UNITED
STATES




SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
20-F


o   REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g)


OF
THE SECURITIES EXCHANGE ACT OF 1934





OR


x   ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934


For
      the fiscal year ended
            December
      31, 2007





OR


o   TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





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 fromCommission
      file number
            0-22704Ship Finance International
      Limited(Exact
      name of Registrant as specified in its charter)Ship Finance International
      Limited(Translation
      of Registrant’s name into English)Bermuda(Jurisdiction
      of incorporation or organization)Par-la-Ville
      Place, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda(Address
      of principal executive offices)





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





Title
      of each class
            
            Name
      of each exchangeCommon Shares, $1.00 Par
    Value
            
            New
      York Stock Exchange





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





None(Title
      of Class)








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





None(Title
      of Class)





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





72,743,737 Common Shares, $1.00 Par
      Value





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.


x Yes  o No


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





Large
      accelerated filer  x
            Accelerated
      filer oNon-accelerated
      filer
              (Do
      not check if a smaller
              reporting
      company)  o
            Smaller
      reporting company o





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.


o Item
17  x
Item 18





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).


o Yes  x No





INDEX
TO REPORT ON FORM 20-F








PART
      I
            
            PAGEITEM
      1.
            IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
            1ITEM
      2.
            OFFER
      STATISTICS AND EXPECTED TIMETABLE
            1ITEM
      3.
            KEY
      INFORMATION
            1ITEM
      4.
            INFORMATION
      ON THE COMPANY
            17ITEM
      4A.
            UNRESOLVED
      STAFF COMMENTS
            38ITEM
      5.
            OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS
            38ITEM
      6.
            DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES
            59ITEM
      7.
            MAJOR
      SHAREHOLDERS AND RELATED PARTYTRANSACTIONS
            63ITEM
      8.
            FINANCIAL
      INFORMATION
            66ITEM
      9.
            THE
      OFFER AND LISTING
            67ITEM
      10.
            ADDITIONAL
      INFORMATION
            68ITEM
      11.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURESABOUT
      MARKET RISK
            82ITEM
      12.
            DESCRIPTION
      OF SECURITIES OTHER THANEQUITY
      SECURITIES
            82PART
      IIITEM
      13.
            DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES
            83ITEM
      14.
            MATERIAL
      MODIFICATIONS TO THE RIGHTS OFSECURITY
      HOLDERS AND USE OF PROCEEDS
            83ITEM
      15.
            CONTROLS
      AND PROCEDURES
            83ITEM
      16A.
            AUDIT
      COMMITTEE FINANCIAL EXPERT
            84ITEM
      16B.
            CODE
      OF ETHICS
            84ITEM
      16C.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
            84ITEM
      16D.
            EXEMPTIONS
      FROM THE LISTING STANDARDS FORAUDIT
      COMMITTEES
            85ITEM
      16E.
            PURCHASE
      OF EQUITY SECURITIES BY ISSUERAND
      AFFILIATED PURCHASERS
            85PART
      IIIITEM
      17.
            FINANCIAL
      STATEMENTS
            87ITEM
      18.
            FINANCIAL
      STATEMENTS
            87ITEM
      19.
            EXHIBITS
            87







i





CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS





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





Ship
Finance International Limited, 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," "anticipate," "intends,"
"estimate," "forecast," "project," "plan," "potential," "will," "may," "should,"
"expect" and similar expressions identify forward-looking
statements.





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 charterhire rates and vessel
values, changes in demand in the markets in which we operate, changes in demand
resulting from changes in OPEC's petroleum production levels and world wide oil
consumption and storage, developments regarding the technologies relating to oil
exploration, changes in market demand in countries which import commodities and
finished goods and changes in the amount and location of the production of those
commodities and finished goods, increased inspection procedures and more
restrictive import and export controls, changes in our operating expenses,
including bunker prices, drydocking and insurance costs, performance of our
charterers and other counterparties with whom we deal, timely delivery of
vessels under construction within the contracted price, 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.


ii


PART
I





ITEM
      1.
            IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS





Not
Applicable





ITEM
      2.
            OFFER
      STATISTICS AND EXPECTED TIMETABLE





Not
Applicable





ITEM
      3.
            KEY
      INFORMATION





Throughout
this report, the “Company”, “we”, “us” and “our” all refer to Ship Finance
International Limited and its subsidiaries (“Ship Finance”). We use the term
deadweight ton, or dwt, in describing the size of the vessels. Dwt, expressed in
metric tons, each of which is equivalent to 1,000 kilograms, refers to the
maximum weight of cargo and supplies that a vessel can carry. Unless otherwise
indicated, all references to “USD,” “US$” and “$” in this report are to, and
amounts are presented in, U.S. dollars.





A.
SELECTED FINANCIAL DATA





The selected
income statement and cash flow statement data of the Company with respect to the
fiscal years ended December 31 2007, 2006, and 2005 and the selected balance
sheet data of the Company with respect to the fiscal years ended December 31
2007 and 2006 have been derived from the Company’s Consolidated Financial
Statements included in Item 18 of this annual report, prepared in accordance
with United States generally accepted accounting principles.





The selected
income statement and cash flow statement data for the fiscal years ended
December 31 2004 and 2003 and the selected balance sheet data for the fiscal
years ended December 31 2005, 2004 and 2003 have been derived from consolidated
financial statements of the Company and predecessor combined carve-out
statements not included herein.  The following table should be read in
conjunction with Item 5. “Operating and Financial Review and Prospects” and the
Company’s Consolidated Financial Statements and Notes thereto included
herein.


1





Year
      Ended December 31
              
              
              Predecessor
      combined carve-out
                Year
      ended December 312007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003(in
      thousands of dollars except common share and per share
      data)Income
      Statement Data:Total
      operating revenues
              
              
              398,792
              
              
              
              424,658
              
              
              
              437,510
              
              
              
              492,069
              
              
              
              695,068Net
      operating income
              
              
              304,881
              
              
              
              293,697
              
              
              
              300,662
              
              
              
              347,157
              
              
              
              348,816Net
      income
              
              
              167,707
              
              
              
              180,798
              
              
              
              209,546
              
              
              
              262,659
              
              
              
              334,812Earnings
      per share, basic
              
              
              $2.31
              
              
              
              $2.48
              
              
              
              $2.84
              
              
              
              $3.52
              
              
              
              $4.53Earnings
      per share, diluted
              
              
              $2.30
              
              
              
              $2.48
              
              
              
              $2.84
              
              
              
              $3.52
              
              
              
              $4.53Cash
      dividends paid
              
              
              159,335
              
              
              
              149,123
              
              
              
              148,863
              
              
              
              78,905
              
              
              
              n/aCash
      dividend paid per share
              
              
              $2.19
              
              
              
              $2.05
              
              
              
              $2.00
              
              
              
              $1.05
              
              
              
              n/aBalance
      Sheet Data (at end ofperiod):Cash
      and cash equivalents
              
              
              78,255
              
              
              
              64,569
              
              
              
              32,857
              
              
              
              29,193
              
              
              
              26,519Vessels
      and equipment, net
              
              
              629,503
              
              
              
              246,549
              
              
              
              315,220
              
              
              
              236,305
              
              
              
              1,863,504Investment
      in finance leases(including
      current portion)
              
              
              2,142,390
              
              
              
              2,109,183
              
              
              
              1,925,354
              
              
              
              1,718,642
              
              
              
              -Total
      assets
              
              
              2,950,028
              
              
              
              2,553,677
              
              
              
              2,393,913
              
              
              
              2,152,937
              
              
              
              2,156,348Long
      term debt (including
                current
      portion)
              
              
              2,269,994
              
              
              
              1,915,200
              
              
              
              1,793,657
              
              
              
              1,478,894
              
              
              
              991,610Share
      capital
              
              
              72,744
              
              
              
              72,744
              
              
              
              73,144
              
              
              
              74,901
              
              
              
              n/aStockholders’
      equity
              
              
              614,477
              
              
              
              600,530
              
              
              
              561,522
              
              
              
              660,982
              
              
              
              822,026Common
      shares outstanding
              
              
              72,743,737
              
              
              
              72,743,737
              
              
              
              73,143,737
              
              
              
              74,900,837
              
              
              
              n/aWeighted
      average commonshares
                outstanding
      (1)
              
              
              72,743,737
              
              
              
              72,764,287
              
              
              
              73,904,465
              
              
              
              74,610,946
              
              
              
              n/aCash
      Flow Data:Cash
      provided by operating activities
              
              
              202,416
              
              
              
              210,160
              
              
              
              280,834
              
              
              
              178,528
              
              
              
              415,523Cash
      provided by (used in)investing
      activities
              
              
              (378,777
              )
              
              
              (127,369
              )
              
              
              (269,573
              )
              
              
              76,948
              
              
              
              (51,632
              )Cash
      provided by (used in)financing
      activities
              
              
              190,047
              
              
              
              (51,079
              )
              
              
              (7,597
              )
              
              
              (226,283
              )
              
              
              (358,006
              )





(1) For all
periods presented prior to June 16 2004, per share amounts are based on a
denominator of 73,925,837 common shares outstanding, which is the number of
issued common shares outstanding on June 16 2004, the date that the Company’s
shares were partially spun off. The Company’s shares were listed on the New York
Stock Exchange on June 17, 2004.


2


B.
CAPITALIZATION AND INDEBTEDNESS





Not
Applicable





C.
REASONS FOR THE OFFER AND USE OF PROCEEDS





Not
Applicable





D.
RISK FACTORS





Our
assets are primarily engaged in transporting crude oil and oil products, drybulk
and containerized cargos, and in offshore drilling and related activities. The
following summarizes some of the risks that may materially affect our business,
financial condition or results of operations.  Unless otherwise
indicated in this Annual Report on Form 20-F, all information concerning our
business and our assets is as of March 11 2008.





Risks
Relating to Our Industry





The seaborne
transportation industry is cyclical and volatile, and this may lead to
reductions in our charter rates, vessel values and results of
operations.





The international seaborne
transportation industry is both cyclical and volatile in terms of
charter rates and profitability. The degree of charter rate volatility for
vessels has varied widely. Fluctuations in charter rates result from changes in
the supply and demand for vessel capacity and changes in the supply and demand for energy resources,
commodities, semi-finished and finished consumer and industrial products
internationally carried at sea. The factors affecting the supply and demand for
vessels are outside of our control, and the nature, timing and degree of changes in industry conditions
are unpredictable.





Factors that influence demand for vessel
capacity include:


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


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


·
              the location of regional and
      global production and manufacturing
  facilities;


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


·
              the globalization of production
      and manufacturing;


·
              global and regional economic and
      political conditions;


·
              developments in international
      trade;


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


·
              environmental and other regulatory
      developments;


·
              currency exchange
      rates;and


·
              weather.


3


Factors that influencesupply ofvessel capacity
include:


·
              the number of newbuilding
      deliveries;


·
              the scrapping rate of older
      vessels;


·
              the price of steeland vessel equipment;


·
              changes in environmental and other
      regulations that may limit the useful lives of
    vessels;


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


·
              port or canal
      congestion.


We anticipate that the future demand for our
vessels and charter rates will be dependent upon continued economic growth inChina,Indiaand the rest of the world, seasonal and
regional changes in demand and changes to the capacity of the world fleet. We
believe the capacity of the world fleet is
likely to increase and there can be no assurance that economic growth will
continue at a rate sufficient to utilize this new capacity. Adverse economic,
political, social or other developments could negatively impact charter rates and therefore have a
material adverse effect on our business, results of operations and ability to
pay dividends.





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




Our
fleet includes nine non-double hull tankers.





TheUnited States, the European Union and the
International Maritime Organization(“IMO”)have all imposed limits or prohibitions
on the use of these types of tankers in specified markets after certain target
dates, depending on certain factors such as the size of the vessel and the type
of cargo.  In the case of our non-double hull tankers, these phase out
dates range from 2010 to 2015.  As of April 15 2005 the Marine
Environmental Protection Committee of the IMO has amended the International
Convention for the Prevention of Pollution from Ships to accelerate the phase
out of certain categories of non-double hull tankers, including the types of
vessels in our fleet, from 2015 to 2010 unless the relevant flag states extend
the date.





This change could result in some or all
of our non-double hull tankers being unable to trade in many markets after 2010.
In addition,non-doublehull tankers are likely to be chartered
less frequently and at lower rates. Additional regulations may be adopted in the
future that could further adversely affect the useful lives of our
non-double hull tankers, as well as our ability to generate income from
them.


4





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




Our operations are affected by extensive
and changing international, national, state and local laws, regulations,
treaties, conventions and standards in force in international waters, the
jurisdictions in which our tankers and other vessels operate and the country or
countries in which such vessels are registered, including those governing the
management and disposal of hazardous substances and wastes, the cleanup of oil
spills and other contamination, air emissions, and water discharges and ballast
water management. These
regulations include the U.S. Oil Pollution Act of 1990, or OPA, the
International Convention on Civil Liability for Oil Pollution Damage of 1969,
International Convention for the Prevention of Pollution from Ships, the IMO
International Convention for the Safety of Life at Sea of 1974, or SOLAS, the
International Convention on Load Lines of 1966 and the U.S. Marine
Transportation Security Act of 2002.





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, or even to scrap or sell certain vessels
altogether.





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





Under local, national and foreign laws,
as well as international treaties and conventions, we could incur material
liabilities, including cleanup obligations, natural resource damages and
third-party claims for personal injury or property damages, in the event that
there is a release of petroleum or other hazardous substances from our vessels
or otherwise in connection with our current or historic
operations.  We could also incur substantial penalties, fines and
other civil or criminal sanctions, including in certain instances seizure or
detention of our vessels, as a result of violations of or liabilities under
environmental laws, regulations and other requirements.  For example,
OPA affects all vessel owners shipping oil to, from or within theUnited States.  OPA allows for potentially
unlimited liability without regard to fault for owners, operators and bareboat
charterers of vessels for oil pollution inUnited Stateswaters.  Similarly, the
International Convention on Civil Liability for Oil Pollution Damage, 1969, as
amended, which has been adopted by most countries outside of theUnited States, imposes liability for oil pollution in
international waters.  OPA expressly permits individual states to
impose their own liability regimes with regard to hazardous materials and oil
pollution incidents occurring within their
boundaries.  Coastal states in theUnited Stateshave enacted pollution prevention
liability and response laws, many providing for unlimited
liability.


5








An
over-supply of container vessel capacity may lead to reductions in charter hire
rates and


profitability.




The market supply of container vessels
has been increasing, and the number of container vessels on orderis atanhistoric high. An over-supply of
container vessel capacity may result in a reduction of charter hire rates. If
such a reduction occurs, the value of our container vessels may decrease and,
under certain circumstances, affect the ability of our customers who charter our
container vessels to make charterhire payments to us.  This and other
factors affecting the supply and demand for container vessels and the supply and
demand for products shipped in containers are outside our control and the
nature, timing and degree of changes in the industry may affect the ability of
our charterers to make charterhire payments to us.







Increased
inspection procedures, tighter import and export controls and new security
regulations could increase costs and cause disruption of our container shipping
business.




International container shipping is
subject to security and customs inspection and related procedures in countries
of origin, destination and trans-shipment points. These security procedures can
result in cargo seizure, delays in the loading, offloading, trans-shipment, or
delivery of containers and the levying of customs duties, fines or other
penalties against exporters or importers and, in some cases,
carriers.





Since the events of September 11 2001,U.S.authorities havesignificantly increased the levelsofinspection forall imported containers. Government
investment in non-intrusive container scanning technology has grown, and there
is interest in electronic monitoring technology, including so-called “e-seals”
and “smart” containers that would enable remote, centralized monitoring of
containers during shipment to identify tampering with or opening of the
containers, along with potentially measuring other characteristics such as
temperature, air pressure, motion, chemicals, biological agents and
radiation.





It is unclear what changes, if any, to
the existing security procedures will ultimately be proposed or implemented, or
how any such changes will affect the container shipping industry. These changes
have the potential to impose additional financial and legal obligations on
carriers and, in certain cases, to render the shipment of certain types of goods
by container uneconomical or impractical. These additional costs could reduce
the volume of goods shipped in containers, resulting in a decreased demand for
container vessels. In addition, it is unclear what financial costs any new
security procedures might create for container vessel owners and operators. Any
additional costs or a decrease in container volumes could have an adverse impact
on our customers that charter container vessels from us and, under certain
circumstances, may affect their ability to make charterhire payments to us under
the terms of our charters.







Our drill rig business depends on the
level of activity in the offshore oil and gas industry, which is significantly
affected by volatile oil and gas prices and other factors.




Our drill rig business depends on the
level of activity in oil and gas exploration, development and production in
market sectors worldwide, with theU.S.and international offshore areas being
our primary market sectors. Oil and gas prices and market expectations of
potential changes in these prices significantly affect this level of activity.
However, higher commodity prices do not necessarily translate into increased
drilling activity since our customers' expectations of future commodity prices
typically drive demand for our rigs. Also, increased competition for our
customers’ drilling budgets could come from, among other areas, land based energy markets in Africa,Russia, other former Soviet Union states, the
Middle East andAlaska. The availability of quality drilling
prospects, exploration success, relative production costs, the stage of
reservoir development and political and regulatory environments also affect our
customers’ drilling campaigns. Worldwide military, political and economic events
have contributed to oil and gas price volatility and are likely to do so in
the future. Oil and gas prices are extremely volatile and are affected by
numerous factors, including the
following:


6





·
            worldwide demand for oil and
      gas;


·
            the ability of OPEC to set and
      maintain production levels and
pricing;


·
            the level of production in
      non-OPEC countries;


·
            the policies of various
      governments regarding exploration and development of their oil and gas
      reserves;


·
            thedevelopment and implementation of
      policies to increase the use of renewable
  energy


·
            advances in exploration and
      development technology; and


·
            the worldwide military and
      political environment, including uncertainty or instability resulting from
      an escalation or additional outbreak of armed hostilities or other crises
      inoil producing
      areasor further acts
      of terrorism in the United States, or
  elsewhere.






The drill rig business involves numerous
operating hazards.




Our drilling operations are subject to
the usual hazards inherent in the drilling of oil and gas wells, such as
blowouts, reservoir damage, loss of production, loss of well control,
punch-throughs, craterings, fires and natural disasters such as hurricanes and
tropical storms could damage or destroy our drillingrigs. The occurrence of one or more of these
events could result in the suspension of drilling operations, damage to or
destruction of the equipment involved and injury or death to rig
personnel.  Operations also may be suspended because of machinery
breakdowns, abnormal drilling conditions, and failure of subcontractors to
perform or supply goods or services or personnel shortages. In addition,
offshore drilling operations are subject to perils peculiar to marine
operations, including capsizing, grounding, collision and loss or damage from
severe weather. Damage to the environment could also result from our operations,
particularly through oil spillage or extensive uncontrolled fires. We may also
be subject to property, environmental and other damage claims by oil and gas
companies. Similar to our vessel operating business our insurance policies and
contractual rights to indemnity may not adequately cover losses, and we do not
have insurance coverage or rights to indemnity for all
risks.







Our
business has inherent operational risks, which may not be adequately covered by
insurance.




Our vessels and their cargoes are at
risk of being damaged or lost because of events such as marine disasters, bad
weather, mechanical failures, human error, environmental accidents, war,
terrorism, piracy and other circumstances or events. In addition, transporting
cargoes across a wide variety of international jurisdictions creates a risk of
business interruptions due to political circumstances in foreign countries,
hostilities, labor strikes and boycotts, the potential for changes in tax rates
or policies, and the potential for government expropriation of our
vessels.  Any of these events may result in loss of revenues,
increased costs and decreased cash flows to our customers, which could impair
their ability to make payments to us under our charters.





In the event of a casualty to a vessel
or other catastrophic event, we will rely on our insurance to pay the insured
value of the vessel or the damages incurred.  Throughtheagreements with our vessel managers, we
procure insurance formost
ofthe vessels in our fleet
employed under time charters against those risks that
we believe the shipping industry commonly insures against. These insurances
include marine hull and machinery insurance, protection and indemnity insurance,
which include pollution risks and crew insurances, and war risk
insurance.  Currently, the amount of coverage for liability for
pollution, spillage and leakage available to us on commercially reasonable terms
through protection and indemnity associations and providers of excess coverage
is $1 billion pertankerper
occurrence.


7


We cannot assure you that we will be
adequately insured against all risks.  Our vessel managers may not be
able to obtain adequate insurance coverage at reasonable rates for our vessels
in the future.  For example, in the past more stringent environmental
regulations have led to increased costs for, and in the future may result in the
lack of availability of, insurance against risks of environmental damage or
pollution.  Additionally, our insurers may refuse to pay particular
claims.  For example, the circumstances of a spill, including
non-compliance with environmental laws, could result in denial of coverage,
protracted litigation and delayed or diminished insurance recoveries or
settlements.  Any significant loss or liability for which we are not
insured could have a material adverse effect on our financial
condition.  Under the terms of our bareboat charters, the charterer is
responsible for procuring all insurances for the vessel.







Maritime
claimants could arrest our vessels, which could interrupt our customers or our
cash flows.




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





Governments
could requisition our vessels during a period of war or emergency without
adequate compensation, resulting in a loss of earnings.




A government could requisition for title
or seize our vessels.  Requisition for title occurs when a government
takes control of a vessel and becomes her owner.  Also, a
government could
requisition our vessels for hire.  Requisition for hire occurs when a
government takes control of a vessel and effectively becomes her charterer at
dictated charter rates. This amount could be materially less than the
charterhire that would havebeen payable otherwise.  In
addition, we would bear all risk of loss or damage toavesselunder requisition for
hire.





As
our fleet ages, the risks associated with older vessels could adversely affect
our operations.




In general, the costs to maintain a
vessel in good operating condition increase as the vessel ages.  Due
to improvements in engine technology, older vesselsaretypically less fuel-efficient than more
recently constructed vessels.  Cargo insurance rates increase with the
age of a vessel, making older vessels less desirable to
charterers.





Governmental regulations, safety,
environmental or other equipment standards related to the age of tankers and
other types of vessels may require expenditures for alterations or the addition
of new equipment to our vessels to comply with safety or environmental laws or
regulations that may be enacted in the future.  These laws or
regulations may also restrict the type of activities in which our vessels may
engage or the geographic regions in which they may operate.  We cannot
predict what alterations or modifications our vessels may be required to undergo
in the future or that as our vessels age, market conditions will justify any
required expenditures or enable us to
operate our vessels profitably during the remainder of their useful
lives.


8


Therearerisks
associated with the purchase and operation of second-hand
vessels.




Our current business strategy includes
additional growth through the acquisition of both newbuildings and
second-hand vessels.  Although we
generally inspect second-hand vessels prior to purchase, this
does not normally provide us with the same knowledge about the vessels’
condition that we would have had if such vessels had been built for and operated
exclusively by us.  Therefore, our future operating results could be
negatively affected if some of the vessels do not perform as we
expect.  Also, we do not receive the benefit of warranties from the
builders if the vessels we buy are older than one year.





Risks
relating to our Company





We
depend on our charterers and principally the Frontline Charterers for our
operating cash flows and for our ability to pay dividends to our
shareholders.




Most of the tanker vessels and
oil/bulk/ore carriers(“OBOs”)in our fleet are chartered to Frontline
Shipping Limitedand Frontline Shipping II Limited(the“Frontline Charterers”),subsidiaries of Frontline Ltd
(“Frontline”).  Our other vesselsthat have charters attached to themare chartered
toother customers under medium to
long-term time and bareboat charters,except one whichisonashort-term time charteruntilOctober 2008.





The charter hire payments that we
receive from our customers constitute substantially all of our operating cash
flows.  The Frontline Charterershavenobusiness or sources of funds other than
those related to the chartering of our tanker fleet to third
parties.





