 million under our
revolving credit facilitywith the
Royal Bank of Scotlandto
finance part of the purchase price of theSalt Lake
City.




In October2007,we entered into aMemorandumof Agreementto acquire one secondhand Capesize dry
bulk carriers, theNorfolk,for a total consideration of$135.0 million.On signing of the agreement,wepaid 20% of thepurchase priceamounting to $27.0 million. The balance
of the purchase prices was paid on the delivery of the vessel to us in February
2008.




During 2008,wedrew down an aggregate amount of
$237.2million under our revolving $300
million credit facilitywith the Royal Bank of
Scotlandand repaid an
aggregate amount of $97.5million.On December 31, 2008 an amount of
$214.7 millionwas outstanding under the revolving
credit facility, which was
used to fund part of the purchase cost of theSalt Lake Cityand theNorfolk.As of December 31, 2008 our total
indebtedness under both our $300 million credit facility with the Royal Bank of
Scotland and our loan agreement with Fortis Bank amounted to $238.8
million.




B.Business
      overview




We are a global provider of shipping
transportation services.  We specialize in transporting dry bulk
cargoes, including such commodities as iron ore, coal, grain and other materials
along worldwide shipping routes. Currently,our fleet consists of19dry bulk carriers, of which 13 are Panamax and six are
Capesize dry bulk carriers, having a combined carrying capacity of approximately
2.0 million dwt. We also have assumed shipbuilding contracts for two additional
Capesize dry bulk carriers, which are under construction by theChina Shipbuilding Trading Company Ltd.,
and Shanghai Waigaoqiao Shipbuilding Co. Ltd., and are expected to be delivered
to us in the second quarter of 2010.




24







As of December 31, 2008our fleet consisted of13modern Panamax dry bulk carriers andsixCapesize dry bulk carriersthat had a combined carrying capacity
of approximately2.0million dwt and a weighted average age
of4.3years.As of December 31, 2007, our fleet consisted of13modern Panamax dry bulk carriers andfiveCapesize dry bulk carriersthat had a combined carrying capacity
of approximately1.8million dwt and a weighted average age
of 3.4years.As of December 31, 2006, our fleet consisted of13modern Panamax dry bulk carriers andtwoCapesize dry bulk carriersthat had a combined carrying capacity
of approximately1.1million dwt and a weighted average age
of 3.7years.




During2008, 2007 and 2006, we had a fleet utilization
of99.6%,99.3% and 99.9%,respectively, our vessels achieved
daily time charter equivalent rates of$46,777, $31,272 and$22,661, respectively, and we generated
revenues of$337.4 million,
$190.5 million and$116.1million,respectively.






The following table presents certain
information concerning the dry bulk carriers in our fleet, as of February 27, 2009.




Vessel
              
              Operating
      Status
              
              Dwt
              
              Age(1)
              
              Time Charter
                Expiration Date(2)
              
              Daily Time
                Charter Hire
      Rate
              
              Sister
                Ships(3)Nirefs
              
              Delivered
      Jan 2001
              
              75,311
              
              7.9
      years
              
              Feb
      3, 2010 – Apr 3, 2010
              
              $60,500
              
              AAlcyon
              
              Delivered
      Feb 2001
              
              75,247
              
              7.9
      years
              
              Nov
      21, 2012 – Feb 21, 2013
              
              $34,500
              
              ATriton
              
              Delivered
      Mar 2001
              
              75,336
              
              7.8
      years
              
              Oct
      17, 2009 – Jan 17, 2010(4)
              
              $24,400
              
              AOceanis
              
              Delivered
      May 2001
              
              75,211
              
              7.6
      years
              
              Jul
      29, 2009 – Oct 29, 2009
              
              $40,000
              
              ADione
              
              Acquired
      May 2003
              
              75,172
              
              8.0
      years
              
              Jun
      1, 2010 – Sep 1, 2010
              
              $12,000
              
              ADanae
              
              Acquired
      Jul 2003
              
              75,106
              
              8.0
      years
              
              Apr
      10, 2009 – May 18, 2009
              
              $29,400
              
              AProtefs
              
              Delivered
      Aug 2004
              
              73,630
              
              4.3
      years
              
              Aug
      18, 2011 – Nov 18, 2011
              
              $59,000
              
              BCalipso
              
              Delivered
      Feb 2005
              
              73,691
              
              3.9
      years
              
              Dec
      24, 2009 – Mar 24, 2010
              
              $9,400
              
              BClio
              
              Delivered
      May 2005
              
              73,691
              
              3.6
      years
              
              Feb
      26, 2009
              
              $6,000
              
              BDec
      26, 2009 – Mar 26, 2010
              
              $11,000Thetis
              
              Acquired
      Nov 2005
              
              73,583
              
              4.4
      years
              
              Dec
      12, 2009 – Mar 12, 2010
              
              $10,500
              
              BErato
              
              Acquired
      Nov 2005
              
              74,444
              
              4.3
      years
              
              Nov
      27, 2009 – Feb 27, 2010
              
              $15,000
              
              CNaias
              
              Acquired
      Jun 2006
              
              73,546
              
              2.5
      years
              
              Aug
      24, 2009 – Oct 24, 2009
              
              $34,000
              
              BCoronis
              
              Delivered
      Jan 2006
              
              74,381
              
              2.9
      years
              
              Mar
      15, 2009 – Apr 9, 2009
              
              $27,500
              
              CSideris
      GS
              
              Delivered
      Nov 2006
              
              174,186
              
              2.1
      years
              
              Nov
      30, 2009
              
              $39,000
              
              DOct
      15, 2010 – Jan 15, 2011(5)
              
              $36,000Aliki
              
              Acquired
      Apr 2007
              
              180,235
              
              3.8
      years
              
              May
      1, 2009
              
              $52,000Mar
      1, 2011 – Jun 1, 2011(5)
              
              $45,000
              
              -Semirio
              
              Delivered
      Jun 2007
              
              174,261
              
              1.6
      years
              
              Jun
      15, 2009
              
              $51,000Apr
      30, 2011 – Jul 30, 2011(5)
              
              $31,000
              
              DBoston
              
              Delivered
      Nov 2007
              
              177,828
              
              1.1
      years
              
              Sep
      28, 2011 – Dec 28, 2011(6)
              
              $52,000Salt
      Lake City
              
              Acquired
      Dec 2007
              
              171,810
              
              3.3
      years
              
              Aug
      28, 2012 – Oct 28, 2012
              
              $55,800
              
              D


25





Vessel
                  
                  Operating
      Status
                  
                  Dwt
                  
                  Age(1)
                  
                  Time Charter
                    Expiration Date(2)
                  
                  Daily Time
                    Charter Hire
      Rate
                  
                  Sister
                    Ships(3)Norfolk
                  
                  Acquired
      Feb 2008
                  
                  164,218
                  
                  6.3
      years
                  
                  Jan
      12, 2013 – Mar 12, 2013
                  
                  $74,750
                  
                  -Hull
      1107 (tbnNew York)(7)(8)(9)
                  
                  Expected
      2010
                  
                  177,000
                  
                  -
                  
                  Feb
      28, 2015 – Jun 30, 2015(9)
                  
                  $48,000(9)
                  
                  DHull
      1108 (tbn Los Angeles) (7)
                  
                  Expected
      2010
                  
                  177,000
                  
                  -
                  
                  -
                  
                  -
                  
                  D











(1)
              As of December 31, 2008.




(2)
            The date range provided represents
      the earliest and latest date on which the charterer may redeliver the
      vessel to us upon the termination of the
  charter.




(3)
            Each dry bulk carrier is a sister
      ship of other dry bulk carriersthat havethe same letter.




(4)
            The charterer has the option to
      employ the vessel for an additional11-13 month period at a daily
      rate based on the average rate of four pre-determined time charter routes
      as published by the Baltic Exchange. The optional period, if exercised
      must be declared on or before the end of the 30th month of employment and
      can only commence at the end of the 36th
  month.




(5)
            The charterer has the option to
      employ the vessel for anadditional11-13 month period. The optional
      period, if exercised, must be declared on or before the end of the 42nd
      month of employment and can only commence at the end of the 48th month, at
      the daily time charter rate of
$48,500.




(6)
            The charterer has the option to
      employ the vessel for an additional11-13 month period. The optional
      period, if exercised, must be declared on or before the end of the 42nd
      month of employment and can only commence at the end of the 48th month, at
      the daily time charter rate of
$52,000.




(7)
            Expected to be delivered in the
      second quarter of 2010.




(8)
            The gross rate will be either
      $50,000 per day for delivery between October 1, 2009 and January 31, 2010
      or $48,000 per day for delivery between February 1, 2010 and April 30,
      2010.




(9)
            Based on the latest possible date
      of delivery to us from the
yard.




Each of our vessels is owned through a
separate wholly-owned subsidiary.




Our vessels operate worldwide within the
trading limits imposed by our insurance terms and do not operate in areas where
sanctionsoftheUnited States,theEuropean Union ortheUnited Nations have been
imposed.




Management of Our
Fleet




The commercial and technical management
of our fleet is carried out byour wholly-owned subsidiary,Diana Shipping Services
S.A., which we refer to as
DSS, or our fleet manager. Prior to our acquisition of DSS effective April 1,
2006,DSS was majority
owned and controlled by Mr.Simeon Palios, our Chairman and Chief
Executive Officer. The stockholders of DSS also included Mr.Anastassis Margaronis, our President and
a member of our board of directors, and Mr.Ioannis Zafirakis, ourExecutiveVice President and a member of our board
of directors.




26







In exchange for providing us withcommercial and technicalservices, personnel and
office space,we pay our fleet manager a commission
that is equal to 2% of our revenues and a fixed management fee of $15,000 per
month for each vessel in our operating fleet.




As of April 1, 2006 these amounts are
considered inter-company transactions and therefore eliminated from our
consolidated financial statements. For 2006, commissions included in voyage
expenses amounted to $0.5 million and management fees amounted to $0.6
million.




Our Customers




Our customers include national, regional
and international companies, such as China National Chartering Corp., Cargill
International S.A.,Australian Wheat Board (AWB), BHP
Billiton and Bocimar N.V. Antwerp.During 2008, two of our charterers
accounted for 31% of our revenues; CargillInternational S.A.,(16%) and BHP Billiton (15%). During
2007, three of our charterers accounted for 49% of our revenues;Australian Wheat Board(11%), BHP Billiton (15%) and CargillInternational S.A.,(23%).During 2006, three or our customers
accounted for 50% of our revenues; Cargill (20%), Bocimar (15%) and China
National (15%).




We charter our dry bulk carriers to
customers primarily pursuant to time charters. Under our time charters, the
charterer typically pays us a fixed daily charter hire rate and bears all voyage
expenses, including the cost of bunkers (fuel oil) and canal and port charges.
We remain responsible for paying the chartered vessel’s operating expenses, including the cost
of crewing, insuring, repairing and maintaining the vessel. We also pay
commissions ranging from 0% to 6.25% of the total daily charter hire rate of
each charter to unaffiliated ship brokers and to in-house brokers associated
with the charterer, depending on the number of brokers involved with arranging
the charter.




We strategically monitor developments in
the dry bulk shipping industry on a regular basis and, subject to market demand,
seek to adjust the charter hire periods for our vessels according to prevailing
market conditions. In order to take advantage of the relatively stable cash flow
and high utilization rates associated with long-term time charters along with
the historically high charter hire rates for Panamax and Capesize
vesselswe had during
2008,we have entered intolong-termtime charters ranging in duration from
17months to 62months. Those of our vessels on
short-term time charters provide us with flexibility in responding to market
developments. We will continue to evaluate our balance of short- and long-term
charters and may extendor
reducethe charter hire
periods ofthevessels in our fleetaccording to thedevelopments in the dry bulk shipping
industry.




The
Dry Bulk Shipping Industry




The global dry bulk carrier fleet may be
divided intosixcategories based on a
vessel’s carrying capacity. These categories
consist of




·
            Very Large
      Ore Carriers (VLOC).  Very large ore carriers have a
      carrying capacity of more than 200,000 dwt and are a comparatively new
      sector of the dry bulk carrier fleet. VLOCs are built to exploit economies
      of scale on long-haul iron ore
routes.




·
            Capesize.  Capesize
      vessels have a carrying capacity of 110,000-199,999 dwt. Only the largest
      ports around the world possess the infrastructure to accommodate vessels
      of this size. Capesize vessels are primarily used to transport iron ore or
      coal and, to a much lesser extent, grains, primarily on long-haul
      routes.




·
            Post-Panamax.  Post-Panamax
      vessels have a carrying capacity of 80,000-109,999 dwt. These vessels tend
      to have a shallower draft and larger beam than a standard Panamax vessel
      with a higher cargo capacity. These vessels have been designed
      specifically for loading high cubic cargoes from draught restricted ports,
      although they cannot transit the Panama
Canal.




27







·
            Panamax.  Panamax
      vessels have a carrying capacity of 60,000-79,999 dwt. These vessels carry
      coal, iron ore, grains, and, to a lesser extent, minor bulks, including
      steel products, cement and fertilizers. Panamax vessels are able to pass
      through the Panama Canal, making them more versatile than larger vessels
      with regard to accessing different trade routes. Most Panamax and
      Post-Panamax vessels are “gearless,” and therefore must be served by
      shore-based cargo handling equipment. However, there are a small number of
      geared vessels with onboard cranes, a feature that enhances trading
      flexibility, and enables operation in ports which have poor infrastructure
      in terms of loading and unloading
facilities.




·
            Handymax/Supramax.  Handymax
      vessels have a carrying capacity of 40,000-59,999 dwt. These vessels
      operate in a large number of geographically dispersed global trade routes,
      carrying primarily grains and minor bulks. Within the Handymax category
      there is also a sub-sector known as Supramax. Supramax bulk carriers are
      ships between 50,000 to 59,999 dwt, normally offering cargo loading and
      unloading flexibility with on-board cranes, or “gear,” while at the same
      time possessing the cargo carrying capability approaching conventional
      Panamax bulk carriers.




·
            Handysize.  Handysize
      vessels have a carrying capacity of up to 39,999 dwt. These vessels are
      primarily involved in carrying minor bulk cargoes. Increasingly, ships of
      this type operate within regional trading routes, and may serve as
      trans-shipment feeders for larger vessels. Handysize vessels are well
      suited for small ports with length and draft restrictions. Their cargo
      gear enables them to service ports lacking the infrastructure for cargo
      loading and unloading.




The supply of dry bulk carriers is
dependent on the delivery of new vessels and the removal of vessels from the
global fleet, either through scrapping or loss. The level of scrapping activity
is generally a function of scrapping prices in relation to current and
prospective charter market conditions, as well as operating, repair and survey
costs.  The average age at which a vessel is scrapped over the last
five years has been 26years.




The demand for dry bulk carrier capacity
is determined by the underlying demand for commodities transported in dry bulk
carriers, which in turn is influenced by trends in the global economy. Demand
for dry bulk carrier capacity is also affected by the operating efficiency of
the global fleet, with port congestion, which has been a feature of the market
since 2004, absorbing tonnage and therefore leading to a tighter balance between
supply and demand. In evaluating demand factors for dry bulk carrier capacity,
the Company believes that dry bulk carriers can be the most versatile element of
the global shipping fleets in terms of employment
alternatives.




Charter
Hire Rates




Charter hire rates fluctuate by varying
degrees among dry bulk carrier size categories. The volume and pattern of trade
in a small number of commodities (major bulks) affect demand for larger vessels.
Therefore, charter rates and vessel values of larger vessels often show greater
volatility. Conversely, trade in a greater number of commodities (minor bulks)
drives demand for smaller dry bulk carriers. Accordingly, charter rates and
vessel values for those vessels are subject to less
volatility.




Charter hire rates paid for dry bulk
carriers are primarily a function of the underlying balance between vessel
supply and demand, although at times other factors may play a role. Furthermore,
the pattern seen in charter rates is broadly mirrored across the different
charter types and the different dry bulk carrier categories. However, because
demand for larger dry bulk vessels is affected by the volume and pattern of
trade in a relatively small number of commodities, charter hire rates (and
vessel values) of larger ships tend to be more volatile than those for smaller
vessels.




In the time charter market, rates vary
depending on the length of the charter period and vessel specific factors such
as age, speed and fuel consumption.




In the voyage charter market, rates are
influenced by cargo size, commodity, port dues and canal transit fees, as well
ascommencement and
terminationregions. In
general, a larger cargo size is quoted at a lower rate per ton




28


than a smaller cargo size. Routes with
costly ports or canals generally command higher rates than routes with low port
dues and no canals to transit. Voyages with a load port within a region that
includes ports where vessels usually discharge cargo or a discharge port within
a region with ports where vessels load cargo also are generally quoted at lower
rates, because such voyages generally increase vessel utilization by reducing
the unloaded portion (or ballast leg) that is included in the calculation of the
return charter to a loading area.




Within the dry bulk shipping industry,
the charter hire rate references most likely to be monitored are the freight
rate indices issued by the Baltic Exchange. These references are based on actual
charter hire rates under charter entered into by market participants as well as
daily assessments provided to the BalticExchange by a panel of major
shipbrokers. The Baltic Panamax Index is the index with the longest history. The
Baltic Capesize Index and Baltic Handymax Index are of more recent origin.




RecentSignificantDecline in Dry Bulk Charter Hire
Rates




The Baltic
Dry Index, or BDI, a daily average of charter rates in 26 shipping routes
measured on a time charter and voyage basis and covering Supramax, Panamax and
Capesize drybulk carriers, declined from a high of 11,793 in May 2008 to a low
of 663 in December 2008, which represents a decline of 94%.  The BDI
fell over 70% during the month of October alone.  Over the comparable
period of May through December 2008, the high and low of the Baltic Panamax
Index and the Baltic Capesize Index represent a decline of 96% and 99%,
respectively. The general decline in the drybulk carrier charter market is due
to various factors, including the lack of trade financing for purchases of
commodities carried by sea, which has resulted in a significant decline in cargo
shipments, and the excess supply of iron ore in China, which has resulted in
falling iron ore prices and increased stockpiles in Chinese ports.




Vessel
Prices




Drybulk vessel values have declined both
as a result of a slowdown in the availability of global credit and the
significant deterioration in charter rates. Charter rates and vessel values have
been affected in part by the lack of availability of credit to finance both
vessel purchases and purchases of commodities carried by sea, resulting in a
decline in cargo shipments, and the excess supply of iron ore in China which
resulted in falling iron ore prices and increased stockpiles in Chinese ports.
Consistent with these trends, the market value of our drybulk carriers has
declined. There can be no assurance as to how long charter rates and vessel
values will remain at their currently low levels or whether they will improve to
any significant degree. Charter rates may remain at depressed levels for some
time which will adversely affect our revenue and
profitability.




Competition




Our business fluctuates in line with the
main patterns of trade of the major dry bulk cargoes and varies according to
changes in the supply and demand for these items.We operate in markets that are highly
competitive and based primarily on supply and demand. We compete for charters on
the basis of price, vessel location, size, age and condition of the vessel, as
well as on our reputation as an owner and operator. We compete with other owners
of dry bulk carriers in the Panamax and smaller class sectors and with owners of
Capesize dry bulk carriers. Ownership of dry bulk carriers is highly
fragmented.




We believe that we possess a number of
strengths that provide us with a competitive advantage in the dry bulk shipping
industry:




·
            We own a
      modern, high quality fleet of dry bulk carriers.We believe that owning a modern,
      high quality fleet reduces operating costs, improves safety and provides
      us with a competitive advantage in securing favorable time charters. We
      maintain the quality of our vessels by carrying out regular inspections,
      both while in port and at sea, and adopting a comprehensive maintenance
      program for each vessel.




29







·
            Our fleet
      includes four groups of sister ships.We believe that maintaining a
      fleet that includes sister ships enhances the revenue generating potential
      of our fleet by providing us with operational and scheduling flexibility.
      The uniform nature of sister ships also improves ouroperating efficiency by allowing
      our fleet manager to apply the technical knowledge of one vessel to all
      vessels of the same series and creates economies of scale that enable us
      to realize cost savings when maintaining, supplying and crewing our
      vessels.




·
            We have an
      experienced management team.Our management team consists of
      experienced executives who have on average more than 23years of operating
      experience in the shipping industry and have demonstrated ability in
      managing the commercial, technical and financial areas of our business.
      Our management team is led by Mr.Simeon Palios, a qualified naval
      architect and engineer who has41years of experience in the
      shipping industry.




·
            Internal
      management of vessel operations.We conduct all of the commercial
      and technical management of our vessels in-house through DSS. We believe
      having in-house commercial and technical management provides us with a
      competitive advantage over many of our competitors by allowing us to more
      closely monitor our operations and to offer higher quality performance,
      reliability and efficiency in arranging charters and the maintenance of
      our vessels.




·
            We benefit
      from strong relationships with members of the shipping and financial
      industries.We have developed strong
      relationships with major international charterers, shipbuilders and
      financial institutions that we believe are the result of the quality of
      our operations, the strength of our management team and our reputation for
      dependability.




·
            We have a
      strong balance sheet and a relatively low level of
      indebtedness.We believe that our strong balance
      sheet and relatively low level of indebtedness provide us with the
      flexibility to increase the amount of funds that we may draw under our
      credit facilities in connection with future acquisitions and enable us to
      use cash flow that would otherwise be dedicated to debt service for other
      purposes.




Permits
and Authorizations




We are required by various governmental
and quasi-governmental agencies to obtain certain permits, licenses and
certificates with respect to our vessels. The kinds of permits, licenses and
certificates required depend upon several factors, including the commodity
transported, the waters in which the vessel operates, the nationality of the
vessel’s crew and the age of a vessel. We have
been able to obtain all permits, licenses and certificates currently required to
permit our vessels to operate. Additional laws and regulations, environmental or
otherwise, may be adopted which could limit our ability to do business or
increase the cost of us doing business.




Environmental
and Other Regulations




Government
regulation significantly affects the ownership and operation of our vessels. We
are subject to international conventions and treaties, national, state and local
laws and regulations in force in the countries in which our vessels may operate
or are registered relating to safety and health and environmental protection
including the storage, handling, emission, transportation and discharge of
hazardous and non-hazardous materials, and the remediation of contamination and
liability for damage to natural resources. Compliance with such laws,
regulations and other requirements entails significant expense, including vessel
modifications and implementation of certain operating procedures.




A variety of government and private
entities subject our vessels to both scheduled and unscheduled inspections.
These entities include the local port authorities (United States Coast Guard,
harbor master or equivalent), classification societies; flag state
administrations (country of registry) and charterers, particularly terminal
operators. Certain of these entities require us to obtain permits, licenses and
certificates for the operation of our vessels. Failure to maintain necessary
permits or approvals could require us to incur substantial costs or temporarily
suspend the operation of one or more of our vessels.


30




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




International Maritime
Organization




The
International Maritime Organization, the United Nations agency for maritime
safety and the prevention of pollution by ships, or the IMO, has adopted the
International Convention for the Prevention of Marine Pollution, 1973, as
modified by the related Protocol of 1978 relating thereto, which has been
updated through various amendments, or the MARPOL Convention.  The
MARPOL Convention establishes environmental standards relating to oil leakage or
spilling, garbage management, sewage, air emissions, handling and disposal of
noxious liquids and the handling of harmful substances in packaged
forms.  The IMO adopted regulations that set forth pollution
prevention requirements applicable to dry bulk carriers.  These
regulations have been adopted by over 150 nations, including many of the
jurisdictions in which our vessels operate.




In
September 1997, the IMO adopted Annex VI to the MARPOL Convention, Regulations
for the Prevention of Pollution from Ships, to address air pollution from ships.
Effective May 2005, Annex VI sets limits on sulfur oxide and nitrogen oxide
emissions from all commercial vessel exhausts and prohibits deliberate emissions
of ozone depleting substances (such as halons and chlorofluorocarbons),
emissions of volatile compounds from cargo tanks, and the shipboard incineration
of specific substances. Annex VI also includes a global cap on the sulfur
content of fuel oil and allows for special areas to be established with more
stringent controls on sulfur emissions. We believe that all our vessels are
currently compliant in all material respects with these regulations. Additional
or new conventions, laws and regulations may be adopted that could require the
installation of expensive emission control systems and could adversely affect
our business, results of operations, cash flows and financial condition. In
October 2008, the IMO adopted amendments to Annex VI regarding nitrogen oxide
and sulfur oxide emissions standards which are expected to enter into force on
July 1, 2010. The amended Annex VI would reduce air pollution from vessels by,
among other things, (i) implementing a progressive reduction of sulfur oxide
emissions from ships, with the global sulfur cap reduced initially to 3.50%
(from the current cap of 4.50%), effective from January 1, 2012, then
progressively to 0.50%, effective from January 1, 2020, subject to a feasibility
review to be completed no later than 2018; and (ii) establishing new tiers of
stringent nitrogen oxide emissions standards for new marine engines, depending
on their date of installation. Once these amendments become effective, we may
incur costs to comply with these revised standards.Also in October 2008, the
United States became a party to the MARPOL Convention by depositing an
instrument of ratification with the IMO for the amended Annex VI, thereby
rendering U.S. air emissions standards equivalent to IMO
requirements.




Safety
Management System Requirements




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




31


Under
Chapter IX of SOLAS, the International Safety Management Code for the Safe
Operation of Ships and for Pollution Prevention, or ISM Code, our operations are
also subject to environmental standards and requirements contained in the ISM
Code promulgated by the IMO. The ISM Code requires the party with operational
control of a vessel to develop an extensive safety management system that
includes, among other things, the adoption of a safety and environmental
protection policy setting forth instructions and procedures for operating its
vessels safely and describing procedures for responding to emergencies. We rely
upon the safety management system that we and our technical manager have
developed for compliance with the ISM Code.  The failure of a ship
owner or bareboat charterer to comply with the ISM Code may subject such party
to increased liability, may decrease available insurance coverage for the
affected vessels and may result in a denial of access to, or detention in,
certain ports. As of the date of this filing, each of our vessels is ISM
code-certified.




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




Pollution
Control and Liability Requirements




IMO
has negotiated international conventions that impose liability for oil pollution
in international waters and the territorial waters of the signatory to such
conventions. For example, IMO adopted an International Convention for the
Control and Management of Ships’ Ballast Water and Sediments, or the BWM
Convention, in February 2004. The BWM Convention’s implementing regulations call
for a phased introduction of mandatory ballast water exchange requirements
(beginning in 2009), to be replaced in time with mandatory concentration limits.
The BWM Convention will not become effective until 12 months after it has been
adopted by 30 states, the combined merchant fleets of which represent not less
than 35% of the gross tonnage of the world’s merchant shipping. To date there
has not been sufficient adoption of this standard for it to take
force.




Although
the United States is not a party to these conventions, many countries have
ratified and follow the liability plan adopted by the IMO and set out in the
International Convention on Civil Liability for Oil Pollution Damage of 1969, as
amended in 2000, or the CLC. Under this convention and depending on whether the
country in which the damage results is a party to the 1992 Protocol to the CLC,
a vessel’s registered owner is strictly liable for pollution damage caused in
the territorial waters of a contracting state by discharge of persistent oil,
subject to certain defenses.  The limits on liability outlined in the
1992 Protocol use the International Monetary Fund currency unit of Special
Drawing Rights, or SDR. Under an amendment to the 1992 Protocol that became
effective on November 1, 2003, for vessels between 5,000 and 140,000 gross tons
(a unit of measurement for the total enclosed spaces within a vessel), liability
is limited to approximately $6.67 million (4.51 million SDR) plus $934 (631 SDR)
for each additional gross ton over 5,000. For vessels of over 140,000 gross
tons, liability is limited to $132.81 million (89.77 million SDR).  As
the convention calculates liability in terms of a basket of currencies, these
figures are based on currency exchange rates of 0.675914 SDR per U.S. dollar on
February 24, 2009. The right to limit liability is forfeited under the CLC where
the spill is caused by the ship owner’s actual fault and under the 1992 Protocol
where the spill is caused by the ship owner’s intentional or reckless conduct.
Vessels trading with states that are parties to these conventions must provide
evidence of insurance covering the liability of the owner. In jurisdictions
where the CLC has not been adopted, various legislative schemes or common law
govern, and liability is imposed either on the basis of fault or in a manner
similar to that of the convention. We believe that our protection and indemnity
insurance will cover the liability under the plan adopted by the
IMO.