FrontlineShipping Limited (“Frontline Shipping”)
and Frontline Shipping II Limited(“Frontline Shipping II”)are,at March 11 2008,
capitalizedwith $186 and $35 million,respectively, which serves to support
the Frontline Charterers’ obligations to make charterhire payments to
us.The
capitalization of Frontline Shipping will upon cancellation of the charter forFront
Sabangbe reduced from $186
million to $181 million.Neither Frontline nor any of its
affiliates guarantees the payment of charterhire or is obligated to contribute
additional capital to the Frontline Charterers at any time.  Although
there are restrictions on the Frontline Charterers’ rights to use their cash to
pay dividends or make other distributions, at any given time their available
cash may be diminished or exhausted, and the Frontline Charterers may be unable
to make charterhire payments to us.  If the Frontline Charterers or
any of our other charterers are unable to make charterhire
payments to us, our results of operations and financial condition will be
materially adversely affected and we may not have cash available to pay debt
service or for distributions to our shareholders.





The
amount of the profit sharing payment we receive under our charters with the
Frontline Charterers, if any, and our ability to pay our ordinary quarterly
dividend, may depend on prevailing spot market rates, which are
volatile.




Most of our tanker vessels and our OBOs
operate under time charters to the Frontline Charterers.  These charter
contracts provide for base charterhire and additional profit sharing payments
when the Frontline Charterers’ earnings from deploying our vessels exceed
certain levels.  The majority of our vessels chartered to the Frontline
Charterers are sub-chartered by the Frontline Charterers in the spot market,
which is subject to greater volatility than the long-term time charter
market.  Accordingly, the amount of profit sharing payments that we
receive, if any, is primarily dependant on the strength of the spot market and
we cannot assure you that we will receive any profit sharing payments for any
periods in the future.  Furthermore, our quarterly dividend may
depend on the Company receiving profit sharing payments or require that we
continue to expand our fleet, so that in either case we receive cash flows in
addition to the cash flows we receive from our base charterhire from the
Frontline Charterers and charter payments from other customers.  As a
result, we cannot assure you that we will continue to pay quarterly
dividends.


9





Volatility
in the international shipping and offshore markets may cause our customers to be
unable to pay charterhire to us.




Our customers are subject to volatility
in the shipping market that affects their ability to operate the vessels they
charter from us at a profit.  Our customers’ successful operation of
our vesselsand rigsin the charter market will
depend on, among other things, their ability to obtain profitable
charters.  We cannot assure you that future charters will be available
to our customers at rates sufficient to enable them to meet their obligations to
make charterhire payments to us.  As a result, our revenues and
results of operations may be adversely affected.  These factors
include:




·
            global and regional economic and
      political conditions;




·
            supply and demand for oil and
      refined petroleum products, which is affected by, among other things,
      competition from alternative sources of
  energy;




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




·
            developments in international
      trade;




·
            changes in seaborne and other
      transportation patterns, including changes in the distances that cargoes
      are transported;




·
            environmental concerns and
      regulations;




·
            weather;




·
            the number of newbuilding
      deliveries;




·
            the phase-outofnon-doublehull tankers from certain markets
      pursuant to national and international laws and
      regulations;




·
            the scrapping rate of older
      vessels;
      and




·
            changes in production of crude
      oil, particularly by OPEC and other key producers.




Tanker charter rates also tend to be
subject to seasonal variations, with demand (and therefore charter rates)
normally higher in winter months in the northern hemisphere.





We
depend on directors who are associated with affiliated companies which may
create conflicts of interest.




Currently,two of our directors,Tor OlavTrøimand Kate Blankenship, are also
directors of Frontline, Golden Ocean Group Limited(“GoldenOcean”), and Seadrill Limited(“Seadrill”).  These
companies and also Deep Sea Supply Plc (“DeepSea”) are indirectly controlled by John
Fredriksen, who also controls our principal shareholders Hemen Holding Limited
and Farahead Investments Inc (hereafter jointly referred to as “Hemen”).Thesetwodirectors owe fiduciary duties to the
shareholders of each company and may have conflicts of interest in matters
involving or affecting us and our customers.  In addition, dueto their ownership of
Frontline,GoldenOcean, Deep Seaor Seadrillcommon shares, they may have conflicts
of interest when faced with decisions that could have different implications for
Frontline,GoldenOcean,DeepSeaor Seadrillthan they do for us. We cannot assure
you that any of these conflicts of interest will be resolved in our
favor.


10


The
agreements between us and affiliates of Hemen may be less favorable to us than
agreements that we could obtain from unaffiliated third
parties.




The charters, management agreements, the
charter ancillary agreements and the other contractual agreements we have with
companies affiliated with Hemen were made in the context of an affiliated relationship and were not necessarily
negotiated in arm’s-length
transactions.  The negotiation of these agreements may have resulted
in prices and other terms that are less favorable to us than terms we might have
obtained in arm’s-length negotiations with unaffiliated third parties for
similar services.





Hemen
and its associated companies’ business activities may conflict with
ours.




While Frontline has agreed to cause the
Frontline Charterers to use their commercial best efforts to employ our vessels
on market terms and not to give preferential treatment in the marketing of any
other vessels owned or managed by Frontline or its other affiliates, it is
possible that conflicts of interests in this regard will adversely affect
us.  Under our charter ancillary agreements with the Frontline
Charterers and Frontline, we are entitled to receive annual profit sharing
payments to the extent that the average timedailycharter equivalent, or TCE, rates
realized by the Frontline Charterers exceed specified levels.  Because
Frontline also owns or manages other vessels in addition to our fleet, which are
not included in the profit sharing calculation, conflicts of interest may arise
between us and Frontline in the allocation of chartering opportunities that
could limit our fleet’s earnings and reduce the profit sharing payments or
charterhire due under our charters.





Our
shareholders must rely on us to enforce our rights against our contract
counterparties.




Holders of our common shares and other
securities have no direct right to enforce the obligations of the Frontline
Charterers, Frontline Management(Bermuda)Ltd.(“Frontline Management”), Frontline, Golden Ocean, Deep Seaand Seadrill or any of our other
customers under the charters, or any of the other agreements to which we are
party, including our management agreement with Frontline
Management.  Accordingly, if any of those counterparties were to
breach their obligations to us under any of these agreements, our shareholders
would have to rely on us to pursue our remediesagainst those
counterparties.





There
is a risk that United States tax authorities could treat us as a “passive
foreign investment company,” which would 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 Statesshareholders of a PFIC are subject to a
disadvantageousUnited
Statesfederal 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.





11


Under
these rules, we should not be considered to be a PFIC if our income from our
time charters is considered to be income for the performance of services, but we
will be consideredto be a PFIC if such income is considered to be
rental income.We
have received an opinion from our counsel, Seward & Kissel LLP, that it is
more likely than not that our income from time charters will not be treated as
passive income for purposes of determining whether we are a
PFIC.  Based on this opinion and our current method of operations, we
do not believe we are, nor do we expect to become, a PFIC with respect to any
taxable year.  Our belief and the opinion are based principallyupon
the positions that (1) time and voyage charter income constitutes services
income, rather than rental income and (2) Frontline Management,which
provides services tomost
ofourtime-charteredvessels,
will be respected as a separate entity from the Frontline Charterers, with which
it is affiliated.





There is no direct legal authority under
the PFIC rules addressing our proposed method of operation.  In
particular, there is no legal authority addressing the situation where the
charterer of a majority of the vessels in a company’s fleet is affiliated with
the technical management provider for a majority of the company’s
vessels.  Accordingly, no assurance can be given that the Internal
Revenue Service(“IRS”)or a court of law
will accept our position, and there is asignificantrisk 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 the
nature and extent of our operations were to change.





If the IRS were to find that we are or
have been a PFIC for any taxable year, ourUnited Statesshareholders will face adverseUnited Statestax
consequences.For example,U.S.non-corporateshareholderswouldnot be eligible for the 15% maximum tax
rate on dividends that we pay, and other adverse tax consequencesmayarise.





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





We expect that we and each of our
subsidiaries qualify for this statutory tax exemption and we will take this
position forUnited
Statesfederal income tax
return reporting purposes.  However, there are factual circumstances
beyond our control that could cause us to lose the benefit of this tax exemption
and thereby become subject toUnited Statesfederal income tax on ourUnited Statessource income.  For example,
Hemenowned 41.4%
ofour outstandingstock at March 11
2008.There is
therefore 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 Hemen, 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 exemption under Section 883 of the Code for any taxable year, we, or
our subsidiaries, could be subject for those years to an effective 4% United
States federal income tax on the gross shipping income these companies derive
during the year that are attributable to the transport of cargoes to or from the
United States.  The imposition of this tax would have a negative
effect on our business and would result in decreased earnings available for
distribution to our shareholders.






12







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




TheRepublicofLiberiaenacted an income tax law generally
effective as of January 1 2001 (“the New Act”) which repealed, in its
entirety, the prior income tax law in effect since 1977, pursuant to which our Liberian subsidiaries, as
non-resident domestic corporations, were wholly exempt from Liberian
tax.





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





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





If
our long-term time or bareboat charters or management agreements with respect to
our vessels employed on long-term time charters terminate, we could be exposed
to increased volatility in our business and financial results, our revenues
could significantly decrease and our operating expenses could significantly
increase.




If any of our charters terminate, we may
not be able to re-charter those vessels on a long-term basis with terms similar
to the terms of our existing charters, or at all.  While the terms of
our current charters for our tanker vessels to the Frontline Charterers end
between2013 and
2027,the Frontline
Charterers have the option to terminate the charters of our non-double hull
tanker vessels from 2010.





Apart fromtheFront
VanadisandFront
Sabangwhicharebothsubject to three and a half year
hire-purchase contracts
scheduled to expire in November 2010 andOctober 2011, respectively,and theMontemar
Europa, which is on a
charter due to expirein
October 2008, the vessels
in our fleet that have charters attached to them aregenerally contracted to expire betweenfiveand19years. However,we have granted some ofourcharterers purchase options that, if
exercised, may effectively terminate our charters with these customers
earlier.  One or more of the charters with respect to our vessels may
also terminate in the event of a requisition for title or a loss of a
vessel.





In addition, under our vessel management
agreements with Frontline Management, for a fixed management fee Frontline
Management is responsible for all of the technical and operational management of
the vessels chartered by the Frontline Charterers, and will indemnify us against
certain loss of hire and various other liabilities relating to the operation of
these vessels.  We may terminate our management agreements with
Frontline Management for any reason at any time on 90 days’ notice or that
agreement may be terminated if the relevant charter is terminated.  We
expect to acquire additional vessels in the future and we cannot assure you that
we will be able to enter into similar fixed price management agreements with
Frontline Management or another third party manager for those
vessels.


13


Therefore, to the extent that we acquire
additional vessels, our cash flow could be more volatile and we could be exposed
to increases in our vessel operating expenses, each of which could materially
and adversely affect our results of operations and business.





If the delivery of any of the
vessels that we have agreed to acquire is delayed or are delivered with
significant defects, our earnings and financial condition could
suffer.




Asat March 11 2008, we haveentered into agreements to acquire two
additional Suezmax tankers, two Capesize drybulk carriers, five additional
container vessels, three seismic vesselsand two chemical tankers.  A delay in the delivery of
any of these vessels or the failure of the contract counterparty to deliver any
of these vessels could cause us to breach our obligations under related charterand financingagreements that we have entered
into,and could adversely affect our revenues
and results of operations.  In addition, an acceptance of any of these
vessels with substantial defects could have similar consequences.







Certain
of our vessels are subject to purchase options held by the charterer of the
vessel, which, if exercised, could reduce the size of our fleet and reduce our
future revenues.




The market values of our vessels, which
are currently at near historically high levels, are expected to change from time
to time depending on a number of factors, including general economic and market
conditions affecting the shipping industry, competition, cost of vessel
construction, governmental or other regulations, prevailing levels of charter
rates, and technological changes.We have granted fixed price purchase
options to certain of our customers with respect to the vessels they have
chartered from us, and these prices may be less than the respective vessel’s
market value at the time the option is exercised.  In addition, we may
not be able to obtain a replacement vessel for the price at which we sell the
vessel.  In such a case, we could incur a loss and a reduction in
earnings.




We
may incur losses when we sell vessels, which may adversely affect our
earnings.




During
the period a vessel is subject to a charter, we will not be permitted to sell it
to take advantage of increases in vessel values without the charterers’
agreement. On the other hand, if the charterers were to default under the
charters due to adverse market conditions, causing a termination of the
charters, it is likely that the fair market value of our vessels would also be
depressed.  If we were to sell a vessel at a time when vessel prices
have fallen, we could incur a loss and a reduction in earnings.





An
increase in interest rates could materially and adversely affect our financial
performance.




As of December 31 2007, we hadapproximately $1.8 billion
infloating rate debt
outstanding under our credit facilities.  Although we use interest
rate swaps to manage our interest rate exposure and have interest rate
adjustment clauses in some of our chartering agreements, we are exposed to
fluctuations in the interest rates. For a portion of our floating rate debt, if
interest rates rise, interest payments on our floating rate debt that we have
not swapped into effectively fixed rates would increase.





As of December 31 2007, we have entered into interest rate
swaps to fix the intereston $884million of our outstanding
indebtedness.  In addition wehadentered into total return bond swaps in
respect of$122million of our 8.5%senior notesas of December 31 2007.  The total return bond swaps
effectively translate the underlying principal amount into floating rate
debt.


14


An increase in interest rates could
cause us to incur additional costs associated with our debt service, which may
materially and adversely affect our results of
operations.For
example, our net income for the year ended December 31 2007 was reduced by a$14 million unrealized
loss,representing the net
change in the fair value of these interest rate swaps.  Our
maximumexposure to
interest rate fluctuations on ouroutstandingdebtand our outstanding total return bond
swapsat December 31
2007was $1,059million.  A one percent
change in interest rates would at most increase or decrease interest expenseby $10.6
millionper year as of
December 31 2007.The maximum figure does not
take into account that certain of our charter contracts include interest
adjustment clauses, whereby the charter rate is adjusted to reflect the actual
interest paid on the outstanding debt related to the assets on
charter.  At December 31 2007,$280 millionof our floating rate debt was subject
to such interest adjustment clauses.





We
may have difficulty managing our planned growth properly.




Since
our original acquisitions from Frontline we have expanded and diversified our
fleet, and we are performing certain administrative services through a wholly
owned subsidiary company that were previously contracted to
Frontline.





The growth in the size and diversity of
our fleet will continue to impose additional responsibilities on our management,
and may require us to increase the number of our personnel. We may need to
increase our customer base in the future as we continue to grow our
fleet.  We cannot assure 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
are highly leveraged and subject to restrictions in our financing agreements
that impose constraints on our operating and financing flexibility.




We have significant indebtedness
outstanding under our senior notes. We have also entered into loan facilities
that we have used to refinance existing indebtedness and to acquire additional
vessels.  We may need to refinance some or all of our indebtedness on
maturity of our senior notesor loan facilitiesand to acquire additional vessels in the
future.  We cannot assure you we will be able to do so on terms that
are acceptable to us or at all.  If we cannot refinance our
indebtedness, we will have to dedicate some or all of our cash flows, and we may
be required to sell some of our assets, to pay the principal and interest on our
indebtedness.  In such a case, we may not be able to pay dividends to
our shareholders and may not be able to grow our fleet as planned.  We
may also incur additional debt in the future.





Our loan facilities and the indenture
for our senior notes subject us to limitations on our business and future
financing activities, including:




·
            limitations on the incurrence of
      additional indebtedness, including  issuance of additional
      guarantees;




·
            limitations on incurrence of
      liens;




·
            limitations on our ability to pay
      dividends and make other distributions;
  and




·
            limitations on our ability to
      renegotiate or amend our charters, management agreements and other
      material agreements.




Further, our loan facilitiescontain financial covenants
that require us to, among
other things:




·
            provide additional security under
      the loan facility or prepay an amount of the loan facility as necessary to
      maintain the fair market value of our vessels securing the loan facility
      at not less than specified percentages (rangingfrom 100% to 140%) ofthe principal amount outstanding
      under the loan facility;




·
            maintain available cash on a
      consolidated basis of not less than$25million;




15







·
            maintain positive working capital
      on a consolidated basis; and




·
            maintain a ratio of
      shareholderequityto total assets of not lessthan
      20%.




Under the terms of our loan facilities,
we may not makedistributionsto our shareholders if we do not
satisfy these covenants or receive waivers from the lenders.  We
cannot assure you that we will be able to satisfy these covenants in the
future.




Due to these restrictions, we may need
to seek permission from our lenders in order to engage in some corporate
actions.  Ourlenders’interests may be different from ours
and we cannot guarantee that we will be able to obtain our lenders’ permission
when needed.  This may prevent us from taking actions that are in our
best interest.





Our debt service obligations require us
to dedicate a substantial portion of our cash flows from operations to required
payments on indebtedness and could limit our ability to obtain additional
financing, make capital expenditures and acquisitions, and carry out other
general corporate activities in the future.  These obligations may
also limit our flexibility in planning for,or reacting to, changes in our business
and the shipping industry or detract from our ability to successfully withstand
a downturn in our business or the economy generally.  This may place
us at a competitive disadvantage to other less leveraged
competitors.





We
have entered into a total return swap transaction in respect of our shares and a
decrease in our share price could adversely affect our financial
results.




In October 2007 the Board of Directors
of the Company approved a share repurchase program of up to seven million
shares. Initially the program is to be financed through the use of Total Return
Swaps (“TRS”) indexed to the Company’s own shares and maturing within 12 months.
Under the arrangementsthe
counterparty acquires shares in the Company, and the Company carries the risk of
fluctuations in the share price of the acquired shares. The settlement amount
for each TRS transactionwill be (A)
the proceeds on sale of the shares plus all dividends received by the
counterparty while holding the shares, less (B) the cost of purchasing the
shares and the counterparty’s financing costs. Settlement will be either a
payment from or to the counterparty, depending on whether A is more or less than
B.The fair value of each
TRS is recognized as an asset or liability, with the changes in fair values
recognized in theconsolidated statement of operations.Asat March 11 2008
approximately692,000 of
our shares were held under this arrangement. Should our share price fall
materially below the level at which the shares were acquired the TRS mark to
market valuations could adversely affect our results.








Risks
Relating to Our Common Shares




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 and other
obligations.




We are a holding company, and have no
significant assets other than the equity interests in our
subsidiaries.  Our subsidiaries own all of our vessels, and payments
under our charter agreements are made to our subsidiaries.  As a
result, our ability to make distributions to our shareholders depends on the
performance of our subsidiaries and their ability to distribute funds to
us.  The ability of a subsidiary to make these distributions could be
affected by a claim or other action by a third party or by the law of their
respective jurisdiction of incorporation which regulates the payment of
dividends by companies.  If we are unable to obtain funds from our
subsidiaries, we will not be able to pay dividends to our
shareholders.


16





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




We are aBermudaexempted company.  Bermuda
law may not as clearly establish your rights and the fiduciary responsibilities
of our directors as do statutes and judicial precedent in someUnited Statesjurisdictions.  In addition,most ofour directors and officers are not
resident in theUnited
Statesand the majority of
our assets are located outside of theUnited States.  As a result, investors may
have more difficulty in protecting their interests and enforcing judgments in
the face of actions by our management, directors or controlling shareholders
than would shareholders of a corporation incorporated in a jurisdiction in theUnited States.




Our
major shareholder, Hemen, may be able to influence us, including the outcome of
shareholder votes with interests that may be different from yours.




Asof March 11 2008, Hemenowned approximately41.4%of our outstanding common
shares.  As a result of its ownership of our common shares, Hemen may
influence our business, including the outcome of any vote of our
shareholders.  Hemen also currently beneficially owns substantial
stakes in Frontline,GoldenOcean,SeadrillandDeepSea.  The interests of Hemen may
be different from your interests.





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





We
are subject to Section 404 of the Sarbanes-Oxley Act of 2002, which requires us
to include in our annual report on Form 20-F our management’s report on, and
assessment of the effectiveness of, our internal controls over financial
reporting. In addition, first effective in this Annual Report for the fiscal
year ended December 31 2007, our independent registered public accounting firm
is required to attest to the effectiveness of our internal controls over
financial reporting. If we fail to maintain the adequacy of our internal
controls over financial reporting, we will not be in compliance with all of the
requirements imposed by Section 404. Any failure to comply with Section 404
could result in an adverse reaction in the financial marketplace due to a loss
of investor confidence in the reliability of our financial statements, which
ultimately could harm our business and could negatively impact the market price
of our common stock. We believe the total cost of our initial compliance and the
future ongoing costs of complying with these requirements may be
substantial.





ITEM
      4.
            INFORMATION
      ON THE COMPANY




A.
HISTORY AND DEVELOPMENT OF THE COMPANY




The
Company





We
are Ship Finance International Limited, a Bermuda based shipping company that is
engaged primarily in the ownership and operation of vessels and offshore related
assets.  We are also involved in the charter, purchase and sale of
assets.  We were incorporated in Bermuda on October 10, 2003 (Company
No. EC-34296). Our registered and principal executive offices are located at
Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda, and our
telephone number is +1 (441) 295-9500.


17


We
operate through subsidiaries and partnerships located in Bermuda, Cyprus,
Liberia, Norway, Delaware, Singapore and the Marshall Islands.


We are an
international ship owning company with one of the largest asset bases across the
maritime and offshore industries. Our assets currently consist of 33 oil
tankers, eight OBOs currently configured to carry drybulk cargo, one drybulk
carrier, eight container vessels, two jack-up drilling rigs and six offshore
supply vessels.





Additionally
we have contracted to purchase the following vessels:





·
            three
      newbuilding seismic vessels, scheduled for delivery in
      2008-09;




·
            two
      newbuilding Capesize drybulk carriers, scheduled for delivery in
      2008-09;




·
            two
      newbuilding Suezmax oil tankers, scheduled for delivery in
      2009;




·
            five
      newbuilding container vessels, scheduled for delivery in 2010;
      and




·
            two
      newbuilding chemical tankers, scheduled for delivery in
    2008




We
have secured charter arrangements for each of our new acquisitions apart from
the two Suezmax tankers and the five container vessels, which we are currently
marketing for medium to long-term employment.





Our
customers currently include Frontline, Horizon Lines Inc. (“Horizon Lines”),
Golden Ocean, Seadrill, SCAN Geophysical ASA (“SCAN”), Taiwan Maritime
Transportation Co. Ltd. (“TMT”), Bryggen Shipping & Trading AS (“Bryggen”),
Heung-A Shipping Co. Ltd. (“Heung-A”), Deep Sea and Compania Sud Americana de
Vapores (“CSAV”).  Existing charters for most of our vessels range
from five to 19 years, providing us with significant, stable base cash flows and
high asset utilization.  Some of our charters include purchase options
on behalf of the charterer, which if exercised would reduce our remaining
charter coverage and contracted cash flow.





Our
primary objective is to continue to grow our business through accretive
acquisitions across a diverse range of marine and offshore asset classes, in
order to increase our dividend per share.In doing so,
our strategy
is to generate stable and increasing cash flows by chartering our assets undermediumto long-term
bareboator
timecharters.





History
of the Company





We
were formed in 2003 as a wholly owned subsidiary of Frontline, which is one of
the largest owners and operators of large crude oil tankers in the world. On May
28 2004 Frontline announced the distribution of 25% of our common shares to its
ordinary shareholders in a partial spin off, and our common shares commenced
trading on the New York Stock Exchange under the ticker symbol “SFL” on June 17
2004. Frontline subsequently made six further dividends of our shares to its
shareholders, including the final distribution in March 2007. Frontline’s
ownership in our Company is now less than one per cent.




Pursuant
to an agreement entered into in December 2003, we purchased from Frontline,
effective January 2004, a fleet of 47 vessels, comprising 23 Very Large Crude
Carriers (“VLCCs”), including an option to acquire one VLCC, 16 Suezmax tankers
and eight OBOs.
  Since
January 1 2005 we have diversified our asset base from the initial two asset
types - crude oil tankers and OBOs - to eight asset types, now including
container vessels, drybulk carriers, chemical tankers, jack-up drilling rigs,
seismic vessels and offshore supply vessels.   18


During
2006 and 2007 we have reduced our non-double hull tanker fleet from 18 vessels
to nine vessels including the VLCCs Front Vanadisand Front Sabang, which we
have sold on hire-purchase terms scheduled to expire in November 2010 and
October 2011, respectively.





Most
of our oil tankers and OBOs are chartered to the Frontline Charterers under
longer term time charters that have remaining terms that range from five to 19
years. The Frontline Charterers, in turn, charter our vessels to third parties.
The daily base charter rates payable to us under the charters have been fixed in
advance and will decrease as our vessels age, and the Frontline Charterers have
the right to terminate the charter for non-double hull vessels from
2010.





Frontline
Shipping was initially capitalized with $250 million in cash provided by
Frontline to support its obligation to make payments to us under the charters.
Frontline Shipping II was capitalized with approximately $21 million in cash. As
a result of sales and acquisitions, the current combined capitalization of the
Frontline Charterers is $221 million.





We
have entered into charter ancillary agreements with the Frontline Charterers,
our vessel-owning subsidiaries and Frontline, which remain in effect until the
last long term charter with the relevant Frontline Charterer terminates in
accordance with its terms. Frontline has guaranteed the Frontline Charterers’
obligations under the charter ancillary agreements. Under the terms of the
charter ancillary agreements, beginning with the final 11-month period in 2004
and for each calendar year after that, the Frontline Charterers have agreed to
pay us a profit sharing payment equal to 20% of the charter revenues they
realize above specified threshold levels, paid annually and calculated on an
average daily TCE basis.  After 2010, all of our non-double hull
vessels will be excluded from the annual profit sharing payment
calculation.





We
have also entered into agreements with Frontline Management to provide fixed
rate operation and maintenance services for the vessels on time charter to the
Frontline Charterers and for administrative support services. These agreements
enhance the predictability and stability of our cash flows, by substantially
fixing all of the operating expenses of our crude oil tankers and
OBOs.





There
are also profit sharing agreements relating to the charters of the jack-up
drilling rigs West
Ceres and West
Prospero, where we will receive profit shares calculated as a percentage
of the annual earnings above specified thresholds relating to milestones set
under the relevant charters. These profit sharing agreements become effective in
2009.





The
charters for two jack-up drilling rigs, three drybulk carriers, five container
vessels, three seismic vessels, six offshore supply vessels, two chemical
tankers and the two VLCCs Front Vanadis and Front Sabang are all on
bareboat terms, under which the respective charterer will bear all operating and
maintenance expenses.





19


Acquisitions
and Disposals
  We purchased our initial
46 vessel owning subsidiaries from Frontline on January 1 2004 for a total
purchase price of $1,062 million.  The purchase price was calculated
as the book value of vessels owned by the subsidiaries of $2,048 million less
related debt balances and other liabilities of $986 million which we
assumed.  The purchase was partly funded by an equity contribution of
$525 million from Frontline. Additionally we purchased for $8.4 million
Frontline’s option to acquire additional
VLCC.  This price represents the book value of the option as recorded
previously in Frontline’s accounts.








Acquisitions





In
the year ended December 31 2005 the following vessels and vessel owning entities
were acquired or delivered to us as discussed below:





·
            In
      January 2005 we exercised an option to acquire the VLCC Oscilla and the vessel
      was delivered to us on April 4 2005. The purchase price paid to acquire
      the vessel was equal to the outstanding mortgage debt under the four loan
      agreements between lenders and the company owning the vessel. In addition,
      we made a payment of $15 million to Frontline to reflect the fact that the
      original purchase price was set assuming delivery to us on January 1 2004,
      whereas delivery did not occur until April 4
  2005.





·
            Between
      January and March 2005 we acquired three additional double hull VLCCs from
      Frontline for an aggregate purchase price of $294
  million.





·
            In
      May 2005 we entered into an agreement with parties affiliated with Hemen
      to acquire two vessel owning companies, each owning one 2005 built
      containership, for a total consideration of $99
  million.





·
            In
      May 2005 we agreed to acquire three Suezmax tankers from Frontline for an
      aggregate amount of $92 million.





·
            In
      June 2005 we entered into an agreement with parties affiliated with Hemen
      to acquire two vessel owning companies, each owning one 2004 built VLCC,
      for total consideration of $184
million.





In
the year ended December 31 2006 the following vessels and vessel owning entities
were acquired or delivered to us:





·
            In
      January 2006 we acquired the VLCC Front Tobago from
      Frontline for consideration of $40
million.





·
            In
      April 2006 we entered into an arrangement with Horizon Lines under which
      we acquired five 2,824 twenty foot equivalent unit (“TEU”) container
      vessels for consideration of approximately $280 million. Under this
      agreement Horizon
      Hunter was delivered in November 2006, Horizon Hawk in March
      2007, Horizon
      Eagle and Horizon
      Falcon in April 2007 and the final vessel, Horizon Tiger, in May
      2007.





·
            In
      June 2006 we acquired the jack-up drilling rig West Ceres from
      SeaDrill Invest I Limited (“SeaDrill Invest I”), a wholly owned subsidiary
      of Seadrill, for total consideration of $210
  million.





·
            In July 2006 we
      entered into an agreement to acquire, through our wholly owned subsidiary
      Front Shadow Inc. (“Front Shadow”), the Panamax drybulk carrier Golden
      Shadow from
      Golden
      Ocean for a total consideration of $28 million.  The vessel was
      delivered to us in September
    2006.






·
              In
      November 2006 we acquired two newbuilding Suezmax contracts from Frontline
      with delivery expected in the first quarter of 2009 and third quarter of
      2009.
  20


In
the year ended December 31 2007 we agreed to acquire the following vessels or
newbuildings:





·
            In
      January 2007 we entered into an agreement to acquire a newbuilding jack-up
      drilling rig from SeaDrill Invest II Limited (“SeaDrill Invest II”), a
      wholly owned subsidiary of Seadrill. The purchase price was $210 million
      and the vessel was delivered in June
2007.





·
            In
      February 2007 we agreed to acquire two newbuilding Capesize vessel
      contracts from Golden Ocean for a total delivered cost of approximately
      $160 million. Delivery from the shipyard is scheduled in the fourth
      quarter of 2008 and first quarter of
2009.





·
            In
      March 2007 we entered into an agreement to acquire three newbuilding
      seismic vessels, including complete seismic equipment, from SCAN for an
      aggregate amount of $210 million. The vessels are scheduled to be
      delivered in 2008 and 2009.





·
            In
      June 2007 we agreed to acquire five newbuilding container vessels with
      scheduled delivery in 2010 for an aggregate construction cost of
      approximately $190 million.





·
            In
      June 2007 we acquired 10% of the equity of Seachange Maritime LLC, a Miami
      based company that owns and charters
  containerships.





·
            In
      July 2007 we entered into an agreement to acquire the 1,700 TEU container
      vessel Montemar
      Europa for a net consideration of $33 million. The vessel, built in
      2003, was delivered to us in August
2007.





·
            In
      August 2007 we entered into an agreement to acquire five offshore supply
      vessels from Deep Sea for a total delivered price of $199 million. The
      vessels, all built in 2007, were delivered in September and October
      2007.





·
            In
      November 2007 we entered into an agreement to acquire a further two
      offshore supply vessels from Deep Sea for a total delivered price of $126
      million. The vessels, built in 1998 and 1999, were delivered to us in
      January 2008.





During
2008 we have so far agreed to acquire the following vessels:





·
            In
      March 2008 we entered into an agreement to acquire two newbuilding
      chemical tankers from Bryggen for a total consideration of $60 million.
      The vessels are expected to be delivered during
  2008.







21





Disposals





In
the year ended December 31 2005 we sold the following vessels:




·
              In
      January 2005 we sold the Suezmax tanker Front Fighter for $68
      million.  The vessel was delivered to its new owner in March
      2005.





·
            In
      May 2005 we sold the three Suezmax tankers, Front Lillo, Front
      Emperor and Front Spirit, for a total
      consideration of $92 million. These vessels were delivered to their new
      owners in June 2005.





·
            In
      August 2005 we sold the Suezmax tanker Front Hunter for net
      proceeds of $71 million.





·
            In
      November 2005 the bareboat charterer of the VLCC Navix Astral exercised
      an option to purchase the vessel for approximately $41 million. The vessel
      was delivered to its new owner in January
2006.





In
the year ended December 31 2006 we sold the following vessel:





·
            In
      December 2006 we sold the VLCC Front Tobago for $45
      million.





In
the year ended December 31 2007 we sold the following vessels:





·
            In
      January 2007 we sold the single-hull Suezmax tanker Front Transporter for
      $38 million.  The vessel was delivered to its new owner in March
      2007.





·
            In
      January 2007 we sold five single-hull Suezmax tankers to Frontline for an
      aggregate amount of $184 million.  The vessels were delivered in
      March 2007.





·
            In
      May 2007 we re-chartered the single-hull VLCC Front Vanadis to an
      unrelated third party. The new charter is in the form of a hire-purchase
      agreement, where the vessel is chartered to the buyer for a 3.5 year
      period, with a purchase obligation at the end of the
    charter.





·
            In
      December 2007 agreed the sale of two non-double hull Suezmax tankers for
      $80 million. The vessels were delivered in December 2007 and January
      2008.





·
            In
      December 2007 we agreed to sell back to Deep Sea one of the offshore
      supply vessels acquired from them earlier in the year for a total
      consideration of $29 million. The vessel was delivered to Deep Sea in
      January 2008.





During
2008 we have so far agreed to sell the following vessels:





·
            In
      March 2008 we agreed to re-charter the single-hull VLCC Front Sabang to an
      unrelated third party. The new charter is in the form of a hire-purchase
      agreement, where the vessel is chartered to the buyer for a 3.5 year
      period with a purchase obligation at the end of the charter. The new
      charter is expected to commence in April
2008.





B.
BUSINESS OVERVIEW





Our
Business Strategies




Our primary objectives are to profitably
grow our business and increase distributable cash flow per share by pursuing the
following strategies:




·
              Expand our
      asset base. We have increased, and intend to further
      increase, the size of our asset base through timely and selective
      acquisitions of additional assets that we believe will be accretive to
      long-term distributable cash flow per share.  We will seek to
      expand our asset base through placing newbuilding orders, acquiring new
      and modern second-hand vessels and entering into medium or long-term
      charter arrangements. From time to time we may also acquire vessels with
      no or limited initial charter coverage. We believe that by entering into
      newbuilding contracts or acquiring modern second-hand vessels or rigs and
      leveraging the relationships with our existing customers, we can provide
      for long-term growth of our assets and continue to decrease the average
      age of our fleet.  In addition, we will seek to enter into sale
      and lease back transactions with new customers, as we believe we can
      provide attractive alternatives for outsourcing of vessel ownership for
      these customers.


22






·
            Diversify
      our asset base.  Since January 1 2005 we have diversified
      our asset base from two asset types, crude oil tankers and OBO carriers,
      to eight asset types including container vessels, drybulk carriers,
      chemical tankers, jack-up drilling rigs, offshore supply vessels and
      seismic vessels.  We believe that there are several attractive
      markets that could provide us the opportunity to continue to diversify our
      asset base.  These markets include vessels and assets that are
      of long-term strategic importance to certain operators in the shipping
      industry. We believe that the expertise and relationships of our
      management and our relationship and affiliation with Mr. John Fredriksen
      could provide us with incremental opportunities to expand our asset
      base.




·
            Expand and
      diversify our customer relationships.  Since January 1
      2005 we have increased our customer base from one to ten customers and
      have expanded our relationship with our original customer, Frontline,
      through the purchase of additional vessels.  Of these ten
      customers, Frontline, Golden Ocean, Deep Sea and Seadrill are directly or
      indirectly controlled by Mr. John Fredriksen.  We intend to
      continue to expand our relationships with our existing customers and also
      to add new customers, as companies servicing the international shipping
      and offshore oil exploration markets continue to expand their use of
      chartered-in assets to add
capacity.




·
            Pursue
      medium to long-term fixed-rate charters.  We intend to
      continue to pursue medium to long-term fixed rate charters, which provide
      us with stable future cash flows.  Our customers typically
      employ long-term charters for strategic expansion as most of their assets
      are typically of strategic importance to certain operating pools,
      established trade routes or dedicated oil-field
      installations.  We believe that we will be well positioned to
      participate in their growth.  In addition, in markets where
      lower relative long-term charter rates are available, we will also seek to
      enter into charter agreements that provide for profit sharing so that we
      can generate incremental revenue and share in the upside during strong
      markets.







Customers




The
Frontline Charterers have been our principal customers since we were spun-off
from Frontline in 2004. We anticipate that the percentage of our business
attributable to the Frontline Charterers will diminish as we continue to expand
our business and our customer base.







Competition




We
currently operate or will operate in several segments of the shipping and
offshore industry, including oil transportation, drybulk shipments, chemical
transportation, container transportation, drilling rigs, offshore supply vessels
and seismic exploration.


23





The
markets for international seaborne oil transportation services, drybulk
transportation services and container transportation services are highly
fragmented and competitive. Seaborne oil transportation services are generally
provided by two main types of operators: major oil companies or captive fleets
(both private and state-owned) and independent shipowner
fleets.


In
addition, several owners and operators pool their vessels together on an ongoing
basis, and such pools are available to customers to the same extent as
independently owned and operated fleets. Many major oil companies and other
commodity carriers also operate their own vessels and use such vessels not only
to transport their own cargoes but also to transport cargoes for third parties,
in direct competition with independent owners and operators.





Container
vessels are generally operated by container logistics companies, where the
vessels are used as an integral part of their services. Therefore, container
vessels are typically chartered more on a period basis and single voyage
chartering is less common. As the market has grown significantly over recent
decades, we expect in the future to see more vessels chartered by container
logistics companies on a shorter term basis, particularly in the smaller
segments.





Our
jack-up drilling rigs, seismic exploration vessels and offshore supply vessels
are chartered out on long-term year charters to contractors, and we are
therefore not directly exposed to the short term fluctuation in these markets.
Jack-up drilling rigs, seismic exploration vessels and offshore supply vessels
are normally chartered by oil companies on a shorter term basis linked to
area-specific well drilling or oil exploration activities, but there have also
been longer period charters available when oil companies want to cover their
longer term requirements for such vessels. Seismic exploration vessels and
offshore supply vessels are self-propelled, and can therefore easily move
between geographic areas. Jack-up drilling rigs are not self-propelled, but it
is common to move these assets over long distances on heavy-lift vessels.
Therefore, the markets and competition for these rigs are effectively
world-wide.





Competition
for charters in all the above segments is intense and is based upon price,
location, size, age, condition and acceptability of the vessel/rig and its
manager. Competition is also affected by the availability of other size
vessels/rigs to compete in the trades in which we engage. Most of our existing
vessels are chartered at fixed rates on a long-term basis and are thus not
directly affected by competition in the short term. However, the tankers and
OBOs chartered to the Frontline Charterers and our two jack-up drilling rigs are
subject to profit sharing agreements, which will be affected by competition
experienced by the charterers.







Risk
of Loss and Insurance




Our
business is affected by a number of risks, including mechanical failure,
collisions, property loss to the vessels, cargo loss or damage and business
interruption due to political circumstances in foreign countries, hostilities
and labor strikes. In addition, the operation of any ocean-going vessel is
subject to the inherent possibility of catastrophic marine disaster, including
oil spills and other environmental mishaps, and the liabilities arising from
owning and operating vessels in international trade.





Except
for vessels whose charter specifies otherwise, Frontline Management and our
third-party managers are responsible for arranging for the insurance of our
vessels in line with standard industry practice. In accordance with that
practice, we maintain marine hull and machinery and war risks insurance, which
include the risk of actual or constructive total loss, and protection and
indemnity insurance with mutual assurance associations. From time to time we
carry insurance covering the loss of hire resulting from marine casualties in
respect of some of our vessels. Currently, the amount of coverage for liability
for pollution, spillage and
leakage available to us on commercially reasonable terms through protection and
indemnity associations and providers of excess coverage is up to $1 billion
per tanker per occurrence. Protection and indemnity associations are mutual
marine indemnity associations formed by shipowners to provide protection from
large financial loss to one member by contribution towards that loss by all
members.


24






We
believe that our current insurance coverage is adequate to protect us against
the accident-related risks involved in the conduct of our business and that we
maintain appropriate levels of environmental damage and pollution insurance
coverage, consistent with standard industry practice. However, there is no
assurance that all risks are adequately insured against, that any particular
claims will be paid, or that we will be able to procure adequate insurance
coverage at commercially reasonable rates in the future.







Environmental
Regulation and Other Regulations




Government
regulations and laws significantly affect the ownership and operation of our
crude oil tankers, OBOs, drybulk carriers, chemical tankers, rigs,
containerships, offshore supply vessels and seismic vessels.  We are
subject to various international conventions, laws and regulations in force in
the countries in which our vessels may operate or are registered.





A
variety of government, quasi-governmental and private organizations subject our
assets to both scheduled and unscheduled inspections.  These
organizations include the local port authorities, national authorities, harbor
masters or equivalent, classification societies, flag state and charterers,
particularly terminal operators, oil companies and drybulk and commodity
owners.  Some of these entities require us to obtain permits, licenses
and certificates for the operation of our assets.  Our failure to
maintain necessary permits or approvals could require us to incur substantial
costs or temporarily suspend operation of one or more of the assets in our
fleet.





We
believe that the heightened levels of environmental and quality concerns among
insurance underwriters, regulators and charterers have led to greater inspection
and safety requirements on all vessels and may accelerate the scrapping of older
vessels throughout the industry, particularly tankers.  Increasing
environmental concerns have created a demand for tankers that conform to the
stricter environmental standards.  We are required to maintain
operating standards for all of our vessels emphasizing operational safety,
quality maintenance, continuous training of our officers and crews and
compliance with applicable local, national and international environmental laws
and regulations.  We believe that the operation of our vessels will be
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 results in significant oil pollution or otherwise causes
significant adverse environmental impact could result in additional legislation
or regulation that could negatively affect our profitability.







Flag
State




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 meetings of the International Maritime Organization. Our
vessels are flagged in
Liberia, Singapore, the Bahamas, Cyprus, the Marshall Islands, Norway, France,
the U.S.A., Panama, Hong Kong and the Isle of Man and vessels flagged in these
states generally receive a good assessment in the shipping
industry.


25




International
Maritime Organization




The
International Maritime Organization, or IMO (the United Nations agency for
maritime safety and the prevention of pollution by ships), has adopted the
International Convention for the Prevention of Marine Pollution from Ships,
1973, as modified by the Protocol of 1978 relating thereto, which has been
updated through various amendments, or the MARPOL Convention. The MARPOL
Convention implements environmental standards including oil leakage or spilling,
garbage management, as well as the handling and disposal of noxious liquids,
harmful substances in packaged forms, sewage and air emissions. These
regulations, which have been implemented in many jurisdictions in which our
vessels operate, provide, in part, that:




·
            25-year
      old tankers must be of double hull construction or of a mid-deck design
      with double-sided construction,
unless:


(1)
            they
      have wing tanks or double-bottom spaces not used for the carriage of oil
      which cover at least 30% of the length of the cargo tank section of the
      hull or bottom; or


(2)
            they
      are capable of hydrostatically balanced loading (loading less cargo into a
      tanker so that in the event of a breach of the hull, water flows into the
      tanker, displacing oil upwards instead of into the
sea);


·
            30-year
      old tankers must be of double hull construction or mid-deck design with
      double-sided construction; and




·
            all
      tankers will be subject to enhanced
inspections.




Also, under
IMO regulations, a tanker must be of double hull construction or a mid-deck
design with double-sided construction or be of another approved design ensuring
the same level of protection against oil pollution if the tanker:




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




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




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




Our
vessels are also subject to regulatory requirements, including the phase-out of
single hull tankers, imposed by the IMO. Effective September 2002, the IMO
accelerated its existing timetable for the phase-out of single hull oil tankers.
At that time, these regulations required the phase-out of most single hull oil
tankers by 2015 or earlier, depending on the age of the tanker and whether it
has segregated ballast tanks.





Under
the regulations, the flag state may allow for some newer single hull ships
registered in its country that conform to certain technical specifications to
continue operating until the 25th anniversary of their delivery. Any port state,
however, may deny entry of those single hull tankers that are allowed to operate
until their 25th anniversary to ports or offshore terminals. These regulations
have been adopted by over 150 nations, including many of the jurisdictions in
which our tankers operate.





As
a result of the oil spill in November 2002 relating to the loss of the
MT Prestige, which was
owned by a company not affiliated with us, in December 2003 the Marine
Environmental Protection Committee of the IMO, or MEPC, adopted an amendment to
the MARPOL Convention, which became effective in April 2005. The amendment
revised an existing regulation
13G accelerating the phase-out of single hull oil tankers and adopted a new
regulation 13H on the prevention of oil pollution from oil tankers when carrying
heavy grade oil. Under the revised regulation, single hull oil tankers were
required to be phased out no later than April 5 2005 or the anniversary of the
date of delivery of the ship on the date or in the year specified in the
following table:


26











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






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





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





Vessel
      Name
            Vessel
      type
            Vessel Category
            Year
      Built
            IMO phase
      out
            Flag
      state exemptionEdinburgh
            VLCC
            DS
            1993
            2010
            2018Front
      Ace
            VLCC
            SH
            1993
            2010
            2015Front
      Duke
            VLCC
            SH
            1992
            2010
            2015Front
      Duchess
            VLCC
            SH
            1993
            2010
            2015Front
      Highness
            VLCC
            SH
            1991
            2010
            2015Front
      Lady
            VLCC
            SH
            1991
            2010
            2015Front
      Lord
            VLCC
            SH
            1991
            2010
            2015Front
      Sabang
            VLCC
            SH
            1990
            2010
            2015Front
      Vanadis
            VLCC
            SH
            1990
            2010
            2015





Under
regulation 13H, the double sided tanker will be allowed to continue operations
until its 25thanniversary.


27


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





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


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


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





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




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




1.
            crude
      oils having a density at 15oC higher than 900 kg/m3;


2.
            fuel
      oils having either a density at 15oC higher than 900 kg/ m3 or
      a kinematic viscosity at 50oC higher than 180 mm2/s;
      or


3.
            bitumen,
      tar and their emulsions.





Under
regulation 13H, the flag state may allow continued operation of oil tankers of
5,000 dwt and above carrying crude oil with a density at 15oC higher than 900
kg/m(3) but
lower than 945 kg/m(3),
that  conform to certain technical specifications and if, in the opinion of
the flag state, the ship is fit to continue such operation, having regard to the
size, age, operational area and structural conditions of the ship and provided
that the continued operation shall not go beyond the date on which the ship
reaches 25 years after the date of its delivery.  The flag state may
also allow continued operation of a single hull oil tanker of 600 dwt and above
but less than 5,000 dwt carrying HGO as cargo if, in the opinion of the flag
state, the ship is fit to continue such operation, having regard to the size,
age, operational area and structural conditions of the ship, provided that the
operation shall not go beyond the date on which the ship reaches 25 years after
the date of its delivery.





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





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





Revised
Annex 1 to the MARPOL Convention entered into force in January 2007. Revised
Annex 1 incorporates various amendments adopted since the MARPOL Convention
entered into force in 1983, including the amendments to regulation 13G
(regulation 20 in the revised Annex)
and regulation 13H (regulation 21 in the revised Annex). Revised Annex 1 also
imposes construction requirements for oil tankers delivered on or after January
1 2010. A further amendment to revised Annex 1 includes an amendment to the
definition of HGO that will broaden the scope of regulation 21. On August 1
2007, regulation 12A (an amendment to Annex I) came into force requiring fuel
oil
tanks to be located inside the double hull in all ships with an aggregate oil
fuel capacity of 600m(3)
and above which are delivered on or after August 1 2010, including ships for
which the building contract is entered into on or after August 1 2007 or, in the
absence of a contract, for which the keel is laid on or after February 1
2008.