In
March 2006, the IMO amended Annex I to MARPOL, including a new regulation
relating to oil fuel tank protection, which became effective August 1,
2007.  The new regulation will apply to various ships delivered on or
after August 1, 2010.  It includes requirements for the protected
location of the fuel tanks, performance standards
for accidental oil fuel outflow, a tank capacity limit and certain other
maintenance, inspection and engineering standards.


32




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




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




Anti-Fouling
Requirements




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




Compliance
Enforcement




The
flag state, as defined by the United Nations Convention on Law of the Sea, has
overall responsibility for the implementation and enforcement of international
maritime regulations for all ships granted the right to fly its flag. The
“Shipping Industry Guidelines on Flag State Performance” evaluates flag states
based on factors such as sufficiency of infrastructure, ratification of
international maritime treaties, implementation and enforcement of international
maritime regulations, supervision of surveys, casualty investigations and
participation at IMO meetings. Our vessels are flagged in the Marshall Islands.
Marshall Islands-flagged vessels have historically received a good assessment in
the shipping industry.  We recognize the importance of a credible flag
state and do not intend to use flags of convenience or flag states with poor
performance indicators.




Noncompliance
with the ISM Code or other IMO regulations may subject the ship owner or
bareboat charterer to increased liability, may lead to decreases in available
insurance coverage for affected vessels and may result in the denial of access
to, or detention in, some ports. The U.S. Coast Guard and European Union
authorities have indicated that vessels not in compliance with the ISM Code by
the applicable deadlines will be prohibited from trading in U.S. and European
Union ports, respectively. As of the date of this report, each of our vessels is
ISM Code certified.  However, there can be no assurance that such
certificate will be maintained.




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




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




The
U.S. Oil Pollution Act of 1990, or OPA, established an extensive regulatory and
liability regime for the protection and cleanup of the environment from oil
spills. OPA affects all owners and operators whose vessels




33


trade
in the United States, its territories and possessions or whose vessels operate
in United States waters, which includes the United States’ territorial sea and
its two hundred nautical mile exclusive economic zone.  The United
States has also enacted the Comprehensive Environmental Response, Compensation
and Liability Act, or CERCLA, which applies to the discharge of hazardous
substances other than oil, whether on land or at sea.  Both OPA and
CERCLA impact our operations.




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




·
            natural
      resources damage and the costs of assessment
  thereof;




·
            real
      and personal property damage;




·
            net
      loss of taxes, royalties, rents, fees and other lost
    revenues;




·
            lost
      profits or impairment of earning capacity due to property or natural
      resources damage;




·
            net
      cost of public services necessitated by a spill response, such as
      protection from fire, safety or health hazards;
  and




·
            loss
      of subsistence use of natural
resources.




Under
amendments to OPA that became effective on July 11, 2006, the liability of
responsible parties is limited to the greater of $950 per gross ton or $0.8
million per non-tank (e.g. dry bulk) vessel that is over 300 gross tons (subject
to periodic adjustment for inflation). CERCLA, which applies to owners and
operators of vessels, contains a similar liability regime and provides for
cleanup, removal and natural resource damages.  Liability under CERCLA
is limited to the greater of $300 per gross ton or $5 million for vessels
carrying a hazardous substance as cargo and the greater of $300 per gross ton or
$0.5 million for any other vessel.  These limits of liability do not
apply if an incident was directly caused by violation of applicable U.S. federal
safety, construction or operating regulations or by a responsible party’s gross
negligence or willful misconduct, or if the responsible party fails or refuses
to report the incident or to cooperate and assist in connection with oil removal
activities.




We
currently maintain pollution liability coverage insurance in the amount of $1
billion per incident for each of our vessels. If the damages from a catastrophic
spill were to exceed our insurance coverage it could have an adverse effect on
our business and results of operation.




OPA
also requires owners and operators of vessels to establish and maintain with the
U.S. Coast Guard evidence of financial responsibility sufficient to meet their
potential liabilities under OPA and CERCLA.  On October 17, 2008, the
U.S. Coast Guard regulatory requirements under OPA and CERCLA were amended to
require evidence of financial responsibility in amounts that reflect the higher
limits of liability imposed by the 2006 amendments to OPA, as described above.
The increased amounts became effective on January 15, 2009.  In
addition, on September 24, 2008, the U.S. Coast Guard proposed adjustments to
the limits of liability for non-tank vessels that would further increase the
limits to the greater of $1,000 per gross ton or $848,000 and establish a
procedure for adjusting the limits for inflation every three
years.  The Coast Guard is currently soliciting comments on the
proposal.  Under the regulations, vessel owners and operators may
evidence their financial responsibility by showing proof of insurance, surety
bond, self-insurance or guaranty. Under OPA, an owner or operator of a fleet of
vessels is required only to demonstrate evidence of financial responsibility in
an amount sufficient to cover the vessels in the fleet having the greatest
maximum liability under OPA.






34


The
U.S. Coast Guard’s regulations concerning certificates of financial
responsibility provide, in accordance with OPA, that claimants may bring suit
directly against an insurer or guarantor that furnishes certificates of
financial responsibility. In the event that such insurer or guarantor is sued
directly, it is prohibited from




The
U.S. Coast Guard’s financial responsibility regulations may also be satisfied by
evidence of surety bond, guaranty or by self-insurance. Under the self-insurance
provisions, the ship owner or operator must have a net worth and working
capital, measured in assets located in the United States against liabilities
located anywhere in the world, that exceeds the applicable amount of financial
responsibility. We have complied with the U.S. Coast Guard regulations by
providing a certificate of responsibility from third party entities that are
acceptable to the U.S. Coast Guard evidencing sufficient
self-insurance.




OPA
specifically permits individual states to impose their own liability regimes
with regard to oil pollution incidents occurring within their boundaries, and
some states have enacted legislation providing for unlimited liability for oil
spills. In some cases, states, which have enacted such legislation, have not yet
issued implementing regulations defining vessels owners’ responsibilities under
these laws. We intend to comply with all applicable state regulations in the
ports where our vessels call.  We believe that we are in substantial
compliance with all applicable existing state requirements.  In
addition, we intend to comply with all future applicable state regulations in
the ports where our vessels call.




Other
Environmental Initiatives




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




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




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






35


For
each discharge type, among other things, the VGP establishes effluent limits
pertaining to the constituents found in the effluent, including best management
practices, or BMPs, designed to decrease the amount of constituents entering the
waste stream. Unlike land-based discharges, which are deemed acceptable by
meeting




On
August 31, 2008, the District Court ordered that the date for implementation of
the VGP be postponed from September 30, 2008 until December 19, 2008. This date
was further postponed until February 6, 2009 by the District Court. Although the
VGP became effective on February 6, 2009, the VGP application procedure, known
as the Notice of Intent, or NOI, has yet to be finalized. Accordingly, Regulated
Vessels will effectively be covered under the VGP from February 6, 2009 until
June 19, 2009, at which time the “eNOI” electronic filing interface will become
operational. Thereafter, owners and operators of Regulated Vessels must file
their NOIs prior to September 19, 2009, or the Deadline. Any Regulated Vessel
that does not file an NOI by the Deadline will, as of that date, no longer be
covered by the VGP and will not be allowed to discharge into U.S. navigable
waters until it has obtained a VGP. Any Regulated Vessel that was delivered on
or before the Deadline will receive final VGP permit coverage on the date that
the EPA receives such Regulated Vessel’s complete NOI. Regulated Vessels
delivered after the Deadline will not receive VGP permit coverage until 30 days
after their NOI submission. Our fleet is composed entirely of Regulated Vessels,
and we intend to submit NOIs for each vessel in our fleet as soon after June 19,
2009 as practicable.




In
addition, pursuant to §401 of the CWA which requires each state to certify
federal discharge permits such as the VGP, certain states have enacted
additional discharge standards as conditions to their certification of the VGP.
These local standards bring the VGP into compliance with more stringent state
requirements, such as those further restricting ballast water discharges and
preventing the introduction of non-indigenous species considered to be invasive.
The VGP and its state-specific regulations and any similar restrictions enacted
in the future will increase the costs of operating in the relevant
waters.




As referenced above, the amended Annex
VI to the IMO’s MARPOL Convention, whichaddresses air pollution from ships, was
ratified by the United States on October 9, 2008 and entered intoforce domestically on January 8, 2009.
The EPA and the state of California, however, have each proposedmore stringent regulations of air
emissions from ocean-going vessels. On July 24, 2008, the CaliforniaAir Resources Board of the State of
California, or CARB, approved clean-fuel regulations applicable toall vessels sailing within 24 miles of
the California coastline whose itineraries call for them to enter
anyCalifornia ports, terminal facilities,
or internal or estuarine waters. The new CARB regulations requiresuch vessels to use low sulfur marine
fuels rather than bunker fuel. By July 1, 2009, such vessels arerequired to switch either to marine gas
oil with a sulfur content of no more than 1.5% or marine diesel oilwith a sulfur content of no more than
0.5%. By 2012, only marine gas oil and marine diesel oil fuels with0.1% sulfur will be allowed. CARB
unilaterally approved the new regulations in spite of legal defeats
atboth the district and appellate court
levels, but more legal challenges are expected to follow. If CARBprevails and the new regulations go into
effect as scheduled on July 1, 2009, in the event our vessels wereto travel within such waters, these new
regulations would require significant expenditures on low-sulfurfuel and would increase our operating
costs. Finally, although the more stringent CARB regime wastechnically superseded when the United
States ratified and implemented the amended Annex VI, thepossible declaration of various U.S.
coastal waters as Emissions Control Areas may in turn bring U.S.emissions standards into line with the
new CARB regulations, which would cause us to incur furthercosts.




36


The
U.S. National Invasive Species Act, or NISA, was enacted in 1996 in response to
growing reports of harmful organisms being released into U.S. ports through
ballast water taken on by ships in foreign ports. NISA established a ballast
water management program for ships entering U.S. waters. Under NISA, mid-ocean
ballast water exchange is voluntary, except for ships heading to the Great Lakes
or Hudson Bay, or vessels engaged in the foreign export of Alaskan North Slope
crude oil. However, NISA’s reporting and record-keeping requirements are
mandatory for vessels bound for any port in the United States. Although ballast
water exchange is the primary means of compliance with the act’s guidelines,
compliance can also be achieved through the retention of ballast water on board
the ship, or the use of environmentally sound alternative ballast water
management methods approved by the U.S. Coast Guard. If the mid-ocean ballast
exchange is made mandatory throughout the United States, or if water treatment
requirements or options are instituted, the cost of compliance could increase
for ocean carriers. Although we do not believe that the costs of compliance with
a mandatory mid-ocean ballast exchange would be material, it is difficult to
predict the overall impact of such a requirement on the dry bulk shipping
industry. The U.S. House of Representatives has recently passed a bill that
amends NISA by prohibiting the discharge of ballast water unless it has been
treated with specified methods or acceptable alternatives. Similar bills have
been introduced in the U.S. Senate, but we cannot predict which bill, if any,
will be enacted into law. In the absence of federal standards, states have
enacted legislation or regulations to address invasive species through ballast
water and hull cleaning management and permitting requirements. For instance,
the state of California has recently enacted legislation extending its ballast
water management program to regulate the management of “hull fouling” organisms
attached to vessels and adopted regulations limiting the number of organisms in
ballast water discharges. In addition, in November 2008 the Sixth Circuit
affirmed a District Court’s dismissal of challenges to the state of Michigan’s
ballast water management legislation mandating the use of various techniques for
ballast water treatment. Other states may proceed with the enactment of similar
requirements that could increase the costs of operating in state
waters.




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




European Union
Regulations




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




Greenhouse Gas
Regulation




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




37







Vessel
Security Regulations




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







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


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


·
            the
      development of vessel security
plans;


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


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


·
            compliance
      with flag state security certification
  requirements.





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




Inspection
by Classification Societies




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




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




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




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




38







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




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




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




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




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




Risk
of Loss and Liability Insurance




General




The operation of any dry bulk vessel
includes risks such as mechanical failure, collision, property loss, cargo loss
or damage and business interruption due to political circumstances in foreign
countries, hostilities and labor strikes. In addition, there is always an
inherent possibility of marine disaster, including oil spills and other
environmental mishaps, and the liabilities arising from owning and operating
vessels in international trade. OPA, which imposes virtually unlimited liability
upon owners, operators and demise charterers of vessels trading in the United
States exclusive economic zone for certain oil pollution accidents in the United
States, has made liability insurance more expensive for ship owners and
operators trading in the United States market.




While we maintain hull and machinery
insurance, war risks insurance, protection and indemnity cover, increased value
insurance and freight, demurrage and defense cover for our operating fleet in
amounts that we believe to be prudent to cover normal risks in our operations,
we may not be able to achieve or maintain this level of coverage throughout a
vessel’s useful life. Furthermore, while we
believe that our present insurance coverage is adequate, not all risks can be
insured, and there can be no guarantee that any specific claim will be paid, or
that we will always be able to obtain adequate insurance coverage at reasonable
rates.




Hull& Machinery and War Risks
Insurance




We maintain marine hull and machinery
and war risks insurance, which cover the risk of actual or
constructive




39


total loss, for all of our vessels. Our
vessels are each covered up to at least fair market value with deductibles
ranging to a maximum of $100,000 per vessel per
incidentfor Panamax
vessels and $150,000 per vessel per incident for Capesize vessels.




Protection and Indemnity
Insurance




Protection and indemnity insurance is
provided by mutual protection and indemnity associations, or P&I
Associations, which insure our third party liabilities in connection with our
shipping activities. This includes third-party liability and other related
expenses resulting from the injury or death of crew, passengers and other third
parties, the loss or damage to cargo, claims arising from collisions with other
vessels, damage to other third-party property, pollution arising from oil or
other substances and salvage, towing and other related costs, including wreck
removal. Protection and indemnity insurance is a form of mutual indemnity
insurance, extended by protection and indemnity mutual associations, or“clubs.”




Our current protection and indemnity
insurance coverage for pollution is $1billion per vessel per incident. The 13
P&I Associations that comprise the International Group insure approximately
90% of the world’s commercial tonnage and have entered
into a pooling agreement to reinsure each association’s liabilities. As a member of a P&I
Association, which is a member of the International Group, we are subject to
calls payable to the associations based on the group’s claim records as well as the claim
records of all other members of the individual associations and members of the
pool of P&I Associations comprising the International Group.




C.Organizational
      structure




Diana Shipping Inc. is the sole owner of
all of theissued
andoutstanding shares of
the subsidiaries listed in Note 1 of our consolidated financial statements under
Item 18 and in exhibit 8.1.




D.Property,
      plants and equipment




We do not own anyrealproperty.We lease propertythrough our management company under
finance and operating leases.Our interests in the vessels in our
fleet are our only material properties.




Item
4A.  Unresolved Staff Comments




None.




Item
5.Operating and Financial Review and Prospects




The following management’s discussion and analysis should be read
in conjunction with our historical consolidated financial statements and their
notes included elsewhere in this report. This discussion contains
forward-looking statements that reflect our current views with respect to future
events and financial performance. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, such as those set forth in the section entitled“Risk Factors”and elsewhere in this
report.




A.
Operating results




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




40







Factors
Affecting Our Results of Operations




We believe that the important measures
for analyzing trends in our results of operations consist of the
following:




·
            Ownership
      days.We define
      ownership days as the aggregate number of days in a period during which
      each vessel in our fleet has been owned by us. Ownership days are an
      indicator of the size of our fleet over a period and affect both the
      amount of revenues and the amount of expenses that we record during a
      period.




·
            Available
      days.We define
      available days as the number of our ownership days less the aggregate
      number of days that our vessels are off-hire due to scheduled repairs or
      repairs under guarantee, vessel upgrades or special surveys and the
      aggregate amount of time that we spend positioning our vessels. The
      shipping industry uses available days to measure the number of days in a
      period during which vessels should be capable of generating
      revenues.




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




·
            Fleet
      utilization.We
      calculate fleet utilization by dividing the number of our operating days
      during a period by the number of our available days during the period. The
      shipping industry uses fleet utilization to measure a company’s efficiency in finding suitable
      employment for its vessels and minimizing the amount of days that its
      vessels are off-hire for reasons other than scheduled repairs or repairs
      under guarantee, vessel upgrades, special surveys or vessel
      positioning.




·
            TCE
      rates.We define TCE
      rates as our voyage and time charter revenues less voyage expenses during
      a period divided by the number of our available days during the period,
      which is consistent with industry standards. TCE rate is a standard
      shipping industry performance measure used primarily to compare daily
      earnings generated by vessels on time charters with daily earnings
      generated by vessels on voyage charters, because charter hire rates for
      vessels on voyage charters are generally not expressed in per day amounts
      while charter hire rates for vessels on time charters generally are
      expressed in such amounts.




The following table reflects our
ownership days, available days, operating days, fleet utilization and TCE rates
for the periods indicated.




Year Ended December
      31,2008
                
                
                2007
                
                
                2006Ownership
    days
                
                
                6,913
                
                
                
                5,813
                
                
                
                4,897Available
    days
                
                
                6,892
                
                
                
                5,813
                
                
                
                4,856Operating
    days
                
                
                6,862
                
                
                
                5,771
                
                
                
                4,849Fleet
      utilization
                
                
                99.6
                %
                
                
                99.3
                %
                
                
                99.9
                %Time charter equivalent (TCE)
      rate
                
                $
                46,777
                
                
                $
                31,272
                
                
                $
                22,661





Voyage and Time Charter
Revenue




Our revenues are driven primarily by the
number of vessels in our fleet, the number of days during which our vessels
operate and the amount of daily charter hire rates that our vessels earn under
charters, which, in turn, are affected by a number of factors,
including:




·
            the duration of our
      charters;




41







·
            our decisions relating to vessel
      acquisitions and disposals;




·
            the amount of time that we spend
      positioning our vessels;




·
            the amount of time that our
      vessels spend indrydockundergoing
      repairs;




·
            maintenance and upgrade
      work;




·
            the age, condition and
      specifications of our
vessels;




·
            levels of supply and demand in the
      dry bulk shipping industry;
and




·
            other factors affecting spot
      market charter rates for dry bulk
  carriers.




Our revenues have grown significantly in
recent periods as a result of the enlargement of our fleet, which has increased
our ownership, available
and operating days. Revenues also increased over the past year due to increased
hire rates negotiated on vessels before the drastic decline in market charter
rates during the latter five months of 2008.At the same time, we have maintained
relatively high vessel utilization rates.We expect our revenues in 2009 to
decline as our vessels that were redelivered to us by their charterers in
December 2008 and the beginning of 2009 were exposed to the lower charter rates
of the spot market and consequently were fixed to new employments at daily time
charter rates considerably lower than their previous employments.Currently, four of
our vessels are employed on time charters scheduled to expire within the next
six months, at which time we expect to enter into new charters for those
vessels. Our time charter agreements subject us to counterparty risk. In
depressed market conditions, charterers may seek to renegotiate the terms of
their existing charter parties or avoid their obligations under those
contracts.  Should a counterparty fail to honor its obligations under
agreements with us, we could sustain significant losses which could have a
material adverse effect on our business, financial condition, results of
operations and cash flows.




Voyage Expenses




We incur voyage expenses that include
port and canal charges, bunker (fuel oil) expenses and commissions. Port and
canal charges and bunker expenses primarily increase in periods during which
vessels are employed on voyage charters because these expenses are for the
account of theowner of thevessels. Port and canal
charges and bunker expenses currently represent a relatively small portion of
our vessels’overall expenses because all of our
vessels are employed under time charters that require the charterer to bear all
of those expenses.




As is common in the shipping industry,
wehave historically paidcommissions ranging from0% to6.25% of the total daily charter hire rate
of each charter to unaffiliated ship brokers and in-house brokers associated
with the charterers, depending on the number of brokers involved with arranging
the charter. In addition to commissions paid to third parties, we have
historically paid our fleet manager a commission that is equal to 2% of our
revenues in exchange for providing us with technical and commercial management
services in connection with the employment of our fleet.However, thiscommissionhas been eliminated from our
consolidated financial statements since April 1, 2006 (after DSS was acquired)
and therefore, since that date does not constitute part of our voyage
expenses.




For 2008, 2007 and 2006 commissions
amounted to $15.6 million, $8.9 million and $5.9 million, respectively of which
$0.5 million in 2006 related to commissions charged by DSS.




We believe that the amounts and the
structures of our commissions are consistent with industry
practices.




We expect that the amount of our total
commissionswill decrease
due to decreased charter hire rates and revenues.




42







Vessel Operating
Expenses




Vessel operating expenses include crew
wages and related costs, the cost of insurance, expenses relating to repairs and
maintenance, the cost of spares and consumable stores, tonnage taxes and other
miscellaneous expenses. Our vessel operating expenses, which generally represent
fixed costs, have historically increased as a result of the enlargement of our
fleet. We expect these expenses to increase further as a result ofthe enlargement of our fleet. Other factors beyond our control, some
of which may affect the shipping industry in general, including, for instance,
developments relating to market prices for insurance, may also cause these
expenses to increase.




Depreciation




The cost of our vessels is depreciated
on a straight-line basis over the expected useful life of each vessel.
Depreciation is based on the cost of the vessel less its estimated residual
value. We estimate the useful life of our vessels to be 25years from the date construction is
completed, which we believe is common in the dry bulk shipping
industryand is usually the
age that vessels are scrapped. Furthermore, we estimate the residual
values of our vessels to be $150 per light-weight ton which we also believe is
common in the dry bulk shipping industryand has been a historical average price
of the cost of the light-weight ton of vessels being scrapped.We do not expect these assumptions to
change in the near future.Our depreciation charges have increased
in recent periods due to the enlargement of
our fleet which has also led to an increase of ownership days. We expect that
these charges will continue to grow as a result ofour acquisition of additional
vessels.




General and Administrative
Expenses




We incur general and administrative
expenses which include our onshore vessel related expenses such as legal and
professional expenses and other general vessel expenses. Subsequent to April
2006, our general and administrative expenses increased as a result of our
acquisition of our fleet
manager.Our general and
administrative expenses also include payroll expensesof employees, executive officersand consultants, compensation cost of
restricted stock awarded to senior management and non-executive directors,
traveling, promotional and other expenses of the public company. General and administrative expenses
may increase as a result of the enlargement of our fleet.




Interest and Finance
Costs




We have historically incurred interest
expense and financing costs
in connection with the vessel-specific debt of our
subsidiaries.As
of December 31, 2008, 2007 and 2006, we had $214.7 million, $75.0 million and
$114.6 millionof
indebtedness outstanding under our revolving credit facility, respectively.We incur interest expense and financing
costs relating to our outstanding debt and our available credit
facilityand have also
incurred interest expense relating to our financing lease, which expired in
December 2008. We expect to
incur additional debt to finance future acquisitions. However, we intend to
limit the amount of these expenses and costs by repaying our outstanding
indebtedness in excess of approximately $150.0 million from time to time with
the net proceeds of future equity issuances. As of December 31, 2008, 2007 and 2006, we had $24.1 million of indebtedness
outstanding under our facility with Fortis bank. Interest and finance costs
incurred in connection with thisloanfacility are capitalized in vessel
cost.




Lack of Historical Operating Data for
Vessels before Their Acquisition




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


43




Where we
identify any intangible assets or liabilitiesassociated with the
acquisition of a vessel, we record all identified assets or liabilities at fair
value. Fair value is determined by reference to market data. We value any asset
or liability arising from the market value of the time charters assumed when a
vessel is acquired. The amount to be recorded as an asset or liability at the
date of vessel delivery is based on the difference between the current fair
market value of the charter and the net present value of future contractual cash
flows.  When the present value of the time charter assumed is greater
than the current fair market value of such charter, the difference is recorded
as prepaid charter revenue.  When the opposite situation occurs, any
difference, capped to the vessel’s fair value on a charter free basis, is
recorded as deferred revenue.  Such assets and liabilities,
respectively, are amortized as a reduction of, or an increase in, revenue over
the period of the time charter assumed.




Weentered intoagreementsto purchasevessels with time charters assumed fortheThetis,theSalt
LakeCityand theNorfolk. We evaluated the charters of theThetis,theSalt Lake
Cityand theNorfolkandrecognizedan asset in the case of theThetiswith a corresponding decrease of the
vessel’s value and a liability in the case of theSalt Lake
City,with a corresponding increase of the
vessel’s value and the actual cost for theNorfolk. The asset recognized for theThetiswas fully amortized to revenue in 2007.
The liability recognized for theSalt Lake
Citywill be fully
amortized in 2012 (when the charter contract expires).




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




·
            obtain the charterer’s consent to us as the new
      owner;




·
            obtain the charterer’s consent to a new technical
      manager;




·
            in some cases, obtain the
      charterer’s consent to a new flag for the
      vessel;




·
            arrange for a new crew for the
      vessel, and where the vessel is on charter, in some cases, the crew must
      be approved by the
charterer;




·
            replace all hired equipment on
      board, such as gas cylinders and communication
      equipment;




·
            negotiate and enter into new
      insurance contracts for the vessel through our own insurance
      brokers;




·
            register the vessel under a flag
      state and perform the related inspections in order to obtain new trading
      certificates from the flag
state;




·
            implement a new planned
      maintenance program for the vessel;
and




·
            ensure that the new technical
      manager obtains new certificates for compliance with the safety and vessel
      security regulations of the flag
state.




When we charter a vessel pursuant to a
long-term time charter agreement with varying rates, we recognize revenue on a
straight line basis, equal to the average revenue during the term of the
charter. We have such varying rates pursuant to our time charter agreements for
theSideris
GS, theAlikiand theSemirio.




The following discussion is intended to
help you understand how acquisitions of vessels affect our business and results
of operations.




Our business is comprised of the
following main elements:




·
            employment and operation of our
      dry bulk vessels; and




44







·
            management of the financial,
      general and administrative elements involved in the conduct of our
      business and ownership of our dry bulk
  vessels.




The employment and operation of our
vessels require the following main components:




·
            vessel maintenance and
      repair;




·
            crew selection and
      training;




·
            vessel spares and stores
      supply;




·
            contingency response
      planning;




·
            onboard safety procedures
      auditing;




·
            accounting;




·
            vessel insurance
      arrangement;




·
            vessel
      chartering;




·
            vessel security training and
      security response plans
(ISPS);




·
            obtain ISM certification and audit
      for each vessel within the six months of taking over a
      vessel;




·
            vessel hire
      management;




·
            vessel surveying;
      and




·
            vessel performance
      monitoring.




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




·
            management of our financial
      resources, including banking relationships, i.e., administration of bank
      loans and bank accounts;




·
            management of our accounting
      system and records and financial
  reporting;




·
            administration of the legal and
      regulatory requirements affecting our business and assets;
      and




·
            management of the relationships
      with our service providers and
customers.




The principal factors that affect our
profitability, cash flows andstockholders’return on investment
include:




·
            rates and periods of charter
      hire;




·
            levels of vessel operating
      expenses;




·
            depreciation
      expenses;




·
            financing costs;
      and




·
            fluctuations in foreign exchange
      rates.