28




Air
Emissions




In
September 1997 the IMO adopted Annex VI to the International Convention for
the Prevention of Pollution from Ships to address air pollution from ships.
Annex VI was ratified in May 2004 and became effective May 19 2005. Annex VI
sets limits on sulfur oxide and nitrogen oxide emissions from ship exhausts and
prohibits deliberate emissions of ozone depleting substances, such
as  chlorofluorocarbons. Annex VI also includes a global cap on the
sulfur content of fuel oil and allows for special areas to be established with
more stringent controls on sulfur emissions.  We believe that all our
vessels are currently compliant in all material aspects with these
regulations.  Additional or new conventions, laws and regulations may
be adopted that could adversely affect our business, cash flows, results of
operations and financial condition.





In
February 2007 the United States proposed a series of amendments to Annex VI
regarding particulate matter, NOx and Sox emission standards. The proposed
emission program would reduce air pollution from ships by establishing a new tie
of performance-based standards for diesel engines on all vessels and stringent
emission requirements for ships that operate in coastal areas with air quality
problems. On June 28 2007 the World Shipping Council announced its support for
these amendments. If these amendments are implemented, we may incur costs to
comply with the proposed standards.







Safety
Requirements




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





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





The
ISM Code requires that vessel managers or operators obtain a safety management
certificate for each vessel they operate.  This certificate evidences
compliance by a vessel's management with 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.  The appointed ship managers
have obtained documents of compliance for their offices and safety management
certificates for
all of our vessels for which certificates are required by the IMO. As required,
these documents of compliance and safety management certificates are renewed
annually.


29





Non-compliance
with the ISM Code and other IMO regulations may subject the shipowner or
bareboat charterer to increased liability, may lead to decreases in available
insurance coverage for affected vessels and may result in the denial of access
to, or detention in, some ports.  The U.S.Coast
Guard and European Union (EU) 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 EU ports, as the case may be.





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







Ballast Water
Requirements




TheIMO adopted an International Convention
for the Control and Management of Ship’s Ballast Water and Sediments, 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 enter into force until 12 months after it has been
adopted by 30 states, the combined merchant fleets of which represent not less
than 35% of the gross tonnage of the world’s merchant
shipping.







Oil Pollution
Liability




Although
the United States is not a party to these conventions, many countries have
ratified and follow the liability plan adopted by the IMO and set out in the
International Convention on Civil Liability for Oil Pollution Damage of 1969, as
amended in 2000, or the CLC. Under this convention and depending on whether the
country in which the damage results is a party to the CLC, a vessel’s registered
owner is strictly liable for pollution damage caused in the territorial waters
of a contracting state by discharge of persistent oil, subject to certain
complete defenses. The limits on liability outlined in the 1992 Protocol use the
International Monetary Fund currency unit of Special Drawing Rights, or SDR.
Under an amendment to the 1992 Protocol that became effective on November 1 2003
for vessels of 5,000 to 140,000 gross tons (a unit of measurement for the total
enclosed spaces within a vessel), liability will be limited to approximately
4.51 million SDR plus 631 SDR for each additional gross ton over 5,000. For
vessels over 140,000 gross tons, liability will be limited to 89.77 million SDR.
The exchange rate between SDRs and U.S. Dollars was 0.620847 SDR per U.S. dollar
on March 5 2008. As the convention calculates liability in terms of a basket of
currencies, these figures are based on currency exchange rates on March 5 2008.
The right to limit liability is forfeited under the CLC where the spill is
caused by the owner’s actual fault and under the 1992 Protocol where the spill
is caused by the owner’s intentional or reckless conduct. Vessels trading to
states that are parties to these conventions must provide evidence of insurance
covering the liability of the owner. In jurisdictions where the 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 CLC.
We believe that our insurance will cover the liability under the plan adopted by
the IMO.





In
2005 the European Union adopted a directive on pollution caused by ships,
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 increase civil liability claims.


30


United
StatesRequirements




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





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




·
            natural resource damages and
      related assessment costs;




·
            real and personal property
      damages;




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




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




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





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





OPA requires owners and operators of
vessels to establish and maintain with the U.S. Coast Guard evidence of
financial responsibility sufficient to meet the limit of their potential strict
liability under the act. The U.S. Coast Guard has enacted regulations requiring
evidence of financial responsibility in the amount of $1,500 per gross ton for
tankers, coupling the former OPA limitation on liability of $1,200 per gross ton
with the CERCLA liability limit of $300 per gross ton. The U.S. Coast Guard has
indicated that it expects to adopt regulations requiring evidence of financial
responsibility in amounts that reflect the higher limits of liability imposed by the July 2006
amendments to OPA, as described above.  Under the regulations,
evidence of financial responsibility may be demonstrated by insurance, surety
bond, self-insurance or guaranty. Under OPA regulations, an owner or operator of
more than one tanker is required to demonstrate evidence of financial
responsibility for the entire fleet in an amount equal only to the financial
responsibility requirement of the tanker having the greatest maximum strict
liability under OPA and CERCLA.We have provided such evidence and received certificates of financial
responsibility from the U.S. Coast Guard for each of our vessels required to
have one.


31





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





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





Owners or operators of tankers operating
in the waters of theUnited
Statesmust file vessel
response plans with the U.S. Coast Guard, and their tankers are required to
operate in compliance with their U.S. Coast Guard approved plans. These response
plans must, among other things:




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




·
            describe crew training and drills;
      and




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




We have obtained vessel response plans
approved bythe U.S.Coast Guard for our vessels
operating in the waters of theUnited States. In addition, the U.S. Coast Guard has
announced it intends to propose similar regulations requiring certain vessels to
prepare response plans for the release of hazardous
substances.





In addition, theUnited StatesClean Water Act prohibits the discharge
of oil or hazardous substances inUnited Statesnavigable waters and imposes strict
liability in the form of penalties for unauthorized discharges.  The
Clean Water Act also imposes substantial liability for the costs of removal,
remediation and damages and complements the remedies available under OPA and
CERCLA, discussed above.  TheUnited StatesEnvironmental Protection Agency, or EPA,
has exempted the discharge of ballast water and other substances incidental to
the normal operation of vessels inU.S.ports from Clean Water Act 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 intheEPA’s regulations for all
discharges incidental to the normal operation of a vessel as of September 30
2008, and directing the EPA to develop a system for regulating all discharges
from vessels by that date.  The EPA filed a notice of appeal of this
decision and, if the EPA’s appeals areunsuccessful andtheexemption is repealed, our vessels may
be subject to Clean Water Act permit requirements that could include ballast
water treatment obligations that could increase the cost of operating in theUnited States.  For example, this could
require the installation of equipment on our vessels to treat ballast water before it is
discharged or the implementation of other port facility disposal arrangements or
procedures at potentially substantial cost, and/or otherwise restrict our
vessels from enteringU.S.waters.On June 21 2007 the EPA provided notice
of its intention to develop a permit program for discharge of ballast water
incidental to the normal operations of vessels and solicited
comments.


32







Other
Regulations




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





In addition, mostU.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 thanU.S.federal law.





The U.S. Clean Air Act of 1970, as
amended by the Clean Air Act Amendments of 1977 and 1990, or the CAA, requires
the EPA to promulgate standards applicable to emissions of volatile organic
compounds and other air contaminants. Our vessels are subject to vapor control
and recovery requirements for certain cargoes when loading, unloading,
ballasting, cleaning and conducting other operations in regulated port
areas.  Our vessels that operate in such port areas with restricted
cargoes are equipped with vapor recovery systems that satisfy these
requirements.  The CAA also requires states to draft State
Implementation Plans, or SIPs, designed to attain national health-based air
quality standards in primarily major metropolitan and/or industrial areas.
Several SIPs regulate emissions resulting from vessel loading and unloading
operations by requiring the installation of vapor control equipment. As
indicated above, our vessels operating in covered port areas are already
equipped with vapor recovery systems that satisfy these requirements. Although a
risk exists that new regulations could require significant capital expenditures
and otherwise increase our costs, based on the regulations that have been
proposed to date, we believe that no material capital expenditures beyond those
currently contemplated and no material increase in costs are likely to be
required.





33







The U.S. National Invasive Species Act,
or NISA, was enacted in 1996 in response to growing reports of harmful organisms
being released intoU.S.ports through ballast water taken on by
ships in foreign ports.  The United States Coast Guard adopted
regulations under NISA in July 2004 that impose mandatory ballast water
management practices for all vessels equipped with ballast water tanks entering
U.S. waters.  These requirements can be met by performing mid-ocean
ballast exchange, by retaining ballast water on board the ship, or by using environmentally sound alternative
ballast water management methods approved by the United States Coast
Guard.However, for ships
heading to the Great Lakes orHudson Bay, or vessels engaged in the foreign
export of Alaskan North Slope crude oil, mid-ocean ballast exchange is
mandatory.Mid-ocean
ballast exchange is the primary method for compliance with the United States
Coast Guard regulations, since holding ballast water
can prevent ships from performing cargo operations upon arrival in theUnited States, and alternative methods are still
under development. Vessels that are unable to conduct mid-ocean ballast exchange
due to voyage or safety concerns may discharge minimum amounts of ballast water
in areas other than the Great Lakes and the Hudson River,provided that they comply with
recordkeeping requirements and document the reasons they could not follow the
required ballast water management requirements. The United States Coast Guard is
developing a proposal to establish ballast water discharge standards, which
could set maximum acceptable discharge limits for various invasive species,
and/or lead to requirements for active treatment of ballast
water.





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





Recent scientific studies have suggested
that emissions of certain gasses, commonly referred to as “greenhouse gasses”,
may be contributing to warming of the Earth’s atmosphere. According to the IMO’s
study of greenhouse gasses emissions from the global shipping fleet, greenhouse
emissions are predicted to rise by 38% to 72% due to increased bunker
consumption by 2020 if corrective measures are not implemented. Any passage of
climate control legislation or other regulatory initiatives by the IMO, or
individual countries where we operate, that restrict emissions of greenhouse
gasses could require us to make significant financial expenditures we cannot
predict with certainty at this time.







Vessel
Security Regulations




Since the terrorist attacks of September
11 2001, there have been a variety of initiatives intended to enhance vessel
security. On November 25 2002 the U.S. Maritime Transportation Security Act of
2002, or MTSA, came into effect. To implement certain portions of the MTSA, in
July 2003 the U.S. Coast Guard issued regulations requiring the implementation
of certain security requirements aboard vessels operating in waters subject to
the jurisdiction of theUnited States. Similarly, in December 2002 amendments
to SOLAS created a new chapter of the convention dealing specifically with
maritime security. The new chapter became effective in July 2004 and imposes
various detailed security obligations on vessels and port authorities, most of
which are contained in the International Ship and Port Facilities Security Code,
or the ISPS Code. The ISPS Code is designed to protect ports and international
shipping against terrorism. After July12004, 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 alerts
      the authorities on shore;




·
            the development of vessel security
      plans;




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






34






·
              a continuous synopsis record kept
      onboard showing a vessel’s history includingthename of the ship and of the state
      whose flag the ship is entitled to fly, the date on whichthe 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 (“ISSC”) attesting to the vessel’s compliance with SOLAS security
requirements and the ISPS Code. We have implemented the various security
measures addressed by MTSA, SOLAS and the ISPS Code, and our fleet is in
compliance with applicable security requirements.







Inspection
by Classification Societies




Classification
Societies are independent organizations that establish and apply technical
standards in relation to the design, construction and survey of marine
facilities including ships and offshore structures. 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 of a flag state, the classification society will undertake
them on application or by official order, acting on behalf of the authorities
concerned.





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





For
maintenance of the class, regular and extraordinary surveys of hull, 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, machinery, including the
      electrical plant, and where applicable for special equipment classes, at
      intervals of 12 months from the date of commencement of the class period
      indicated on the
certificate.




·
            Intermediate
      surveys: Extended
      annual surveys are referred to as intermediate surveys and typically are
      conducted two and a 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
      ultrasonic thickness-gauging to determine the thickness of 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
      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.







35








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







C.
ORGANIZATIONAL STRUCTURE





See
Exhibit 8.1 for a list of our significant subsidiaries.







D.
PROPERTY, PLANT AND EQUIPMENT




We
own a substantially modern fleet of vessels. The following table sets forth the
fleet that we own or have contracted for delivery as of March 11
2008.





Vessel
            Approximate
            Construction
            Flag
            Charter
              TerminationBuilt
            Dwt.
            DateVLCCsFront
      Sabang
            1990
            286,000
            Single-hull
            SG
            2011
            (2)Front
      Vanadis
            1990
            286,000
            Single-hull
            SG
            2010
            (2)Front
      Highness
            1991
            284,000
            Single-hull
            SG
            2015
            (1)Front
      Lady
            1991
            284,000
            Single-hull
            SG
            2015
            (1)Front
      Lord
            1991
            284,000
            Single-hull
            SG
            2015
            (1)Front
      Duke
            1992
            284,000
            Single-hull
            SG
            2014
            (1)Front
      Duchess
            1993
            284,000
            Single-hull
            SG
            2014
            (1)Front
      Edinburgh
            1993
            302,000
            Double-side
            LIB
            2013
            (1)Front
      Ace
            1993
            276,000
            Single-hull
            LIB
            2014
            (1)Front
      Century
            1998
            311,000
            Double-hull
            MI
            2021Front
      Champion
            1998
            311,000
            Double-hull
            BA
            2022Front
      Vanguard
            1998
            300,000
            Double-hull
            MI
            2021Front
      Vista
            1998
            300,000
            Double-hull
            MI
            2021Front
      Circassia
            1999
            306,000
            Double-hull
            MI
            2021Front
      Opalia
            1999
            302,000
            Double-hull
            MI
            2022Front
      Comanche
            1999
            300,000
            Double-hull
            FRA
            2022Golden
      Victory
            1999
            300,000
            Double-hull
            MI
            2022Ocana(ex
      Front Commerce)
            1999
            300,000
            Double-hull
            IoM
            2022Front
      Scilla
            2000
            303,000
            Double-hull
            MI
            2023Oliva(ex
      Ariake)
            2001
            299,000
            Double-hull
            BA
            2023Front
      Serenade
            2002
            299,000
            Double-hull
            LIB
            2024Otina(ex
      Hakata)
            2002
            298,465
            Double-hull
            IoM
            2025Ondina(ex
      Front Stratus)
            2002
            299,000
            Double-hull
            LIB
            2025Front
      Falcon
            2002
            309,000
            Double-hull
            BA
            2025Front
      Page
            2002
            299,000
            Double-hull
            LIB
            2025Front
      Energy
            2004
            305,000
            Double-hull
            CYP
            2027Front
      Force
            2004
            305,000
            Double-hull
            CYP
            2027








36






SuezmaxesFront
      Pride
            1993
            150,000
            Double-hull
            NIS
            2017Front
      Glory
            1995
            150,000
            Double-hull
            NIS
            2018Front
      Splendour
            1995
            150,000
            Double-hull
            NIS
            2019Front
      Ardenne
            1997
            153,000
            Double-hull
            NIS
            2020Front
      Brabant
            1998
            153,000
            Double-hull
            NIS
            2021Mindanao
            1998
            159,000
            Double-hull
            SG
            2021TBN/SFL
      Heimdall (NB)
            2009
            156,000
            Double-hull
            n/a
            n/aTBN/SFL
      Baldur (NB)
            2009
            156,000
            Double-hull
            n/a
            n/aChemical
      TankersTBN/SC
      Hebei (NB)
            2008
            17,000
            Double-hull
            PAN
            2018TBN/SC
      Guangzhou (NB)
            2008
            17,000
            Double-hull
            PAN
            2018OBO
      CarriersFront
      Breaker
            1991
            169,000
            Double-hull
            MI
            2015Front
      Climber
            1991
            169,000
            Double-hull
            SG
            2015Front
      Driver
            1991
            169,000
            Double-hull
            MI
            2015Front
      Guider
            1991
            169,000
            Double-hull
            SG
            2015Front
      Leader
            1991
            169,000
            Double-hull
            SG
            2015Front
      Rider
            1992
            170,000
            Double-hull
            SG
            2015Front
      Striver
            1992
            169,000
            Double-hull
            SG
            2015Front
      Viewer
            1992
            169,000
            Double-hull
            SG
            2015Panamax Drybulk
      CarrierGolden
      Shadow
            1997
            73,732
            n/a
            HK
            2016
            (2)Capesize Drybulk
      CarrierTBN/Golden
      Straits (NB)
            2008
            170,000
            n/a
            n/a
            2023
            (2)TBN/Golden
      Island (NB)
            2009
            170,000
            n/a
            n/a
            2024
            (2)ContainershipsMontemar
      Europa
            2003
            1,700
      TEU
            n/a
            MI
            2008Sea
      Alfa
            2005
            1,700
      TEU
            n/a
            CYP
            2020
            (2)Sea
      Beta
            2005
            1,700
      TEU
            n/a
            CYP
            2020
            (2)Horizon
      Hunter
            2006
            2,824
      TEU
            n/a
            U.S.
            2018
            (2)Horizon
      Hawk
            2007
            2,824
      TEU
            n/a
            U.S.
            2019
            (2)Horizon
      Falcon
            2007
            2,824
      TEU
            n/a
            U.S.
            2019
            (2)Horizon
      Eagle
            2007
            2,824
      TEU
            n/a
            U.S.
            2019
            (2)Horizon
      Tiger
            2006
            2,824
      TEU
            n/a
            U.S.
            2019
            (2)TBN/SFL
      Avon (NB)
            2010
            1,700
      TEU
            n/a
            MI
            n/aTBN/SFL
      Clyde (NB)
            2010
            1,700
      TEU
            n/a
            MI
            n/aTBN/SFL
      Dee (NB)
            2010
            1,700
      TEU
            n/a
            MI
            n/aTBN/SFL
      Humber (NB)
            2010
            2,500
      TEU
            n/a
            MI
            n/aTBN/SFL
      Tamar (NB)
            2010
            2,500
      TEU
            n/a
            MI
            n/a






37






Jack-Up Drilling
      RigsWest
      Ceres
            2006
            300
      ft
            n/a
            PAN
            2021
            (2)West
      Prospero
            2007
            300
      ft
            n/a
            PAN
            2022
            (2)Offshore supply
      vesselsSea
      Leopard
            1998
            AHTS
      (3)
            n/a
            CYP
            2020
            (2)Sea
      Bear
            1999
            AHTS
      (3)
            n/a
            CYP
            2020
            (2)Sea
      Cheetah
            2007
            AHTS
      (3)
            n/a
            CYP
            2019
            (2)Sea
      Jaguar
            2007
            AHTS
      (3)
            n/a
            CYP
            2019
            (2)Sea
      Halibut
            2007
            PSV
      (4)
            n/a
            CYP
            2019
            (2)Sea
      Pike
            2007
            PSV
      (4)
            n/a
            CYP
            2019
            (2)SeismicTBN/Scan
      Empress (NB)
            2008
            
            n/a
            n/a
            2020
            (2)TBN/Scan
      Superior (NB)
            2009
            
            n/a
            n/a
            2021
            (2)TBN/Scan
      Finder (NB)
            2009
            
            n/a
            n/a
            2021
            (2)




NB
– Newbuilding


Key to
Flags:


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






(1)
            Charter
      subject to termination at the Frontline Charterer's option from
      2010.




(2)
            Charterer
      has purchase options during the term of the
  charter.




(3)
            Anchor
      handling tug supply vessel (AHTS)




(4)
            Platform
      supply vessel (PSV)







Other
than our interests in the vessels and jack-up drilling rigs described above, we
do not own any material physical properties. We do not own any real property. We
lease office space in Oslo from Frontline Management and in London from Golar
LNG Limited, both related parties.




ITEM
4A.        UNRESOLVED STAFF
COMMENTS





None





ITEM
5.          OPERATING AND
FINANCIAL REVIEW AND PROSPECTS





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







38


Overview


Following
our spin-off from Frontline and purchase of our original fleet in 2004, we have
established ourselves as a leading international maritime asset owning company
with one of the largest asset bases across the maritime and offshore industries.
A full fleet list is provided in Item 4.D “Information on the Company” showing
the assets that we currently own and charter to our customers.







Fleet
Development





The
following tables summarized the development of our active fleet of
vessels.





Vessel
      type
            Total
      fleet
            Additions/
              Disposals
              2006
            Total
      fleet
            Additions/disposals
      2007
            Total
      fleetDecember
      31
            December
      31
            December
      312005
            2006
            2007Oil
      Tankers
            43
            -2
            
            41
            -7
            
            34OBO /
      Dry bulk carriers
            8
            
            +1
            9
            
            
            9Container
      vessels
            2
            
            +1
            3
            
            +5
            8Jack-up
      drilling rigs
            0
            
            +1
            1
            
            +1
            2Offshore
      supply vessels
            0
            
            
            0
            
            +5
            5Total
      Active Fleet
            53
            
            
            54
            
            
            58





The
following deliveries have taken place or are scheduled to take place after
December 31 2007:




·
            the
      oil tanker Front Maplewas delivered to its new owner in January
  2008;




·
            the
      offshore supply vessel Sea Trout was delivered
      to its new owner in January 2008;




·
            the
      offshore supply vessels Sea Bear and Sea Leopard were
      delivered to us in January 2008;




·
            two
      newbuilding chemical tankers are scheduled for delivery to us in
      2008;




·
            three
      newbuilding seismic vessels are scheduled for delivery to us in
      2008-09:




·
            two
      newbuilding Capesize drybulk carriers are scheduled for delivery to us in
      2008-09;




·
            two
      newbuilding Suezmax oil tankers are scheduled for delivery to us in
      2009;




·
            fivenewbuildingcontainer vesselsarescheduled for deliveryto usin 2010;
  and




·
            the VLCCsFront
      VanadisandFront
      Sabangare scheduled
      for delivery to their new owners in 2010 and 2011,
      respectively.






Factors
Affecting Our Current and Future Results




Principal factors that have affected our
results since 2004 and are expected to affect our future results of operations
and financial position include:




·
            the earnings of our vessels under
      time charters and bareboat charters tothe Frontline Charterers and other
      charterers;




·
            the amount we receive under the
      profit sharing arrangements withthe Frontline Charters;




·
            the earnings and expenses related
      to any additional vessels that we
  acquire;




·
            earnings from the sale of
      assets




·
            vessel management fees and
      expenses;




·
            administrative expenses;
      and




·
            interest
      expenses.




39


Revenues




Our
revenues since January 1 2004 derive primarily from our long-term, fixed-rate
time charters. Most of the vessels that we have acquired from Frontline are
chartered to the Frontline Charterers under long-term time charters that are
generally accounted for as finance leases.




Finance lease interest income reduces
over the terms of our leases as progressively a lesser proportion of the lease
rental payment is allocated as income, and a higher amount treated as repayment
of finance lease.





Our
future earnings are dependent upon the continuation of our existing lease
arrangements and our continued investment in new lease arrangements. Future
earnings may also be significantly affected by the sale of vessels. Investments
and sales which have affected our earnings to date are listed in Item 4 above
under acquisitions and disposals. Some of our lease arrangements contain
purchase options which, if exercised by our charterers, will affect our future
leasing revenues.





We have profit sharing
agreements withsome of our charterers, in particular
withthe Frontline
Charterers.Revenues received under profit sharing
agreements depend upon the returns generated by the charterers by the deployment
of our vessels. These returns are subject to market conditions which have
historically been subject to significant volatility.





Expenses




Our
expenses consist primarily of vessel management fees and expenses,
administrative expenses and interest expense. With respect to vessel management
fees and expenses, our vessel owning subsidiaries
with vessels on charter to the Frontline Charterers have entered into fixed rate
management agreements with Frontline Management under which Frontline Management
is responsible for all technical management of the vessels.  Each of
these subsidiaries pays Frontline Management a fixed fee of $6,500 per day per
vessel for all of the above services.





In
addition to the vessels on charter to the Frontline Charterers, we also have
three 1,700 TEU container vessels employed on time charters. We have outsourced
the technical management for these vessels, and we pay operating expenses for
these vessels as they are incurred.  The remaining vessels we own that
have charters attached to them are employed on bareboat charters, where the
charterer pays all operating expenses, including maintenance, drydocking and
insurance.





We
have entered into an administrative services agreement with Frontline Management
under which they provide us with certain administrative support
services.  For the year 2007 we paid them a total of $1.2 million in
fees for their services under the agreement, and agreed to reimburse them for
reasonable third party costs, if any, advanced on our behalf. Some of the
compensation paid to Frontline Management is based on cost sharing for the
services rendered based on actual incurred costs plus a margin.





Other
than the interest expense associated with our 8.5% senior notes, the amount of
our interest expense will be dependent on our overall borrowing levels and may
significantly increase when we acquire vessels or on the delivery of
newbuildings. Interest incurred during the construction of a newbuilding is
capitalized in the cost of the newbuilding. Interest expense may also change
with prevailing interest rates, although the effect of these changes may be
reduced by interest rate swaps or other derivative instruments that we enter
into.





Critical
Accounting Policies and Estimates




The
preparation of our consolidated financial statements and combined financial
statements in accordance with accounting principles generally accepted in the
United States requires management
to make estimates and assumptions affecting the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
our financial statements and the reported amounts of revenues and expenses
during the reporting period.  The following is a discussion of the
accounting policies we apply that are considered to involve a higher degree of
judgment in their application. See Note 2 to our consolidated financial
statements for details of all of our material accounting
policies.


40




Revenue
Recognition




Revenues
are generated from time charter and bareboat charterhires and are recorded over
the term of the charter as service is provided. Each charter agreement is
evaluated and classified as an operating lease or a finance lease (see leases
below). Rental  receipts from operating leases are recognized to
income over the period to which the payment relates.





Rental
payments from finance leases are allocated between finance lease service
revenues, if applicable, finance lease interest income and repayment of net
investment in finance leases. The amount allocated to finance lease service
revenue is based on the estimated fair value of the services provided, which
consist of ship management and operating services.





Subject
to Fixed
Price Purchase Options(see below), the finance lease interest
income element is calculated so as to provide a constant rate of return on the
net investment in the finance lease as it is depreciated to the vessel’s
unguaranteed residual value at the end of the lease term. Any contingent
elements of rental income, such as interest rate adjustments, are recognized as
they fall due.





There
is a degree of uncertainty involved in the estimation of the unguaranteed
residual values of assets leased under both operating and finance leases. Global
effects of supply and demand for oil and changes in international government
regulations cause volatility in the spot market for second-hand vessels. Where
assets are held until the end of their useful lives the unguaranteed residual
value (i.e. scrap value) will fluctuate with the price of steel and any changes
in laws related to the ship scrapping process, commonly known as ship
breaking.





The
Company estimates the unguaranteed residual value of its finance lease assets at
the end of the lease period by calculating depreciation in accordance with its
accounting policies over the estimated useful life of the asset (see Vessels and Depreciation
below). Residual values are reviewed at least annually to ensure that original
estimates remain appropriate. To date the Company has not changed its original
estimates, although it is possible that future events and circumstances could
cause us to change our estimates.





The
implicit rate of return for each of the Company’s finance leases is derived
according to FAS 13 “Accounting for Leases”, paragraph 5k, using the fair value
of the asset at the lease inception (which is either the cost of the asset if
acquired from an unrelated third party, or independent valuation if acquired
from a related party), the minimum contractual lease payments and the estimated
residual values.





The
Frontline Charterers have agreed to pay us a profit sharing payment equal to 20%
of the charter revenues they realize on our fleet above specified threshold
levels, paid annually and calculated on an average daily TCE basis. For each
profit sharing period the threshold is calculated as the number of days in the
period multiplied by the daily threshold TCE rates for the applicable vessels.
Profit sharing revenues are recorded when earned and realizable.







41




Vessels
and Depreciation




The cost of
vessels and rigs less estimated residual value are depreciated on a straight
line basis over their estimated remaining economic useful lives.  The
estimated economic useful life of our rigs is 30 years and for all other vessels
it is between 25 and 30 years depending on the type of asset. These are common
life expectancies applied in the shipping industry.




If
the estimated economic useful life of a particular vessel is incorrect, or
circumstances change and the estimated economic useful life has to be revised,
an impairment loss could result in future periods. We will continue to monitor
the situation and revise the estimated useful lives of any such vessels as
appropriate when new regulations are implemented.







Leases




Leases(charters)of our vessels where we are the lessor
are classified as either finance leases or operating leases,based on an assessment of the terms of
the lease.





For
charters classified as finance leases the minimum lease payments, reduced in the
case of time-chartered vessels by projected vessel operating costs, plus the
estimated residual value of the vessel are recorded as the gross investment in
the finance lease.  The difference between the gross investment in the
lease and the sum of the present values of the two components of the gross
investment is recorded as unearned finance lease interest income.





Classification of a lease involves the
use of estimates or assumptions about fair values of leased vessels and expected
future values of vessels.  We generally base our estimates of fair
value on the average of three independent broker valuations of a
vessel.  Our estimates of expected future values of vessels are based
on current fair values amortized in accordance with our standard depreciation
policy for owned vessels.







Fixed Price Purchase
Options




Where an asset is subject to an
operating lease that includes fixed price purchase options, the projected net
book value of the asset is compared to the option price at the various option
dates. If any option price is less than the projected net book value at an
option date, the initial depreciation schedule is amended so that the carrying
value of the asset is written down on a straight line basis to the option price
at the option date. If the option is not exercised, this process is repeated so
as to amortize the remaining carrying value, on a straight line basis, to the
estimated scrap value or the option price at the next option date, as
appropriate.





Similarly, where a finance lease relates
to a charter arrangement containing fixed price purchase options, the projected
carrying value of the net investment in the finance lease is compared to the
option price at the various option dates. If any option price is less than the
projected net investment in the finance lease at an option date, the rate of
amortization of unearned finance lease interest income is adjusted to reduce the
net investment to the option price at the option date. If the option is not
exercised, this process is repeated so as to reduce the net investment in the
finance lease to the un-guaranteed residual value or the option price at the
next option date, as appropriate.





Thus, for both operating and finance
lease assets, if an option is exercised there will either be a) no gain or loss
on the exercise of the option or b) in the event that an option is exercised at
a price in excess of the net book value of the asset or the net investment in
the finance lease, as appropriate, at the option date, a gain will be reported
in the statement of operations at the date of delivery to the new
owners.





42






Impairment
of Long-lived Assets




The
vessels and rigs held and used by us are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In assessing the recoverability of carrying amounts, we must
make assumptions regarding estimated future cash flows. These assumptions
include assumptions about spot market rates, operating costs and the estimated
economic useful life of these assets. In making these assumptions we refer to
historical trends and performance as well as any known future factors. Factors
we consider important which could affect recoverability and trigger impairment
include significant underperformance relative to expected operating results, new
regulations that change the estimated useful economic lives of our vessels and
rigs and significant negative industry or economic trends.





Mark-to-Market
Valuation of Financial Instruments




The
Company enters into interest rate swap transactions, total return bond swaps and
total return equity swaps. As required by FAS 133 “Accounting for Derivative
Instruments and Hedging Activities”, the
mark-to-market valuations of these transactions are recognized as assets or
liabilities, with changes in their fair value recognized in the consolidated
statements of operations or, in the case of interest rate swaps designated as
hedges to underlying loans, in other comprehensive income. To determine the
market valuation of these instruments, the Company seeks wherever possible to
obtain valuations from third parties, namely the banks who are counterparties to
the transactions. Some transactions, particularly total return equity swaps,
require the Company itself to calculate market valuations and these are prepared
using the closing price for the underlying security and other appropriate
factors. All methods of assessing fair value result in a general approximation
of value, and such value may never actually be realized.





Variable
Interest Entities




A
variable interest entity is a legal entity where either (a) equity interest
holders as a group lack the characteristics of a controlling financial interest,
including decision making ability and an interest in the entity’s residual risks
and rewards or (b) the equity holders have not provided sufficient equity
investment to permit the entity to finance its activities without additional
subordinated financial support. FASB Interpretation 46 (R) requires a variable
interest entity to be consolidated if any of its interest holders are entitled
to a majority of the entity’s residual return or are exposed to a majority of
its expected losses.





In
applying the provisions of Interpretation 46 (R), we must make assumptions in
respect of, but not limited to, the sufficiency of the equity investment in the
underlying entity.  These assumptions include assumptions about the
future revenues, operating costs and estimated economic useful lives of assets
of the underlying entity.







Recent accounting
pronouncements




In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”
(“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. FAS 157 applies under most other accounting
pronouncements that require or permit fair value measurements and does not
require any new fair value measurements. FAS 157 is effective for fiscal years
beginning after November 15, 2007.




In
February 2008 the FASB issued FSP No. FAS157-1 “Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13” (“FSP
FAS157-1”). FSP FAS157-1 amends FAS 157 to exclude FASB Statement No. 13“Accounting for Leases” (“FAS 13”) and
its related interpretive accounting pronouncements that address leasing
transactions. The FASB decided to exclude leasing transactions covered by FAS 13
in order to allow it to more broadly consider the use of fair value measurements
for these transactions aspart
of its project to comprehensively reconsider the accounting for leasing
transactions. The Company does not expect the adoption of FAS 157 and FSP
FAS157-1 to have a material impact on its financial
statements.


43





In
February 2007 the FASB issued SFAS No. 159 “The Fair Value Option for Financial
Assets and Financial
Liabilities – including an amendment of FASB Statement No. 115” (“FAS
159”). FAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. FAS 159 is
effective for fiscal years beginning after November 15 2007. The Company does
not expect the adoption of FAS 159 to have a material impact on its financial
statements.





In
December 2007 the FASB issued SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial
Statements – an amendment of ARB No.51” (“FAS 160”). FAS 160 is intended
to improve the relevance, comparability and transparency of financial
information that a reporting entity provides in its consolidated financial
statements with reference to a noncontrolling interest in a subsidiary. Such a
noncontrolling interest, sometimes called a minority interest, is the portion of
equity in a subsidiary not attributable, directly or indirectly, to the parent
entity. FAS 160 is effective for fiscal years beginning on or after December 15
2008. The Company does not expect the adoption of FAS 160 to have a material
impact on its financial statements.





In
December 2007 the FASB issued SFAS No. 141 (revised 2007) “Business Combinations” (“FAS
141R”). The objective of FAS 141R is to improve the relevance, representational
faithfulness and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects.
To accomplish this, FAS 141R establishes principles and requirements for how the
acquirer a) recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed and any non-controlling interest in the
acquiree, b) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain price, and c)determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. FAS 141R is effective for fiscal
years beginning on or after December 15, 2008. The Company does not expect the
adoption of FAS 141R to have a material impact on its financial
statements.




In
December 2007 the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”),
relating to share-based payment. SAB 110 expresses the views of the staff
regarding the use of a "simplified" method, as discussed in SAB 107, in
developing an estimate of expected term of "plain vanilla" share options in
accordance with FAS 123 (revised 2004) “Share-Based Payment”. In
particular, the staff indicated in SAB 107 that it will accept a company's
election to use the simplified method, regardless of whether the company has
sufficient information to make more refined estimates of expected term. At the
time SAB 107 was issued, the staff believed that more detailed external
information about employee exercise behavior (e.g. employee exercise patterns by
industry and/or other categories of companies) would, over time, become readily
available to companies. Therefore, the staff stated in SAB 107 that it would not
expect a company to use the simplified method for share option grants after
December 31 2007. The staff understands that such detailed information about
employee exercise behavior may not be widely available by December 31 2007.
Accordingly, the staff will continue to accept, under certain circumstances, the
use of the simplified method beyond December 31 2007. The Company
continues to use the simplified method for making estimates of expected term, as
allowed by SAB 110.


44







Market
Overview




The
Oil Tanker Market




The tanker market remainedstrong in2007, despite aslowdown inspot ratesin the third quarter and part of thefourth quarter.According to industry
sources, average one year
timecharterrates for a VLCCweredown from $58,300perday in 2006 to$55,500per dayin 2007. Average one year time charter rates
for a Suezmax tanker were up from $43,200 per day in 2006 to $44,400 per day in
2007.





Thetotalworldtanker fleetexpanded by about 7% in 2007measured in number of
vessels. Tanker ordering
has been decreasing, and according to industry sources only one VLCC was ordered
duringthethird quarter of 2007, as opposed toan average of
approximately nineVLCCs every month in 2006. At the same time, theestimatedvalue of afiveyear oldVLCCrose from$118million inDecember2006 to $135million inDecember2007.The estimated value of a five year old
Suezmax tanker rose from $82 million in December 2006 to $92 million in December
2007.





According
to industry sources, the total VLCC fleet increased by about 2% in 2007 measured
in number of vessels. The total orderbook for VLCCs at the end of 2007
represented approximately 36% of the existing fleet. The total Suezmax fleet
increased by about 2% in 2007 measured in number of vessels. The total orderbook
for Suezmaxes at the end of 2007 represented approximately 38% of the existing
fleet.





There
is a trend for oil majors to discriminate against non-double hull vessels when
transporting crude oil and refined oil products. Oil traders with crude or fuel
oil cargoes often require double hull tonnage in order to have full flexibility
with regards to cargo delivery. Hence, non-double hull ships appear no longer
able to trade to their full capacity compared to double hull vessels, which
implies a further gap in the already existing “two-tier market” between double
and non-double hull vessels.





According
to industry sources, approximately 28% of the VLCC fleet and 14% of the Suezmax
fleet are non-double hull, and we expect that these vessels will be difficult to
trade in the crude oil market after the scheduled IMO phase out in 2010. Conversions ofnon-doublehull VLCC’s and Suezmaxtankerstodrybulk carriers andfloating production/storage/offloading
facilitiesis expected to
take out capacity prematurely from the tanker fleet.





The
International Energy Agency (“IEA”) estimates that the average world oil demand
was 85.8 million barrels per day in 2007, a 1.1% increase from 2006. For 2008
growth in world oil demand is forecast to be 2.0% with China, Latin America and
the Middle East as the main drivers.







The
Drybulk Shipping Market




The
drybulk shipping market continued its strong performance in 2007, with the
Baltic Dry Index showing an increase in excess of 100% during the year. Trade
volume grew by approximately 5% in 2007 and, according to industry sources, iron
ore recorded the highest growth at approximately 9%.


45


Order
book volumes have continued to grow, representing in excess of 50% of the
current fleet by the end of 2007 measured in dwt. The increase in the order book
may put pressure on rates going forward, and particularly in 2010 when a
significant portion of the newbuildings are scheduled to be
delivered.


The
development in the drybulk market is highly dependent on the Chinese economy,
and a slow-down in the Chinese economy could also soften the
market.







The
Containership Market




The
global demand for containerized trade showed an annual growth rate of
approximately 10% in 2007, the key drivers being growth on the Far East-Europe
trade routes and the intra-Asia routes. According to industry sources,
containerized cargo volumes to Europe were up 20% in 2007 compared to 2006,
mainly due to a strong economic environment in Europe combined with robust
demand from Eastern Europe.





The
strong drybulk markets have made it increasingly cost-effective to containerize
bulk cargoes, and this is expected to secure further demand going forward.
According to industry sources, growth rates in 2008 and 2009 for global
containerized demand are projected to be around 10% per annum.





The
year-end orderbook for vessels capable of carrying containerized cargoes
represented approximately 54% of the active fleet measured in TEU, and 21%
measured in number of vessels.







The
Offshore Market




The substantial oil price crash in 1998,
caused by the Asian crisis, has for many years deterred global oil majors from
making significant expansion of exploration and production budgets. However,
with the strong upturn in oil prices since 2003, exploration and production
budgetshave been increased
to meetgrowing oil demand
and depletion of existing oil reserves in regions such as theNorth Seaand the U.S. Gulf of
Mexico.





The
increase in the average oil price from $30 per barrel in 2003 to
approximately $70 per barrel in 2007 is partly a result of the increased
oil demand by Asian developing countries. Oil producers have encountered
difficulties coping with the growth in production required to meet this increase
in demand. Depletion of North Sea and U.S. Gulf of Mexico oil reserves, rising
costs and barriers to entry for foreign oil companies tapping into Russian oil
reserves, and geopolitical issues that constantly disrupt steady oil supplies in
West Africa have led to increasing pressure on the limited spare capacity held
by the Middle East OPEC producers. As a consequence, oil majors have taken
serious efforts to increase their budgets for oil exploration and
production.





According
to industry experts, it is estimated that offshore oil production will continue
to grow through 2010, with production from deepwater sources taking the
lead. The focus of offshore services is in the North Sea, U.S. Gulf of
Mexico, Brazil, West Africa and South East Asia.





Strong
growth in offshore production volume has also significantly improved the demand
outlook for offshore drilling rigs and supply vessels. The
offshore services markets have experienced tight conditions with fleet
utilization staying above 90% for offshore drilling rigs in main areas. As a
result, there has been an increase in the newbuilding market for offshore
drilling units and supply vessels during the past three years. In particular,
demand has increased for drilling rigs capable of operating in harsh
environments such as the North Sea, boosting capacity utilization and
consequently day rates.


46


With
the estimated growth in demand and current orderbook, the offshore services
market is expected to continue to enjoy the high levels of utilization seen in
2007. The market balance is expected to soften gradually as more newbuildings
are delivered in 2008 and afterwards. Nevertheless, according to industry
sources, it is expected that the offshore market will continue to enjoy a
healthy outlook over the next three to four years.


The
above overviews of the various sectors in which we operate are based on current
market conditions. However, market developments cannot always be predicted and
may well differ from our current expectations.







Seasonality




Most
of our vessels are chartered at fixed rates on a long-term basis and seasonal
factors do not have a significant direct affect on our business. Our two jack-up
drilling rigs and most of our tankers and OBOs are subject to profit sharing
agreements and to the extent that seasonal factors affect the profits of the
charterers of these vessels we will also be affected. However, profit sharing is
calculated annually and the effects of seasonality will be limited to the timing
of our profit sharing revenues.







Inflation




Most
of our time chartered vessels are subject to operating and management agreements
that have the charges for these services fixed for the term of the charter.
Thus, although inflation has a moderate impact on our corporate overheads and
our ship operating expenses, we do not consider inflation to be a significant
risk to direct costs in the current and foreseeable economic
environment.  In addition, in a shipping downturn, costs subject to
inflation can usually be controlled because shipping companies typically monitor
costs to preserve liquidity and encourage suppliers and service providers to
lower rates and prices in the event of a downturn.







Results of
Operations





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





Operating
revenues




(in thousands of
      $)
            
            2007
            
            
            2006Finance
      lease interest income
            
            
            186,680
            
            
            
            182,580Finance
      lease service revenues
            
            
            102,070
            
            
            
            106,791Profit
      sharing revenues
            
            
            52,527
            
            
            
            78,923Time
      charter revenues
            
            
            23,675
            
            
            
            53,087Bareboat
      charter revenues
            
            
            32,005
            
            
            
            3,986Other
      operating income
            
            
            1,835
            
            
            
            (709
            )Total
      operating revenues
            
            
            398,792
            
            
            
            424,658




Total
operating revenues decreased 6% in the year ended December 31 2007 compared with
2006.





Finance
lease interest income reduces over the terms of our leases as progressively a
lesser proportion of the lease rental payment is allocated as income, and a
higher amount treated as repayment of finance lease. Our total finance lease
interest income has increased compared to 2006 due to investment in the two
offshore jack-up rigs at a time when the offshore rig market is particularly
strong. The additional finance lease income from the two new leases exceeds
other reductions of finance lease income, including reductions arising from the
sale of seven of the oil tankers and termination of their leases to the
Frontline Charterers.


47





The
reduction in finance lease service revenue and profit sharing revenues reflects
the reduction in the number of tankers leased to the Frontline Charterers. The
profit share results were also adversely
affected by lower average charter rates earned by Frontline from our vessels in
2007 compared to 2006.




Certain
of our vessels acquired as part of the original spin-off were on charter to
third parties as at January 1 2004 when our charter arrangements with the first
of the Frontline Charterers became economically effective.  Our
arrangement with the Frontline Charterers was that while our vessels were
completing performance of third party charters, we paid the Frontline Charterers
all revenues we earned under third party charters in exchange for the Frontline
Charterers paying us the agreed upon charterhire rates.  We accounted
for the revenues received from these third party charters as time charter,
bareboat or voyage revenues as applicable and the subsequent payment of these
amounts to the Frontline Charterers as deemed dividends paid. We accounted for
the charter revenues received from the Frontline Charterers prior to the
charters becoming effective for accounting purposes as deemed dividends
received.
  Time charter
revenues have declined as each of these existing charter arrangements and
cross-over voyages completed, after which income from the vessels has
been accounted for as finance lease income. The last of these existing
charter and cross-over voyages was completed in April 2007.





Bareboat
charter revenues arise from our vessels which are leased under operating leases.
These revenues have increased with the addition of five container ships and five
offshore supply vessels to our fleet, all of which have been leased under
operating lease arrangements.







Cash
flows arising from finance leases




The
following table analyzes our cash flows from the charters to the Frontline
Charterers, Seadrill and TMT during 2007 and 2006 and shows how they are
accounted for:





(in
      thousands of $)2007
            
            
            2006Charterhire
      payments accounted for as:Finance
      lease interest income
            
            
            186,680
            
            
            
            182,580Finance
      lease service revenues
            
            
            102,070
            
            
            
            106,791Finance
      lease repayments
            
            
            173,193
            
            
            
            136,701Deemed
      dividends received
            
            
            4,642
            
            
            
            31,741Total
      charterhire paid
            
            
            467,842
            
            
            
            457,813




Tankers
and OBOs chartered to the Frontline Charterers are leased on time charter terms,
under which it is our responsibility to manage and operate the vessels. This has
been effected by entering into fixed price agreements with Frontline Management
whereby we pay them management fees of $6,500 per day for each vessel chartered
to the Frontline Charterers. Accordingly, $6,500 per day is allocated from each
time charter payment received from the Frontline Charterers to cover lease
executory costs and this is classified as “finance lease service
revenue”.




Deemed dividends have
reduced following the completion of the third party charter arrangements and
cross-over voyages mentioned above.





Voyage
expenses




Voyage
expenses are incurred by vessels which were chartered in the spot market to
third parties on their delivery date to us.  Voyage expenses decreased
in 2007 and, based on the employment of our current fleet, we do not expect to
report further significant voyage expenses.







Ship
operating expenses




Ship
operating expenses decreased by 10% from $118 million for the year ended
December 31 2006 to $106 million for the year ended December 31 2007, primarily
due to the disposal of tankers.


48


Ship
operating expenses in 2007 consist mainly of payments to Frontline Management of
$6,500 per day for each tanker and OBO chartered to the Frontline Charterers, in
accordance with the vessel management agreements. They also include ship
operating expenses for three of our containerships that are managed by unrelated
third parties.


Administrative
expenses




Administrative
expenses increased from $6.6 million in 2006 to $7.8 million in 2007, primarily
due to the establishment of our own management organization in 2006 and
corresponding staff costs.







Depreciation
expense




Depreciation
expenses relate to the vessels on charters accounted for as operating leases.
For the year ended December 31 2007 depreciation expenses were $20.6 million,
compared to $14.5 million for the year ended December 31 2006.  The
increase is due to the delivery in 2006 and 2007 of six containerships and five
offshore supply vessels, all of which were chartered under arrangements
accounted for as operating leases.