45







Critical
Accounting Policies




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




Critical accounting policies are those
that reflect significant judgments of uncertainties and potentially result in
materially different results under different assumptions and conditions. We have
described below what we believe are our most critical accounting policies,
because they generally involve a comparatively higher degree of judgment in
their application. For a description of all our significant accounting policies,
see Note2 to our consolidated financial
statements includedin this
annual report.




Accounts Receivable,
Trade




Accounts receivable, trade, at each
balance sheet date, include receivables from charterers for hirenet of a provision for
doubtful accounts. At each balance sheet date, all potentially uncollectible
accounts are assessed individually for purposes of determining the appropriate
provision for doubtful accounts.




Accounting for Revenues and
Expenses




Revenues
are generated from time charter agreements and are usually paid 15 days in
advance. Time charter agreements with the same charterer are accounted for as
separate agreements according to the terms and conditions of each agreement.
Time charter revenues over the term of the charter are recorded as service is
provided when they become fixed and determinable. Revenues from time charter
agreements providing for varying annual rates over their term are accounted for
on a straight line basis.  Income representing ballast bonus payments
by the charterer to the vessel owner is recognized in the period earned.
Deferred revenue includes cash received prior to the balance sheet date for
which all criteria for recognition as revenue have not been met, including any
deferred revenue resulting from
charter agreements providing for varying annual rates, which are accounted for
on a straight line basis. Deferred revenue also includes the unamortized
balance of the liability associated with the acquisition of second-hand vessels
with time charters attached which were acquired at values below fair market
value at the date the acquisition agreement is consummated.




Voyage
expenses, primarily consisting of port, canal and bunker expenses that are
unique to a particular charter, are paid for by the charterer under time charter
arrangements or by the Company under voyage charter arrangements, except for
commissions, which are always paid for by the Company, regardless of charter
type. All voyage and vessel operating expenses are expensed as incurred, except
for commissions. Commissions are deferred over the related voyage charter period
to the extent revenue has been deferred since commissions are earned as the
Company’s revenues are earned.




Prepaid/Deferred Charter
Revenue:




The
Company records identified assets or liabilities associated with the acquisition
of a vessel at fair value, determined by reference to market data. The Company
values any asset or liability arising from the market value of the time charters
assumed when a vessel is acquired. The amount to be recorded as an asset or
liability at the date of vessel delivery is based on the difference between the
current fair market value of the charter and the net present value of future
contractual cash flows.  When the present value of the contractual
cash flows of the time charter assumed is greater than its current fair value,
the difference is recorded as prepaid charter revenue.  When the
opposite situation occurs, any difference, capped to the vessel’s fair value on
a charter free basis, is recorded as deferred revenue.  Such assets
and liabilities, respectively, are amortized as a reduction of, or an increase
in, revenue over the period of the time charter assumed.




46







Depreciation




We record the value of our vessels at
their cost (which includes acquisition costs directly attributable to the vessel
and expenditures made to prepare the vessel for its initial voyage) less
accumulated depreciation. We depreciate our dry bulk vessels on a straight-line
basis over their estimated useful lives, estimated to be 25years from the date of initial delivery
from the shipyardwhich we
believe is alsoconsistent
with that of other shipping companies.Second hand
vessels are depreciated from the date of their acquisition through their
remaining estimated useful life.Depreciation is based on cost less the
estimated residual scrap value. Furthermore, we estimate the residual values of
our vessels to be $150 per light-weight ton which we believe is common in the
dry bulk shipping industry. A decrease in the useful life of a dry bulk vessel
or in its residual value would have the effect of increasing the annual
depreciation charge. When regulations place limitations on the ability of a
vessel to trade on a worldwide basis, the vessel’s useful life is adjusted at the date
such regulations are adopted.




Deferred DrydockCost




Our vessels are required to be drydocked
approximately every 30 to 36 months for major repairs and maintenance that
cannot be performed while the vessels are operating. We capitalize the costs
associated with drydockings as they occur and amortize these costs on a
straight-line basis over the period between drydockings.Unamortized
drydocking costs of vessels that are sold are written off and included in the
calculation of the resulting gain or loss in the year of the vessel’s sale.Costs capitalized as part
of the drydocking include actual costs incurred at the yard and parts used inthe drydocking. We believe that these criteria are consistent with industry
practice and that our policy of capitalization reflects the economics and market
values of the vessels.




Impairment of Long-lived
Assets




We evaluate the carrying amounts
(primarily for vessels and related drydock costs) and periods over which
long-lived assets are depreciated to determine if events have occurred which
would require modification to their carrying values or useful lives. When the
estimate of undiscounted cash flows, excluding interest charges, expected to be
generated by the use of the asset is less than its carrying amount,weshould evaluate the asset for an
impairment loss. Measurement of the impairment loss is based on the fair value
of the asset.Wedetermine the fair value ofourassets based on management estimates and
assumptions and by making use of available market data and taking into
consideration third party valuations. In evaluating useful lives and carrying
values of long-lived assets, management reviews certain indicators of potential
impairment, such as undiscounted projected operating cash flows, vessel sales
and purchases, business plans and overall market conditions. The current
economic and market conditions, including the significant disruptions in the
global credit markets, are having broad effects on participants in a wide
variety of industries. Since mid-August 2008, the charter rates in the dry bulk
charter market have declined significantly, and dry bulk vessel values have also
declined both as a result of a slowdown in the availability of global credit and
the significant deterioration in charter rates; conditions that the Company
considers indicators of a potential impairment.




We determine undiscounted projected net
operating cash flows for each vessel and compare it to the vessel’s carrying value. The projected net
operating cash flows are determined by considering the charter revenues from
existing time charters for the fixed fleet days and an estimated daily time
charter equivalent for the unfixed days (based on the most recentten-yearblended (for modern and older
vessels)average historicalone-yeartime charter rates available for each
type of vessel) over the remaining estimated life of each vessel, net of
brokerage commissions, expected outflows for scheduled vessels’maintenance and vessel operating
expenses assuming an average annual inflation rate of
3%.Historical
ten-year blended average one-year time charter rates used in our impairment test
exercise are in line with our overall chartering strategy, especially in
periods/years of depressed charter rates; they reflect the full operating
history of vessels of the same type and particulars with our operating fleet
(Panamax and Capesize vessels with dwt over 70,000 and 150,000, respectively)
and they cover at least a full business cycle. The average annual inflation rate
applied on vessels’ maintenance and operating costs
approximates current projections for global inflation rate for the remaining
useful life of our vessels.Effective fleet utilization is assumedat98%, taking into account the period(s)
each vessel is expected to undergo her scheduled maintenance (drydocking and special surveys), as well as an
estimate of 1% off hire days each year, assumptions in line with the
Company’s historical performanceand our expectations for future fleet
utilization under our current fleet deployment strategy.


47




Our impairment test exercise is highly
sensitive on variances in the time charter rates and fleet effective
utilization. Our current analysis,which involved also a sensitivity
analysis by assigning possible alternative values to these two significant
inputs,indicates that
there is no impairment of individual long lived assets. However, there can be no
assurance as to how long charter rates and vessel values will remain at their
currently low levels or whether they will improve to any significant degree.
Charter rates may remain at depressed levels for some time which could adversely
affect our revenue and profitability, and future assessments of vessel
impairment.




Results
of Operations




Year ended December31, 2008compared tothe year ended December 31,
2007




Voyage and Time
Charter Revenues.Voyage and time charter revenuesincreasedby $146.9million, or77%, to $337.4millionfor 2008, compared to $190.5millionfor2007. Theincreaseisattributabletoan increase in the size of the fleet
resulting in a 19% increase in operating days, and a 50% increase in average
charter rates as a result of the favorable shipping rates in 2008 compared to
2007.The increase in
operating days during
2008resulted from the
enlargement of our fleet following our acquisition oftheAlikiin April, theSemirioin June, theBostonin November and theSalt Lake
Cityin December 2007 and
theNorfolkin February 2008. This increase was
partly offset with days lost due to the sale of thePantelis
SPin July, 2007.In 2008we had total operating daysof 6,862and fleet utilization of 99.6%, compared to5,771total operating days and a fleet
utilization of 99.3%,in 2007.




Voyage
Expenses.Voyage expenses increased by
$6.3million, or72%, to $15.0million in2008compared to $8.7million in2007. This increase in voyage expenses is
attributable to the increase incommissionspaidto unaffiliated ship brokers and
in-house ship brokers
associated with charterers. Commissions are a percentage of voyage and time
charter revenues; therefore, their increase is due to the increase in
revenues.




Vessel Operating
Expenses.Vessel operating expenses increased by
$10.6million, or 36%, to $39.9million in 2008compared to $29.3million in 2007. The increase in operating expenses is
attributable to the 19% increase in ownership days resulting from the delivery
of the new Capesize vessels to our fleet as well as increased crew costs, insurance andrepaircosts. Daily operating expenses were
$5,772 in 2008compared to$5,046 in 2007, representing an increase
of14%.Our operating expenses are affected by
the Euro/US$ exchange rates,withUS$ exchange rates deteriorating towards
Euro;as a large part of them (around 50%)
and mainly crew expenses, which represent around 60% of our operating costs, is
paid in Euros. Furthermore, insurance costs increased in 2008 due to
supplementary calls charged by our P&I Club and increased Hull and Machinery
premiums for the insurance coverage of our fleet, which were in line with the
increased fleet market values for the most part of 2008.Repair costs have also increased
compared to the previous year due to the insurance deductibles for hull and
machinery claims for two of our vessels and also due to the additional repair
costs incurred as a result of the drydock surveys for another two of our vessels
in our fleet.




Depreciation and
Amortization ofDeferredCharges.Depreciation and amortization of
deferred chargesincreased
by $18.9million, or77%, to $43.3million for2008, compared to $24.4million for2007. This increase is the result of the
increase in the number of vesselsin our fleet and was partly offset by
decreased depreciation expenses for the vesselPantelis
SP.




General and
Administrative Expenses.General and Administrative
Expensesfor 2008 increased
by $2.1 million or 18% to $13.8 million compared to $11.7 million in 2007. The
increase is mainly attributable to increases in salaries and compensation cost
relating to restricted stock awards to executive management and non-executive
directors andthe exchange
rate of U.S.$totheEuro.




48







Interest and Finance
Costs.Interest and finance costsdecreased by $0.5 million or 8%, to $5.9
million in 2008 compared to $6.4 million in 2007. The decrease is attributable
to interest expenses related to long-term debt outstanding.Interestcosts in 2008 amounted to $5.4 million
compared to $5.5 million in 2007,which resulted from increased long-term
debt outstanding during the yearbut decreasedaverage interest ratesandinterest relating to leased
property.




Interest
Income. Interest income
decreased by $1.9 million or 70%, to $0.8 million in 2008 compared to $2.7
million in 2007. The decrease is attributable to decreased levels of cash on
hand during the year.




Year ended December31, 2007compared tothe year ended December 31,
2006




Voyage and Time
Charter Revenues.Voyage and time charter revenuesincreasedby $74.4million, or64%, to $190.5millionfor2007, compared to $116.1millionfor 2006. Theincreaseisattributabletoan increase in the size of the fleet
resulting in a 19% increase in operating days, and a 38% increase in average
charter rates as a result of the favorable shipping rates in 2007 compared to
the same periodof2006.The increase in operating days
during 2007resulted from the enlargement of our
fleet following our acquisition oftheAlikiin April, theSemirioin June, theBostonin November and theSalt Lake
Cityin December 2007 and
was partly offset with days lost due to the sale of thePantelis
SPin July, 2007.In 2007we had total operating daysof 5,771and fleet utilization of 99.3%, compared to4,849total operating days and a fleet
utilization of 99.9%,in 2006.




Voyage
Expenses.Voyage expenses increased by $2.6
million, or 43%, to $8.7 million in 2007 compared to $6.1 million in 2006. This
increase in voyage expenses is attributable to the increase incommissionsand was partly offset by the 2%
elimination in commissions charged byourmanagement company, after its
acquisitionby
uson April 1, 2006.
Commissionspaidto our fleet
managerduring 2007 and 2006 amounted
to$0 and$0.5million(due to their eliminationupon acquisition of our fleet
manager), respectively,and commissions to
unaffiliated ship brokers and in-house ship brokers associated with charterers
amounted to$8.9
millionand$5.4million, respectively. The increase in
commissions was primarily the result of the increase in the amount ofcharter hirerevenue we reported in
2007.




Vessel Operating
Expenses.Vessel operating expenses increased by
$6.8 million, or 30%, to $29.3 million in 2007 compared to $22.5 million in
2006. The increase in operating expenses is attributable to the 19% increase in
ownership days resulting from the delivery of the new Capesize vessels to our
fleet having higher daily operating expenses than the Panamax vessels as well as
increased crew costs, insurances, repairs, taxes and other. Daily operating
expenses were $5,046 in 2007 compared to $4,592 in 2006, representing an
increase of 10%.




Depreciation and
Amortization ofDeferredCharges.Depreciation and amortization of
deferred chargesincreased
by $7.7million, or46%, to $24.4million for2007, compared to $16.7million for2006. This increase is the result of the
increase in the number of vesselsin our fleet and was partly offset by
decreased depreciation expenses for the vesselPantelis
SP.




General and
Administrative expenses.General and Administrative
Expensesfor 2007 increased
by $5.4 million or 86% to $11.7 million compared to $6.3 million in 2006. The
increase is mainly attributable to increases in salaries, a bonus of $1.7
million to officers and employees, expenses for contemplated due diligence
issues related to a potential merger and acquisition transaction in 2007,the exchange rate of USD totheEuroand finally to the first quarter
expenses of the fleet manager that did not exist in 2006.




Gain on Vessel
Sale. In February 2007, we
entered into a memorandum of agreement to sell the Pantelis SP. The vessel was
delivered to her new owners in July 2007 and resulted in a gain of $21.5
million, which is reflected in the 2007 statement of income.




Interest and Finance
Costs.Interest and finance costsincreased by $2.5 million or 64%, to
$6.4 million compared to $3.9 million in 2006. The increase is attributable to
interest expenses relating to long-term debt outstanding.Interestcosts in 2007 amounted to $5.5 million
compared to $3.1 million for the same period in 2006,which resulted from increased long-term
debt outstanding during the year, increased average interest rates and increasedinterest relating to leased
property.




49






Interest
Income. Interest income
increased by $1.7 million or 170%, to $2.7 million compared to $1.0 million in
2006. The increase is attributable to increased cash provided by our operating
activities and proceeds resulting from our secondary public offerings, which
were temporarily invested in bank deposits until being used to finance new
vessel acquisitions.




Inflation




Inflation has only a moderate effect on
our expenses given current economic conditions. In the event that significant
global inflationary pressures appear, these pressures would increase our
operating, voyage, administrative and financing costs.




B.Liquidity
and Capital Resources




We have historically financed our
capital requirements with cash flow from operations, equity contributions from
stockholders and long-term bank debt. Our main uses of funds have been capital
expenditures for the acquisition of new vessels, expenditures incurred in
connection with ensuring that our vessels comply with international and
regulatory standards, repayments of bank loans and payments of dividends. We
will require capital to fund ongoing operations, the construction ofour new vesselsand debt service. Working
capital, which is current assets minus current liabilities, including the
current portion of long-term debt,amounted to $48.5 million at December
31, 2008 and $0.6 million at December 31, 2007.




We anticipate that internally generated
cash flow will be sufficient to fund the operations of our fleet, including our
working capital requirements.Currently, we have $85.3 million
available under our revolving credit facility with the Royal Bank of
Scotlandto finance future vessel acquisitions,
of which $50.0 million can be used for working capital purposes, and $36.1
million available under our facility with Fortis Bank to finance the predelivery
installments of the construction of theNew York
(Hull
1107)andLos Angeles
(Hull
1108).




It is ourpolicyto fund our future acquisition related
capital requirements initially through borrowings under our creditfacilitiesand to repay those borrowingsin excess of $150 millionfrom time to time with the
net proceeds of equity issuances.Because of the recent global economic
downturn that has affected the international dry bulk industry we may not be
able to obtain financing either from our credit facilities or the equity
markets. As of November 2008, our board of directors has suspended the payment
of dividends, so as to retain cash from operations and use it either to fund our
operations, our vessel acquisitions or service our debt depending on market
conditions and opportunities.We believe that this suspension will
enhance our future flexibility by permitting cash flow that would have been
devoted to dividends to be used for opportunities that may arise in the current
marketplace.




Cash
Flow




Cashand cash equivalents increased to $62.0
million as of December 31, 2008, comparedto$16.7 million as of December 31,
2007.We considerhighly liquid investments such as time
deposits and certificates of deposit with an original maturity of three months
or less to be cash equivalents.Cash and cash equivalents are primarily
held in U.S. dollars.




Net Cash Provided By Operating
Activities




Net cash provided by operating
activities increased by $112.2million, or75%, to $261.2millionin 2008compared to $149.0 millionmillion in 2007.Theincrease was primarily attributable to
the increase in the number of operating days that we achieved during the
yearand the increased
charter rates, which
resulted in increasedrevenues. Net cash provided
by operating activities increased by $66.6million, or81%, to $149.0millionin 2007compared to $82.4million in 2006. This increase was primarily
attributable to the increase in the number of operating days that we achieved
during the yearand the
increased charter rates,
which resulted in an increase in our revenues.




50







Net Cash Used In Investing
Activities




Net cash used in investing activities
was $108.7 million for 2008, which consists of the 80% balance of the purchase
price and additional predelivery costs of theNorfolk, amounting to $108.5 million; $1.1
million of construction costs we paid for theNew Yorkand theLos
Angelesand $0.9 million we
received from insurers for unrepaired damages to the Coronis caused during its
grounding in 2007.




Net cash used in investing activities
was $409.1 million for 2007, which consists of the advance and additional costs
paid for the acquisition of theNorfolk, amounting to $27.0 million and $1.8
million of construction costs we paid for theNew York(Hull
1107) andtheLos
Angeles(Hull
1108); $459.0 million paid
for the delivery installment of theSemirioand for the acquisition of theAliki, theBostonand theSalt Lake
City; $78.9 million of net
proceeds from the sale of thePantelis
SPand $0.2 million paid
for other assets.




Net cash used in investing activities
was $193.1 million for 2006, mainly consisting of the first predelivery advance
we paid for our vessels under construction, theNew York(Hull
1107) and theLos
Angeles(Hull
1108),amounting to $24.1 million plus
additional construction costs of $0.3 million and $168.7 million paid for the
delivery installment of theCoronisand the acquisition of theNaiasand theSideris
GS.




Net Cash Provided By / Used In Financing
Activities




Net cash used in financing activities in
2008 amounted to $107.2 million and consists of $237.2 million of proceeds drawn
under our revolving credit facility for the acquisition of theSalt Lake Cityand theNorfolk;$97.5 million of
indebtedness that we repaid under our revolving credit facility with the Royal
Bank of Scotland and $0.1 million proceeds we received under our dividend
reinvestment plan and $247.0 million of dividends paid to
stockholders.




Net cash provided by financing
activities in 2007 amounted to $262.3 million and consists of $287.8 million of
proceeds drawn under our revolving credit facility for the acquisition of theSemirio($92.0 million), theAliki ($87.0 million), theBoston($22.0 million) and theSalt Lake
City($86.8 million);
$327.4 million of indebtedness that we repaid under our revolving credit
facility with the Royal Bank of Scotland and $0.1 million of financing fees
relating to the 364 day loan facility with the Royal Bank of Scotland. Net cash
provided by financing activities also consists of $433.1 million of net proceeds
from our public offerings in April and September 2007, and $131.1 million of
dividends paid to stockholders.




Net cash provided by financing
activities was $104.0 million for 2006, mainly consisting of $197.2 million of
proceeds drawn under our revolving credit and loan facilities for the
acquisition of theCoronis($38.5 million), the fleet manager or
DSS ($20.0 million), theNaias($39.6 million), theSideris
GS($75.0 million) andHulls
1107and1108($24.1 million). From the above loan
proceeds an amount of $71.4 million was repaid with the net proceeds of our
additional public offering in June 2006, amounting to $71.7 million. Also, an
amount of $19.7 million was the net cash consideration paid for the acquisition
of DSS, the fleet manager, which represents the consideration of $20.0 paid, net
of $0.3 million of cash acquired in the transaction. In addition, $73.6 million
was paid as dividends in 2006.




Credit
Facilities




In February2005, we entered into a
$230.0million secured revolving credit
facility with The Royal Bank of Scotland Plc., which was amended on
May24, 2006,to increase the facility amount to
$300.0million. Our credit facility permits us
to borrow up to $50.0million for working capital. In
January2007, we entered into a supplemental
agreement with The Royal Bank of Scotland Plc. for a 364-day standby credit
facility of up to $200.0million, whichhowever expired in March 2008. This
facility wasavailable to
us in connection with vessel acquisitions or the acquisitions of vessel owning,
chartering or operating subsidiaries upon our full utilization of the existing
$300.0million revolving credit facility.
Because our strategy involves limiting the amount of debt that we have
outstanding, we intend to draw funds under our $300.0million credit facility to fund acquisitions and, as necessary, to
fund our working capital needs and to repay outstanding debt from time to time
with the net proceeds of future equity issuances.


51




The $300.0million revolving credit facility has a
term of ten years from May24, 2006, which we refer to as the
availability date, and we are permitted to borrow up to the facility limit,
provided that conditions to drawdown are satisfied and that borrowings do not
exceed 75% of the aggregate value of the vessels. The facility limit will be
$300.0million for a period of six years from
the availability date, at which time the facility limit will be reduced to
$285.0million. Thereafter, the facility limit
will be reduced by $15.0million semi-annually over a period of
four years with a final reduction of $165.0milliontogether withthe last semi-annual reduction.




The credit facility hascommitment feesof 0.25% per annum on the amount of the
undrawn balanceof the
facility,payable quarterly
in arrears. Interest on amounts drawn are payable at a rateranging from 0.75% to 0.85%per annum over LIBOR.During 2008 and 2007, the weighted
average interest rate relating to the amounts drawn under the credit facility
was 3.40% and 6.17%, respectively.




In November2006, we entered into a loan agreement
with Fortis Bank for a secured term loan of $60.2million and a guarantee facility of up
to $36.5million, which we intend to use to
finance the pre-delivery installments of the two newbuilding Capesize dry bulk
carriers that we expect to take delivery of during the second quarter of 2010.
Under this loan agreement, principal payments are scheduled upon completion of
certain stages of the construction of the vessels,until December 30, 2010 (the termination
date) and such advances will be repaid in full at the earlier of the repayment
date (December 31, 2010) or the delivery of each vessel.The guarantee facility will be available
until December 31, 2010.




The loan bears interest at LIBOR plus a
marginranging from 0.65%
to 0.85%and commitment
fees of 0.10% until issuance of the guarantee. The bank guarantee bears
guarantee commission equal to the margin.The interest and finance costs on this
facility during the construction period are capitalized and included in the
construction cost of the vessels.




Our obligations under our
creditfacilitiesare secured by,
or will be secured upon drawdown,by a first priority mortgage on one or
more of the vessels in our fleet, currently on 11 vessels,and such other vessels that we may from
time to time include with the approval of our lender, and a first assignment of
all freights, earnings,insurances and requisition
compensation, and pledges
of the outstanding stock of our subsidiaries. We may grant additional security from
time to time in the future.




Our ability to borrow amounts under the
credit facilitiesis subject to the execution of
customary documentation relating to the facilities, including security documents,
satisfaction of certain customary conditions precedent and compliance with terms
and conditions included in the loan documents. To the extent that the vessels in
our fleet that secure our obligations under the credit facilitiesare insufficient to satisfy minimum
security requirements, we will be required to grant additional security or
obtain a waiver or consent from the lender. We will also not be permitted to
borrow amounts under the facilitiesif we experience a change of
control.




Thecredit facilitiescontain financialand othercovenants requiring us, among other
things, to ensure that:




·
            the aggregate market value of the
      vessels in our fleet that secure our obligations under the credit facility
      at all times exceeds120% of the aggregate principal
      amount of debt outstanding under the credit facility and the notional or
      actual cost of terminating any relating hedging
      arrangements;




·
            our total assets minus our debt
      will not at any time be less than $150million and at all times will
      exceed25% of our total
      assets;




·
            we maintain $0.40million ofliquid fundsper
  vessel.




For the purposes of the credit
facilities, our“total assets”are defined to include our tangible
fixed assets and our current assets, as set forth in our consolidated financial
statements, except that the value of any vessels in our fleet that secure our
obligations under the credit facility will be measured by their fair market
value rather than their carrying value on our consolidated balance
sheet.




52







The credit facilitiesalso contain general covenants that
require us to maintain adequate insurance coverage and to obtain the
lender’s consent before we acquire new vessels,
change the flag, class or management of our vessels, enter into time charters or
consecutive voyage charters that have a term that exceeds, or which by virtue of
any optional extensions may exceed,13months or enter into a new line of
business.In addition, the
credit facilitiesinclude
customary events of default, including those relating to a failure to pay
principal or interest, a breach of covenant, representation and warranty, a
cross-default to other indebtedness and non-compliance with security
documents.




Our credit facilities do not prohibit us
from paying dividends as long as an event of default has not occurred. Whenwe incur debt under the
credit facility, however, the amount of cash that we have available to
distribute as dividends in a period may be reduced by any interest or principal
payments that we are required to make.As of November 2008, our board of
directors has suspended the payment of dividends.We believe that this suspension will
enhance our future flexibility by permitting cash flow that would have been
devoted to dividends to be used for opportunities that may arise in the current
marketplace, such asfunding our operations,
acquiring vessels or servicing our debt.Currently, we believe we are not in
default of our covenants relating to our credit facility with the Royal Bank of
Scotland. However, if the market values of our vessels decline further, our
vessel values securing our debt may not exceed 120% of the aggregate principal
amount of debt outstanding, which would result in a breach of our covenants.
Currently, 11ofourvesselshave been provided as collateral to
secureourcredit facilitywith the Royal Bank of
Scotland.




As ofDecember31,2008 and as of the date of this annual
report, wehave$214.7million principal balance outstanding
under our $300.0million revolving credit facility, whichwas usedto fundpart of the purchase price of theSalt
Lake Cityand theNorfolk.




As ofDecember 31, 2008and as of the date of this annual
report, wehavea $24.1million principal balance outstanding
under our $60.2million loan facility.As of December 31, 2008, we were not in
compliance with a covenant requiring a minimum combined 20% ownership of us by
our Chief Executive Officer and President (and their families). We have obtained
a waiver from this covenant modifying the minimum shareholding requirement to
10%, for the period up to December 31, 2009.




As of December 31, 2008, 2007 and 2006
and as of the date of this annual report, we did not use and have not used, any
financial instruments for hedging purposes.




Capital
Expenditures




We make capital expenditures from time
to time in connection with our vessel acquisitions.We have entered into agreements to
assume the shipbuilding contracts for two 177,000 Capesize dry bulk carriers,
which we expect to take delivery of in the second quarter of 2010.We financed the20%first predelivery installments of the
two vessels under construction, with funds under our loan facility with Fortis,
and expect to finance the second, third and fourth predelivery installments with
funds under the same facility. We expect to finance the delivery installments of
our two vessels under construction and our debt that will be outstanding under
the facility with Fortis on the delivery of those vessels, with cash from
operations, debt under our revolving credit facility with the Royal Bank of
Scotland or any other credit institution that will provide the necessary funds
at terms acceptable to us, or with funds from equity issuances.