Interest income




Interest
income has increased by $2.8 million for the year ended December 31 2007, mainly
owing to the increase in funds on deposit during the year.







Interest
expense




(in
      thousands of $)
            
            2007
            
            
            2006
            
            
            Change
      (%)Interest
      on floating rate loans
            
            
            101,261
            
            
            
            80,453
            
            
            
            26
            %Interest
      on 8.5% Senior Notes
            
            
            38,113
            
            
            
            38,881
            
            
            
            (2
            %)Swap
      interest (income)
            
            
            (12,331
            )
            
            
            (8,815
            )
            
            
            n/aAmortization
      of deferred charges
            
            
            3,358
            
            
            
            3,069
            
            
            
            9
            %130,401
            
            
            
            113,588
            
            
            
            15
            %




At
December 31 2007 we had total debt outstanding of $2,270 million comprised of
$449 million principal amount of 8.5% senior notes and $1,821 million under
floating rate secured credit facilities.  At December 31 2006 we had
total debt outstanding of $1,915 million, of which $449 million related to the
8.5% senior notes and $1,466 million was floating rate debt. The overall
increase in interest expense is primarily due to this increased level of
borrowing.




At
December 31 2007 we were party to interest rate swap contracts which effectively
fix our interest rate on $884 million of floating rate debt at a weighted
average rate of 4.29% per annum (2006: $739 million of floating rate debt fixed
at a weighted average rate of 4.15% per annum).





Amortization
of deferred charges increased by 9% in 2007 to $3.4 million, as a result of new
financing facilities established during 2007.







Other
financial items




Other
financial items consist mainly of mark to market valuation changes on financial
instruments, including our interest rate swap contracts, our bond swaps and
equity swaps. In the year ended December 31 2007 these amounted to a net cost of
$14.5 million (2006: net cost $3.6 million).




49


Equity
in earnings of associated companies


We
have one investment which, since its acquisition in 2006, has been accounted for
under the equity method, as discussed in Note 2 of the Consolidated Financial
Statements included herein.







Year
ended December 31 2006 compared with the year ended December 31
2005





Operating
revenues




(in thousands of
      $)
            
            2006
            
            
            2005Finance
      lease interest income
            
            
            182,580
            
            
            
            177,474Finance
      lease service revenues
            
            
            106,791
            
            
            
            92,265Profit
      sharing revenues
            
            
            78,923
            
            
            
            88,096Time
      charter revenues
            
            
            53,087
            
            
            
            62,605Bareboat
      charter revenues
            
            
            3,986
            
            
            
            7,325Other
      operating income
            
            
            (709
            )
            
            
            9,745Total
      operating revenues
            
            
            424,658
            
            
            
            437,510




Total
operating revenues decreased 3% in the year ended December 31, 2006 compared
with 2005.




The
increase in finance lease interest income from 2005 to 2006 results from the new
leasing contracts for the jack-up drilling rig which commenced June 30
2006.  In addition, during 2006 four vessels were redelivered
following the completion of time charters to third parties. On redelivery, each
commenced time charter contracts with the Frontline Charterers, accounted for as
finance leases.




Finance
lease service revenues, which are based on a fixed daily rate, increased in 2006
because of the change in employment of the four above-mentioned
vessels.




The
decrease in profit sharing revenue is directly related to lower average charter
rates earned by vessels while employed by Frontline in 2006.




Time
charter revenues consist mainly of revenues received as a result of incomplete
third party charters on vessels acquired from Frontline. During 2006 time
charter revenues decreased as four such third party charters expired and we
commenced accounting for the revenues from these vessels as finance lease income
under the lease arrangements with the Frontline Charterers.




In
2005 two vessels accounted for a significant portion of voyage charter revenues
due to lucrative spot market rates prior to their employment with the Frontline
Charterers.




Other
operating income includes voyage charter revenues and demurrage, despatch, pool
earnings and other items which are subject to various adjustments, e.g. loss of
hire, vendor rebates and underperformance claims. Voyage charters were minimal
after 2005 and these adjustments have resulted in a negative figure in
2006.







50




Cash
flows arising from finance leases




The
following table analyzes our cash flows from the charters to the Frontline
Charterers and SeaDrill Invest I during 2006 and 2005 and how they are accounted
for:




(in
      thousands of $)2006
            
            
            2005Charterhire
      payments accounted for as:Finance
      lease interest income
            
            
            182,580
            
            
            
            177,474Finance
      lease service revenues
            
            
            106,791
            
            
            
            92,265Finance
      lease repayments
            
            
            136,701
            
            
            
            94,777Deemed
      dividends received
            
            
            31,741
            
            
            
            50,560Total
      charterhire paid
            
            
            457,813
            
            
            
            415,076




We
allocate $6,500 per day from each time charter payment from the Frontline
Charterers as finance lease service revenue.





The
decrease in deemed dividends received is due to the fact that all but two of our
tankers had completed their respective third party charters and cross-over
voyages as at December 31 2006.





Voyage
expenses




Voyage
expenses are derived from vessels which were on charter to third parties on
their delivery date to us.  Voyage expenses have decreased in 2006 as
fewer vessels are on voyage charter to third parties. We do not expect to report
further significant voyage expenses.





Ship
operating expenses




Ship
operating expenses increased 7% from $110 million for the year ended December 31
2005 to $118 million for the year ended December 31 2006 primarily due to the
change in employment of our tankers. In 2006 four of our tankers were
redelivered from bareboat charters and resumed vessel management with Frontline
Management.





Ship
operating expenses in 2006 are primarily comprised of our payments to Frontline
Management of $6,500 per day under the management contracts for our tankers and
OBOs chartered to the Frontline Charterers. They also include ship operating
expenses for two of our containerships that are managed by unrelated third
parties.







51




Administrative
expenses




Administrative
expenses increased from $2.5 million in 2005 to $6.6 million in 2006. This
increase is primarily due to the establishment of our own management
organization in 2006 and consequent staff costs.  Prior to 2006, all
administrative activities were outsourced to Frontline Management in conjunction
with our administrative services agreement and comprised
a fee of $20,000 per vessel owning subsidiary plus $20,000 paid by us. Fees
payable under this agreement amounted to $1.0 million in the year ended December
31 2006 (December 31 2005: $1.0 million).  Frontline Management
provides administrative services under this agreement, which include accounting,
corporate secretarial and other services.




Additionally,
we pay expenses that are not covered by this agreement which include audit and
legal fees, listing fees and other professional charges. Commencing in 2007,
some of the compensation to Frontline Management will be based on cost sharing
for the services rendered based on actual incurred costs plus a
margin.







Depreciation
expense




Depreciation
expenses for the year ended December 31 2006 were $14.5 million compared to
$19.9 million for the year ended December 31 2005. Depreciation expenses relate
to the vessels on charters accounted for as operating leases.  In
2006, four such Frontline vessels were redelivered from third party charters and
are now being accounted for as finance leases, thus contributing to the decrease
in depreciation from 2005.  We expect that our depreciation charge
relating to our tankers on charter to the Frontline Charterers will continue to
decrease as the remaining vessels have now completed their charters to third
parties.  However, those decreases are likely to be offset as we
expand our fleet.







Interest
income




Interest
income has increased by $0.6 million for the year ended December 31 2006. The
increase is a result of the increase in funds on deposit during the
year.





Interest
expense




(in
      thousands of $)
            
            2006
            
            
            2005
            
            
            Change
      (%)Interest
      on floating rate loans
            
            
            80,453
            
            
            
            50,951
            
            
            
            58
            %Interest
      on 8.5% Senior Notes
            
            
            38,881
            
            
            
            41,614
            
            
            
            (7
            %)Swap
      interest (income)
            
            
            (8,815
            )
            
            
            2,846
            
            
            
            n/aAmortization
      of deferred charges
            
            
            3,069
            
            
            
            16,524
            
            
            
            (81
            %)113,588
            
            
            
            111,935
            
            
            
            1
            %




At
December 31 2006 we had total debt outstanding of $1,915 million comprised of
$449 million aggregate principal amount of 8.5% senior notes and $1,466 million
under floating rate secured credit facilities.  At December 31 2005 we
had total debt outstanding of $1,794 million, $457 million related to the 8.5%
senior notes and $1,337 million of which was floating rate debt.




Overall,
interest expense has increased due to increased underlying interest rates. This
has been partially offset by swap interest income, and by the decrease in senior
notes interest, as the Company repurchased and cancelled $8.0 million of the
notes during 2006.




At
December 31 2006 we were party to interest rate swap contracts which effectively
fix our interest rate on $739 million of floating rate debt at a weighted
average rate of 4.15% per annum. At December 31 2005 we were party to interest
rate swap contracts with a notional principal amount of $568 million. Swap
interest has decreased due to the increase in the three month LIBOR throughout
2006.





52






Amortization
of deferred charges decreased 81% in 2006 to $3.1 million because 2005 included
the write off of deferred charges associated with a refinancing of a $1,058
million credit facility.






Other
financial items




Other
financial items consist mainly of mark to market valuation changes on financial
instruments, including our interest rate swap contracts and our bond swaps and
equity swaps. In the year ended December 31 2006 these amounted to a net cost of
$3.6 million (2005: net gain of $17.5 million).






Equity
in earnings of associated companies




As
of December 31 2006, we have accounted for one investment under the equity
method as discussed in Note 2 of the Consolidated Financial Statements included
herein.






Liquidity
and Capital Resources




We
operate in a capital intensive industry.  Our purchase of the tankers
in the initial transaction with Frontline was financed through a combination of
debt issuances, a deemed equity contribution from Frontline and borrowings from
commercial banks.  Our subsequent transactions have been financed
through a combination of our own equity and borrowings from commercial
banks.  Our liquidity requirements relate to servicing our debt,
funding the equity portion of investments in vessels, funding working capital
requirements and maintaining cash reserves against fluctuations in operating
cash flows.  Revenues from our time charters and bareboat charters are
received monthly in advance, quarterly in advance or monthly in
arrears.  Management fees are payable monthly in advance.





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





Our
short-term liquidity requirements relate to servicing our debt and funding
working capital requirements, including required payments under our management
agreements and administrative services agreements.  Sources of
short-term liquidity include cash balances, restricted cash balances, short-term
investments, available amounts under a revolving credit facility and receipts
from our charters.  We believe that our cash flow from the charters
will be sufficient to fund our anticipated debt service and working capital
requirements for the short and medium term.





Our
long term liquidity requirements include funding the equity portion of
investments in new vessels, and repayment of long term debt balances including
those relating to our 8.5% senior notes due 2013, our $1,131 million secured
credit facility due 2011, our $350 million secured term loan facility due 2012,
our $165 million secured term loan facility due 2012, our $170 million secured
term loan facility due 2013, our $120 million secured term loan facility due
2014, our $149 million secured loan facility due 2014, our $77 million secured
term loan facility due 2015, our $30 million secured revolving credit facility
due 2015, our $23 million secured term loan facility due 2016 and our $210
million secured term loan facility due 2019.





At December
31 2007 the Company had contractual commitments relating to newbuilding
contracts and vessel acquisitions totaling $701 million. At December 31 2007 we
had secured bank financing in an aggregate amount of $327 million to partly fund
$415 million of these contractual commitments.


53







We
expect that we will require additional borrowings or issuances of equity in the
long term to meet our capital requirements.





As
of December 31 2007 and December 31 2006, we had cash and cash equivalents
(including restricted cash) of $105 million and $78 million,
respectively.  In the year ended December 31 2007 we
generated cash from operations of $202 million, used $379 million in
investing activities and raised $190 million net in financing
activities.





During
the year ended December 31 2007 we paid cash dividends of $2.19 per common share
(2006: $2.05), or a total of $159 million.  A cash dividend of $0.55
per share was declared and paid in the first quarter of 2008, totaling $40
million.







Borrowings




As
of December 31 2007 we had total long term debt outstanding of $2,270 million
(2006: $1,915 million).  In addition, our wholly owned subsidiary
Front Shadow had long term debt of $21 million outstanding as of December 31
2007 (2006: $23 million). Front Shadow is accounted for using the equity method,
and its outstanding long term debt does not appear in our consolidated balance
sheet.





The
total long term debt at December 31 2007 includes $449 million outstanding from
the issue in 2003 of $580 million 8.5% senior notes due 2013.





In
February 2005 we entered into a $1,131 million secured credit facility with a
syndicate of banks, for the part financing of our initial fleet of tankers
acquired from Frontline in 2004. The facility bears interest at LIBOR plus a
margin, is repayable over a term of six years and is secured by the
vessel-owning subsidiaries’ assets. In September 2006 we signed an agreement
whereby the existing facility, which had been partially repaid, was increased by
$220 million to the original outstanding amount of $1,131 million. The increase
is available on a revolving basis.  At December 31 2007 the
outstanding amount on this facility was $897 million, and the
available undrawn amount was $85.0 million. This facility contains
covenants that require us to maintain a minimum aggregate value of the vessels
secured as collateral and also certain minimum levels of free cash, working
capital and equity ratios.





In
June 2005 we entered into a combined $350 million senior and junior secured term
loan facility with a syndicate of banks. The proceeds of the facility were used
to partly fund the acquisition of five VLCCs. At December 31 2007 the
outstanding amount on this facility was $294 million. The facility bears
interest at LIBOR plus a margin and is repayable over a term of seven years,
with security terms and covenants similar to those on the $1,131 million
facility.





In
April 2006 five vessel owning subsidiaries entered into a $210 million secured
term loan facility with a syndicate of banks.  The facility is non
recourse to Ship Finance International Limited, as the holding company does not
guarantee this debt. The proceeds of the facility were used to partly fund the
acquisition of five newbuilding container vessels in connection with our
long-term bareboat charters to Horizon Lines.  At December 31 2007 the
outstanding amount under this facility was $204 million, all five vessels having
been delivered. The facility bears interest at LIBOR plus a margin, is repayable
over a term of 12 years and is secured by the vessel owning subsidiaries’
assets.  The facility also contains a minimum value covenant, which is
only applicable if there is a default under any of the charters.





In
June 2006 our subsidiary Rig Finance entered into a $165 million secured term
loan facility with a syndicate of banks.  The proceeds of the facility
were used to partly fund the acquisition of the newbuilding jack-up drilling rig
West Ceres. At December
31 2007 the outstanding
amount under this facility was $130 million. The facility bears interest at
LIBOR plus a margin and contains a minimum value covenant and covenants
requiring us to maintain certain minimum levels of free cash, working capital
and equity ratios.  The facility is repayable over six years and is
secured by the
rig-owning subsidiary’s assets.  The lenders have limited recourse to
Ship Finance International Limited as the holding company only guarantees $10
million of this debt.


54





In
September 2006 our subsidiary Front Shadow entered into a $23 million secured
term loan facility, the proceeds of which were used to partly fund the
acquisition of a 1997 built Panamax drybulk carrier.  At December 31
2007 the outstanding amount under this facility was $21 million.  The
facility bears interest at LIBOR plus a margin, is repayable over ten years and
is secured by the vessel-owning subsidiary’s assets.  The facility
contains a minimum value covenant and a covenant requiring us to maintain
certain minimum levels of free cash. The requirement for certain minimum levels
of free cash is only applicable after four years. The lender has limited
recourse to Ship Finance International Limited as the holding company guarantees
$2.1 million of this debt.





In
February 2007 our subsidiary Rig Finance II entered into a $170 million secured
term loan facility with a syndicate of banks.  The proceeds of the
facility were used to partly fund the acquisition of the newbuilding jack-up
drilling rig West
Prospero. At December 31 2007 the outstanding amount under this facility
was $150 million. The facility bears interest at LIBOR plus a margin, is
repayable over six years and is secured by the rig-owning subsidiary’s assets.
The facility contains a minimum value covenant and covenants requiring us to
maintain certain minimum levels of free cash, working capital and equity ratios.
The lenders have limited recourse to Ship Finance International Limited as the
holding company only guarantees $20 million of the debt.





In
March 2007 three vessel owning subsidiaries entered into a $120 million secured
term loan and guarantee facility with a syndicate of banks.  The
facility is divided into a $48.5 million pre-delivery guarantee facility and a
$120 million term loan facility, and will be used to partly fund the acquisition
of three newbuilding seismic vessels. The guarantee facility is for the purpose
of guaranteeing obligations under the construction contracts with the yard. The
proceeds from the term loan facility will be used to partly fund the acquisition
of the vessels upon delivery from the yard.  The facility bears
interest at LIBOR plus a margin and contains a minimum value covenant and
covenants that require us to maintain certain minimum levels of free cash,
working capital and equity ratios. The facility is repayable over six years and
is secured by the vessel-owning subsidiaries’ assets.  The lenders
have limited recourse to Ship Finance International Limited as the holding
company has provided a guarantee of $48.5 million prior to delivery from the
shipyard and $30 million of the debt thereafter.





In August 2007 five vessel owning
subsidiaries entered into a$149 millionsecured term loan facility with a
syndicate of banks, in order to partly fund the acquisition of five offshore
supply vessels. At December 31 2007 the outstanding amount under this facility
was $146 million. The facility bears interest at LIBOR plus a margin and is
repayableover seven
years. The facility
containsa minimum value
covenant and covenants that require us to maintain certain minimum levels of
free cash, working capital and equity ratios. The
facility requires the five vessel-owning subsidiaries to maintain certain
minimum levels of working capital and is secured by the subsidiaries’ assets.
The lenders have limited recourse to Ship Finance International Limited as the
holding company only guarantees $41.5 million of the debt.





In January 2008 two vessel owning
subsidiaries entered into a $77 million secured term loan facility with a
syndicate of banks, in order to partly fund the acquisition of two offshore
supply vessels. The facility bears interest of LIBOR plus a margin and is
repayable over a term of seven years. The facility requires the two vessel
owning subsidiaries to maintain certain minimum levels of working capital and issecured by the
subsidiaries’ assets.The
lenders have limited recourse to Ship Finance International Limited as the
holding company only guarantees $24 million of the debt.
The facility contains covenants that require us to maintain certain minimum
levels of free cash, working capital and equity
ratios.


55







In February
2008asubsidiary
entered into a $30 million secured revolving credit facility in order to part
finance the container vesselMontemar
Europa. The
facility bears interest of LIBOR plus a margin and issecured by the
subsidiary’s assets and a guarantee from Ship Finance International Limited. The
facility is available on a revolving basis and has a
term of seven years.The
facility contains covenants that require us to maintain certain minimum levels
of free cash, working capital and equity ratios.





We
were in compliance with all loan covenants at December 31 2007.  At
December 31 2007 three month U.S. dollar LIBOR was 4.70%.







Derivatives




We
use financial instruments to reduce the risk associated with fluctuations in
interest rates. At December 31 2007 we had entered into interest rate swap
contracts with a combined notional principal amount of $884 million at rates
between 3.32% per annum and 5.65% per annum.  The overall effect of
these swaps is to fix the interest rate on $884 million of floating rate debt at
a weighted average interest of 4.29% per annum. Several of our charter contracts
also contain interest adjustment clauses, whereby the charter rate is adjusted
to reflect the actual interest paid on the outstanding loan, effectively
transferring the interest rate exposure to the counterparty under the charter
contract. At December 31 2007 $280 million of our outstanding debt was subject
to such interest adjustment clauses.





The
Company has entered into short-term total return bond swap lines with banks,
whereby the banks acquire the Company’s senior notes and the Company carries the
risk of fluctuations in the market price of the acquired notes. The settlement
amount for the bond swaps will be (A) the proceeds on
sale of the notes plus all interest received by the banks while holding the
notes, less (B) the cost of purchasing the notes and the banks’ financing costs.
Settlement will be either a payment from or to the banks, depending on whether A
is more or less than B.The fair value of the bond swaps are recognized
as an asset or liability, with the changes in fair values recognized in the
consolidated statement of operations.  As of December 31 2007, bond
swaps held by the Company under these arrangements had principal amounts
totaling $122 million (2006: $52 million), effectively translating the
underlying principle amounts into floating rate debt.





At
December 31 2007 our net exposure to interest rate fluctuations on our
outstanding debt was $779 million, compared with $791 million at December 31
2006. Our net exposure to interest fluctuations is based on our total floating
rate debt outstanding at December 31 2007 plus the outstanding balance under the
bond swap line at December 31 2007, less the outstanding floating rate debt
subject to interest adjustment clauses under charter contracts and the notional
principal of our floating to fixed interest rate swaps outstanding at December
31 2007.





The
outstanding debt of $21 million at December 31 2007 in our subsidiary Front
Shadow, which is accounted for using the equity method, is subject to an
interest adjustment clause under the charter contract.





56







In
October 2007 the Board of Directors of the Company approved a share repurchase
program of up to seven million shares. Initially the program is to be financed
through the use of TRS transactions indexed to the Company’s own shares, whereby
the counterparty acquires shares in the Company, and the Company carries the
risk of fluctuations in the share price of theacquired shares. The
settlement amount for each TRS transaction will be (A) the proceeds on sale of
the shares plus all dividends received by the counterparty while holding the
shares, less (B) the cost of purchasing the shares and the counterparty’s
financing costs. Settlement will be either a payment from or to the
counterparty, depending on whether A is more or less than B.  At
December 31 2007 the counterparty hadacquired
approximately 349,000 shares in the Company. There is no obligation for the
Company to purchase any shares from the counterparty and this arrangement has
been recorded as a derivative transaction, with the fair value of each TRS
recognized as an asset or liability and changes in fair values recognized in the
consolidated statement of operations.




In
addition to the above TRS transactions indexed to the Company’s own securities,
the Company may from time to time enter into short-term TRS arrangements
relating to securities in other companies.




Equity




The
Company did not repurchase any common shares for cancellation in 2007. The Board
of Directors of the Company has approved a share repurchase program of up to
seven million shares under which the counterparty to our TRS agreements has to
date acquired approximately 692,000 of our shares. These TRS agreements could
potentially result in the purchase and cancellation of the Company’s own shares
in 2008 or later.





The Company
has accounted for the acquisition of vessels from Frontline at Frontline’s
historical carrying value.  The difference between the historical
carrying value and the net investment in the lease has been recorded as a
deferred deemed equity contribution. This deferred deemed equity contribution is
presented as a reduction in the net investment in finance leases in the balance
sheet and results from the related party nature of both the transfer of the
vessel and the subsequent finance lease.  The deferred deemed equity
contribution is amortized as a credit to contributed surplus over the life of
the new lease arrangement, as lease payments are applied to the principal
balance of the lease receivable. In the year ended
December 31 2007 we accounted for $21 million as amortization of such deemed
equity contributions (2006: $30 million).





In
November 2006 the board of directors approved a share option scheme, permitting
the directors to grant options in the Company’s shares to employees and
directors of the Company or its subsidiaries. The fair value cost of options
granted is recognized in the statement of operations, with a corresponding
amount credited to contributed surplus (see Note 18 to the Consolidated
Financial Statements). The contributed surplus arising from share options was
$0.8 million in the year ended December 31 2007.





Following
these transactions, as of December 31 2007 our issued and fully paid share
capital balance was $72.7 million and our contributed surplus balance was $485.9
million.





57


Contractual
Commitments




At
December 31 2007 we had the following contractual obligations and
commitments:





Payment
      due by periodLess
      than
              1
      year
            1–3
      years
            3–5
      years
            After
              5
      years
            Total(in
      millions of $)




8.5%
      Senior Notes due 2013
            -
            -
            -
            449.1
            449.1Floating
      rate debt
            179.4
            301.5
            993.4
            795.7
            2,270.0Total
      contractual cash obligations under existing loans
            179.4
            301.5
            993.4
            1,244.8
            2,719.1Obligations
      under newbuilding contracts and vessel acquisitions
            277.1
            423.9
            -
            -
            701.0Total
      contractual cash obligations
            456.5
            725.4
            993.4
            1,244.8
            3,420.1




Trend
information




Our
charters with the Frontline Charterers provide that daily rates decline over the
terms of the charters as discussed in Item 4.B “Our Fleet".





Since
December 31 2007 we have agreed to acquire two chemical tankers, which are
scheduled for delivery in 2008. Each of the two chemical tankers will commence
10 year bareboat charters upon delivery to us. In addition, we have agreed to
re-charter the single-hull VLCC Front Sabang to an unrelated third
party. The new charter is in the form of a hire-purchase agreement where the
vessel is chartered to the buyer for a 3.5 year period, with a purchase
obligation at the end of the charter.





The
current trend is for prices of both second-hand vessels and newbuilding
contracts to increase, with the same being the case for drilling rigs. This
trend is associated with the current strong markets in most sectors in which we
operate, and also reflects market expectations going forward. Furthermore, spare
shipyard capacity for additional newbuildings over the next years is limited,
with new contracts generally not providing for delivery from the builder until
2011 or later.





Interest
rates have decreased since December 31 2007, which will reduce our interest
expenses on our floating rate debt. We have effectively locked in part of our
interest exposure on our floating rate debt through swap agreements with banks.
Several of our charter contracts also include interest adjustment clauses,
whereby the charter rate is adjusted to reflect the actual interest paid on the
outstanding loan relating to the asset, effectively transferring the interest
rate exposure to our counterparty under the charter contract.





Towards
the end of December 2007 the spot market for tankers strengthened dramatically
to exceptionally high levels and, although spot charter rates have declined in
the first two months of 2008, market sources expect that the tanker
market will continue to be strong in 2008.  So far in 2008, market
rates for spot chartered tankers have been close to those in the same period in
2007, but are significantly higher than in the second half of
2007.  Our tanker vessels
on charter to the Frontline Charterers are subject to long term charters that
provide for both a fixed base charterhire and a profit sharing payment that
applies once the applicable Frontline Charterer earns daily rates from our
vessels that exceed certain levels. If rates for spot market chartered vessels
increase, our profit sharing revenues will likewise increase for those vessels
operated by the Frontline Charterers in thespot
market. The charter contracts for the two jack-up drilling rigs on charter to
Seadrill also include profit sharing payments above certain base levels from
2009 onwards. The current market for jack-up rigs is strong, but should the
market decrease, we may not receive any revenues from the profit sharing
agreements once they commence.


58




Off
balance sheet arrangements




At
December 31 2007 the only arrangements we are party to which may be considered
to be off balance sheet arrangements are the TRS agreements in our own and other
companies’ securities. The fair value of these positions as at December 31 2007
is reflected in the Consolidated Financial Statements included in Item 18 of
this Annual Report.








ITEM
6.           DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES





A.
DIRECTORS AND SENIOR MANAGEMENT





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








Name
            Age
            PositionCraig
      H. Stevenson Jr
            54
            Director
      and Chairman of the BoardTor
      Olav Trøim
            45
            Director
      of the CompanyPaul
      Leand
            41
            Director
      of the CompanyKate
      Blankenship
            43
            Director
      of the Company and Chairperson of the Audit CommitteeLars
      Solbakken
            50
            Chief
      Executive Officer of Ship Finance Management ASOle
      B. Hjertaker
            41
            Chief
      Financial Officer of Ship Finance Management
AS




Under
our constituent documents, we are required to have at least one independent
director on our Board of Directors whose consent will be required to file for
bankruptcy, liquidate or dissolve, merge or sell all or substantially all of our
assets.





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





Craig H.
Stevenson Jr.has served as a director and Chairman of the Board
since September 2007. He has a long career as senior executive in several
companies, including Chairman of the Board and Chief Executive Officer of OMI
Corporation (OMI - a NYSE listed shipping company) from 1998 to 2007, when he
left following the acquisition of OMI by Teekay Shipping Corporation and A/S
Dampskibsselskabet Torm. He is also currently the CEO of Diamond S
Management.





Tor
Olav Trøimhas served as a
Director of the Company since October 2003 and was the Chairman of the Board
until September 2007. He was Vice-President and a director of
Frontline from November 1997 to March 2008, and has served as an alternate
director of Frontline since March 2008.  Mr.Trøimgraduated as M.Sc Naval Architect from
the University of Trondheim, Norway, in 1985. His experience includes Portfolio
Manager Equity in Storebrand ASA (1987-1990) and Chief Executive Officer for the
Norwegian Oil Company DNO AS (1992-1995). Since 1995 Mr. Trøim has been a
director of SeaTankers Management inCyprus. In this capacity, he has acted as
Chief Executive Officer for the public companies Knightsbridge Tankers Limited,
Golar LNG Limited (NASDAQ) and Seadrill.Mr.Trøimis currently Vice Chairman of the
latter two companies and in addition is a member of the Boards in the publiccompanies Golden Ocean (OSE), Aktiv
Kapital ASA (OSE) and Marine Harvest ASA
(OSE).


59





Paul
Leand Jr. serves as a Director of the Company. Mr. Leand is the
Chief Executive Officer and Director of AMA Capital Partners LLC, or AMA, an
investment bank specializing in the maritime industry. From 1989 to 1998
Mr. Leand served at the First National Bank of Maryland where he managed
the Bank's Railroad Division and its International Maritime Division. He has
worked extensively in the U.S. capital markets in connection with AMA's
restructuring and mergers and acquisitions practices. Mr. Leand serves as a
member of American Marine Credit LLC's Credit Committee and served as a member
of the Investment Committee of AMA Shipping Fund I, a private equity fund
formed and managed by AMA.





Svein
Aaserserved as a Director of
the Company until his resignation in September 2007.





Kate
Blankenship has been a director of the Company since October 2003. Ms.
Blankenship served as the Company's Chief Accounting Officer and Company
Secretary from October 2003 to October 2005. Ms. Blankenship has been a director
of Frontline since August 2003, a director of Golar LNG Limited since 2003, a
director of Golden Ocean since October 2004 and a director of Seadrill since May
2005.





Lars
Solbakken has been employed as Chief Executive Officer of Ship Finance
Management AS since May 1 2006. In the period from June 1997 until April 2006,
Mr. Solbakken was employed as General Manager of Fortis Bank in Norway and was
also responsible for the bank's shipping and oil service activities in
Scandinavia. From 1987 to 1997 Mr. Solbakken served in several positions in
Nordea Bank Norge ASA (previously Christiania Bank). He was Senior Vice
President and Deputy for the shipping, offshore and aviation group, head of
equity issues and merger & acquisition activities and General Manager for
the Seattle Branch. Prior to joining Nordea Bank Norge ASA, Mr. Solbakken worked
five years in Wilh. Wilhelmsen ASA as Finance Manager.




Ole B.
Hjertaker has served as Chief Financial Officer of Ship Finance
Management AS since September 2006. Prior to joining Ship Finance, Mr. Hjertaker
was a director in the Corporate Finance division of DnB NOR Markets, a leading
shipping and offshore bank. Mr. Hjertaker has extensive corporate and investment
banking experience, mainly within the Maritime/Transportation
industries.







B.
COMPENSATION





During
the year ended December 31 2007 we paid to our directors and executive officers
aggregate cash compensation of $3.4 million including an aggregate amount of
$0.1 million for pension and retirement benefits.  We reimburse
directors for reasonable out of pocket expenses incurred by them in connection
with their service to us.





In
addition to cash compensation, during 2007 we also recognized an expense of $0.8
million relating to 150,000 and 210,000 stock options issued in 2006 and 2007,
respectively, to certain of our directors and employees. The options vest over a
three year period, with the first of them vesting in November 2007, and expire
between November 2011 and September 2012.  The exercise price of the
options is currently between $19.58 and $27.19 per share, and shall be reduced
from time to time by the amount of any future dividend declared
with respect to the common shares. The option awarded to a Director has a strike
price that increases by 6% each year.


60





The
employment contract for one of our executive officers contains a share-based
bonus provision.  Under the terms of the contract, the share based
bonus is calculated based on the annual increase in the
share price of the Company, plus any dividend per share paid, multiplied by a
notional share holding of 200,000 shares.  Any bonus relating to the
increase in share price is payable at the end of each calendar year, while any
bonus linked to dividend payments is payable on the relevant dividend payment
date.  The share-based bonus fair value of $1.0 million at December 31
2007 was recorded as a liability.





C.
BOARD PRACTICES





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





We
currently have an Audit Committee, which is responsible for overseeing the
quality and integrity of the Company’s financial statements and its accounting,
auditing and financial reporting practices, the Company’s compliance with legal
and regulatory requirements, the independent auditor’s qualifications,
independence and performance and the Company’s internal audit function. Kate
Blankenship is the Chairperson of the Audit Committee and the Audit Committee
Financial Expert.





As a foreign private issuer we are
exempt from certain requirements of the New York Stock Exchange that are
applicable toU.S.listed companies.  For a
listing and further discussion of how our corporate governance practices differ
from those required of U.S. companies listed on the New York Stock Exchange,
please visit the corporate governance section of our website atwww.shipfinance.bm.





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





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





D.
EMPLOYEES





We
currently employ seven persons. We have contracted with Frontline Management and
other third parties for certain managerial responsibilities for our fleet, and
with Frontline Management for some administrative services, including corporate
services.


E.
SHARE OWNERSHIP
  The
beneficial interests of our Directors and officers in our common shares as of
March 11 2008 are as follows:
  Director or
      Officer
              Common Shares of $1.00
      each
              Percentage of Common Shares
      OutstandingCraig
      H. Stevenson Jr.
              115,000
              *Tor
      Olav Trøim
              203,132
              *Paul
      Leand
              5,000
              *Kate
      Blankenship
              3,980
              *Lars
      Solbakken
              12,000
              *Ole B.
      Hjertaker
              54,000**
              *
 *   Less
than one percent
 **
Including 50,000 options to acquire common shares that have vested.
 
  61
  Share
Option Scheme
  In
November 2006 the Board of Directors approved the Ship Finance International
Limited Share Option Scheme. The subscription price for all options granted
under the scheme will be reduced by the amount of all dividends declared by the
Company per share in the period from the date of grant until the date the
options are exercised.
 
 Details
of options to acquire common shares in the Company by Directors and officers as
of March 11 2008 were as follows:
 
 Director or Officer
              Number of options
              Exercise price
              Expiration DateCraig
      H. Stevenson Jr.
              200,000*
              $27.19**
              Dec.
      2012Ole
      B. Hjertaker
              150,000***
                60,000*
              $19.58
                $26.55
              Nov.
      2011
                Feb.
      2013
 *    
None of the options have vested.
 **  
The initial exercise price is adjusted upwards by 6% on each anniversary date of
the grant.
 ***
50,000 of the options have vested.


62







ITEM
      7.
            MAJOR
      SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS





A.
MAJOR SHAREHOLDERS





Ship
Finance International
Limited is indirectly controlled by another corporation (see below).The following table
presents certain information as at December 31 2007 regarding the ownership of
our Common Shares with respect to each shareholder who we know to beneficially
own more than five percent of our outstanding Common
Shares.




Owner
            Amount
      of Common Shares
            Percent
      of Common SharesHemen
      Holding Ltd. (1)
            18,128,177
            24.93%Farahead
      Investments Inc. (1)
            12,000,000
            16.5%FMR
      LLC (2)
            5,430,488
            7.46%




(1)
              Hemen
      Holding Ltd. is a Cyprus holding company, and Farahead Investments Inc. is
      a Liberian Company, both indirectly controlled by Mr. John
      Fredriksen.


(2)
            Fidelity
      Management & Research Company is a wholly owned subsidiary of FMR LLC.
      The above information in respect of FMR LLC is
      derived solely from information publicly filed by FMR LLC with the
      SEC.





The
Company’s major shareholders have
the same voting rights as other shareholders of the Company.





As
at March 11 2008 the Company had 292 holders of record in the United States. We
had a total of 72,743,737 of Common Shares outstanding as of March 11
2008.





We
are not aware of any arrangements, the operation of which may at a subsequent
date result in a change in control.





B.
RELATED PARTY TRANSACTIONS





The
Company, which was formed in 2003 as a wholly-owned subsidiary of Frontline, was
partially spun-off in 2004 and its shares commenced trading on the New York
Stock Exchange in June 2004. A significant proportion of the Company’s business
continues to be transacted through contractual relationships between us and the
following parties, which are either indirectly controlled by Hemen, or which
have directors who are also directors of this Company:




-
            Frontline-
            Seadrill




-
            Golden
      Ocean




-
            Deep
      Sea







63


The
majority of our assets were acquired from Frontline in 2004 soon after we were
first established as a subsidiary of Frontline. As of March 11 2008 our fleet
consists of 58 operating vessels and a further 14 which are under construction.
The total of 72 vessels includes the Front Vanadis, which isthe subject of a
hire-purchase agreement, and the Front Sabang, which will be
subject to a hire purchase agreement. The majority of our operations are
conducted through contractual relationships between us and parties indirectly
controlled by Hemen. In addition, the majority of our directors are also
directors of companies related to Hemen. We refer you to Item 10.C “Material
Contracts” for discussion of the material contractual arrangements that we have
with affiliates of Hemen.





As
of March 11 2008 we charter 40 of our vessels to the Frontline Charterers under
long-term leases, most of which were given economic effect from January 1 2004.
In connection with these charters to the Frontline Charterers, we have
recognized the inception of net investments in finance leases of $1,877 million,
additions during 2007 of $96 million (2006: $137 million) and disposals during
2007 of $170 million (2006: $34 million).  At December 31 2007 the
balance of net investments in finance leases to the Frontline Charterers was
$1,752 million (2006: $1,910 million) of which $116 million (2006: $127 million)
represents short-term maturities.





We
pay Frontline Management a management fee of $6,500 per day per vessel for all
vessels chartered to the Frontline Charterers, resulting in expenses of $103
million for the year ended December 31 2007 (2006: $116 million). The management
fees are classified as ship operating expenses.





We
have an administrative services agreement with Frontline Management under which
they provide us with certain administrative support services.  For
periods up to December 31 2006, we and each of our vessel-owning subsidiaries
paid Frontline Management a fixed fee of $20,000 per year for services under the
agreement, and agreed to reimburse Frontline Management for reasonable third
party costs, if any, advanced on our behalf by Frontline. The original agreement
has been amended, such that from January 1 2007 onwards we pay Frontline
Management our allocation of the actual costs they incur on our behalf, plus a
margin.





The
Frontline Charterers pay us profit sharing of 20% of earnings above average base
charter rates. During the year ended December 31 2007 we earned and recognized
revenue of $53 million (2006: $79 million) under this arrangement.





In
June 2005 we sold the Suezmax Front Hunter to an unrelated
third party for a net gain of $25 million which was deferred.  The
charter and management agreements with Frontline relating to this vessel were
terminated, and we paid Frontline a $4 million termination fee, in addition to
Frontline having the right to sell to Ship Finance a newbuilding VLCC and
charter it back at reduced charter rates.  In June 2006 the parties
agreed to cancel the agreement and to split the profit in accordance with the
profit share agreement (80% to Frontline and 20% to us), but adjusted for the
residual value belonging to us.  The cancellation of this agreement
resulted in net payment of $16 million to Frontline, in addition to the earlier
termination payment of $4 million.  In 2006 we booked a net gain of $9
million relating to the sale of Front Hunter and the
cancellation of the option agreement.





In
January 2006 we acquired the VLCC Front Tobago from Frontline
for consideration of $40 million. The vessel was subsequently sold in December
2006 to an unrelated third party for $45 million.
At the time of the sale the vessel was on lease with one of the Frontline
Charterers, and we paid a termination fee of approximately $10 million to
Frontline to terminate the lease.


64





In April
2006 we entered into an agreement with Horizon Lines under which we acquired
five container vessels under construction for consideration of approximately
$280 million. The vessels have been chartered back to Horizon Lines under
12-year bareboat charters with three-year renewal options on
the part of Horizon Lines. Horizon Lines has options to buy the vessels after
five, eight, 12 and 15 years.  As part of this transaction, Horizon
Lines paid a commission to AMA Capital Partners LLC (“AMA”) for brokerage and
financial advice. One of our board members is associated with AMA.





In
June 2006 Rig Finance, our wholly owned subsidiary, purchased the newbuilding
jack-up drilling rig West
Ceres from SeaDrill Invest I for a total consideration of $210
million.  Upon delivery the rig was immediately bareboat chartered
back to SeaDrill Invest I for a period of 15 years.  The charter party
is fully guaranteed by Seadrill, the ultimate parent company of SeaDrill Invest
I.  SeaDrill Invest I has been granted fixed price purchase options
after three, five, seven, 10, 12 and 15 years.





In
July 2006 we entered into an agreement to acquire the 1997 built Panamax drybulk
carrier Golden Shadow
for $28.4 million from Golden Ocean.  The vessel was chartered back to
the seller for a period of 10 years upon delivery to us in September
2006.  As part of the agreement, Golden Ocean has provided an interest
free and non-amortizing seller’s credit of $2.6 million.  Golden Ocean
has been granted fixed purchase options after three, five, seven and 10
years.  At the end of the charter, we also have an option to sell the
vessel back to Golden Ocean at an agreed fixed price.





In
November 2006 we announced that we had assumed two newbuilding Suezmax tanker
contracts from Frontline, with scheduled delivery in the first and third
quarters of 2009. We expect to market these vessels for medium to long-term
employment.





In
January 2007 we announced that Rig Finance II, a wholly owned subsidiary, had
entered into an agreement to acquire the newbuilding jack-up drilling rig West Prospero from SeaDrill
Invest II. The purchase price for the rig was $210 million and the rig was
delivered in June 2007. Upon delivery, the rig was bareboat chartered back to
SeaDrill II for a period of 15 years. The charter party is fully guaranteed by
Seadrill, the ultimate parent company of SeaDrill Invest II. SeaDrill Invest II
has been granted fixed price purchase options after three, five, seven, 10, 12
and 15 years.





In
January 2007 we sold five single hull Suezmax tankers to
Frontline.  The gross sales price for the vessels was $184 million,
and the Company received approximately $119 million in cash after paying
compensation of approximately $65 million to Frontline for the termination of
the charters. The vessels were delivered to Frontline in March
2007.





In January
2007 we sold the single-hull Suezmax tanker Front Transporter to an
unrelated third party for a gross sales price of $38 million. The vessel was
delivered to its new owner in March 2007 and we paid a termination fee of $15
million to Frontline for the termination of the related charter.





In
February 2007 we entered into an agreement to acquire two newbuilding Capesize
drybulk carriers from Golden Ocean. Delivery from the shipyard is scheduled in
the fourth quarter of 2008 and first quarter of 2009. Upon delivery the vessels
will commence fifteen year bareboat charter contracts to Golden Ocean. Golden
Ocean has been granted fixed price purchase options after five, 10 and 15
years.




In May 2007
we re-chartered the single-hull VLCC Front Vanadis to an unrelated
third party. The new charter is in the form of a hire-purchase agreement, where
the vessel is chartered to the buyer for a 3.5 year period, with a purchase
obligation at the end of the charter. We paid a compensation payment of
approximately $13 million to Frontline for the termination of the
charter.


65


In August
2007 we entered into an agreement to acquire five offshore supply vessels from
Deep Sea for a total delivered price of $199 million. Upon delivery the vessels
were chartered back to Deep Sea under 12 year bareboat charter agreements, with
Deep Sea having options to buy back the vessels after three, five, seven, 10 and
12 years. One of the vessels was sold back to Deep Sea in January
2008.





In November
2007 we entered into an agreement to acquire a further two offshore supply
vessels from Deep Sea for a total delivered price of $126 million. The
vessels were delivered in January 2008 and chartered back to Deep Sea on 12 year
bareboat charter terms, with Deep Sea having options to buy back the vessels
after three, five, seven, 10 and 12 years.





In December
2007 we sold two double sided Suezmax tankers to unrelated third parties. The
gross sales price was $80 million and the vessels were delivered in December
2007 and January 2008. The Company paid $33 million in compensation to Frontline
for the early termination of the charters.





In March
2008 we entered into an agreement to re-charter the single-hull VLCC Front Sabang to an unrelated
third party. The new charter is in the form of a hire-purchase agreement, where
the vessel is chartered to the buyer for a 3.5 year period, with a purchase
obligation at the end of the charter. We have agreed to pay a compensation
payment of approximately $25 million to Frontline for the early termination of
the charter.








C.
INTERESTS OF EXPERTS AND COUNSEL





Not
Applicable.





ITEM
      8.
            FINANCIAL
      INFORMATION





A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION





See
Item 18.





Legal
Proceedings





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





Dividend
Policy





Our Board
of Directors adopted a policy in May 2004 in connection with our public listing,
whereby we would seek to have a regular quarterly dividend, the amount of which
is based on our contracted revenues and growth prospects. Our goal is to
increase our quarterly dividend as we grow the business, but the timing and
amount of dividends, if any, is at the discretion of our Board of Directors and
will depend upon our operating results, financial condition, cash requirements,
restrictions in terms of financing arrangements and other relevant
factors.


66




We
have paid the following cash dividends since our public listing in June
2004:





Payment
      Date
            Amount per
      Share2004July
      9 2004
            $0.25September
      13 2004
            $0.35December
      7 2004
            $0.452005March
      18 2005
            $0.50June
      24 2005
            $0.50September
      20 2005
            $0.50December
      13 2005
            $0.502006March
      20 2006
            $0.50June
      26 2006
            $0.50September
      18 2006
            $0.52December
      21 2006
            $0.532007March
      22 2007
            $0.54June
      21 2007
            $0.55September
      13 2007
            $0.55December
      10 2007
            $0.55





On
February 14 2008 the Board declared a dividend of $0.55 per share which
was paid on March 10 2008.





B.
SIGNIFICANT CHANGES





None .







ITEM
      9.
            THE
      OFFER AND LISTING





Not
applicable except for Item 9.A.4. and Item 9.C.





The
Company’s common shares were listed on the New York Stock Exchange, or NYSE, on
June 15 2004 and commenced trading on that date under the symbol
“SFL”.


67


The
following table sets forth the fiscal years high and low closing prices for the
common shares on the NYSE since the date of listing.




High
              
              LowFiscal
      year ended December 312007
              $31.54
              
              $22.242006
              $23.80
              
              $16.332005
              $24.00
              
              $16.702004
              $26.16
              
              $11.55The
      following table sets forth, for each full financial quarter for the two
      most recent fiscal years, the high and low prices of the common shares on
      the NYSE since the date of listing.High
              
              LowFiscal
      year ended December 31First
      quarter
              $27.90
              
              $22.24Second
      quarter
              $31.42
              
              $27.44Third
      quarter
              $31.54
              
              $25.23Fourth
      quarter
              $28.46
              
              $24.64High
              
              LowFiscal
      year ended December 31First
      quarter
              $18.75
              
              $16.70Second
      quarter
              $17.64
              
              $16.33Third
      quarter
              $21.00
              
              $17.91Fourth
      quarter
              $23.80
              
              $19.31The
      following table sets forth, for the most recent six months, the high and
      low prices for the common shares on the NYSE.High
              
              LowFebruary
      2008
              $28.01
              
              $25.84January
      2008
              $27.80
              
              $23.64December
      2007
              $28.46
              
              $24.64November
      2007
              $26.51
              
              $24.92October
      2007
              $27.41
              
              $25.78September
      2007
              $28.77
              
              $25.85


ITEM
      10.
            ADDITIONAL
      INFORMATION





A.
SHARE CAPITAL





Not
Applicable





B.
MEMORANDUM AND ARTICLES OF ASSOCIATION





The
Memorandum of Association of the Company has previously been filed as Exhibit
3.1 to the Company’s Registration Statement on Form F-4/A, (Registration No.
333-115705) filed with
the Securities and Exchange Commission on May 25 2004, and is hereby
incorporated by reference into this Annual Report.