We incur additional capital expenditures
when our vessels undergo surveys. This process of recertification may require us
to reposition these vessels from a discharge port to shipyard facilities, which
will reduce our operating days during the period. The loss of earnings
associated with the decrease in operating days, together with the capital needs
for repairs and upgrades, is expected to result in increased cash flow needs. We
expect to fund these expenditures with cash on hand.




C.
Research and development, patents and licenses




We incur from time to time expenditures
relating to inspections for acquiring new vessels that meet our standards. Such
expenditures are insignificant and they are expensed as they
incur.




53







D.
Trend information




Our results of operations depend
primarily on the charter hire rates that we are able to
realize.  Charter hire rates paid for dry bulk carriers are primarily
a function of the underlying balance between vessel supply and
demand.




Since mid-August 2008, the charter rates
in the dry bulk charter market have declined significantly, and dry bulk vessel
values have also declined both as a result of a slowdown in the availability of
global credit and the significant deterioration in charter rates. Although, market conditions have not
materially affected our earnings for 2008, we expect our earnings in 2009 to
decrease. Five of our vessels that were redelivered during December 2008 or
January 2009, were fixed in time charter agreements at rates considerably lower
than those achieved in 2008. We expect more vessels to be redelivered from their
current charters in 2009. Although, charter rates have increased from their low
levels experienced at the end of 2008 and beginning of 2009, they are well below
the average daily charter rates we achieved in 2008 for those vessels and we
cannot assure investors that we will be able to fix our vessels at rates similar
to their current employments.




E.
Off-balance Sheet Arrangements




We do not have any off-balance sheet
arrangements.




F.
Contractual Obligations




The following table sets forth our
contractual obligations, in
thousands ofU.S.$,and their maturity dates as of
December31, 2008:







Within
                  One Year
                
                
                One to
                  Three Years
                
                
                Three to
                  Five Years
                
                
                More than
                  Five years
                
                
                Total(in thousands of U.S.
      dollars)Shipbuilding contracts(1)
                
                $
                24,080
                
                
                
                72,240
                
                
                
                -
                
                
                
                -
                
                
                $
                96,320Long term debt
      (2)
                
                
                -
                
                
                
                24,080
                
                
                
                -
                
                
                
                214,700
                
                
                
                238,780Operating lease obligations (3)
                
                
                397
                
                
                
                861
                
                
                
                -
                
                
                
                -
                
                
                
                1,258









(1)
              We have entered into
      agreements to assume
      the shipbuilding contracts for the construction of two Capesize dry bulk
      carriers for the purchase price of $60.2 million each. We have paid the
      first predelivery installment of $12.04 million for each vessel, or 20% of
      the contract price. We financed the first predelivery installment with
      proceeds under our loan facility with Fortis, mentioned in note (2) below.
      We expect to pay two additional installments amounting to $12.04 million
      for each vessel in 2009 and one predelivery installment and the delivery
      installment of each vessel, in 2010.




(2)
            As of December 31, 2008, we had an
      aggregate principal of $238.8 million of indebtedness outstanding under
      our loan facilities. This indebtedness was incurred in connection with our
      acquisition of theSalt Lake Cityand theNorfolkand in connection
      with the first predelivery installments of theNew York
      (Hull
      1107)and theLos Angeles
      (Hull
      1108), mentioned in note (1) above and
      does not include projected interest payments which are based on LIBOR plus
      a margin.




(3)
            We pay rent to Universal Shipping
      and Real Estates Inc., a related party company controlled by our Chairman
      and Chief Executive Officer, Mr. Palios, pursuant to a lease agreement
      signed between DSS and Universal Shipping and Real Estates Inc. The lease
      which expired in December 2008 was renewed for three years and minimum
      estimated lease payments until expiration of the agreement in 2011, using
      the exchange rate at December 31, 2008 of U.S.$ 1.43 to €1.00,are estimated to be around $0.7
      million. See alsoItem7B.“Related Party
      Transactions”.Wealsopay rent to Altair Travel Agency
      Ltd. and Diana Shipping Agencies S.A.,or DSA,both related companies controlled
      by our Chairman and Chief Executive Officer, Mr. Palios, pursuant to lease
      agreements signed between the two companies and DSS in January and
      December 2006, respectively. Both agreements expiredin December 2008and were renewed for three more
      years until December 2011.Minimum estimated lease payment
      amounts, using the exchange rate at December 31, 2008of U.S.$ 1.43to €1.00, are estimated to beabout$59,000to Altairand $0.5 million to DSA. See alsoItem7B.“Related Party
      Transactions”.




54






We have entered into agreements with an
unrelated supplier for the exclusive supply of lubricants for some of our
vessels. Under the terms of those agreements, wewereprovided with free lubricants provided
that the specific supplier remains our exclusive supplier for a specified
period. Please see the notes toourconsolidated financial statements as of
December31,2008.




G.
Safe Harbor




See section“forward looking statements”at the beginning of this annual
report.




Item 6. Directors, Senior Management
and Employees




A.
Directors and Senior Management




Set forth below are the names, ages and
positions of our directors and executive officers. Our board of directors is
elected annually on a staggered basis, and each director elected holds office
for a three year term. Officers are appointed from time to time by our board of
directors and hold office until a successor is appointed or their employment is
terminated.




Name
              
              Age
              
              PositionSimeon
    Palios
              
              67
              
              Class I Director, Chief Executive
      Officer and ChairmanAnastassis
      Margaronis
              
              53
              
              Class I Director and
      PresidentIoannis
      Zafirakis
              
              37
              
              Class I Director,ExecutiveVice President and
      SecretaryAndreas
      Michalopoulos
              
              38
              
              Chief Financial Officer and
      TreasurerMaria Dede
              
              36
              
              Chief Accounting
      OfficerWilliam (Bill)
      Lawes
              
              65
              
              Class II
      DirectorKonstantinos
      Psaltis
              
              70
              
              Class II
      DirectorBoris
    Nachamkin
              
              75
              
              Class III
      DirectorApostolos
      Kontoyannis
              
              60
              
              Class III
      Director







The term of our ClassI directors expires in 2009, the term of our ClassII directors expires in2010and the term of our Class III directors expires in
2011.




The business address of each officer and
director is the address of our principal executive offices, which are located at
Pendelis 16, 175 64 Palaio Faliro, Athens, Greece.




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




Simeon P.
Palioshas served as our
Chief Executive Officer and Chairman since February21, 2005 and as a Director since
March9, 1999. Mr.Palios also serves as an employee of
DSS. Prior to November12, 2004, Mr.Palios was the Managing Director of
Diana Shipping Agencies S.A. and performed on our behalf the services he now
performs as Chief Executive Officer. Since 1972, when he formed Diana Shipping
Agencies, Mr.Palios has had the overall
responsibility of our activities. Mr.Palios has40years experience in the shipping
industry and expertise in technical and operational issues. He has served as an
ensign in the Greek Navy for the inspection of passenger boats on behalf of
Ministry of Merchant Marine and is qualified as a naval architect and engineer.
Mr.Palios is a member of various leading
classification societies worldwide and he is a member of the board of directors
of the United Kingdom Freight Demurrage and Defense Association Limited. He
holds abachelor’s
degreein Marine
Engineering from Durham University.




55







Anastassis C.
Margaronishas served as
our President and as a Director since February21, 2005. Mr.Margaronis also serves as an employee of
DSS. Prior to February21, 2005, Mr.Margaronis was employed by Diana
Shipping Agencies S.A. and performed on our behalf the services he now performs
as President. He joined Diana Shipping Agencies in 1979 and has been responsible
for overseeing our insurance matters, including hull and machinery, protection
and indemnity and war risks cover. Mr.Margaronis has27years of experience in shipping,
including in ship finance and insurance. He is a member of the Governing Council
of the Greek Shipowner’s Union and a member of the board of
directors of the United Kingdom Mutual Steam Ship Assurance Association
(Bermuda) Limited. He holds abachelor’s degreein Economics from the University of
Warwick and a master’sof sciencedegreein Maritime Lawfrom the Wales Institute of Science and
Technology.




Ioannis G.
Zafirakishas served as ourExecutiveVice President and Secretarysince February 14, 2008, as
ourVice President and
Secretary since February21, 2005 and as a Director since
March9, 1999. Mr.Zafirakis also serves as an employee of
DSS. Prior to February21, 2005, Mr.Zafirakis was employed by Diana Shipping
Agencies S.A. and performed on ourbehalf the
services he now performs asExecutiveVice President. He joined Diana Shipping
Agencies S.A. in 1997 where he held a number of positions in its finance and
accounting department. He holds abachelor’s degreein Business Studies from City
University Business School in London and a master’s degree in International Transport from
the University of Wales in Cardiff.




Andreas
Michalopouloshas served as
our Chief Financial Officer and Treasurer since March 8, 2006. Mr. Michalopoulos
started his career in 1993 where he joined Merrill Lynch Private Banking in
Paris. In 1995, he became an International Corporate Auditor with Nestle SA
based in Vevey, Switzerland and moved in 1998 to the position of Trade Marketing
and Merchandising Manager. From 2000 to 2002, he worked for McKinsey and Company
in Paris, France as an Associate Generalist Consultant before joining from 2002
to 2005, a major Greek Pharmaceutical Group with U.S. R&D activity as a Vice
President International Business Development, Member of the Executive Committee.
From 2005 to 2006, he joined Diana Shipping Agencies as a Project Manager. Mr.
Michalopoulos has graduated from Paris IX Dauphine University with Honours in
1993 obtaining a MSc in Economics and a master’s degree in Management Sciences
specialized in Finance. In 1995, he also obtained a master’s degree in business
administration from Imperial College, University of London.Mr. Andreas Michalopoulos is married to
the youngest daughter of Mr. Simeon Palios.




Maria
Dedehas served as our
Chief Accounting Officer since September1, 2005 during which time she has been
responsible for all financial reporting requirements. Mrs.Dede has also served as an employee of
DSS since March2005. In 2000, Mrs.Dede joined the Athens branch of Arthur
Andersen, which merged with Ernst and Young (Hellas) in 2002, where she served
as an external auditor of shipping companies until 2005. From 1996 to 2000,
Mrs.Dede was employed by Venus Enterprises
SA, a ship-management company, where she held a number of positions primarily in
accounting and supplies. Mrs.Dede holds abachelor’s degreein Maritime Studies from the University
of Piraeus and amaster’sdegree inbusinessadministration fromALBA.




William (Bill)
Laweshas served as a
Director and the Chairman of our Audit Committee since March 2005.
Mr.Lawes served as a Managing Director and
a member of the Regional Senior Management Board of JPMorgan Chase (London) from
1987 until 2002. Prior to joining JPMorgan Chase, he was Global Head of Shipping
Finance at Grindlays Bank.Since December 2007, he serves as an
independent member of the Board of Directors and Chairman of the Audit Committee
of Teekay Tankers Ltd.Mr.Lawes is qualified as a member of the
Institute of Chartered Accountants of Scotland.




Konstantinos
Psaltishas served as a
Director since March 2005. Since 1981, Mr.Psaltis has served as Managing Director
of Ormos Compania Naviera S.A., a company that specializes in operating and
managing multipurpose container vessels. Prior to joining Ormos Compania Naviera
S.A., Mr.Psaltis simultaneously served as a
technical manager in the textile manufacturing industry and as a shareholder of
shipping companies managed by M.J. Lemos. From 1961 to 1964, he served as ensign
in the Royal Hellenic Navy. Mr.Psaltis is a member of the Germanischer
Lloyds Hellas Committee. He holds a degree in Mechanical Engineering from Technische Hochschule
Reutlingen& Wuppertal and a
bachelor’s degree in Business Administration from
Tubingen University in Germany.


56




Boris
Nachamkinhas served as a
Director and as a member of our Compensation Committee since March 2005.
Mr.Nachamkin was with Bankers Trust
Company, New York, for 37years, from 1956 to 1993 and was posted
to London in 1968. Upon retirement in 1993, he acted as Managing Director and
Global Head of Shipping at Bankers Trust. Mr.Nachamkin was also the UK Representative
of Deutsche Bank Shipping from 1996 to 1998 and Senior Executive and Head of
Shipping, based in Paris, for Credit Agricole Indosuez between 1998 and 2000.
Previously, he was a Director of Mercur Tankers, a company which was listed on
the Oslo Stock Exchange, and Ugland International, a shipping company. He also
serves as Managing Director of Seatrust Shipping ServicesLtd., a private consulting
firm.




Apostolos
Kontoyannishas served as a
Director and as the Chairman of our Compensation Committee and a member of our
Audit Committee effective as since March 2005. Since 1987, Mr.Kontoyannis has been the Chairman of
Investments and FinanceLtd., a financial consultancy firm he
founded, that specializes in financial and structuring issues relating to the
Greek maritime industry, with offices in Piraeus and London. He was employed by
Chase Manhattan Bank N.A. in Frankfurt (Corporate Bank), London (Head of
Shipping Finance South Western European Region) and Piraeus (Manager, Ship
Finance Group) from 1975 to
1987. He is an independent member of the Board of
Directors of Excel Maritime Carriers Ltd.Mr.Kontoyannis holds abachelor’s degree in Finance and
Marketing and a master’s degree in business administration inFinance from Boston
University.




B.
Compensation




The aggregate compensation to members of
our senior managementfor
2008, 2007 and 2006was$1.9 million for each
year. We did not pay any
benefits in2007 and 2006.
In February 2008, our senior management received a cash bonus of $0.9 million,
relating to 2007 performance, and an aggregate of 65,100 shares of restricted
common stock. The restricted stock willvest ratably over three
years. In October 2008 our
senior management also received 500,000 restricted shares of common stock to
vest ratably over six years and in January 2009 they received 315,400 restricted
shares of common stock to vest ratably over three years. All restricted stocks
were awarded in accordance with terms and conditions of our incentive plan we
have in place since 2005.




Non-employee directors receive annual
fees in the amount of $40,000 plus reimbursement of their out-of-pocket
expenses. In addition, each non-executive serving as chairman or member of the
committees receives annual fees of $20,000 and $10,000, respectively, plus
reimbursement ofhis/herout-of-pocket expenses.For 2008, 2007 and2006fees to non-executive directors amounted
to$0.2 million for each
year.In February 2008, non-employee
directors received an aggregate of 10,400 shares of restricted common
stock.The restricted stock will vest ratably
over three years. In October 2008 non-employee directors also received 100,000
restricted shares of common stock to vest ratably over six years and in January
2009 they received 48,800 restricted shares of common stock to vest ratably over
three years.




In 2008, compensation cost relating the
aggregate amount of restricted stock awards amounted to $1.1 million.We do not have a retirement
plan for our officers or directors.




C.
Board Practices




We have established an Audit
Committee,comprised of two board
members,which is responsible for reviewing our
accounting controls, recommending to the board of directors the engagement of
ourindependentauditors, and pre-approving audit and
audit-related services and
fees.Each member is an independent director.As directed by its written
charter, the Audit Committee is responsible for appointing, and overseeing the
work of the independent auditors, including reviewing and approving their
engagement letter and all fees paid to our auditors, reviewing the adequacy and
effectiveness of the Company’s accounting and internal control procedures and reading and discussing
with management and the independent auditors the annual audited financial
statements.


57




In addition, we have established a
Compensation Committee comprised of two members, which is responsible for
establishing executive officers’compensation and benefits. The members
of the Audit Committee are Mr.William Lawes (Chairman and financial
expert) and Mr.Apostolos Kontoyannis(member and financial expert)and the members of the
Compensation Committee are Mr.Apostolos Kontoyannis (Chairman) and
Mr.Boris Nachamkin(member). While we are exempt from New York
Stock Exchange rules on independent directors, we currently conform to those
rules.




We have established an Executive
Committee comprised of the three executive directors, Mr. Simeon Palios, Mr.
Anastassis Margaronis and Mr. Ioannis Zafirakis. The Executive Committee has, to
the extent permitted by law, the powers of the Board of Directors in the
management of the business and affairs of the Company.




We also maintain directors’ and
officers’ insurance, pursuant to which we provide insurance coverage against
certain liabilities to which our directors and officers may be subject,
including liability incurred under U.S. securities law.




D.
Crewing and Shore Employees




Prior to February21, 2005, the shoreside personnel
provided by our fleet manager included Mr.Simeon Palios, Mr.Anastassis Margaronis, Mr.Ioannis Zafirakis and Evangelos
Monastiriotis, who, as employees of our fleet manager, performed services that
were substantially identical to services provided by executive officers. On
February21, 2005, Mr.Simeon Palios, Mr.Anastassis Margaronis, and
Mr.Ioannis Zafirakis became executive
officers and employees ofDiana Shipping Inc.effective March 17, 2005. From
February21, 2005 to September 1, 2005,
Mr.Monastiriotis, while employed by our
fleet manager, served as our acting Chief Accounting Officer. On September 1,
2005, Mrs. Maria Dede became our Chief Accounting Officer and provides her
services to us pursuant to her employment with our fleet manager. Effective
March 8, 2006,Mr. Andreas Michalopoulos became our
Chief Financial Officer and Treasurer and Mr. Koutsomitopoulos who served as our
Chief Financial Officer until then,became our Vice President and Head of
Corporate Developmentuntil
April 30, 2007.




We crew our vessels primarily with Greek
officers and Filipino officers and seamen.We areresponsible for identifying our Greek
officers, which are hired by our vessel owning subsidiaries. Our Filipino
officers and seamen are referred to by Crossworld Marine ServicesInc., an independent crewing agency. The
crewing agency handles each seaman’s training, travel and payroll. We
ensure that all our seamen have the qualifications and licenses required to
comply with international regulations and shipping conventions. Additionally,
our seafaring employees perform most commissioning work and supervise work at
shipyards and drydock facilities. We typically man our vessels with more crew
members than are required by the country of the vessel’s flag in order to allow for the
performance of routine maintenance duties.




Although we had no shoreside employeesin2005 and until April 1, 2006 when our
fleet manager became ourwholly-ownedsubsidiary, our fleet manager has informed us of
the number of persons employed by it that were dedicated to managing our fleet.
The following table presents the average number of shoreside personnel and the
number of seafaring personnel employed by our vessel owning subsidiaries during
the periods indicated.







Year Ended December31,2008
                  
                  
                  2007
                  
                  
                  2006Shoreside
                  
                  
                  44
                  
                  
                  
                  39
                  
                  
                  
                  36Seafaring
                  
                  
                  422
                  
                  
                  
                  389
                  
                  
                  
                  329Total
                  
                  
                  466
                  
                  
                  
                  428
                  
                  
                  
                  365





58







E.
Share Ownership




With respect to the total amount of
common stock owned by all of our officers and directors, individually and as a
group, see Item 7“MajorStockholdersand Related Party
Transactions”.




Equity
Incentive Plan




We haveadopted an equity incentive
plan, which we refer to as
the plan,which entitles
employees,officers and directors to receive
options to acquireourcommon stock. A total of 2,800,000
shares of common stock are reserved for issuance under the plan. The plan is
administered byour board
of directors. Under the
terms of the plan,ourBoard of Directors will be able to
granta) incentive stock
options, b) non-qualified stock options, c) stock appreciation rights, d)
dividend equivalent rights, e) restricted stock, f) unrestricted stock, g)
restricted stock units, and h) performance shares. No options, stock
appreciation rights or restricted stock units can be exercisable prior to the
first anniversary or subsequent to the tenth anniversary of the date on which
such award was granted.The
plan will expiretenyears from theadoption of the Plan by the Board of
Directors.In February 2008, our Board of Directors
granted 75,500 shares of restricted common stock to our senior management and
non-executive directors. These shares will vest ratably over a period of three
years. The restricted shares are subject to forfeiture until they become vested.
Unless they forfeit their shares, grantees have the right to vote, to receive
and retain all dividends paid and to exercise all other rights, powers and
privileges of a holder of shares. In October 2008 andJanuary 2009, 600,000 shares and 364,200
shares, respectively, of restricted common stock were granted to our senior
management and non-executive directors to be vested over a period of six years
and three years, respectively. Currently, 1,760,300 shares of common stock are
reserved for issuance under the plan.




Item 7. Major Stockholders and Related Party Transactions




A.Major
      Stockholders






The following table sets forthcurrentinformation regarding (i)the owners of more than five percent of
our common stock that we are aware of and (ii)the total amount of common stock owned
by all of our officers and directors, individually and as a group. All of the
stockholders, including the stockholders listed in this table, are entitled to
one vote for each share of common stock held.







Title
      of Class
            
            Identity
      of Person or Group
            
            Number
      of
              Shares
      Owned
            
            Percent
      of ClassCommon Stock, par value
      $0.01
            
            Simeon Palios(1)
            
            14,593,210
            
            19.35%All officers and directors as a
      group(2)
            
            15,329,322
            
            20.32%








(1)
            Currently, Mr. Simeon Palios
      beneficially owns 306,670 restricted commonsharesgranted through the Company’s
      Equity Incentive Plan and 14,286,540 sharesindirectly through Corozal
      Compania Naviera S.A. and Ironwood Trading Corp. over which
      Mr.Simeon Palios exercises sole
      voting and dispositive power.As of December 31, 2006, 2007,
      2008 and currently, Mr. Simeon Palios owned indirectly through Corozal and
      Ironwood 39.06%, 19.21%, 19.30% and 19.35%, respectively, of our common
      stock.




(2)
            Mr.Simeon Palios is our only director
      or officer that beneficially owns5% or more ofour common stock.Mr.Anastassis Margaronis, our
      President and a member of our board of directors, and Mr.Ioannis Zafirakis, ourExecutiveVice President and a
      member of our board of directors, are indirect stockholdersthrough ownership of stock held inCorozal Compania
      Naviera S.A., which is the registered owner of some of our common stock.
      Mr.Margaronis and Mr.Zafirakis do not have dispositive
      or voting power with regard to shares held by Corozal Compania S.A. and,
      accordingly,




59


are not considered to be beneficial
owners of our commonshares
held through Corozal Compania Naviera S.A..Messrs. Lawes, Psaltis,
Nachamkin and Kontoyannis, each a non-executive director of ours, owns shares of
our common stock of less than 1%, each.






B.Related Party
Transactions






Universal
Shipping and Real Estates Inc.






Following our acquisition of DSS, we pay
rent for our office space to Universal Shipping and Real Estates Inc., or
Universal, a company controlled by our Chairman and Chief Executive Officer,
Mr.Simeon Palios. Pursuant to the lease
agreement signed between DSS and Universaland amended in December
2006,in 2008, 2007 and 2006, we paid rentamountingtoabout $231,000, $205,000 and $227,000,
respectively. The agreement, which expired in 2008, was renewed for three years
until 2011. In 2008 and 2007, rent expense was classified as interest expense of
a financing lease, and in 2006, $128,000 of the total amount was classified as
interest expense.Under the extended lease term of three
years we expect to pay rent expense at around $0.7 million ($0.2 million in
2009, $0.2 million in 2010 and $0.3 million in 2011), which will be classified
as general and administrative expenses.The terms of the renewed agreement were
the same as the one expired apart from the monthly rent for 2009 which was set
to Euro 12,688 plus stamp duty.




Diana
Shipping Agencies S.A. Management Agreements




Diana Shipping Agencies S.A., or DSA,isan affiliated entity that is majority
owned and controlled by our Chairman and Chief Executive
Officer.In December 2006, we entered into a
lease agreement with DSA to lease office space. In 2008, 2007 and 2006, we paid
rent amounting to $156,000, $138,000 and $11,000, respectively. The lease, which
expired in 2008, was renewed for three more years until 2011 and until
expiration we expect to pay approximately $0.5 million in rent expense ($0.1
million in 2009, $0.2 million in 2010 and $0.2 million in 2011). The terms of
the renewed agreement were the same as the one expired apart from the monthly
rent for 2009 which was set to Euro 8,560 plus stamp duty.




Commercial
Banking, Financial Advisory and Investment Banking Services




Fortis Bank (Nederland) N.V.,which prior to September
2007 owned more than 5% of our issued and outstanding shares, and its affiliates have provided and
may provide in the future commercial banking, financial advisory and investment
banking services for us for which they receive customary compensation. Fortis
Securities LLC, an affiliate of Fortis Bank (Nederland) N.V., was an underwriter
in our initial public offering in March 2005 and our follow-on offering in
December 2005.In November
2006, we entered into a loan facility agreement with Fortis Bank for a loan of
up to $60.2 million and a guarantee facility of up to $36.5 millionfor the purpose of financing and
guaranteeing the payment of part of the construction cost of our two Capesize
dry bulk carriers we have under construction at the Shanghai Waigaoqiao
Shipbuilding Co. Ltd, in China and we expect to take delivery of in 2010.




Registration
Rights Agreement




We have entered into a registration
rights agreement with Corozal Compania Naviera S.A., Ironwood Trading Corp., and
Zoe S. CompanyLtd., our stockholders of record
immediately prior to our initial public offering in March 2005, pursuant to
which we have granted them, their affiliates (including Mr.Simeon Palios, Mr.Anastassis Margaronis and
Mr.Ioannis Zafirakis) and certain of their
transferees, the right, under certain circumstances and subject to certain
restrictions, including any applicable lock-up agreements then in place, to
require us to register under the Securities Act shares of our common stock held
by them. Under the registration rights agreement, these persons will have the
right to request us to register the sale of shares held by them on their behalf
and may require us to make available shelf registration statements permitting
sales of shares into the market from time to time over an extended period. In
addition, these persons will have the ability to exercise certain piggyback
registration rights in connection with registered offerings requested by
stockholders or initiated by us. Our stockholders of record immediately prior to
our initial public offering,owned25,768,750 shares entitled to these
registration rights.In
December 2006, we filed a Registration Statement to register 8,000,000 of these shares of which
5,750,000 were sold in a secondary offering in January 2007, at the price of
$15.75 per share and the remaining 2,250,000 in April 2007 at the price of
$17.00 per share.


60






Consultancy
Agreements




We have consulting agreements with
companiesownedby Mr.Palios, Mr.Margaronis, Mr.ZafirakisandMr. Michalopoulos (as of
March 1, 2006), and until March 31, 2006 by Mr. Koutsomitopoulos, respectively.
In2008, 2007 and 2006, we paid to these companies$1.7, $1.6 and $1.6 million
respectively,for services
provided by their owners and performed outside of Greece.




Travel
Services




Altair TravelAgencyS.A., an affiliated entity that is
controlled by our Chairman and Chief Executive Officer, Mr.Simeon Palios, provides us with travel
related services. Travel related expenses in2008, 2007 and 2006amounted to$1.5 million, $1.1 million and $0.9
million, respectively. We
believe that the fees that we pay to Altair TravelAgencyS.A. are no greater than fees we would
pay to an unrelated third party for comparable services in an arm’s length transaction. Following our
acquisition of DSS, wealsopay rent to Altair for the
lease of parkingspace,which for 2008, 2007 and 2006 amounted
to about $19,000, $17,000 and $13,000. The agreement which expired in 2008 was
renewed for three years under the same terms and the monthly rent for 2009 was
set at Euro 1,051 plus stamp duty. During the renewed term of the lease
agreement, we expect to pay rent to Altair of $59,000 ($18,700 in 2009, $19,700
in 2010 and $20,600 in 2011).




C.Interests
of Experts and Counsel




Not Applicable.




Item
8.Financial information




A.Consolidated
statements and other financial information




See Item 18.




Legal
Proceedings




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




Dividend
Policy




As
a result of market conditions in the international shipping industry and in line
with our dividend policy, as of November 2008, our board of directors has
decided to suspend the payment of future dividends. We believe that this
suspension will enhance our future flexibility by permitting cash flow that
would have been devoted to dividends to be used for opportunities that may arise
in the current marketplace, such as funding our operations, acquiring vessels or
servicing our debt.   In addition, other external factors, such
as our lenders imposing restrictions on our ability to pay dividends under the
terms of our credit facilities, may limit our ability to pay
dividends.  Further, we may not be permitted to pay dividends if we
are in breach of the covenants contained in our loan agreements.






61




Ourpreviouspolicywas to declare quarterly distributions to
stockholders by each February, May, August and November substantially equal to
our available cash from operations during the previous quarter after expenses d  we re required, and after taking into
account contingent liabilities, the terms of our credit facilit ies , our growth strategy and other cash
needs and the requirements of Marshall Islands law. Marshall Islands law generally prohibits
the payment of dividends other than from surplus or when a company is insolvent
or if the payment of the dividend would render the company
insolvent.  Our board of directors may review and
amend our dividend policy from time to time in light of our plans for future
growth and other factors.




For those periods that we paid
dividends,we
calculatedour dividends per share as if any debt,
excluding construction pre-delivery financing, in excess of $150.0million were financed entirely with
equity such that (i)the available cash from operations as
determined by our board of directors would be increased by the amount of
interest expense incurred on account of such outstanding debt during the related
period, and (ii)the number of shares outstanding would
be deemed to include an additional number of shares, which, if issued, would
have generated net proceeds that would have been sufficient to have allowed us
to repay such outstanding debt as of the beginning of the related period (based
on the market price of our common stock as of the determination date). From time
to time we usedthe net proceeds from equity offerings
to temporarily reduce our outstanding debt, excluding construction pre-delivery
financing, to less than $150.0million pending the application of such
proceeds to vessel acquisitions or other uses. As ofDecember31, 2008, we had total debt outstanding of
$238.8millionof principal balance, including $24.1million of construction pre-delivery
financing.




We believe that, under current law, any
dividends thatwe have paid
andmay payin the futurefrom earnings and profits constitute“qualified dividend income”and as sucharegenerally subject to a 15% United
States federal income tax rate with respect to non-corporate United States
stockholders. Distributions in excess of our earnings and profits will be
treated first as a non-taxable return of capital to the extent of a United
States stockholder’s tax basis in its common stock on a
dollar-for-dollar basis and thereafter as capital gain.We note that legislation was previously
introduced in the United States Congress, which, if enacted in its present form,
would preclude dividends received after the date of enactment from qualifying as“qualified dividend income.”Please see the section of this annual
report entitled“Taxation”underItem10.E for additional information
relating to the tax treatment of our dividend payments.




Since our initial public offering in
March 2005, we have declared and paid dividendsof$2.71 per sharerepresenting ourcash available from
operationsfor the first three quarters of 2008,
$2.19 per sharerepresenting ourcash available from
operationsfor 2007, $1.56per sharefor 2006 and $1.485 per share, for
2005.As of November 2008 and after the
significant deterioration of the credit markets significantly affecting the
international dry bulk shipping, our Board of Directors decided to suspend the
payment of future dividendsas a result of market conditions in the
international shipping industry.




B.
Significant Changes




There have been no significant changes
since the date of the annual consolidated financial statements included in this
annual report.




Item
9. Listing Details




The trading market for shares of our
common stock is the New York Stock Exchange, on which our shares trade under the
symbol“DSX”. The following table sets forth the
high and low closing prices for shares of our common stock since our initial
public offering on March 17, 2005, as reported by the New York Stock
Exchange:




62





2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005Period
                
                High
                
                
                Low
                
                
                High
                
                
                Low
                
                
                High
                
                
                Low
                
                
                High
                
                
                Low
                
                
                High
                
                
                LowAnnual
                
                
                -
                
                
                
                -
                
                
                $
                31.66
                
                
                $
                7.24
                
                
                $
                44.82
                
                
                $
                15.79
                
                
                $
                13.55
                
                
                $
                11.19
                
                
                $
                17.50
                
                
                $
                12.141st quarter
                
                
                -
                
                
                
                -
                
                
                
                31.10
                
                
                
                21.12
                
                
                
                20.31
                
                
                
                15.792nd quarter
                
                
                -
                
                
                
                -
                
                
                
                39.00
                
                
                
                26.05
                
                
                
                23.00
                
                
                
                17.953rd quarter
                
                
                -
                
                
                
                -
                
                
                
                31.66
                
                
                
                19.21
                
                
                
                29.24
                
                
                
                21.624th quarter
                
                
                -
                
                
                
                -
                
                
                
                20.07
                
                
                
                7.24
                
                
                
                44.82
                
                
                
                25.05September
                
                
                
                
                
                
                -
                
                
                
                26.96
                
                
                
                19.21October
                
                
                
                
                
                
                
                
                
                
                20.07
                
                
                
                13.98November
                
                
                
                
                
                
                
                
                
                
                17.23
                
                
                
                7.84December
                
                
                
                
                
                
                
                
                
                
                7.24
                
                
                
                14.88January
                
                $
                15.04
                
                
                $
                10.83February
                
                
                16.89
                
                
                
                12.43




Item
10. Additional Information




A.Share
      Capital




Not Applicable.




B.Memorandum
      and articles of association




Ourcurrentamended and restated articles of
incorporationhave been
filed as exhibit 1 to our Form 6-K filed with the Securities and Exchange
Commission on May 29, 2008 with file number 001-32458, and our current amended
and restated bylaws have been filed as exhibit 1.2 to our Form 6-K filed with
the Securities and Exchange Commission on December 4, 2007 with file number
001-32458.The information
contained in these exhibits
isincorporated by
reference herein.




Information regarding the rights,
preferences and restrictions attaching to each class of the shares is described
in section“Description of Capital Stock”in our Registration Statement on Form
F-1 filed with the Securities and Exchange Commission on November 23,
2005 with file number
333-129726,provided that since the date of that
Registration Statement, our outstanding shares of common stock has increased to75,427,241.We have also filed with the Securities
and Exchange Commission our amended and restated stockholders rights agreement
as exhibit 4.5 to our Form 8-A12B/A filed on October 7, 2008 and amended on
October 10, 2008, with file number 001-32458.




C.Material
      Contracts




We refer you to Item 7.B for a
discussion of our registration rights agreement with our stockholders of record
before our initial public offeringand agreements with companies
controlled by our Chairman and Chief Executive Officer, Mr. Simeon
Palios. Other than these
agreements, we have no material contracts, other than contracts entered into in
the ordinary course of business, to which the Company or any member of the group
is a party.




D.Exchange
      Controls






Under Marshall Islands, Panamanian and
Greek law, there are currently no restrictions on the export or import of
capital, including foreign exchange controls or restrictions that affect the
remittance of dividends, interest or other payments to non-resident holders of
our common stock.




63






E.Taxation




United States Taxation




The following discussion is based upon
the provisions of the U.S. Internal Revenue Code of 1986, as amended (the“Code”), existing and proposed U.S. Treasury
Department regulations, administrative rulings, pronouncements and judicial
decisions, all as of the date of this Annual Report.  This discussion
assumes that we do not have an office or other fixed place of business in the
United States. Unless the context otherwise requires, the reference to Company
below shall be meant to refer to both the Company and its vessel owning and
operating subsidiaries.




Taxation
of the Company’s Shipping Income: In General




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




Shipping income that is attributable to
transportation that begins or ends, but that does not both begin and end, in the
United States will be considered to be 50% derived from sources within the
United States. Shipping income attributable to transportation that both begins
and ends in the United States will be considered to be 100% derived from sources
within the United States. The Company is not permittedby lawto engage in transportation that gives
rise to 100% U.S.source income. Shipping income
attributable to transportation exclusively between non-U.S.ports will be considered to be 100%
derived from sources outside the United States. Shipping income derived from
sources outside the United States will not be subject to U.S.federal income tax.




Based upon the Company’s anticipated shipping operations, the
Company’s vessels will operate in various parts
of the world, including to or from U.S.ports. Unless exempt from
U.S.taxation under Section883 of the Code, the Company will be
subject to U.S.federal income taxation, in the manner
discussed below, to the extent its shipping income is considered derived from
sources within the United States.




In the year ended December 31,
2008, approximately10.6%, of the Company’s shipping income was attributable to
the transportation of cargoes either to or from a U.S. port.
Accordingly,5.3% of the
Company’s shipping income would be treated as
derived from U.S.sources for the year ended December 31,
2008. In the absence of exemption from tax
under Section883, the Company would have been subject
to a 4% tax on its gross U.S. source shipping income equal to approximately
$0.5million for the year ended December 31,
2008.




Application
of Code Section 883




Under the relevant provisions of
Section883 of the Code and the final
regulations promulgated thereunder, or the final regulations, which became
effective on January 1, 2005 for calendar year taxpayers like ourselves and our
subsidiaries, a foreign corporation will be exempt from U.S.taxation on its U.S.source shipping income if:






(1)
            It is organized in a qualified
      foreign country which, as defined, is one that grants an equivalent
      exemption from tax to corporations organized in the United States in
      respect of the shipping income for which exemption is being claimed under
      Section883, or  the“country of organization
      requirement”;
  and




64






(2)
            It can satisfy any one of the
      following two (2)stock ownership
      requirements:




§
            more than 50% of its stock, in
      terms of value, is beneficially owned by qualified stockholders which, as
      defined, includes individuals who are residents of a qualified foreign
      country, or the“50% Ownership Test”;
  or




§
            its stock or that of its 100%
      parent is“primarily and
      regularly”traded on an established
      securities market located in the United States, or the“Publicly Traded Test”.




The U.S.Treasury Department has recognized the
Marshall Islands, the Company’s country of organization since February
2005, and Panama, the country of incorporation of each of the
Company’s subsidiaries that earned shipping
income during2008, as a qualified foreign country.
Accordingly, the Company and each of the subsidiaries satisfy the country of
organization requirement.




For the2008tax year, the Company believes that it
will be unlikely to satisfy the 50% Ownership Test. Therefore, the eligibility
of the Company and each subsidiary to qualify for exemption under
Section883 is wholly dependent upon being able
to satisfy the Publicly Traded Test.




Under the final regulations, the
Company’s common stock, which is the sole class
of issued and outstanding stock, was“primarily traded”on the New York Stock Exchange during2008.




Under the final regulations, the
Company’s common stock will be considered to be“regularly traded”on the New York Stock Exchange if its
common stock is listed on the New York Stock Exchange and in addition, its
common stock is traded on the New York Stock Exchange, other than in minimal
quantities, on at least 60days during the taxable year and the
aggregate number of shares of common stock so traded during the taxable year is
at least 10% of the average number of shares of common stock issued and
outstanding during such year. The Company has satisfied the listing requirement
as well as the trading frequency and trading volume tests.




Notwithstanding the foregoing, the final
regulations provide, in pertinent part, that stock will not be considered to be“regularly traded”on an established securities market for
any taxable year in which 50% or more of such stock is owned, actually or
constructively under specified stock attribution rules, on more than half the
days during the taxable year by persons, or 5% Stockholders, who each own 5% or
more of the value of stock, or the“5 Percent Override Rule.”




For more than half the days of the tax
year2008, 19.22% of the Company’s common stock was owned by 5%
Stockholders.Therefore,
the Company is not subject to the 5 Percent Override Rule for2008.  However, there is no
assurance that the Company will continue to qualify for exemption under Section
883.  For example, the Company could be subject to the 5% Override
Rule if another 5% Stockholder in combination with the Company’s existing 5% Stockholders were to own
50% or more of the Company’s stock.  In such a case, the
Company would be subject to the 5% Override Rule unless it could establish that,
among the shares owned by the 5% Stockholders, sufficient shares are owned by
qualified shareholders to preclude non-qualified shareholders from owning 50
percent or more of the Company’s stock for more than half the number of
days during the taxable year.  These requirements are onerous and
there is no assurance the Company will be able to satisfy
them.




Based on the foregoing, the Company
believes that it satisfied thePubliclyTradedTest for2008and intends to take this position on
its2008United States income tax
returns.




Taxation
in Absence of Internal Revenue Code Section 883 Exemption




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


65






Based on its U.S. source Shipping Income
for2008, the Company would be subject to U.S.
federal income tax of approximately $0.5million under Section 887 in the absence
of an exemption under Section 883.




Gain
on Sale of Vessels.




Regardless of whether we qualify for
exemption under Section883, we will not be subject to United
States federal income taxation with respect to gain realized on a sale of a
vessel, provided the sale is considered to occur outside of the United States
under United States federal income tax principles.  In general, a sale
of a vessel will be considered to occur outside of the United States for this
purpose if title to the vessel, and risk of loss with respect to the vessel,
pass to the buyer outside of the United States.  It is expected that
any sale of a vessel by us will be considered to occur outside of the United
States.




Taxation of U.S.
Holders




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




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




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




Distributions




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




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




66







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




Sale, Exchange or other Disposition of
Common Shares




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




Passive Foreign Investment Company
Status and Significant Tax Consequences




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




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




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




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




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




67







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




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




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




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




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




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




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




·
            the excess distribution or gain
      would be allocated ratably over the Non-Electing Holders’aggregate holding period for the
      common shares;




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




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




68







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




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




A
beneficial owner of common shares that is not a U.S. Holder (other than a
partnership) is referred to herein as a “Non-U.S. Holder.”




Dividends on Common
Shares




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




Sale, Exchange or Other Disposition of
Common Shares




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




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




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




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




Backup Withholding and Information
Reporting




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


·
              fails to provide an accurate
      taxpayer identification
number;


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




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




69


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




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




Marshall
Islands Tax Considerations




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




F.
      Dividends and paying agents




Not Applicable.




G.
      Statement by experts




Not Applicable.




H.
      Documents on display




We file reports and other information
with the SEC. These materials, including this annual report and the accompanying
exhibits, may be inspected and copied at the public reference facilities
maintained by theSECat 100 F Street, N.E., Washington, D.C.
20549, or from the SEC’s websitehttp://www.sec.gov. You may obtain information on the
operation of the public reference room by calling 1 (800) SEC-0330 and you may obtain copies at
prescribed rates.




I.
      Subsidiary information




Not Applicable.




Item
11. Quantitative and Qualitative Disclosures about Market Risk




Interest
Rates




We are exposed to market risks
associated with changes in interest ratesrelating to our revolving credit
facility. At December 31,
2008, we had $238.8million of indebtedness
outstandingof which $214.7millionwas under our revolving credit facility
with the Royal Bank of
Scotland and $24.1 million was under our loan facility with Fortis.Interest costs incurred under our
revolving credit facility are included in our statement of income and interest
costs incurred under our loan facility are included in vessel cost.




In 2008, the weighted average interest
rate for both of our facilities was3.41%and the respective interest rates
ranged from 1.14% to6.00%, including
margins.An average increase of 1% in the
interest rates of 2008 would have resulted in interest costs of $7.7 million
instead of $5.1 million, an increase of 29%.




The weighted average interest raterelating to our revolving
credit facility with The Royal Bank of Scotland was 3.40% and the respective
interest rates ranged from 1.22% to6.00%, including margins. An average increase of




70


1% in the interest rates of 2008 would
have resulted in interest expenses of $6.6 million, instead of $5.1 million, an
increase of 29%.




The weighted average interest raterelating to our facility
with Fortis was 3.47% and the respective interest rates ranged from 1.14% to
5.51% including margins.An average increase of 1%
in the interest rates of 2008 would have resulted in interest costs $1.1 million
instead of $0.9 million, an increase of 29%.




Currently, we have $24.1 million of
indebtedness outstanding relating to theNew York (Hull
1107)and theLos Angeles (Hull
1108)under our facility with
Fortis and $214.7 million of principal balance outstanding under our credit
facility with the Royal Bank of Scotland.




We will continue to have debt
outstanding, which could impact our results of operations and financial condition and
althoughwe intend to limit
the amount of indebtedness that we have outstanding at any timeup to $150.0 million,through equity offerings on terms
acceptable to us, we may
not be able to do so. We
expect to manage any exposure in interest rates through our regular operating
and financing activities and, when deemed appropriate, through the use of
derivative financial instruments.




Currency
and Exchange Rates




We generate all of our revenues in U.S.
dollars but currently incur over half of our operating expenses and the majority
of ourgeneral and
administrative expensesin
currencies other than the U.S. dollar, primarily theEuro. For accounting purposes, expenses
incurred inEuros are converted into U.S. dollars at
the exchange rate prevailing on the date of each transaction. Because a
significant portion of our expenses are incurred in currencies other than the
U.S. dollar, our expenses may from time to time increase relative to our
revenues as a result of fluctuations in exchange rates, particularly between the
U.S. dollar and theEuro, which could affect the amount of
net income that we report in future periods. While we historically have not
mitigated the risk associated with exchange rate fluctuations through the use of
financial derivatives, we may determine to employ such instruments from time to
time in the future in order to minimize this risk. Our use of financial
derivatives would involve certain risks, including the risk that losses on a
hedged position could exceed the nominal amount invested in the instrument and
the risk that the counterparty to the derivative transaction may be unable or
unwilling to satisfy its contractual obligations, which could have an adverse
effect on our results.




Item
12. Description of Securities Other than Equity Securities




Not Applicable.




PART
II




Item
13. Defaults, Dividend Arrearages and Delinquencies




None.




Item
14. Material Modifications to the Rights of Security Holders and Use of
Proceeds




None.




Item
15. Controls and Procedures




a) Disclosure
Controls and Procedures


Management, including our Chief
Executive Officer and Chief Financial Officer, has conducted an evaluation of
the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this report. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in the reports that it files or submits to the SEC
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.


71




b) Management’sAnnual Report on Internal Control over
Financial Reporting


Management is responsible for
establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Rule 13a-15(f) of the Exchange Act. The
Company’s internal control over financial
reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Chief
Financial Officer to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the Company’s financial statements for external
reporting purposes in accordance with accounting principles generally accepted
in the United States.




Management has conducted an assessment
of the effectiveness of the Company’s internal control over financial
reporting based on the framework established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management has determined that the
Company’s internal control over financial
reporting as of December 31, 2008is effective.




c)Attestation Report ofIndependentRegistered Public Accounting
Firm


The registered public accounting firm
that audited the consolidated financial statements, Ernst Young (Hellas)
Certified Auditors Accountants S.A., has issued an attestation report on the
Company’s internal control over financial reporting,appearing under Item 18,and such reportis incorporated herein byreference.




d)Changes inInternal Control over Financial
Reporting


None.




Inherent Limitations on Effectiveness of
Controls


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




Item
16A. Audit Committee Financial Expert




Our Board of Directors has determined
that both the members of our Audit Committee, Mr. William Lawes and Mr. Apostolos
Kontoyannis,qualify as“Audit Committeefinancial
experts”and they are both considered to be“independent”according to the SEC
rules.




72







Item
16B. Code of Ethics




We have adopted a code of ethics that
applies to officers and employees. Our code of ethics is posted in our
website:http://www.dianashippinginc.com, under“Corporate Governance”and was filed as Exhibit 11.1 to the
2004 annual report on Form 20-F filed with the Securities and Exchange
Commission on June 29, 2005 with number 001-32458.Copies of our Code of Ethicsare available in print upon
request to Diana Shipping Inc., Pendelis16, 175 64 PalaioFaliro, Athens, Greece.Weintend to satisfy any disclosure
requirements regarding any amendment to, or waiver from, a provision of this
Code of Ethics by posting such information onourwebsite.




Item
16C. Principal Accountant Fees and Services




Our principal Accountants, Ernst and
Young (Hellas), Certified Auditors Accountants S.A., have billed us for audit,
audit-related and non-audit services as follows:




2008
                
                
                2007Stated inEuroAudit fees
                
                
                446,250
                
                
                
                589,050Audit-related
      fees
                
                
                -
                
                
                
                197,000Tax fees
                
                
                -
                
                
                
                -All other
    fees
                
                
                -
                
                
                
                -Total
                
                
                446,250
                
                
                
                786,050







Audit feesin 2008 and 2007relate to audit services provided in
connection withtimely SAS
100 reviews, the audit of our consolidated financial statements, the audit of
internal control over financial reporting, as well as audit services performed
in connection with the Company’s follow on equity offerings.




Audit related fees in 2007 related to
financial due diligence services provided in connection with potential business
acquisitions.




TheAuditCommittee is responsible for the
appointment, replacement, compensation, evaluation and oversight of the work of
the independent auditors. As part of this responsibility, the Audit Committee
pre-approves the audit and non-audit services performed by the independent
auditors in order to assure that they do not impair the auditor’s independence from the Company. The
Audit Committee has adopted a policy which sets forth the procedures and the
conditions pursuant to which services proposed to be performed by the
independent auditors may be pre-approved.




All audit services and other services
provided by Ernst and Young (Hellas), Certified Auditors Accountants S.A., were
pre-approved by theAuditCommittee.




Item
16D. Exemptions from the Listing Standards for Audit Committees




Our Audit Committee consists of two
independent members of our Board of Directors.Otherwise, our Audit Committee conforms toeachother requirement applicable to audit
committeesas required by
the applicable listingstandards of theNew York Stock
Exchange.




Item
16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers




None.




73




Item
16G. Corporate Governance






Pursuant to an exemption for foreign
private issuers, we are not required to comply with all of the corporate
governance requirements of the New York Stock Exchange that are applicable to
U.S. listed companies. A description of the significant differences between our
corporate governance practices and the New York Stock Exchange requirements may
be found on our website under “Corporate Governance” athttp://www.dianashippinginc.com.




PART
III




Item
17.Financial Statements




See Item 18.




Item
18.Financial Statements




The following financial statementsbeginning on page F-1 are filed as a part of this
annual report.




74











Item 19.
Exhibits




(a)           Exhibits





Exhibit
                Number
            Description1.1
            Amended
      and Restated Articles of Incorporation of Diana Shipping Investment Corp.
      (changing name to Diana Shipping Inc. and increasing the authorized
      shares) (1)1.2
            Amended
      and Restated By-laws of the Company (2)2.1
            Form
      of Share Certificate4.1
            Second
      Amended and Restated Stockholders Rights Agreement dated October 7, 2008
      (4)4.2
            Form
      of Registration Rights Agreement (5)4.3
            Amended
      and Restated 2005 Stock Incentive Plan (6)4.4
            Form
      of Technical Manager Purchase Option Agreement (5)4.5
            Form
      of Management Agreement (3)4.6
            Loan
      Agreement with Royal Bank of Scotland dated February 18, 2005 (5)4.7
            Supplemental
      Agreement with the Royal Bank of Scotlanddated
      January 30, 2007 (7)4.8
            Facility
      Agreement with Fortis Bank dated November 6, 2006 (8)4.9
            First
      Amendment to Technical Manager Purchase Option Agreement February 17, 2006
      (9)4.10
            Amending
      and Restating Loan Agreement with Royal Bank of Scotland dated May 24,
      2006 (10)4.11
            Sales
      Agency Financing Agreement dated April 23, 2008 (11)8.1
            Subsidiaries
      of the Company11.1
            Code
      of Ethics12.1
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer12.2
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer13.1
            Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200213.2
            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200215.1
            Consent of Independent Registered Public Accounting
      Firm







(1)
                                                              Filed
      as Exhibit 1 to the Company’s Form 6-K filed on May 29,
    2008.(2)
                                                              Filed
      as Exhibit 1 to the Company’s Form 6-K filed on December 4,
      2007.(3)
                                                              Filed
      as an Exhibit to the Company’s Amended Registration Statement (File No.
      123052) on March 15,2005.(4)
                                                              Filed
      as Exhibit 4.5 to the Company’s Form 8-A12B/A filed on October 7, 2008 and
      amended on October 10, 2008 (File No. 001-32458).(5)
                                                              Filed
      as an Exhibit to the Company’s Registration Statement (File No. 123052) on
      March 1, 2005.(6)
                                                              Filed
      as Exhibit 1 to the Company’s Form 6-K filed on October 27,
      2008.(7)
                                                              Filed
      as Exhibit VI to the Company’s Form 6-K filed on March 19,
      2007.(8)
                                                              Filed
      as an Exhibit to the Company’s Form 6-K filed on December 13,
      2006.(9)
                                                              Filed
      as Exhibit 4.7 to the Company’s Amended Annual Report filed on Form 20-F/A
      on April 14, 2006.(10)
                                                              Filed
      as Exhibit 4.10 to the Company’s 2007 Annual Report on Form 20-F (File No.
      001-32458) on March14, 2008.(11)
                                                              Filed
      as Exhibit 2 to the Company’s Form 6-K filed on April 24,
      2008.


75








SIGNATURES




The registrant hereby certifies that it
meets all of the requirements for filing on Form 20-F and
that it has duly caused and authorized the undersigned to sign this annual
report on its behalf.











DIANA SHIPPING
      INC.By:
              /s/ Andreas
      MichalopoulosAndreas
      MichalopoulosChiefFinancial Officer and
      TreasurerDated:
      February 27, 2009


















76






DIANA
      SHIPPING INC.






INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




PageReport of Independent Registered Public Accounting
      Firm
              
              F-2Report of Independent Registered
      Public Accounting Firmon Internal Control over
      Financial Reporting
              
              F-3Consolidated Balance Sheets as ofDecember 31, 2008 and
      2007
              
              F-4Consolidated Statements of Income
      for theyears
      endedDecember 31, 2008,2007 and 2006
              
              F-5Consolidated Statements of
      Stockholders’Equity for theyears endedDecember 31, 2008,2007 and 2006
              
              F-6Consolidated Statements of Cash
      Flows for the years ended December 31, 2008, 2007and 2006
              
              F-7Notes to Consolidated Financial
      Statements
              
              F-8





F-1




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




The
Board of Directors and Stockholders of DIANA SHIPPING
INC.




We
have audited the accompanying consolidated balance sheets of Diana Shipping Inc.
as of December 31, 2008 and 2007, and the related consolidated statements of
income, stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2008.  These financial statements are the
responsibility of the Company’s management.  Our responsibility is to
express an opinion on these financial statements based on our
audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Diana Shipping Inc. at
December 31, 2008 and 2007, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2008, in conformity with U.S. generally accepted accounting
principles.




We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Diana Shipping Inc.’s internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report datedFebruary
27, 2009expressedan
unqualified opinion
thereon.











Athens,


February
27, 2009










F-2


Report
of Independent Registered Public Accounting Firm






The Board
of Directors and Stockholders of DIANA SHIPPING INC.






We have
audited Diana Shipping Inc.’s internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Diana Shipping Inc.’s management is responsible
for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the Management’s Annual Report on Internal Control over Financial
Reporting appearing under Item 15.b in the Company’s Annual Report on Form 20-F
for the year ended December 31, 2008. Our responsibility is to express an
opinion on the company’s internal control over financial reporting based on our
audit.




We
conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.




A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial
statements.




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




In our opinion, Diana
Shipping Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2008, based onthe
COSO criteria.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Diana
Shipping Inc. as of December 31, 2008 and 2007 and the related consolidated
statements of income, stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 2008 of Diana Shipping Inc. and our
report dated February 27, 2009 expressed an unqualified opinion
thereon.












February
27, 2009


F-3


DIANA
      SHIPPING INC.CONSOLIDATED BALANCE
      SHEETSDECEMBER 31, 2008 AND
      2007(Expressed in thousands of U.S.
      Dollars – except for share and per share data)2008
                                                                                                        
                                                                                                        
                                                                                                        2007ASSETSCURRENT
    ASSETS:Cash and cash
      equivalents
                                                                                                        
                                                                                                        $
                                                                                                        62,033
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        16,726Accounts receivable,
      trade
                                                                                                        
                                                                                                        
                                                                                                        1,646
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        1,822Inventories
                                                                                                        
                                                                                                        
                                                                                                        3,146
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        2,102Prepaid insurance and
      other
                                                                                                        
                                                                                                        
                                                                                                        1,729
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        864Total current
      assets
                                                                                                        
                                                                                                        
                                                                                                        68,554
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        21,514FIXED
    ASSETS:Advances for vessels under
      construction and acquisitions and other vessel costs (Note 4)
                                                                                                        
                                                                                                        
                                                                                                        27,199
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        53,104Vessels (Note 5)
                                                                                                        
                                                                                                        
                                                                                                        1,060,311
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        924,838Accumulated depreciation
      (Note 5)
                                                                                                        
                                                                                                        
                                                                                                        (99,880
                                                                                                        )
                                                                                                        
                                                                                                        
                                                                                                        (57,206
                                                                                                        )Vessels’ net book
      value
                                                                                                        
                                                                                                        
                                                                                                        960,431
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        867,632Property and equipment,
      net
                                                                                                        
                                                                                                        
                                                                                                        136
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        956Total fixed
      assets
                                                                                                        
                                                                                                        
                                                                                                        987,766
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        921,692OTHER NON-CURRENT
      ASSETS:Deferred charges,
      net
                                                                                                        
                                                                                                        
                                                                                                        886
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        1,136Total
assets
                                                                                                        
                                                                                                        $
                                                                                                        1,057,206
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        944,342LIABILITIES AND STOCKHOLDERS’
      EQUITYCURRENT
      LIABILITIES:Accounts payable, trade and
      other
                                                                                                        
                                                                                                        
                                                                                                        4,225
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        3,718Due to related companies
      (Note 3)
                                                                                                        
                                                                                                        
                                                                                                        177
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        161Accrued
      liabilities
                                                                                                        
                                                                                                        
                                                                                                        3,631
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        4,159Deferred revenue, current
      portion (Notes 2 and 7)
                                                                                                        
                                                                                                        
                                                                                                        11,802
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        12,122Other current
      liabilities
                                                                                                        
                                                                                                        
                                                                                                        177
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        804Total current
      liabilities
                                                                                                        
                                                                                                        
                                                                                                        20,012
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        20,964LONG-TERM DEBT(Note 6)
                                                                                                        
                                                                                                        
                                                                                                        238,094
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        98,819DEFERRED REVENUE, non-current
      portion (Notes 2 and 7)
                                                                                                        
                                                                                                        
                                                                                                        22,502
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        23,965OTHER NON-CURRENT
      LIABILITIES
                                                                                                        
                                                                                                        
                                                                                                        1,122
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        1,120COMMITMENTS AND
      CONTINGENCIES
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -STOCKHOLDERS’EQUITY:Preferred stock, $0.01 par value;
      25,000,000 shares authorized, none issued
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -Common stock, $0.01 par value;
      200,000,000and 100,000,000shares
      authorized;75,062,003and 74,375,000 issued and
      outstanding atDecember 31,2008 and 2007,
      respectively. (Note
      9)
                                                                                                        
                                                                                                        
                                                                                                        751
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        744Additional paid-in
      capital
                                                                                                        
                                                                                                        
                                                                                                        802,574
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        801,349Other comprehensive income (Note
      2)
                                                                                                        
                                                                                                        
                                                                                                        182
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        110Accumulated
      deficit
                                                                                                        
                                                                                                        
                                                                                                        (28,031
                                                                                                        )
                                                                                                        
                                                                                                        
                                                                                                        (2,729
                                                                                                        )Total stockholders’
      equity
                                                                                                        
                                                                                                        
                                                                                                        775,476
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        799,474Total liabilities and
      stockholders’ equity
                                                                                                        
                                                                                                        $
                                                                                                        1,057,206
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        944,342




The accompanying notes are an integral
part of these consolidated financial statements.


F-4











DIANA SHIPPING
      INC.CONSOLIDATED STATEMENTS OF
      INCOMEFOR THE YEARS ENDED DECEMBER 31,2008, 2007 and
      2006(Expressed in thousands of U.S.
      Dollars – except for share and per share data)2008
                                                                
                                                                
                                                                2007
                                                                
                                                                
                                                                2006REVENUES:Voyage and time charter
      revenues
                                                                
                                                                $
                                                                337,391
                                                                
                                                                
                                                                $
                                                                190,480
                                                                
                                                                
                                                                $
                                                                116,101EXPENSES:Voyage expenses(Note 2 &
      10)
                                                                
                                                                
                                                                15,003
                                                                
                                                                
                                                                
                                                                8,697
                                                                
                                                                
                                                                
                                                                6,059Vessel operating expenses(Note 2 &
      10)
                                                                
                                                                
                                                                39,899
                                                                
                                                                
                                                                
                                                                29,332
                                                                
                                                                
                                                                
                                                                22,489Depreciation and amortization of
      deferred charges(Note 5)
                                                                
                                                                
                                                                43,259
                                                                
                                                                
                                                                
                                                                24,443
                                                                
                                                                
                                                                
                                                                16,709Management
    fees
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                573Executive management services and
      rent(Note
      9)
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                76General and administrative
      expenses
                                                                
                                                                
                                                                13,831
                                                                
                                                                
                                                                
                                                                11,718
                                                                
                                                                
                                                                
                                                                6,331Gain on vessel
      sale
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (21,504
                                                                )
                                                                
                                                                
                                                                -Foreign currency
      losses/(gains)
                                                                
                                                                
                                                                (438
                                                                )
                                                                
                                                                
                                                                (144
                                                                )
                                                                
                                                                
                                                                (52
                                                                )Operating
      income
                                                                
                                                                
                                                                225,837
                                                                
                                                                
                                                                
                                                                137,938
                                                                
                                                                
                                                                
                                                                63,916OTHER INCOME
      (EXPENSES):Interest and finance costs(Notes 6 and
      11)
                                                                
                                                                
                                                                (5,851
                                                                )
                                                                
                                                                
                                                                (6,394
                                                                )
                                                                
                                                                
                                                                (3,886
                                                                )Interest
    income
                                                                
                                                                
                                                                768
                                                                
                                                                
                                                                
                                                                2,676
                                                                
                                                                
                                                                
                                                                1,033Insurance settlement for vessel
      un-repaired damages
                                                                
                                                                
                                                                945
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -Total other income (expenses),
      net
                                                                
                                                                
                                                                (4,138
                                                                )
                                                                
                                                                
                                                                (3,718
                                                                )
                                                                
                                                                
                                                                (2,853
                                                                )Net income
                                                                
                                                                $
                                                                221,699
                                                                
                                                                
                                                                $
                                                                134,220
                                                                
                                                                
                                                                $
                                                                61,063Preferential Deemed
      Dividend
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (20,267
                                                                )Net income available to common
      stockholders
                                                                
                                                                $
                                                                221,699
                                                                
                                                                
                                                                $
                                                                134,220
                                                                
                                                                
                                                                $
                                                                40,796Earnings per common share, basic
      and diluted
                                                                
                                                                $
                                                                2.97
                                                                
                                                                
                                                                $
                                                                2.11
                                                                
                                                                
                                                                $
                                                                0.82Weighted average number of common
      shares, basic
                                                                
                                                                
                                                                74,375,686
                                                                
                                                                
                                                                
                                                                63,748,973
                                                                
                                                                
                                                                
                                                                49,528,904Weighted average number of common
      shares, diluted
                                                                
                                                                
                                                                74,558,254
                                                                
                                                                
                                                                
                                                                63,748,973
                                                                
                                                                
                                                                
                                                                49,528,904




The accompanying notes are an integral
part of these consolidated financial statements.


F-5


DIANA
      SHIPPING INC.CONSOLIDATED STATEMENTS OF
      STOCKHOLDERS’EQUITYFOR THE YEARS ENDED DECEMBER 31,
      2008, 2007 AND 2006(Expressed in thousands of U.S.
      Dollars – except for share and per share data)  Common
      Stock
  Comprehensive
      income
                  
                  
                  # of
      shares
                  
                  
                  Par
    value
                  
                  
                  Additional paid-in
      capital
                  
                  
                  Other
                      Comprehensive
      income
                  
                  
                  Accumulated
      deficit
                  
                  
                  TotalBALANCE,
                    December 31,
      2005
                  
                  
                  
                  
                  
                  45,000,000
                  
                  
                  $
                  450
                  
                  
                  $
                  296,831
                  
                  
                  $
                  -
                  
                  
                  $
                  26,877
                  
                  
                  $
                  324,158- Net
      income
                  
                  
                  61,063
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  61,063
                  
                  
                  
                  61,063- Contribution to
                    additional-paid in
      capital
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  76
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  76- Issuance of common
      stock
                  
                  
                  
                  
                  
                  
                  8,050,000
                  
                  
                  
                  81
                  
                  
                  
                  71,570
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  71,651- Dividends declared and
      paid
                    ($ 0.40 per
      share)
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (18,000
                  )
                  
                  
                  (18,000
                  )- Dividends declared and
      paid
                    ($ 0.345 per
      share)
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (15,525
                  )
                  
                  
                  (15,525
                  )- Dividends declared and
      paid
                    ($ 0.355 per
      share)
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (18,833
                  )
                  
                  
                  (18,833
                  )- Dividends declared and
      paid
                    ($ 0.40 per
      share)
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (21,220
                  )
                  
                  
                  (21,220
                  )- Preferrential deemed
      dividend
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (20,267
                  )
                  
                  
                  (20,267
                  )Comprehensive
      income
                  
                  $
                  61,063BALANCE,
                    December 31,
      2006
                  
                  
                  
                  
                  
                  
                  53,050,000
                  
                  
                  $
                  531
                  
                  
                  $
                  368,477
                  
                  
                  $
                  -
                  
                  
                  $
                  (5,905
                  )
                  
                  $
                  363,103- Net
      income
                  
                  
                  134,220
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  134,220
                  
                  
                  
                  134,220- Issuance of common
      stock
                  
                  
                  
                  
                  
                  
                  21,325,000
                  
                  
                  
                  213
                  
                  
                  
                  432,872
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  433,085- Dividends declared and
      paid
                    ($ 0.46 per
      share)
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (24,403
                  )
                  
                  
                  (24,403
                  )- Dividends declared and
      paid
                    ($ 0.50 per
      share)
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (31,437
                  )
                  
                  
                  (31,437
                  )- Dividends declared and
      paid
                    ($ 0.51 per
      share)
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (32,066
                  )
                  
                  
                  (32,066
                  )- Dividends declared and
      paid
                    ($ 0.58 per
      share)
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (43,138
                  )
                  
                  
                  (43,138
                  )- Actuarial
      gains
                  
                  
                  110
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  110
                  
                  
                  
                  -
                  
                  
                  
                  110Comprehensive
      income
                  
                  $
                  134,330BALANCE,
                    December 31,
      2007
                  
                  
                  
                  
                  
                  
                  74,375,000
                  
                  
                  $
                  744
                  
                  
                  $
                  801,349
                  
                  
                  $
                  110
                  
                  
                  $
                  (2,729
                  )
                  
                  $
                  799,474- Net
      income
                  
                  
                  221,699
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  221,699
                  
                  
                  
                  221,699- Issuance of common
      stock
                  
                  
                  
                  
                  
                  
                  686,697
                  
                  
                  
                  7
                  
                  
                  
                  1,225
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,232- Dividends declared and
      paid
                    ($ 0.60 per
      share)
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (44,670
                  )
                  
                  
                  (44,670
                  )- Dividends declared and
      paid
                    ($ 0.85 per
      share)
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (63,283
                  )
                  
                  
                  (63,283
                  )- Dividends declared and
      paid
                    ($ 0.91 per
      share)
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (67,750
                  )
                  
                  
                  (67,750
                  )- Dividends declared and
      paid
                    ($ 0.95 per
      share)
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (71,298
                  )
                  
                  
                  (71,298
                  )- Actuarial
      gains
                  
                  
                  72
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  72
                  
                  
                  
                  -
                  
                  
                  
                  72Comprehensive
      income
                  
                  $
                  221,771BALANCE,
                    December 31,
      2008
                  
                  
                  
                  
                  
                  
                  75,061,697
                  
                  
                  $
                  751
                  
                  
                  $
                  802,574
                  
                  
                  $
                  182
                  
                  
                  $
                  (28,031
                  )
                  
                  
                  775,476
  The accompanying notes are an integral
part of these consolidated financial statements.


F-6


DIANA
      SHIPPING INC.CONSOLIDATED STATEMENTS OF CASH
      FLOWSFOR THE YEARS ENDED DECEMBER 31,
      2008, 2007 AND 2006(Expressed in thousands of U.S.
      Dollars – except for share and per share data)2008
                                                                                        
                                                                                        
                                                                                        2007
                                                                                        
                                                                                        
                                                                                        2006Cash Flows from Operating
      Activities:Net
      income
                                                                                        
                                                                                        $
                                                                                        221,699
                                                                                        
                                                                                        
                                                                                        $
                                                                                        134,220
                                                                                        
                                                                                        
                                                                                        $
                                                                                        61,063Adjustments to reconcile net
      income to net cash from operating activities:Depreciation and amortization of
      deferred charges
                                                                                        
                                                                                        
                                                                                        43,259
                                                                                        
                                                                                        
                                                                                        
                                                                                        24,443
                                                                                        
                                                                                        
                                                                                        
                                                                                        16,709Gain on vessel
      sale
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (21,504
                                                                                        )
                                                                                        
                                                                                        
                                                                                        -Executive management services and
      rent
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        76Amortization and write off of
      financing costs
                                                                                        
                                                                                        
                                                                                        86
                                                                                        
                                                                                        
                                                                                        
                                                                                        111
                                                                                        
                                                                                        
                                                                                        
                                                                                        128Amortization of free lubricants
      benefit
                                                                                        
                                                                                        
                                                                                        (124
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (87
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (71
                                                                                        )Compensation cost on restricted
      stock
                                                                                        
                                                                                        
                                                                                        1,113
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -Insurance settlements for vessel
      un-repaired damages
                                                                                        
                                                                                        
                                                                                        (945
                                                                                        )
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -Actuarial
    gains
                                                                                        
                                                                                        
                                                                                        72
                                                                                        
                                                                                        
                                                                                        
                                                                                        110
                                                                                        
                                                                                        
                                                                                        
                                                                                        -(Increase) Decrease
      in:Receivables
                                                                                        
                                                                                        
                                                                                        176
                                                                                        
                                                                                        
                                                                                        
                                                                                        (822
                                                                                        )
                                                                                        
                                                                                        
                                                                                        7Inventories
                                                                                        
                                                                                        
                                                                                        (1,044
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (823
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (407
                                                                                        )Prepayments and
      other
                                                                                        
                                                                                        
                                                                                        (865
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (314
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (164
                                                                                        )Prepaid charter
      revenue
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,822
                                                                                        
                                                                                        
                                                                                        
                                                                                        3,322Other
assets
                                                                                        
                                                                                        
                                                                                        712
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -Increase (Decrease)
      in:Accounts
      payable
                                                                                        
                                                                                        
                                                                                        507
                                                                                        
                                                                                        
                                                                                        
                                                                                        850
                                                                                        
                                                                                        
                                                                                        
                                                                                        988Due to related
      companies
                                                                                        
                                                                                        
                                                                                        16
                                                                                        
                                                                                        
                                                                                        
                                                                                        7
                                                                                        
                                                                                        
                                                                                        
                                                                                        50Accrued
      liabilities
                                                                                        
                                                                                        
                                                                                        (528
                                                                                        )
                                                                                        
                                                                                        
                                                                                        1,957
                                                                                        
                                                                                        
                                                                                        
                                                                                        (421
                                                                                        )Deferred
      revenue
                                                                                        
                                                                                        
                                                                                        (1,783
                                                                                        )
                                                                                        
                                                                                        
                                                                                        8,600
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,235Other
      liabilities
                                                                                        
                                                                                        
                                                                                        (502
                                                                                        )
                                                                                        
                                                                                        
                                                                                        389
                                                                                        
                                                                                        
                                                                                        
                                                                                        988Dry
dockings
                                                                                        
                                                                                        
                                                                                        (698
                                                                                        )
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (1,133
                                                                                        )Net Cash provided by
      Operating Activities
                                                                                        
                                                                                        
                                                                                        261,151
                                                                                        
                                                                                        
                                                                                        
                                                                                        148,959
                                                                                        
                                                                                        
                                                                                        
                                                                                        82,370Cash Flows from Investing
      Activities:Advances for vessels under
      construction and acquisitions and other vessel
costs
                                                                                        
                                                                                        
                                                                                        (1,099
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (28,757
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (24,347
                                                                                        )Vessel
      acquisitions
                                                                                        
                                                                                        
                                                                                        (108,469
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (458,989
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (168,749
                                                                                        )Proceeds from sale of
      vessel
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        78,857
                                                                                        
                                                                                        
                                                                                        
                                                                                        -Other
Assets
                                                                                        
                                                                                        
                                                                                        (39
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (196
                                                                                        )
                                                                                        
                                                                                        
                                                                                        -Proceeds from insurance
      settlements for vessel un-repaired damages
                                                                                        
                                                                                        
                                                                                        945
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -Net Cash used in Investing
      Activities
                                                                                        
                                                                                        
                                                                                        (108,662
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (409,085
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (193,096
                                                                                        )Cash Flows from Financing
      Activities:Proceeds from long-term
      debt
                                                                                        
                                                                                        
                                                                                        237,200
                                                                                        
                                                                                        
                                                                                        
                                                                                        287,750
                                                                                        
                                                                                        
                                                                                        
                                                                                        197,180Proceeds from public offering, net
      of related issuance costs
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        433,085
                                                                                        
                                                                                        
                                                                                        
                                                                                        71,651Proceedsfrom reinvestment of
      dividends
                                                                                        
                                                                                        
                                                                                        119Financing
    costs
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (100
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (100
                                                                                        )Payments of long-term
      debt
                                                                                        
                                                                                        
                                                                                        (97,500
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (327,350
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (71,425
                                                                                        )Preferential deemed
      dividend
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (19,721
                                                                                        )Cash
    dividends
                                                                                        
                                                                                        
                                                                                        (247,001
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (131,044
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (73,578
                                                                                        )Net Cash provided by
      Financing Activities
                                                                                        
                                                                                        
                                                                                        (107,182
                                                                                        )
                                                                                        
                                                                                        
                                                                                        262,341
                                                                                        
                                                                                        
                                                                                        
                                                                                        104,007Net increase (decrease) in
      cash and cash equivalents
                                                                                        
                                                                                        
                                                                                        45,307
                                                                                        
                                                                                        
                                                                                        
                                                                                        2,215
                                                                                        
                                                                                        
                                                                                        
                                                                                        (6,719
                                                                                        )Cash and cash equivalents at
      beginning of year
                                                                                        
                                                                                        
                                                                                        16,726
                                                                                        
                                                                                        
                                                                                        
                                                                                        14,511
                                                                                        
                                                                                        
                                                                                        
                                                                                        21,230Cash and cash equivalents at
      end of year
                                                                                        
                                                                                        $
                                                                                        62,033
                                                                                        
                                                                                        
                                                                                        $
                                                                                        16,726
                                                                                        
                                                                                        
                                                                                        $
                                                                                        14,511SUPPLEMENTAL CASH FLOW
      INFORMATIONCash paid during the year
      for:Interest
      payments, net of amounts capitalized
                                                                                        
                                                                                        $
                                                                                        5,356
                                                                                        
                                                                                        
                                                                                        $
                                                                                        5,733
                                                                                        
                                                                                        
                                                                                        $
                                                                                        2,062Non-cash financing
      activities:Executive
      management services and rent
                                                                                        
                                                                                        $
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        76Fair value of
      charter assumed in connection with vessel
    acquisition
                                                                                        
                                                                                        $
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (25,000
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        -




The accompanying notes are an integral
part of these consolidated financial statements.


F-7
 DIANA SHIPPING INC.
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008
 (Expressed in thousands of U.S. Dollars
– except share and per share data, unless otherwise stated)







1.
            Basis
      of Presentation and General
Information:






The accompanying consolidated financial
statements include the accounts of Diana Shipping Inc. (“Diana”) and its wholly-owned subsidiaries
(collectively, the“Company”). Diana was formed on March 8, 1999 as
Diana Shipping Investment Corp., under the laws of the Republic of Liberia. In
February 2005, the Company’s articles of incorporation were
amended. Under the amended articles of incorporation, the Company was renamed
Diana Shipping Inc. and was redomiciled from the Republic of Liberia to the
Republic of the Marshall Islands.In May 2008 the amended Articles of
incorporation were amended to increase the authorized shares from 100.0 million
to 200.0 million.In March
2005, December 2005, June 2006, April 2007 and September 2007, the Company
completed its initial and four secondary public offerings in the United States
under the United States Securities Act of 1933, as amended, the net proceeds of
which amounted to $193,976, $63,085, $71,651,$159,342 and $273,743,respectively.




The Company is engaged in the ocean
transportation of dry bulk cargoes worldwide through the ownership and operation
of bulk carrier vessels and is the sole owner of all outstanding shares of the
following subsidiaries:




1.1.
            Shipowning companies incorporated
      in the Republic of Panama:




(a)
            Skyvan
      Shipping Company S.A. (“Skyvan”),owner of the Bahamas flag 75,311
      dwt bulk carrier vessel“Nirefs”, which was built and delivered in
      January 2001.




(b)
            Buenos
      Aires Compania Armadora S.A. (“Buenos”),owner of the Bahamas flag 75,247
      dwt bulk carrier vessel“Alcyon”, which was built and delivered in
      February 2001.




(c)
            Husky
      Trading, S.A. (“Husky”),owner of the Bahamas flag 75,336
      dwt bulk carrier vessel“Triton”, which was built and delivered in
      March 2001.




(d)
            Panama
      Compania Armadora S.A. (“Panama”),owner of the Bahamas flag 75,211
      dwt bulk carrier vessel“Oceanis”, which was built and delivered in
      May 2001.




(e)
            Eaton
      Marine S.A. (“Eaton”),owner of the Greek flag 75,106 dwt
      bulk carrier vessel“Danae”(built in 2001), which was
      acquired in July 2003.




(f)
            Chorrera
      Compania Armadora S.A. (“Chorrera”),owner of the Greek flag 75,172
      dwt bulk carrier vessel“Dione”(built in 2001), which was
      acquired in May 2003.




(g)
            Cypres
      Enterprises Corp. (“Cypres”),owner of the Bahamas flag 73,630
      dwt bulk carrier vessel“Protefs”(Hull No. H2301), which was built
      and delivered in August
2004.




(h)
            Darien
      Compania Armadora S.A. (“Darien”),owner of the Bahamas flag 73,691
      dwt bulk carrier vessel“Calipso”(Hull No. H2303), which was built
      and delivered in February
2005.




(i)
            Cerada
      International S.A (“Cerada”),owner of the Bahamas flag 169,883
      dwt bulk carrier vessel“Pantelis SP”(built in 1999), which was
      acquired in February 2005. The vessel was sold in February 2007 and was
      deliveredto her new
      owners in July 2007.




(j)
            Texford
      Maritime S.A. (“Texford”),owner of the Bahamas flag 73,691
      dwt bulk carrier vessel“Clio”(Hull No. H2304), which was built
      and delivered in May 2005.




(k)
            Urbina
      Bay Trading, S.A. (“Urbina”),owner of the Bahamas flag 74,444
      dwt bulk carrier vessel“Erato”(built in 2004), which was
      acquired in November2005.




F-8
 DIANA SHIPPING INC.
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008
 (Expressed in thousands of U.S. Dollars
– except share and per share data, unless otherwise
stated)






(l)
            Changame
      Compania Armadora S.A. (“Changame”),owner of the Bahamas flag 73,583
      dwt bulk carrier vessel“Thetis”(built in 2004), which was
      acquired in November2005.




(m)
            Vesta
      Commercial, S.A. (“Vesta”),owner of the Bahamas flag 74,381
      dwt bulk carrier vessel“Coronis”(Hull No. H1307A), which was
      built and delivered in January
2006.




1.2.
            Subsidiaries incorporated in the
      Republic of the Marshall
Islands:




(a)
            Ailuk
      Shipping Company Inc. (“Ailuk”),owner of the Marshall
      Islands’flag 73,546 dwt dry bulk carrier
      vessel“Naias”(built in 2006), which was
      delivered in August 2006.




(b)
            Bikini
      Shipping Company Inc. (“Bikini”)has assumed from its original
      buyers a shipbuilding contract for the construction of one 177,000 dwt dry
      bulk carrier with Hull No. H1107, expected to be delivered in the second
      quarter of 2010 (Note 4).




(c)
            Eniwetok
      Shipping Company Inc. (“Eniwetok”)has assumed from its original
      buyers a shipbuilding contract for the construction of one 177,000 dwt dry
      bulk carrier with Hull No. H1108, expected to be delivered in the second
      quarter of 2010 (Note 4).




(d)
            Jaluit
      Shipping Company Inc. (“Jaluit”),owner of the Marshall
      Islands’flag 174,186 dwt dry bulk carrier
      vessel“Sideris GS”, which was built and delivered in
      November 2006.




(e)
            Kili
      Shipping Company Inc. (“Kili”),owner of the Marshall
      Islands’flag 174,261 dwt bulk carrier
      vessel“Semirio”, which was built and delivered in
      June 2007.




(f)
            Knox
      Shipping Company Inc. (“Knox”),owner of the Marshal Islands flag
      180,235 dwt bulk carrier vessel“Aliki”(built 2005), which was delivered
      in April 2007.




(g)
            Lib
      Shipping Company Inc. (“Lib”),owner of the Marshal Islands flag
      177,828 dwt bulk carrier vessel“Boston”, which was built and delivered in
      November 2007.




(h)
            Majuro
      Shipping Company Inc. (“Majuro”)was established in September 2006
      and is a wholly owned subsidiary of the Company. At December 31,
      2008, Majuro did not have any
      operations.




(i)
            Taka
      Shipping Company Inc. (“Taka”)was established in September 2006
      and is a wholly owned subsidiary of the Company. At December 31,
      2008, Taka did not have any
      operations.




1.3.
            Subsidiaries incorporated in the
      United States of America:




(a)
            Bulk
      Carriers (USA) LLC (“Bulk
      Carriers”)was established in September 2006,
      in the State of Delaware, USA, to act as the Company’s authorized representative in the
      United States.




1.4.
            Subsidiaries incorporated in theRepublic of
      Cyprus:




(a)
            Marfort
      Navigation Company Limited (“Marfort”),owner of the Cyprus flag 171,810
      dwt bulk carrier vessel“Salt Lake City”(built 2005), which was delivered
      in December 2007.




(b)
            Silver
      Chandra Shipping Company Limited (“Silver”),owner of the Cyprus flag 164,218
      dwt bulk carrier vessel“Norfolk”(built 2002), which was delivered
      in February 2008 (Note 5).




F-9
 DIANA SHIPPING INC.
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008
 (Expressed in thousands of U.S. Dollars
– except share and per share data, unless otherwise
stated)






1.5.
            Diana Shipping Services S.A. (the“Manager”or“DSS”).




DSS was acquired in April 2006 and
provides the Company and the vessels with management services since November 12,
2004, pursuant to management agreements, for a fixed monthly fee of $15 per
vessel and 2% commission on all voyage and time charter revenues. Management
fees and commissions charged by DSS, effective April1,2006, are eliminated from the
consolidated financial statements as intercompany transactions.Management fees and commissions charged
in 2006 (from January 1 until April 1, when the company was acquired), amounted
to $573 and $497, respectively. Management fees are separately reflected in the
accompanying consolidated statements of income and commissions are included in
Voyage expenses in the accompanying consolidated statements of income (Note
10).




During2008, 2007 and2006fivecharterers individually accounted for
more than 10% of the Company’s voyage and time charter revenues as
follows:




Charterer
              
              
              2008
              
              
              2007
              
              
              2006A
              
              
              
              16
              %
              
              
              23
              %
              
              
              20
              %B
              
              
              
              -
              
              
              
              -
              
              
              
              15
              %C
              
              
              
              -
              
              
              
              -
              
              
              
              15
              %D
              
              
              
              15
              %
              
              
              15
              %
              
              
              -E
              
              
              
              -
              
              
              
              11
              %
              
              
              -




2.
            Significant
      Accounting Policies and Recent Accounting Pronouncements:




(a)
            Principles
      of Consolidation: The
      accompanying consolidated financial statements have been prepared in
      accordance with U.S. generally accepted accounting principles and include
      the accounts of Diana Shipping Inc. and its wholly-owned subsidiaries
      referred to in Note 1above. All significant
      intercompany balances and transactions have been eliminated in
      consolidation.




(b)
            Use
      of Estimates:The
      preparation of consolidated financial statements in conformity with U.S.
      generally accepted accounting principles requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the
      date of the consolidated financial statements and the reported amounts of
      revenues and expenses during the reporting period.  Actual
      results could differ from those
  estimates.




(c)
            Other
      Comprehensive Income:The Company follows the provisions
      of Statement of Financial Accounting Standards (“SFAS”) No. 130,“Reporting Comprehensive
      Income”, which requires separate
      presentation of certain transactions, which are recorded directly as
      components of stockholders’equity. The Company had no such
      transactions which affected comprehensive income in 2006 and, accordingly,
      comprehensive income was equal to net income. In2008 and2007, Other comprehensive income
      increased with gains of$72 and$110, respectivelythat resulted from the actuarial
      valuation of the employees’retirement and staff leaving
      indemnities (Note 2(t)).As of December 31, 2008 and 2007,
      comprehensive income amounted to $182 and $110,
      respectively.




(d)
            Foreign
      Currency Translation:The functional currency of the
      Company is the U.S. Dollar because the Company’s vessels operate in international
      shipping markets, and therefore primarily transact business in U.S.
      Dollars. The Company’s books of accounts are maintained
      in U.S. Dollars. Transactions involving other currencies during the year
      are converted into U.S. Dollars using the exchange rates in effect at the
      time of the transactions. At the balance sheet dates, monetary assets and
      liabilities, which are denominated in other currencies, are translated
      into U.S. Dollars at the year-end exchange rates. Resulting gains or
      losses are reflected separately in the accompanying consolidated
      statements of income.




F-10
 DIANA SHIPPING INC.
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008
 (Expressed in thousands of U.S. Dollars
– except share and per share data, unless otherwise
stated)




(e)
            Cash
      and Cash Equivalents:The Company considers highly
      liquid investments such as time deposits,certificates of depositand their equivalentswith an original
      maturity of three months or less to be cash equivalents.




(f)
            Accounts
      Receivable, Trade:The amount shown as accounts
      receivable, trade, at each balance sheet date, includes receivables from
      charterers for hire, freight and demurrage billings, net of anyprovision for doubtful accounts.
      At each balance sheet date, all potentially uncollectible accounts are
      assessed individually for purposes of determining the appropriate
      provision for doubtful accounts.No provision for doubtful accounts
      has been established as of December 31, 2008and 2007.




(g)
            Inventories: Inventories consist of
      lubricants and victualling which are stated at the lower of cost or
      market. Cost is determined by the first in, first out method.Inventories may also consist of
      bunkers when on the cut- off date a vessel has been redelivered by its
      previous charterers and has not yet been delivered to the new ones, or
      remains idle. Bunkers are also stated at the lower of cost or market and
      cost is determined by the first in, first out
    method.




(h)
            Vessel
      Cost:Vessels are
      stated at cost, which consists of the contract price and any material
      expenses incurred upon acquisition (initial repairs, improvements and
      delivery expenses, interest and on-site supervision costs incurred during
      the construction periods). Subsequent expenditures for conversions and
      major improvements are also capitalized when they appreciably extend the
      life, increase the earning capacity or improve the efficiency or safety of
      the vessels; otherwise these amounts are charged to expense as
      incurred.




(i)
            Prepaid/Deferred
      Charter Revenue:The Company records
      identified assets or liabilities associated with the acquisition of a
      vessel at fair value, determined by reference to market data.The Company values any asset or
      liability arising from the market value of the time charters assumed when
      a vessel is acquired. The amount to be recorded as an asset or liability
      at the date of vessel delivery is based on the difference between the
      current fair market value of the charter and the net present value of
      future contractual cash flows.  When the present value of
      thecontractual cash
      flows of thetime
      charter assumed is greater thanitscurrent fair value, the
      difference is recorded as prepaid charter revenue.  When the
      opposite situation occurs,anydifference, capped to the vessel’s fair
      value on a charter free basis,is recorded as deferred
      revenue.  Such assets and liabilities, respectively, are
      amortized as a reduction of, or an increase in, revenue over the period of
      the time charter assumed.




(j)
            Impairment
      of Long-Lived Assets:The Company uses SFAS No. 144“Accounting for the Impairment or
      Disposal of Long-lived Assets”, which addresses financial
      accounting and reporting for the impairment or disposal of long-lived
      assets. The standard requires that long-lived assets and certain
      identifiable intangibles held and used by an entity be reviewed for
      impairment whenever events or changes in circumstances indicate that the
      carrying amount of the assets may not be recoverable. When the estimate of
      undiscounted cash flows, excluding interest charges, expected to be
      generated by the use of the asset is less than its carrying amount, the
      Company should evaluate the asset for an impairment loss. Measurement of
      the impairment loss is based on the fair value of the asset. The Company
      determines the fair value of its assets based on management estimates and
      assumptions and by making use of available market data and taking into
      consideration third party
valuations.




The Company evaluates the carrying
amounts (primarily for vessels and related dry-dock and special survey costs)
and periods over which long-lived assets are depreciated to determine if events
have occurred which would require modification to their carrying values or
useful lives. In evaluating useful lives and carrying values of long-lived
assets, management reviews certain indicators of potential impairment, such as
undiscounted projected operating cash flows, vessel sales and purchases,
business plans and overall market conditions.




F-11
 DIANA SHIPPING INC.
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008
 (Expressed in thousands of U.S. Dollars
– except share and per share data, unless otherwise
stated)




The current economic and market
conditions, including the significant disruptions in the global credit markets,
are having broad effects on participants in a wide variety of industries. Since
mid-August 2008, the charter rates in the dry bulk charter market have declined
significantly, and dry bulk vessel values have also declined both as a result of
a slowdown in the availability of global credit and the significant
deterioration in charter rates; conditions that the Company considers indicators
of a potential impairment.




The Company determines undiscounted
projected net operating cash flows for each vessel and compares it to the
vessel’s carrying value. The projected net
operating cash flows are determined by considering the charter revenues from
existing time charters for the fixed fleet days and an estimated daily time
charter equivalent for the unfixed days (based on the most recent 10 year
average historical 1 year time charter rates available for each type of vessel)
over the remaining estimated life of each vessel, net of brokerage commissions,
expected outflows for scheduled vessels’maintenance and vessel operating
expenses assuming an average annual inflation rate of 3%.Effective fleet utilization
is assumed to 98% in the Company’s exercise, taking into account the
period(s) each vessel is expected to undergo her scheduled maintenance
(drydocking and special surveys), as well as
an estimate of 1% off hire days each year, assumptions in line with the
Company’s historical
performance.




No impairment loss was identified or
recorded for 2008, 2007 and 2006 and the Company has not identified any other
facts or circumstances that would require the write down of vessel values in the
near future.




(k)
            Assets
      held for sale: It is
      the Company’s policy to dispose of vessels and
      other fixed assets when suitable opportunities occur and not necessarily
      to keep them until the end of their useful life. The Company classifies
      assets and disposal groups as being held for sale in accordance with SFAS
      No. 144‘‘Accounting for the Impairment or
      the Disposal of Long-Lived Assets’’, when the following criteria are
      met: (i) management possessing the necessary authority has committed to a
      plan to sell the asset (disposal group); (ii)  the asset
      (disposal group) is immediately available for sale on an“as is”basis; (iii) an active program to
      find the buyer and other actions required to execute the plan to sell the
      asset (disposal group) have been initiated; (iv) the sale of the asset
      (disposal group) is probable, and transfer of the asset (disposal group)
      is expected to qualify for recognition as a completed sale within one
      year; and (v) the asset (disposal group) is being actively marketed for
      sale at a price that is reasonable in relation to its current fair value
      and actions required to complete the plan indicate that it is unlikely
      that significant changes to the plan will be made or that the plan will be
      withdrawn. Long-lived assets or disposal groups classified as held for
      sale are measured at the lower of their carrying amount or fair value less
      cost to sell. These assets are not depreciated once they meet the criteria
      to be held for sale.




(l)
            Vessel
      Depreciation:
      Depreciation is computed using the straight-line method over the estimated
      useful life of the vessels, after considering the estimated salvage
      value.  Each vessel’s salvage value is equal to the
      product of its lightweight tonnage and estimated scrap rate. Management
      estimates the useful life of the Company’s vessels to be 25 years from the
      date of initial delivery from the shipyard. Second hand vessels are
      depreciated from the date of their acquisition through their remaining
      estimated useful life. When regulations place limitations over the ability
      of a vessel to trade on a worldwide basis, its remaining useful life is
      adjusted at the date such regulations are
  adopted.




(m)
            Accounting
      for Dry-Docking Costs: The Company follows the deferral
      method of accounting for dry-docking costs whereby actual costs incurred
      are deferred and are amortized on a straight-line basis over the period
      through the date the next dry-docking is scheduled to become due.
      Unamortized dry-docking costs of vessels that are sold are written off and
      included in the calculation of the resulting gain or loss in the year of
      the vessel’s
  sale.




F-12
 DIANA SHIPPING INC.
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008
 (Expressed in thousands of U.S. Dollars
– except share and per share data, unless otherwise
stated)




(n)
            Financing
      Costs: Fees paid to
      lenders for obtaining new loans or refinancing existing ones are deferred
      and recorded as a contra to debt. Other fees paid for obtaining loan
      facilities not used at the balance sheet date are capitalized as deferred
      financing costs.  Fees are amortized to interest and finance
      costs over the life of the related debt using the effective interest
      method and, for the loan facilities not used at the balance sheet date,
      according to their availability terms. Unamortized fees relating to loans
      repaid or refinancedas debt extinguishmentare expensed as interest and
      finance costs in the period the repayment orextinguishmentis made. Loan commitment fees are
      charged to expense in the period
  incurred.




(o)
            Property
      and equipment.  The Company leases
      from a related party property consisting of office space, a warehouse and
      parking spaces, which was previously owned by DSS, the management company.
      The sale and leaseback was accounted for by the financing method and the
      property remained in the Company’s consolidated financial
      statements and was being depreciated on a straight-line basis over its
      remaining useful life until December 31, 2008, when the lease agreement
      expired and property was de-recognized from the Company’s consolidated financial
      statements. The estimated useful life of the property is 20 years and no
      residual value has been estimated. Equipment consists of office furniture
      and equipment, computer software and hardware and vehicles. The useful
      life of the office furniture, equipment and vehicles is 5 years and of the
      computer software and hardware is 3 years. Depreciation is calculated on a
      straight-line basis.




(p)
            Concentration
      of Credit Risk:Financial instruments, which potentially subject the Company to
      significant concentrations of credit risk, consist principally of cash and
      trade accounts receivable. The Company places its temporary cash
      investments, consisting mostly of deposits, with high credit qualified
      financial institutions. The Company performs periodic evaluations of the
      relative credit standing of those financial institutions that are
      considered in the Company’s investment strategy. The Company
      limits its credit risk with accounts receivable by performing ongoing
      credit evaluations of its customers’financial condition and generally
      does not require collateral for its accounts receivable and does not have
      any agreements to mitigate credit
risk.




(q)
            Accounting
      for Revenues and Expenses:Revenues are generated from time
      charter agreements and are usually paid fifteen days in advance. Time
      charter agreements with the same charterer are accounted for as separate
      agreements according to the terms and conditions of each agreement. Time
      charter revenues over the term of the charter are recorded as service is
      provided when they become fixed and determinable. Revenues from time
      charter agreements providing for varying annual rates over their term are
      accounted for on a straight line basis.  A voyage is deemed to
      commence upon the completion of discharge of the vessel’s previous cargo and is deemed to
      end upon the completion of discharge of the current
      cargo.  Income representing ballast bonus payments by the
      charterer to the vessel owner is recognized in the period earned. Deferred
      revenue includes cash received prior to the balance sheet date for which
      all criteria to recognize as revenue have not been met, including any
      deferred revenue resulting from charter agreements providing for varying
      annual rates, which are accounted for on a straight line basis. Deferred
      revenue also includes the unamortized balance of the liability associated
      with the acquisition of second-hand vessels with time charters attached
      which were acquired at values below fair market value at the date the
      acquisition agreement is consummated. Voyage expenses, primarily
      consisting of port, canal and bunker expenses that are unique to a
      particular charter, are paid for by the charterer under time charter
      arrangements or by the Company under voyage charter arrangements, except
      for commissions, which are always paid for by the Company, regardless of
      charter type. All voyage and vessel operating expenses are expensed as
      incurred, except for commissions. Commissions are deferred over the
      related voyage charter period to the extent revenue has been deferred
      since commissions are earned as the Company’s revenues are
      earned.




(r)
            Repairs
      and Maintenance:All
      repair and maintenance expenses including underwater inspection expenses
      are expensed in the year incurred. Such costs are included in vessel
      operating expenses in the accompanying consolidated statements of
      income.




F-13
 DIANA SHIPPING INC.
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008
 (Expressed in thousands of U.S. Dollars
– except share and per share data, unless otherwise
stated)




(s)
            Pension
      and retirement benefit obligations.Administrative employees are
      covered by state-sponsored pension funds. Both employees and the Company
      are required to contribute a portion of the employees’gross salary to the fund. Upon
      retirement, the state-sponsored pension funds are responsible for paying
      the employees retirement benefits and accordingly the Company has no such
      obligation. Employer’s contributions for 2008, 2007 and
      for the period from April 1, 2006 (acquisition date of the management
      company) to December 31, 2006 amounted to $631, $526 and $273,
      respectively.




(t)
            Employees’retirement and staff leaving indemnities.Administrative personnel are
      entitled to an indemnity in case of dismissal or retirement unless they
      resign or are dismissed with cause. The Company, as of the acquisition
      date of DSS (April 1, 2006), recognizes the estimated benefit obligation
      for the past service
      of DSS’s employees under the requirements
      of SFAS 158“Employer’s Accounting for Defined Benefit
      Pension and Other
      Postretirement Plans”.This is an unfunded plan and the
      Company engages a third party company to determine the other comprehensive
      income component, net of tax and, the gains or losses, the prior service
      costs or credits that arise during the period but are not recognized as
      components of net periodic benefit cost pursuant to FASB Statement No. 87,“Employers’Accounting for
      Pensions”, or No. 106,“Employers’Accounting for Postretirement
      Benefits Other Than Pensions”and to measure defined benefit
      plan obligations as of the date of the fiscal year-end statement of
      financial position.
      At December 31, 2008 and2007, the projected benefit
      obligation amounted to $816 and$954,
      respectively.




(u)
            Earnings
      per Common Share:Basic earnings per common share are computed by dividing net income
      available to common stockholders by the weighted average number of common
      shares outstanding during the year. Diluted earnings per common share,
      reflects the potential dilution that could occur if securities or other
      contracts to issue common stock were exercised. The Company had no
      dilutive securities during 2007 and 2006. As of December 31, 2008 dilutive
      shares amounted to 182,568 (Note12).






(v)
            Segmental
      Reporting:The
      Company reports financial information and evaluates its operations by
      charter revenues and not by the length of ship employment for its
      customers, i.e. spot or time charters. The Company does not use discrete
      financial information to evaluate the operating results for each such type
      of charter. Although revenue can be identified for these types of
      charters, management cannot and does not identify expenses, profitability
      or other financial information for these charters. As a result,
      management, including the chief operating decision maker, reviews
      operating results solely by revenue per day and operating results of the
      fleet and thus the Company has determined that it operates under one
      reportable segment. Furthermore, when the Company charters a vessel to a
      charterer, the charterer is free to trade the vessel worldwide and, as a
      result, the disclosure of geographic information is
      impracticable.




(w)
            Variable
      Interest Entities:SFAS No. 46R, Consolidation of Variable Interest Entities, addresses the
      consolidation of business enterprises (variable interest entities) to
      which the usual condition (ownership of a majority voting interest) of
      consolidation does not apply.  The Interpretation focuses on
      financial interests that indicate control. It concludes that in the
      absence of clear control through voting interests, a company’s exposure (variable interest) to
      the economic risks and potential rewards from the variable interest
      entity’s assets and activities are the
      best evidence of control.  Variable interests are rights and
      obligations that convey economic gains or losses from changes in the value
      of the variable interest entity’s assets and liabilities. The
      Company evaluates financial instruments, service contracts, and other
      arrangements to determine if any variable interests relating to an entity
      exist, as the primary beneficiary would be required to include assets,
      liabilities, and the results of operations of the variable interest entity
      in its financial statements. As of December 31, 2008and2007 no such interests
      existed.


F-14
 DIANA SHIPPING INC.
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008
 (Expressed in thousands of U.S. Dollars
– except share and per share data, unless otherwise
stated)




(x)
              Fair
      Value Measurements:
      SFAS No. 157“Fair Value
      Measurements”provides guidance for using fair
      value to measure assets and liabilities. The standard also responds to
      investors’requests for expanded information
      about the extent to which, companies measure assets and liabilities at
      fair value, the information used to measure fair value, and the effect of
      fair value measurements on earnings. The standard applies whenever other
      standards require (or permit) assets or liabilities to be measured at fair
      value. Under the standard, fair value refers to the price that would be
      received to sell an asset or paid to transfer a liability in an orderly
      transaction between market participants in the market in which the
      reporting entity transacts. SFAS No. 157 clarifies the principle that fair
      value should be based on the assumptions market participants would use
      when pricing the asset or liability. In support of this principle, the
      standard establishes a fair value hierarchy that prioritizes the
      information used to develop those assumptions. The fair value hierarchy
      gives the highest priority to quoted prices in active markets and the
      lowest priority to unobservable data, for example, the reporting
      entity’s own data. Under the standard,
      fair value measurements would be separately disclosed by level within the
      fair value hierarchy. The Company adopted this pronouncement beginning in
      fiscal year 2008. The adoption of the standard didnot have a material effect on the
      Company’s financial position or results of
      operations.


(y)
            Share
      Based Payment:According to Statement 123R“Share Based Payment”, the Company is required to
      measure the cost of employee services received in exchange for an award of
      equity instruments based on the grant-date fair value of the award (with
      limited exceptions). That cost is recognized over the period during which
      an employee is required to provide service in exchange for the award—the
      requisite service period (usually the vesting period). No compensation
      cost is recognized for equity instruments for which employees do not
      render the requisite service. Employee share purchase plans will not
      result in recognition of compensation cost if certain conditions are met;
      those conditions are much the same as the related conditions in Statement
      123. The Company initially measures the cost of employee services received
      in exchange for an award or liability instrument based on its current fair
      value; the fair value of that award or liability instrument is remeasured
      subsequently at each reporting date through the settlement date.Changes in fair value
      during the requisite service period are recognized as compensation cost
      over that period with the exception of awards granted in the form of
      restricted shares which are measured at their grant date fair value and
      are not subsequently re measured. The grant-date fair value of employee
      share options and
      similar instruments are estimated using option-pricing models adjusted for
      the unique characteristics of those instruments (unless observable market
      prices for the same or similar instruments are available). If an equity
      award is modified after the grant date, incremental compensation cost will
      be recognized in an amount equal to the excess of the fair value of the
      modified award over the fair value of the original award immediately
      before the modification. As of December 31, 2008, the Company had granted
      675,500 restricted shares to senior management and directors (Note
      9).




3.
            Transactions
      with Related Parties:




(a)
            Altair
      Travel Agency S.A. (“Altair”):The Company uses the
      services of an affiliated travel agent, Altair, which is controlled by the
      Company’s CEO and Chairman. Travel
      expenses for2008,
      2007 and 2006amounted to$1,485, $1,109 and$923, respectively, and are included in
      Vessels, Vessel operatingexpenses and General and administrative expenses
      in the accompanying consolidated financial statements. Effective April 1,
      2006 the Company also pays Altair rent for parking space and a warehouse
      leasedby DSSin January 2006, for
      a period of three years and for the monthly rent of Euro 935 plus stamp
      duty. Rent increases annually at a rate of 3% above inflation. Rent
      expense for2008,
      2007and 2006
      amounted to$19,$17and $13, respectively, and is included in
      General and administrative expenses in the accompanying consolidated
      statements of income. AtDecember 31, 2008 and
      2007an amount of$122, and$105, respectively, was payable to
      Altair and is included in Due to related companies in the accompanying
      consolidated balance sheets.The lease which expired in
      December 2008 was renewed under the same terms for three years at the
      monthly rate of Euro 1,051 plus stamp duty. Minimum lease payments until
      the expiration of the rent agreement are estimated to
      $59.


F-15
 DIANA SHIPPING INC.
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008
 (Expressed in thousands of U.S. Dollars
– except share and per share data, unless otherwise
stated)




(b)
              Universal
      Shipping and Real Estates Inc. (“Universal”):Universal is a
      company controlled by the Company’s CEO and Chairman. In January
      2006, DSS entered into a lease agreement with Universal for the lease of
      office space, a warehouse and parking spaces for a monthly rent of Euro
      19,700 plus stamp duty, for a period of three years. Rent increases
      annually at a rate of 3% above inflation. Effective December 1, 2006, the
      Company entered into an amended agreement to reduce the office space
      leased from Universal and reduced monthly rent to Euro 11,187 plus stamp
      duty. The lease wasaccounted for by the financing
      method. Rent expense for2008,2007and 2006 amounted to$231,$205and $227, respectively of which$231,$205and $128, respectively, is included in
      Interest and finance costs and the remainder of 2006 is included in
      General and administrative expenses in the accompanying2006consolidated statement of income.
      No amounts were payable to or receivable from Universal as atDecember 31, 2008 and
      2007.The lease which expired in
      December 2008 was renewed under the same terms for three years at the
      monthly rate of Euro 12,688 plus stamp duty and will be accounted for as
      an operating lease.Minimum lease payments until the
      expiration of the rent agreement are estimated to
      $716.


(c)
            Diana
      Shipping Agencies S.A. (“DSA”):DSA is a company
      controlled by the Company’s CEO and Chairman. In December
      2006, DSS entered into a lease agreement with DSA for the lease of office
      space for a monthly rent of Euro 8,000 plus stamp duty, for a period of 25
      months. Rent increases annually at a rate of 3% above inflation. Rent
      expense for2008,
      2007and 2006amounted to$156,$138and $11and is included in General and
      administrative expenses in the accompanying consolidated
      statementsof income. No amounts were
      payable to or receivable from DSA as atDecember 31, 2008 and
      2007.The lease which expired in
      December 2008 was renewed under the same terms for three years at the
      monthly rate of Euro 8,560 plus stamp duty and will be accounted for as an
      operating lease.Minimum lease payments until the
      expiration of the rent agreement are estimated to
    $483.




4.
            Advances
      for Vessels Construction and Acquisition and Other Vessel
      Costs:




The amounts in the accompanying
consolidated balance sheets include payments to sellers of vessels or, in the
case of vessels under construction, to the shipyards and other costs as analyzed
below:




2008
              
              
              2007Pre-delivery
      installments
              
              
              24,080
              
              
              
              24,080Advances for vessel
      acquisitions
              
              
              -
              
              
              
              27,000Capitalized interest and finance
      costs
              
              
              3,089
              
              
              
              1,999Other related
      costs
              
              
              30
              
              
              
              25Total
              
              
              27,199
              
              
              
              53,104




The movement of the account, duringDecember 31, 2008 and
2007was as
follows:




2008
              
              
              2007Beginning
      balance
              
              
              53,104
              
              
              
              24,347- Advances for vessels under
      construction and other vessel costs
              
              
              1,099
              
              
              
              1,753- Advances for vessel acquisitions
      and other vessel costs(Note 5)
              
              
              469
              
              
              
              108,593- Transferred to vessel
      cost(Note
      5)
              
              
              (27,473
              )
              
              
              (81,589
              )Ending
    balance
              
              
              27,199
              
              
              
              53,104







On September 13, 2006, the Company
entered into agreements with unrelated third parties to assume two shipbuilding
contracts dated March 30, 2006, for the construction of two 177,000 dwt Capesize
dry bulk carriers,with Hull No. H1107 and
H1108,for the price of $60,200 each. The
vessels will be constructed by the China Shipbuilding Trading Company Ltd. and
Shanghai Waigaoqiao Shipbuilding Co. Ltd. (collectively the“Builders”) and are expected to be delivered to
the Company in the second quarter of 2010. The contract price will be paid in
five installments, one of 20%, three subsequent installments of 10% each, and a
final predelivery installment of 50%.The Company also pays
additional construction costs and interest and finance charges (Note
6) relating to the amounts
drawn under the facility the Company has entered into, to partly finance the
vessels’ construction.As
atDecember 31, 2008 and
2007, the Company had paid
one predelivery installment for each vessel amounting to $12,040
each,or 20%,of the vessels’contract price and $3,119and $2,020of additional construction costs,
respectively.




F-16
 DIANA SHIPPING INC.
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008
 (Expressed in thousands of U.S. Dollars
– except share and per share data, unless otherwise stated)




5.
            Vessels:




The amounts in the accompanying
consolidated balance sheets are analyzed as follows:




Vessel
      Cost
              
              
              Accumulated
      Depreciation
              
              
              Net Book
      ValueBalance, December 31,
      2006
              
              
              504,493
              
              
              
              (40,054
              )
              
              
              464,439- Vessel
      disposals
              
              
              (63,644
              )
              
              
              6,291
              
              
              
              (57,353
              )- Transfer from advances for
      vessels under construction and acquisition and other vessel
      costs
              
              
              81,589
              
              
              
              -
              
              
              
              81,589-  Vessels acquisitions
      and other vessels’costs
              
              
              402,400
              
              
              
              -
              
              
              
              402,400- Depreciationfor the
    year
              
              
              -
              
              
              
              (23,443
              )
              
              
              (23,443
              )Balance, December 31,
      2007
              
              
              924,838
              
              
              
              (57,206
              )
              
              
              867,632- Transfer from advances for
      vessels under construction and acquisition and other vessel
      costs
              
              
              27,473
              
              
              
              -
              
              
              
              27,473-  Vessels acquisitions
      and other vessels’costs
              
              
              108,000
              
              
              
              -
              
              
              
              108,000- Depreciation for the
      year
              
              
              -
              
              
              
              (42,674
              )
              
              
              (42,674
              )Balance, December 31,
      2008
              
              
              1,060,311
              
              
              
              (99,880
              )
              
              
              960,431




In October2007, the Companyentered intoaMemorandumof Agreement withanunrelated thirdpartyto acquirethe164,218dwtCapesize dry bulk carrier “Norfolk” (built 2002)for a total consideration of
$135,000.As part of the Memorandum of Agreement
the Company agreed to assume a charter party contract, effective upon delivery
of the vessel to the Company, providing for a charter period of 59 to 61 months
at a daily rate of $75 gross of commissions.On signing of the agreement, the Companymade an advance payment,
representing the 20% of the vessel’spurchase price,amounting to$27,000 and paid the balance of the
purchase price amounting to $108,000 on the vessel’s delivery to the Company inFebruary 2008. Total predelivery expenses amounted to
$473.




Eleven of the Company’s vessels, having a total carrying value of$215,603as ofDecember 31, 2008, have been provided as collateral to
secure the revolving credit facility discussed in Note 6.




As ofDecember 31, 2008,except for one vessel that was on its
ballast trip to dry-docking,all vessels were operating under time
charters, the last of which expires inMarch2013.Contracts with minimum duration in
excess of one year as of December 31, 2008, were as follows:




F-17
 DIANA SHIPPING INC.
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008
 (Expressed in thousands of U.S. Dollars
– except share and per share data, unless otherwise
stated)







Vessel
      name
              
              Daily time charter gross rate (in
      U.S. Dollars)
              
              Charterer redelivery
      option periodsNirefs
              
              $
              60,500
              
              Feb 2010 – Apr
      2010Alcyon
              
              $
              34,500
              
              Nov 2012 – Feb
      2013Dione
              
              $
              12,000
              
              May 2010 – Aug
      2010Protefs
              
              $
              59,000
              
              Aug2011–Nov2011Sideris GS
              
              $
              39,000
              
              Nov2009$
              36,000
              
              Oct 2010 – Jan
      2011Aliki
              
              $
              52,000
              
              May 2009$
              45,000
              
              Mar 2011 – Jun
      2011Semirio
              
              $
              51,000
              
              Jun 2009$
              31,000
              
              Apr 2011 – Jul
      2011Boston
              
              $
              52,000
              
              Sep 2011 – Dec
      2011Salt Lake
    City
              
              $
              55,800
              
              Aug 2012 – Oct
      2012Norfolk
              
              $
              74,750
              
              Jan 2013 – Mar
      2013New York or Los
      Angeles
              
              $
              48,000
              
              Feb 2015 – Jun
      2015





For the vessels Sideris GS, Aliki and
Semirio that have varying rates for each year, the Company accounts for those
revenues by using the average daily rates of the four year duration of the
respective contracts (Note 7). The vessels New York and Los Angeles
are the Hull 1107 and Hull 1108, respectively that are under construction (Note
4). The Company has fixed a
contract and has the option to deliver either vessel, whichever will be
delivered earlier from the shipyard.The gross rate willbe$50 per day for deliveryof any vesselbetween October 1, 2009 and January 31,
2010and$48 per day for delivery between
February 1, 2010 and April 30, 2010.




6.
            Long-term
      Debt:




The amount of long-term debt shown in
the accompanying consolidated balance sheets is analyzed as
follows:




2008
              
              
              2007Revolving credit
      facility
              
              
              214,700
              
              
              
              75,000Secured term loan
      facility
              
              
              24,080
              
              
              
              24,080Less related deferred financing
      costs
              
              
              (686
              )
              
              
              (261
              )Total
              
              
              238,094
              
              
              
              98,819




Revolving
Credit Facility: In
February 2005, the Company entered into an agreement with the Royal Bank of
Scotland for a $230 million secured revolving credit facility, to finance the
acquisition of additional dry bulk carrier vessels or cellular container ships,
the acquisition of DSS (Note 1.5) and for working
capital.On May
24, 2006, the Company entered into an amended agreement to extend the facility
amount to $300 million. Pursuant to the amended agreement the Company is
permitted to borrow amounts up to the facility limit, provided that certain
pre-conditions are satisfied and that borrowings do not exceed 75% of the
aggregatemarketvalue of the mortgaged
vessels.The maturity of
the credit facility is ten years and the interest rate on amounts drawn is at
LIBOR plus a margin.




The amended facility is available in
full for six years from May 24, 2006, the new availability date. At the end of
the sixth year it will be reduced by $15 million and over the remaining period
of four years will be reducing in semiannual amounts of $15 million with a final
reduction of $165 million together with the last semi-annual
reduction.




F-18
 DIANA SHIPPING INC.
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008
 (Expressed in thousands of U.S. Dollars
– except share and per share data, unless otherwise
stated)







In January 2007, the Company entered
into a supplemental loan agreement with the Royal Bank of Scotland, for the
purpose of amending the terms and conditions applicable to the existing
revolving credit facility agreement to make available to the Company under the
facility agreement an additional 364 day standby facility of up to $200,000 upon
full utilization of the Facility. An amount of $100 was paid on signing of the
agreement.Thefacility was terminatedonMarch 6, 2008.




During 2008, the Company drew down an
aggregate amount of $237,200 and repaid an aggregate amount of $97,500. On
December 31, 2008 an amount of $214,700 was outstanding under the revolving
credit facility andthe
unused portion of the facility amounted to $85,300.




The credit facility is secured by a
first priority or preferred ship mortgage onelevenvesselsoftheCompany’sfleet excluding the Coronis, the Naias,
the Sideris GS, the Aliki,theSemirio, the Boston and the Salt Lake City and
the Norfolk,assignment of
all freights, earnings, insurances and requisition compensation. The lenders may
also require additional security in the future in the event the Company breaches
certain covenants under the credit facility, as described
below.




The credit facility contains covenants
including restrictions as to changes in management and ownership of the vessels,
additional indebtedness, as well as minimum requirements regarding hull cover
ratio (vessels’market values at least 120% of the
outstanding balance of the credit facility), minimum liquidity of $400 per each
mortgaged vessel in the fleet unless the available credit facility for working
capital exceeds this amount and other financial covenants. Furthermore, the
Company is not permitted to pay any dividends that would result in a breach of
the financial covenants.




The Company pays commitment
feeson the undrawn portion of the facility,
which for theyears2008, 2007 and 2006 amounted to $388,
$548 and $648, respectively
and are included in Interest and finance costs in the accompanying consolidated
statements of income(Note
11).The weighted average interest rate of
the revolving credit facility as at December 31, 2008 and 2007 was 3.40% and
6.17%, respectively.




Secured
term loan facility:In November 2006 the
Company, acting as the Corporate Guarantor, through its subsidiaries Eniwetok
and Bikini (the“Borrowers”), entered into a facility agreement
with Fortis Bank for a loan of up to $60,200 and a guarantee facility of up to
$36,451, each to be used for the purpose of financing and guaranteeing the
payment of part of the construction and acquisition cost of two 177,000 dwt
Capesize dry bulk carriers, expected to be delivered to the Company in the
second quarter of 2010 (Note 4). The loan facility is available in
advances, according to the payment schedule provided in the ship-building
contracts, until December 30, 2010 (the termination date) and such advances will
be repaid in full at the earlier of the repayment date (December 31, 2010) or
the delivery of each vessel. The guarantee facility will be available until
December 31, 2010. The loan bears interest at LIBOR plus a margin and commitment
fees of 0.10% until issuance of the guarantee. The bank guarantee bears
guarantee commission equal to the margin. An arrangement fee of $60 was paid
upon signing the agreement. The loan is secured with a corporate guarantee,
pre-delivery security assignments, an account pledge, a refund guarantee
assignment consents and acknowledgements, a contract assignment consents and
acknowledgements. The facility also includes covenants regarding minimum
liquidity and net worth of the Company, restrictions in distributions and
shareholding, and other events of default.As of December 31, 2008, the Company was
not in compliance with an event of default relating to a minimum combined 20%
ownership of the CEO and the President (and their families) over the Company’s
stock, that should be maintained at all times. The Company has obtained a waiver
with this respect, in which the Lenders modify the minimum shareholding
requirement to 10%, for a period up to December 31, 2009.




As atDecember 31, 2008 and 2007the Company had $24,080 of debt
outstanding under the facility agreement relating to the first installment for
the construction of the two Capesize dry bulk carriers (Note 4). During2008 and 2007, the Company paid guarantee commission
amounting to$237 and $240and is included in Advances
for




F-19
 DIANA SHIPPING INC.
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008
 (Expressed in thousands of U.S. Dollars
– except share and per share data, unless otherwise stated)


vessels under construction and
acquisitions and other vessel costs in the accompanying consolidated balance
sheets.




Total interest incurred on long-term
debt for2008, 2007 and
2006amounted to$5,974, $6,635 and
$2,989, respectively. Of
the above amounts,$853,$1,440 and $133, respectively, were capitalized and
included in Advances for vessels under construction and acquisitions and other
vessel costs in the accompanying consolidated balance sheets (Note 4). Interest expense on long-term debt,
net of interest capitalized, is included in Interest and finance costs in the
accompanying consolidated statements of income.




7.
            Deferred
      Revenue, current and non-current:




The amountspresented as current and non-current
deferred revenuein the
accompanying consolidated balance sheets as ofDecember 31, 2008 and 2007reflect(a)cash received prior to the balance sheet
datefor which all criteria
to recognize as revenue have not been met, (b)any deferred revenueresulting from charter agreements
providing for varying annual charter rates over their term, which were accounted
for on a straight line basis at their average rate and (c) the unamortized
balance of the liability associated with the acquisition of the Salt Lake City
with a charter party assumed at a value below its fair market value at the date
of delivery of the vessel.




2008
              
              
              2007Hires collected in
      advance
              
              
              5,195
              
              
              
              7,004Charter revenue resulting from
      varying charter rates
              
              
              9,535
              
              
              
              4,377Unamortized balance of charter
      assumed
              
              
              19,574
              
              
              
              24,706Total
              
              
              34,304
              
              
              
              36,087Less current
      portion
              
              
              (11,802
              )
              
              
              (12,122
              )Non-current
      portion
              
              
              22,502
              
              
              
              23,965




As of December 31, 2008 and 2007, cash
received prior to the balance sheet date for which all criteria to recognizeas revenue have not been
met amounted to $5,195 and $7,004, respectively and is included in Deferred
revenue, current portion in the accompanying consolidated balance
sheets.




In November 2006, the Company entered
into a long term time charter agreement with an unrelated third party company to
charter the Sideris GS for a period of four years at varying rates for each
year. In February and March 2007, the Company entered into two similar long term
time charter agreements with unrelated third party companies to charter the
Semirio and the Aliki for a period of four years each, at varying rates. The
Company accounts for the revenues deriving from the above agreements on a
straight line basis at the average rate of the agreements and the balance is
recorded in deferred revenue. As at December 31, 2008 and 2007 deferred revenue
deriving from those agreements amounted to $9,535 and $4,377, respectively and
is included in Deferred revenue, current ($1,489 in 2008) and non-current
portion in the accompanying consolidated balance sheets.




In December 2007, upon delivery of the
Salt Lake City, the Company assumed the then existing time charter agreement of
the vessel. According to the Company’s policy, the time charter agreement was
valued on the date of the vessel’s delivery and resulted in the recognition of a
deferred income of $25,000. As of December 31, 2008 and 2007 the unamortized
balance of the liability amounted to $19,574 and $24,706, respectively and is
included in Deferred revenue, current portion ($5,118 and $5,132, respectively)
and non-current portion ($14,456 and $19,574, respectively), in the accompanying
consolidated balance sheets. The amortization during 2008 and 2007 amounted to
$5,132 and $294, respectively and is included in voyage and time charter
revenues in the accompanying consolidated statements of
income.




8.
            Contingencies:




Various claims, suits, and complaints,
including those involving government regulations and product liability, arise in
the ordinary course of the shipping business. In addition, losses may arise from
disputes with charterers, agents, insurance and other claims with
suppliers relating to the operations of the Company’s
vessels.  Currently, management is not aware of any such claims or
contingent liabilities, which should be disclosed, or for which a provision
should be established in the accompanying consolidated financial
statements.


F-20
 DIANA SHIPPING INC.
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008
 (Expressed in thousands of U.S. Dollars
– except share and per share data, unless otherwise
stated)




The Company accrues for the cost of
environmental liabilities when management becomes aware that a liability is
probable and is able to reasonably estimate the probable exposure. Currently,
management is not aware of any such claims or contingent liabilities, which
should be disclosed, or for which a provision should be established in the
accompanying consolidated financial statements. Up to $1 billion of the
liabilities associated with the individual vessels’ actions, mainly for sea
pollution, are covered by the Protection and Indemnity (P&I) Club
insurance.




9.
            Common
      Stock and Additional Paid-In
Capital:




(a)
            Preferred
      stock and common stock: Under the amended articles of
      incorporation in May 2008, discussed in Note 1, the Company’s authorized
      capital stock consists of 200,000,000 shares (all in registered form) of
      common stock, par value $0.01 per share and of 25,000,000 shares (all in
      registered form) of preferred stock, par value $0.01 per share. The
      holders of the common shares are entitled to one vote on all matters
      submitted to a vote of stockholders and to receive all dividends, if
      any.




(b)
            Additional
      paid-in capital:The
      amounts shown in the accompanying consolidated balance sheets, as
      additional paid-in capital, represent (i) payments made by the
      stockholders at various dates to finance vessel acquisitions in excess of
      the amounts of bank loans obtained and advances for working capital
      purposes, (ii) payments made by the stockholders in excess of the par
      value of common stock purchased by them and (iii) the value of executive
      management services provided through the management agreement with DSS to
      the Company until consummation of the initial public offering in March
      2005, as well as the value of the lease expense for the office space and
      of the secretarial services that have been provided to the Company at no
      additional charge by DSS until its acquisition by the Company, on April 1,
      2006. The value of the services was determined by reference to the amounts
      of the employment agreements signed between the Company and its
      executives. The value of the rent for the free office space was determined
      by reference to the lease agreement between DSS and Universal, which
      acquired the office space previously owned by DSS and (iv) the value of
      restricted stock granted by the Board of Directors to the Company’s
      executive management and non-executive directors under the Company’s
      incentive plan, described in note (c)
  below.




(c)
            Incentive
      plan: In February
      2005, the Company adopted an equity incentive plan (the “Plan”) which
      entitles the Company’s employees, officers and directors to receive
      options to acquire the Company’s common stock. A total of 2,800,000 shares
      of common stock are reserved for issuance under the plan. The plan is
      administered by the Company’s Board of Directors. Under the terms of the
      plan, the Company’s Board of Directors is able to grant a) incentive stock
      options, b) non-qualified stock options, c) stock appreciation rights, d)
      dividend equivalent rights, e) restricted stock, f) unrestricted stock, g)
      restricted stock units, and h) performance shares. No options, stock
      appreciation rights or restricted stock units can be exercisable prior to
      the first anniversary or subsequent to the tenth anniversary of the date
      on which such award was granted. The plan will expire 10 years from the
      adoption of the plan by the Board of
  Directors.




As of December 31, 2007, no awards were
granted under the plan. In January 2008, the Company’s Board of Directors
approved a policy for Annual Incentive Bonuses of up to approximately 3% of the
Company’s annual net profit, consisting of cash bonuses and restricted stock. In
February 2008, the Board of Directors approved the grant of 75,500 shares of
restricted common stock to executive management and non-executive directors,
pursuant to the Company’s 2005 equity incentive plan and in accordance with
terms and conditions of Restricted Shares Award Agreements signed by the
grantees. The restricted shares will be vested over a period of 3 years, by
one-third each year and are subject to forfeiture until they become vested.
Unless they forfeit, grantees have the right to vote, to receive and retain all
dividends paid and to exercise all other rights, powers and privileges of a
holder of shares. In September 2008, the Board of Directors approved the grant of 600,000
shares of restricted common stock to executive management and non-executive
directors. The restricted shares will be vested over a period of six years (1/6
each year) and the grantees may receive dividends and exercise voting rights
prior to vesting. Any unvested shares and all existing equity grants are to be
vested in full and immediately in case of change of control of the
Company.




F-21
 DIANA SHIPPING INC.
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008
 (Expressed in thousands of U.S. Dollars
– except share and per share data, unless otherwise
stated)




The Company follows the provisions of
FASB Statement 123(R) “Accounting forStock-Based Compensation” for purposes
of accounting of such share-based payments. All share-based compensation
provided to employees is recognized in accordance with the provisions of
Statement 123(R) and Included in General and administrative expenses in the
accompanying 2008 consolidated statement of income. The fair value of the 75,500
restricted shares was $2,347 and was determined with reference to the closing
price of the Company’s stock on the date the agreements were signed ($31.09 per
share). The fair value of the 600,000 restricted shares was $10,536 and was
determined with reference to the closing price of the Company’s stock on the
date the agreements were signed ($17.56 per share). The aggregate compensation
cost is being recognized ratably in the consolidated income statement over the
respective vesting periods, of which $1,113 was recognized in 2008. At December
31, 2008, the total unrecognized cost related to restricted share awards was
$11,771, of which $1,683 will be recognized until February 2011 and $10,088
until October 2014. Total dividends paid in 2008 to the holders of all
restricted shares amounted to $820 and are recognized in the financial
statements as a charge to retained earnings (Note 12).




On October 21, 2008, the Stock Incentive
Plan was amended and restated. Under the amended and restated Plan, the
Administrator may waive or modify the application of forfeiture of awards of
restricted stock and performance shares in connection with cessation of service
with the Company. The Company’s Board of Directors delegated to the members of
the Compensation Committee its authority as Administrator of the Plan to vest
restricted stock awards granted under the Plan in the event of the grantee’s
death.




(d)
            Dividend
      Reinvestment and Direct Stock Purchase Plan (the “Plan”):In April 2008, the Company entered
      into a Plan for 2,500,000 of common stock to allow existing shareholders
      to purchase additional common stock by reinvesting all or a portion of the
      dividends paid on their common stock and by making optional cash
      investments and new investors to enter into the Plan by making an initial
      investment. As at December 31, 2008 11,197 shares had been issued pursuant
      to the Plan.




(e)
            Sales
      agency financing agreement (“SAFA” or the “Agreement”):In April 2008, the Company,
      Corozal Compania Naviera S.A., a corporation organized under the laws of
      Panama, and Ironwood Trading Corp., a corporation organized under the laws
      of the Republic of Liberia (collectively, the “Selling
      Shareholders”),  entered into a sales agency financing agreement
      with BNY Capital Markets, Inc. (“BNYCMI”) for the issuance and sale of
      $200,000 of the Company’s common stock and the sale of 2,500,000 shares of
      the Selling Shareholders. During the term of the agreement, the Company or
      the selling stockholders may deliver an issuance notice to BNYCMI
      specifying: (i) the length of the selling period, which may not exceed 20
      consecutive trading days; (ii) the aggregate sales price of the common
      shares to be sold, which may not exceed $50,000 during any selling period
      without BNYCMI’s prior written consent; and (iii) the minimum price below
      which sales may not be made.




The Company or the selling stockholder,
as the case may be, will pay BNYCMI a commission equal to 1.25% of the sales
price of all shares sold through it as agent under the Agreement and reimburse
BNYCMI for its reasonable documented out-of-pocket expenses, including fees and
expenses of counsel, up to $100 in connection with the
Agreement.




The offering of shares pursuant to the
Agreement will terminate upon the earliest of (1) the sale of all shares of
common stock subject to the sales agency financing agreement, (2) the third
anniversary of the date of the sales agency financing agreement and (3) any time
upon 30 days’ prior notice to BNYCMI.  BNYCMI may terminate the sales
agency financing agreement upon one trading day’s notice in certain
circumstances, including bankruptcy events relating to the Company, the
Company’s failure to maintain the listing of common stock on the New York
Stock Exchange or the occurrence of an event which has had or would reasonably
be expected to have a material adverse effect on the Company. As at December 31,
2008 no shares were sold under the Agreement.




F-22
 DIANA SHIPPING INC.
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008
 (Expressed in thousands of U.S. Dollars
– except share and per share data, unless otherwise
stated)




(f)
            Stockholders
      Rights Agreement: In
      October 2008, the Company signed an amended and restated Stockholders
      Rights Agreement which removed Computershare Trust Company Inc. as
      its Rights Agent and replaced it with Mellon Investor Services
      LLC.  Pursuant to the amended and restated agreement, the
      Company may grant to certain of its stockholders the right to purchase
      one-thousandth of a share of the Company’s Series A preferred
      participating stock at the Exercise Price of $100 (one hundred US
      Dollars).




(g)
            Share
      repurchase plan:In December 2008, the Company
      entered into a share repurchase plan with Jefferies & Company, Inc.
      (the Broker), to repurchase shares of the Company’s outstanding common
      stock according to Rule 10b-18 promulgated under the Securities Act of
      1934. The broker’s compensation under the program will be $0.02 per share
      purchased. Under the plan, the Company has the right to terminate the
      program or the broker at any time, purchase shares for its own account in
      privately negotiated transactions, appoint one or more other agents to
      repurchase shares, or suspend or terminate purchases at any time. As at
      December 31, 2008, no shares were repurchased under the
      plan.




10.
            Voyage
      and Vessel Operating Expenses:




The
amounts in the accompanying consolidated statements of income are analyzed as
follows:




2008
              
              
              2007
              
              
              2006Voyage
    ExpensesPort
charges
              
              
              8
              
              
              
              1
              
              
              
              2Bunkers
              
              
              (817
              )
              
              
              (251
              )
              
              
              70Commissions charged by third
      parties
              
              
              15,648
              
              
              
              8,913
              
              
              
              5,364Commissions charged by a related
      party(Note
      1.5)
              
              
              -
              
              
              
              -
              
              
              
              497Miscellaneous
              
              
              164
              
              
              
              34
              
              
              
              126Total
              
              
              15,003
              
              
              
              8,697
              
              
              
              6,059Vessel Operating
      ExpensesCrew wages and related
      costs
              
              
              23,661
              
              
              
              16,938
              
              
              
              12,748Insurance
              
              
              4,695
              
              
              
              2,963
              
              
              
              2,274Spares and consumable
      stores
              
              
              7,948
              
              
              
              6,604
              
              
              
              5,557Repairs and
      maintenance
              
              
              2,923
              
              
              
              2,223
              
              
              
              1,490Tonnage taxes (Note 13)
              
              
              260
              
              
              
              207
              
              
              
              129Miscellaneous
              
              
              412
              
              
              
              397
              
              
              
              291Total
              
              
              39,899
              
              
              
              29,332
              
              
              
              22,489




11.
            Interest
      and Finance Costs:




The
amounts in the accompanying consolidated statements of income are analyzed as
follows:





2008
              
              
              2007
              
              
              2006Interest
      expense
              
              
              5,372
              
              
              
              5,508
              
              
              
              3,055Amortization and write-off of
      financing costs
              
              
              86
              
              
              
              111
              
              
              
              128Commitment
    fees
              
              
              388
              
              
              
              548
              
              
              
              648Other
              
              
              5
              
              
              
              227
              
              
              
              55Total
              
              
              5,851
              
              
              
              6,394
              
              
              
              3,886







Interest expense for 2008 and 2007
includes an amount of $251 and $311, respectively relating to the financing
method of accounting of the sale and leaseback transaction between DSS and
Universal (Note 3).




F-23
 DIANA SHIPPING INC.
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008
 (Expressed in thousands of U.S. Dollars
– except share and per share data, unless otherwise
stated)







12.
            Earnings
      per Share:




All shares issued (including the
restricted shares issued under the Company’s Incentive Plan) are the
Company’s common stock and have equal rights to
vote and participate in dividends upon their vesting. The calculation of basic
earnings per share, does not consider the non-vested shares as outstanding until
the time-based vesting restriction has lapsed. Dividends declared during the
period endedDecember
31,2008 for non-vested
shares, amounting to $820, are deducted from the net income
reported for purposes of calculating net income available to common shareholders
for the computation of basic earnings per share.




For purposes of calculating diluted
earnings per share, dividends declared during the period for non-vested shares
are not deducted from the net income reported since such calculation assumes
non-vested shares were fully vested from the grant date. However, the
denominator of the diluted earnings per share calculation includes182,568shares, being the incremental shares
assumed issued under the treasury stock method weighted for the period the
non-vested shares were outstanding.




Basic
    EPS
              
              
              Diluted
      EPSNet income
              
              $
              221,699
              
              
              $
              221,699Less: Dividends paid on restricted
      stock
              
              
              (820
              )
              
              
              -Net income available to common
      stockholders
              
              $
              220,879
              
              
              $
              221,699Weightedaverage number of common shares
      outstanding
              
              
              74,375,686
              
              
              
              74,375,686Incrementalshares
              
              
              -
              
              
              
              182,568Total shares
      outstanding
              
              
              74,375,686
              
              
              
              74,558,254EPS
              
              $
              2.97
              
              
              $
              2.97




13.
            Income
      Taxes:




Under the laws of the countries of the
companies’incorporation and / or
vessels’registration, the companies are not
subject to tax on international shipping income; however, they are subject to
registration and tonnage taxes, which are included in vessel operating expenses
in the accompanying consolidated statements of income.




Pursuant to the Internal Revenue Code of
the United States (the“Code”), U.S. source income from the
international operations of ships is generally exempt from U.S. tax if the
company operating the ships meets both of the following requirements, (a) the
Company is organized in a foreign country that grants an equivalent exception to
corporations organized in the United States and (b) either (i) more than 50% of
the value of the Company’s stock is owned, directly or
indirectly, by individuals who are“residents”of the Company’s country of organization or of another
foreign country that grants an“equivalent exemption”to corporations organized in the United
States (50% Ownership Test) or (ii) the Company’s stock is“primarily and regularly traded on an
established securities market”in its country of organization, in
another country that grants an“equivalent exemption”to United States corporations, or in
the United States (Publicly-Traded Test).




Notwithstanding the foregoing, the
regulations provide, in pertinent part, that each class of the
Company’s stock will not be considered to be“regularly traded”on an established securities market for
any taxable year in which 50% or more of the vote and value of the outstanding
shares of such class are owned, actually or constructively under specified stock
attribution rules, on more than half the days during the taxable year by persons
who each own 5% or more of the value of such class of the Company’s outstanding stock, (“5 Percent Override Rule”).




F-24
 DIANA SHIPPING INC.
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008
 (Expressed in thousands of U.S. Dollars
– except share and per share data, unless otherwise
stated)


We expect that we and each of our
subsidiaries qualify for this statutory tax exemption for the2008, 2007 and 2006taxable yearsand we have taken or will take this
position for United States federal income tax return reporting
purposes.  However, there are factual circumstances beyond our control
that could cause us to lose the benefit of this tax exemption in future years
and thereby become subject to United States federal income tax on our United
States source incomesuch
as  if,for a
particular taxable year,other shareholders with a
five percent or greater interest in our stock were, in combination with our
existing 5% shareholders, to own 50% or more of our outstanding shares of our
stock on more than half the days during the taxable year.




The Company estimates that since no more
than the 50% of its shipping income would be treated as being United States
source income, the effective tax rate is expected to be 2% and accordingly it
anticipates that the impact on its results of operations will not be material.
The Company believes that it satisfies the Publicly-Traded Test and all of its
United States source shipping incomeisexempt from U.S. federal income tax.
Based on its U.S. source Shipping Income for 2008, 2007 and 2006, the Company
would be subject to U.S. federal income tax of approximately $0.5, $0.2 million
and $0.25 million, respectively, in the absence of an exemption under
Section883.




14.
            Financial
      Instruments:




The carrying values of temporary cash
investments, accounts receivable and accounts payable approximate their fair
value due to the short-term nature of these financial instruments. The fair
values of long-term bank loans approximate the recorded values, due to their
variable interest rates.




15.
            Subsequent
      Events:




(a)
            Stock
      incentive plan: On
      January 16, 2009 the Company’s Board of Directors approved a cash bonus of
      about $2.0 million to all employees and executive management of the
      Company and 364,200 shares of restricted common stock to executive
      management and non-executive directors, pursuant to the Company’s 2005
      equity incentive plan.The fair value of the restricted
      shares based on the closing price on the date of the Board of Directors’
      approval ($12.10 per share) was $4,407 and will be recognized in income
      ratably over the restricted shares vesting period which will be three
      years.









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