68





At the 2007Annual General Meeting of the Company
the shareholders votedto
amend the Company’s Bye-Laws to ensure conformity with recent revisions to the
Bermuda Companies Act 1981, as amended.These amended Bye-Laws of the Company as
adopted by shareholders onSeptember 28 2007have been filed as Exhibit 1 to the
Company's 6-K filed on October 22 2007, and are hereby incorporated by reference
intothis Annual
Report.





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





Bermuda
law permits the Bye-laws of a Bermuda company to contain provisions excluding
personal liability of a director, alternate director, officer, member of a
committee authorized under Bye-law 98, resident representative or their
respective heirs, executors or administrators to the company for any loss
arising or liability attaching to him by virtue of any rule of law in respect of
any negligence, default, breach of duty or breach of trust of which the officer
or person may be guilty.  Bermuda law also grants companies the power
generally to indemnify directors, alternate directors and officers of the
Company  and any members authorized under Bye-law 98, resident
representatives or their respective heirs, executors or administrators if any
such person was or is a party or threatened to be made a party to a threatened,
pending or completed action, suit or proceeding by reason of the fact that he or
she is or was a director, alternate director or officer of the Company or member
of a committee authorized under Bye-law 98, resident representative or their
respective heirs, executors or administrators or was serving in a similar
capacity for another entity at the company's request.





Our
shareholders have no pre-emptive, subscription, redemption, conversion or
sinking fund rights. Shareholders are entitled to one vote for each share held
of record on all matters submitted to a vote of our shareholders. Shareholders
have no cumulative voting rights. Shareholders are entitled to dividends if and
when they are declared by our Board of Directors, subject to any preferred
dividend right of holders of any preference shares. Directors to be elected by
shareholder require a plurality of votes cast at a meeting at which a quorum is
present. For all other matters, unless a different majority is required by law
or our Bye-laws, resolutions to be approved by shareholders require approval by
a majority of votes cast at a meeting at which a quorum is present.





Upon
our liquidation, dissolution or winding up, shareholders will be entitled to
receive, rateably, our net assets available after the payment of all our debts
and liabilities and any preference amount owed to any preference shareholders.
The rights of shareholders, including the right to elect directors, are subject
to the rights of any series of preference shares we may issue in the
future.





Under
our Bye-laws annual meetings of shareholders will be held at a time and place
selected by our Board of Directors each calendar year. Special meetings of
shareholders may be called by
our Board of Directors at any time and must be called at the request of
shareholders holding at least 10% of our paid-up share capital carrying the
right to vote at general meetings. Under our Bye-laws five days’ notice of an
annual meeting or any special meeting must be given to each shareholder entitled
to vote at that meeting. Under Bermuda law accidental failure to give notice
will not invalidate proceedings at a meeting. Our Board of Directors may set a
record date at any time before or after any date on which such notice is
dispatched.


69





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





Our
Bye-laws do not prohibit a director from being a party to, or otherwise having
an interest in, any transaction or arrangement with the Company or in which the
Company is otherwise interested.  Our Bye-laws provide our Board of
Directors the authority to exercise all of the powers of the Company to borrow
money and to mortgage or charge all or any part of our property and assets as
collateral security for any debt, liability or obligation.  Our
directors are not required to retire because of their age, and our directors are
not required to be holders of our common shares.  Directors serve for
one year terms, and shall serve until re-elected or until their successors are
appointed at the next annual general meeting.





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








C.
MATERIAL CONTRACTS





Frontline
Time Charters




We
have chartered most of our tankers and OBOs to the Frontline Charterers under
long term time charters, which will extend for various periods depending on the
age of the vessels, ranging from approximately five to 19 years. We refer you to
Item 4.D. "Property, Plant and Equipment" for the relevant charter termination
dates for each of our vessels.  The daily base charter rates payable
to us under the charters have been fixed in advance and will decrease as our
vessels age, and the Frontline Charterers have the right to terminate a charter
for a non-double hull vessel beginning on each vessel’s anniversary date in
2010.


With
the exceptions described below, the daily base charter rates for our charters
with the Frontline Charterers, which are payable to us monthly in advance for a
maximum of 360 days per year (361 days per leap year), are as
follows:


70





Year
            VLCC
            Suezmax/OBO2003 to 2006
            $25,575
            $21,1002007 to 2010
            $25,175
            $20,7002011 and beyond
            $24,175
            $19,700







The
daily base charter rates for vessels that reach their 18th delivery date
anniversary, in the case of non-double hull vessels, or their 20th delivery date
anniversary, in the case of double hull vessels, will decline to $18,262 per day
for VLCCs and $15,348 for Suezmax tankers after such dates,
respectively.





The
exceptions to the above rates are for the following vessels on daily base
charterhire to Frontline Shipping II, these rates also payable to us monthly in
advance for a maximum of 360 days per year (361 days per leap year), as
follows:








Vessel
            2005
      to 2006
            2007
      to 2010
            2011
      to 2018
            2019
      and beyondFront
      Champion
            $31,340
            $31,140
            $30,640
            $28,464Front
      Century
            $31,501
            $31,301
            $30,801
            $28,625Golden
      Victory
            $33,793
            $33,793
            $33,793
            $33,793Front
      Energy
            $30,014
            $30,014
            $30,014
            $30,014Front
      Force
            $29,853
            $29,853
            $29,853
            $29,853






In
addition, the base charter rate for our non-double hull vessels will decline to
$7,500 per day on each vessel's anniversary date in 2010, at which time the
relevant Frontline Charterer will have the option to terminate the charters for
those vessels. Each charter also provides that the base charter rate will be
reduced if the vessel does not achieve the performance specifications set forth
in the charter. The related management agreement provides that Frontline
Management will reimburse us for any such reduced charter payments. The
Frontline Charterers have the right under a charter to direct us to bareboat
charter the related vessel to a third party. During the term of the bareboat
charter, the Frontline Charterer will continue to pay us the daily base charter
rate for the vessel, less $6,500 per day. The related management agreement
provides that our obligation to pay the $6,500 fixed fee to Frontline Management
will be suspended for so long as the vessel is bareboat chartered.





Under
the charters we are required to keep the vessels seaworthy, and to crew and
maintain them. Frontline Management performs those duties for us under the
management agreements described below. If a structural change or new equipment
is required due to changes in classification society or regulatory requirements,
the Frontline Charterers may make them, at their expense, without our consent,
but those changes or improvements will become our property. The Frontline
Charterers are not obligated to pay us charterhire for off hire days in excess
of five off hire days per year per vessel calculated on a fleet-wide basis,
which include days a vessel is unable to be in service due to, among other
things, repairs or drydockings. However, under the management agreements
described below, Frontline Management will reimburse us for any loss of charter
revenue in excess of five off hire days per vessel, calculated on a fleet-wide
basis.




The
terms of the charters do not provide the Frontline Charterers with an option to
terminate the charter before the end of its term, other than with respect to our
non-double hull vessels after the vessels anniversary dates in 2010. We may
terminate any or all of the charters in the event of an event of default under
the charter ancillary agreement that we describe below. The charters may also
terminate in the event of (1) a requisition for title of a vessel or
(2) the total loss or constructive total
loss of a vessel. In addition, each charter provides that we may not sell the
related vessel without relevant Frontline Charterers
consent.




71






Charter
Ancillary Agreement




We
have entered into charter ancillary agreements with each of the Frontline
Charterers, our relevant vessel-owning subsidiaries and
Frontline.  The charter ancillary agreements remain in effect until
the last long term charter with the Frontline Charterers terminates in
accordance with its terms. Frontline has guaranteed the Frontline Charterers’
obligations under the charter ancillary agreements, except for the Frontline
Charterers’ obligations to pay charterhire.




Charter Service Reserve.
Frontline Shipping was initially capitalized with $250 million in cash
provided by Frontline to support its obligation to make payments to us under the
charters. Frontline Shipping II was initially capitalized with approximately $21
million in cash. Due to sales and acquisitions, the current capitalization in
Frontline Shipping and Frontline Shipping II are $186 million and $35 million
respectively. The capitalization of Frontline Shipping will reduce to $181
million upon the cancellation of the charter for Front Sabang. These funds are
being held as a charter service reserve to support each Charterer’s obligation
to make charter payments to us under the charters. The Frontline Charterer’s are
entitled to use the charter service reserve only (1) to make charter
payments to us and (2) for reasonable working capital to meet short term
voyage expenses. The Frontline Charterers are required to provide us with
monthly certifications of the balances of and activity in the charter service
reserve.




Material
Covenants.  Pursuant to the terms of the charter ancillary
agreement, each Frontline Charterer has agreed not to pay dividends or other
distributions to its shareholders or loan, repay or make any other payment in
respect of its indebtedness to any of its affiliates (other than us or our
wholly owned subsidiaries), unless (1) the relevant Frontline Charterer is then
in compliance with its obligations under the charter ancillary agreement,
(2) after giving effect to the dividend or other distribution, (A) the
Frontline Charterer remains in compliance with such obligations, (B) the
balance of the charter service reserve equals at least $186 million in the
case of Frontline Shipping (reducing to $181 million upon the cancellation of
the charter for Front
Sabang), or $35 million in the case of Frontline Shipping II (which
threshold will be reduced by $5.3 million and $7.0 million in the case of
Frontline Shipping and Frontline Shipping II, respectively, in each event that a
charter to which the Frontline Charterer is a party is terminated other than by
reason of a default by the Frontline Charterer), which we refer to as the
"Minimum Reserve", and (C) it certifies to us that it reasonably believes
that the charter service reserve will be equal to or greater than the Minimum
Reserve level for at least 30 days after the date of that dividend or
distribution, taking into consideration its reasonably expected payment
obligations during such 30-day period, (3) any charterhire payments
deferred pursuant to the deferral provisions described below have been fully
paid to us and (4) any profit sharing payments deferred pursuant to the
profit sharing payment provisions described below have been fully paid to us. In
addition, each Frontline Charterer has agreed to certain other restrictive
covenants, including restrictions on its ability to, without our
consent:




·
              amend
      its organizational documents in a manner that would adversely affect
      us;
  ·
              violate
      its organizational documents;
  ·
              engage
      in businesses other than the operation and chartering of our vessels (not
      applicable for Frontline Shipping
II);
  ·
              incur
      debt, other than in the ordinary course of
  business;
  ·
              sell
      all or substantially all of its assets or the assets of the relevant
      Frontline Charterer and its subsidiaries taken as a whole, or enter into
      any merger, consolidation or business combination
    transaction;
   72
  ·
              enter
      into transactions with affiliates, other than on an arm's-length
      basis;
  ·
              permit
      the incurrence of any liens on any of its assets, other than liens
      incurred in the ordinary course of
business;
  ·
              issue
      any capital stock to any person or entity other than Frontline;
      and
  ·
              make
      any investments in, provide loans or advances to, or grant guarantees for
      the benefit of any person or entity other than in the ordinary course of
      business.


In
addition, Frontline has agreed that it will cause the Frontline Charterers at
all times to remain its wholly owned subsidiaries.




Deferral of Charter
Payments.  For any period during which the cash and cash
equivalents held by Frontline Shipping are less than $75 million, Frontline
Shipping is entitled to defer from the payments payable to us under each charter
up to $4,600 per day for each of our vessels that is a VLCC and up to $3,400 per
day for each of our vessels that is a Suezmax, in each case without
interest.  However, no such deferral with respect to a particular
charter may be outstanding for more than one year at any given time. Frontline
Shipping will be required to immediately use all revenues that Frontline
Shipping receives that are in excess of the daily charter rates payable to us to
pay any deferred amounts at such time as the cash and cash equivalents held by
Frontline Shipping are greater than $75 million, unless Frontline Shipping
reasonably believes that the cash and cash equivalents held by Frontline
Shipping will not exceed $75 million for at least 30 days after the date of
the payment.




Profit Sharing
Payments.  Under the terms of the charter ancillary agreements,
the Frontline Charterers have agreed to pay us a profit sharing payment equal to
20% of the charter revenues they realize on our fleet above specified threshold
levels, paid annually and calculated on an average TCE basis. For each profit
sharing period the threshold is calculated as the number of days in the period
multiplied by the daily threshold TCE rates for the applicable
vessels.  After 2010 all of our non-double hull vessels will be
excluded from the annual profit sharing payment calculation. For purposes of
calculating bareboat revenues on a TCE basis, vessel operating expenses are
assumed to equal $6,500 per day. Each of the Frontline Charterers has agreed to
use its commercial best efforts to charter our vessels on market terms and not
to give preferential treatment to the marketing of any other vessels owned or
managed by Frontline or its affiliates.




The
Frontline Charterers are entitled to defer, without interest, any profit sharing
payment to the extent that, after giving effect to the payment, the charter
service reserve would be less than the Minimum Reserve.  The Frontline
Charterers are required to immediately use all revenues that the Frontline
Charterers receive that are in excess of the daily charter rates payable to us
to pay any deferred profit sharing amounts at such time as the charter service
reserve exceeds the minimum reserve, unless the relevant Frontline Charterer
reasonably believes that the charter service reserve will not exceed the minimum
reserve level for at least 30 days after the date of the payment. In
addition, the Frontline Charterers will not be required to make any payment of
deferred profit sharing amounts until the payment would be at least
$2 million.




Collateral
Arrangements.  The charter ancillary agreements provide that
the obligations of the Frontline Charterers to us under the charters and the
charter ancillary agreements are secured by a lien over all of the assets of the
Frontline Charterers and a pledge of the equity interests in the Frontline
Charterers.




Default.  An event
of default shall be deemed to occur under the charter ancillary agreements
if:




·
              the
      relevant Frontline Charterer materially breaches any of its obligations
      under any of the charters, including the failure to make charterhire
      payments when due, subject to Frontline Shipping’s deferral rights
      explained above;
  ·
              the
      relevant Frontline Charterer or Frontline materially breaches any of its
      obligations under the applicable charter ancillary agreement or the
      Frontline performance guarantee;
   73
   ·
              Frontline
      Management materially breaches any of its obligations under any of the
      management agreements; or
  ·
              Frontline
      Shipping and Frontline Shipping II fails at any time to hold at least
      $55 million or $7.5 million in cash and cash equivalents,
      respectively.


Upon
the occurrence of any event of default under a charter ancillary agreement that
continues for 30 days after we give the relevant Frontline Charterer notice
of such default, we may elect to:




·
            terminate
      any or all of the relevant charters with the relevant Frontline Charterer;
      and




·
            foreclose
      on any or all of our security interests described above with respect to
      the relevant Frontline Charterer;
and/or




·
            pursue
      any other available rights or
remedies.






Frontline
Performance Guarantee




Frontline
has issued a performance guarantee with respect to the charters, the charter
ancillary agreements, the management agreements and the administrative services agreement. Pursuant to the performance guarantee,
Frontline has guaranteed the following obligations of the Frontline Charterers
and Frontline Management:





·
            the
      performance of the obligations of the Frontline Charterers under the
      charters with the exception of payment of charter hire, which is not
      guaranteed;




·
            the
      performance of the obligations of the Frontline Charterers under the
      charter ancillary agreements;




·
            the
      performance of the obligations of Frontline Management under the
      management agreements, provided however that Frontline's obligations with
      respect to indemnification for environmental matters shall not extend
      beyond the protection and indemnity insurance coverage with respect to any
      vessel required by us under the management agreements;
  and




·
            the
      performance of the obligations of Frontline Management under the
      administrative services agreement.




Frontline’s
performance guarantee shall remain in effect until all obligations of the
Frontline Charterers or Frontline Management, as the case may be, that have been
guaranteed by Frontline under the performance guarantee have been performed and
paid in full.






Vessel
Management Agreements




Our
tanker owning subsidiaries that we acquired from Frontline entered into fixed
rate management agreements with Frontline Management effective January 1 2004.
Under the management agreements, Frontline Management is responsible for all
technical management of the vessels, including crewing, maintenance, repair,
certain capital expenditures, drydocking, vessel taxes and other vessel
operating expenses. In addition, if a structural change or new equipment
is required due to changes in classification society or regulatory requirements,
Frontline Management will be responsible for making them, unless Frontline
Shipping does so under the charters. Frontline Management outsources many of
these services to third party providers.




74




Frontline
Management is also obligated under the management agreements to maintain
insurance for each of our vessels, including marine hull and machinery
insurance, protection and indemnity insurance
(including pollution risks and crew insurances) and war risk insurance.
Frontline Management will also reimburse us for all lost charter revenue caused
by our vessels being off hire for more than five days per year on a fleet-wide
basis or failing to achieve the performance standards set forth in the charters.
Under the management agreements, we will pay Frontline Management a fixed fee of
$6,500 per day per vessel for all of the above services, for as long as the
relevant charter is in place. If Frontline Shipping exercises its right under a
charter to direct us to bareboat charter the related vessel to a third party,
the related management agreement provides that our obligation to pay the $6,500
fixed fee to Frontline Management will be suspended for so long as the vessel is
bareboat chartered. Both we and Frontline Management have the right to terminate
any of the management agreements if the relevant charter has been terminated and
in addition we have the right to terminate any of the management agreements upon
90 days prior written notice to Frontline Management.




Frontline
has guaranteed to us Frontline Management's performance under these management
agreements.






Administrative
Services Agreement




We have an administrative services
agreement with Frontline Management under whichtheyprovide us with certain administrative
support services.  Forperiods up to December 31
2006, we and each of our
vessel-owning subsidiaries paid Frontline
Management a fixed fee of$20,000per year for services under the
agreement, and agreedto reimburse Frontline Management for
reasonable third party costs, if any, advanced on our behalf by Frontline.The original agreement has
been amended, such that from January 1 2007 onwards we pay Frontline Management
our allocation of the actual costs they incur on our behalf, plus a margin (see
Exhibit 4.10).Frontline
guarantees to us Frontline Management's performance under this administrative
services agreement.





D.
EXCHANGE CONTROLS





We
are classified by the Bermuda Monetary Authority as a non-resident of Bermuda
for exchange control purposes.





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





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





E.
TAXATION





United
States Taxation




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




75







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
permitted by law to engage in transportation that gives rise to 100%
U.S. source income.





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





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







Application
of Code Section 883




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




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






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






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






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




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






76





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





For
the 2007 tax year, the Company satisfied the Publicly-Traded Test since, on more
than half the days of the taxable year, the Company’s stock was primarily and
regularly traded on the New York Stock Exchange.







Taxation
in Absence of Internal Revenue Code Section 883 Exemption




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






Gain
on Sale of Vessels




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







Taxation
of U.S. Holders




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





As
used herein, the term “U.S. Holder” means a beneficial owner of our common stock
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 our common stock as
a capital asset, generally, for investment purposes.




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







77







Distributions




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





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





There
is no assurance that any dividends paid on our common stock will be eligible for
these preferential rates in the hands of a U.S. Individual
Holder.  Legislation has
been recently introduced in the U.S. Congress which, if enacted in its present
form, would preclude our dividends 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. Individual Holder.







Sale,
Exchange or other Disposition of Common Stock




Assuming
we do not constitute a passive foreign investment company for any taxable year,
a U.S. Holder generally will recognize taxable gain or loss upon a sale,
exchange or other disposition of our common stock in an amount equal to the
difference between the amount realized by the U.S. Holder from such sale,
exchange or other disposition and the U.S. Holder’s tax basis in such
stock.  Such gain or loss will be treated as long-term capital gain or
loss if the U.S. Holder’s holding period in the common stock 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
United States federal income tax rules apply to a U.S. Holder that holds stock
in a foreign corporation classified as a passive foreign investment company, or
a PFIC, for United States federal income tax purposes.  In general, we
will be treated as a PFIC with respect to a U.S. Holder if, for any taxable year
in which such holder held our common stock, either at least 75% of our gross income
for such taxable year consists of passive income (e.g., dividends, interest,
capital gains and rents derived other than in the active conduct of a rental
business),
or at least 50% of the average value of the assets held by the corporation
during such taxable year produce, or are held for the production of, passive
income.


78





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





Based
on our current operations and future projections, we do not believe that we are,
nor do we expect to become, a PFIC with respect to any taxable
year.  Although there is no legal authority directly on point, our
belief is based principally on the position that, for purposes of determining
whether we are a PFIC, the gross income we derive or are deemed to derive from
the time chartering and voyage chartering activities of our wholly-owned
subsidiaries should constitute services income, rather than rental
income.  Correspondingly, we believe that such income does not
constitute passive income, and the assets that we or our 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 we are a PFIC.  We believe there is substantial
legal authority supporting our 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.  In addition, we have received an opinion from our Counsel,
Seward & Kissel LLP, that it is more likely than not that our income from
time charters will not be treated as passive income for purposes of determining
whether we are a PFIC. 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 our position.  In addition, although we intend to conduct our
affairs in a manner to avoid being classified as a PFIC with respect to any
taxable year, we cannot assure you that the nature of our operations will not
change in the future.





As
discussed more fully below, if we 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 us as a “Qualified Electing
Fund”, which election we refer 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 our common stock, 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 we refer to as an
“Electing Holder,” the Electing Holder must report each year for United States
federal income tax purposes his pro rata share of our ordinary earnings and our
net capital gain, if any, for our taxable year that ends with or within the
taxable year of the Electing Holder, regardless of whether or not distributions
were received from us by the Electing Holder.  The Electing Holder’s
adjusted tax basis in the common stock 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 stock 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 our common
stock.







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




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







79




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




Finally,
if we 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 we refer 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 our common stock in a
taxable year in excess of 125 percent of the average annual distributions
received by the Non-Electing Holder in the three preceding taxable years, or, if
shorter, the Non-Electing Holder’s holding period for the common stock), and
(2) any gain realized on the sale, exchange or other disposition of our
common stock.  Under these special rules:





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




·
            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.




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 our common stock.  If a
Non-Electing Holder who is an individual dies while owning our common stock,
such holder’s successor generally would not receive a step-up in tax basis with
respect to such stock.







Backup
Withholding and Information Reporting




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





·
            fail
      to provide an accurate taxpayer identification
  number;




·
            are
      notified by the Internal Revenue Service that you have failed to report
      all interest or dividends required to be shown on your federal income tax
      returns; or




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




If
you sell your 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 you establish an exemption.  If you sell your common
shares through a non-U.S. office of a non-U.S. broker and the sales proceeds are
paid to you outside the United States then information reporting and backup
withholding generally will not apply to that payment.  However, U.S.
information reporting requirements, but not backup withholding, will apply to a
payment of sales
proceeds, including a payment made to you outside the United States, if you sell
your common stock 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, you generally may obtain a refund of
any amounts withheld
under backup withholding rules that exceed your income tax liability by filing a
refund claim with the U.S. Internal Revenue Service.






80






Bermuda
Taxation




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







Liberian
Taxation




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





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





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







F.
DIVIDENDS AND PAYING AGENTS







Not
Applicable







G.
STATEMENT BY EXPERTS




Not
Applicable







H.
DOCUMENTS ON DISPLAY




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







81




I.
SUBSIDIARY INFORMATION




Not
Applicable







ITEM
      11.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK







We
are exposed to various market risks, including interest rates and foreign
currency fluctuations. We use interest rate swaps to manage interest rate risk.
Several of our charter contracts also contain interest adjustment clauses,
whereby the charter rate is adjusted to reflect the actual interest paid on the
outstanding debt, effectively transferring the interest rate exposure on the
counterparty under the charter contract. We may enter into derivative
instruments from time to time for speculative purposes.





Our exposure to interest rate risk
relates primarily to our debt and related interest rate swaps. The majority of
this exposure derives from our floating rate debt, which totaled$1,821million at December 31 2007(2006: $1,466million). We have entered into interest
rate swap agreements to manage this exposure to interest rate changes by
swapping floating interest rates with fixed interest rates. At December 31
2007we had swaps with a total notional
principalof $884
million(2006: $739million).  The swap
agreements maturebetween
February 2009 and May 2019,
and we estimate that we wouldpay $18 millionto terminate these agreements as of
December 31 2007(2006:receive$9million).  At December 312007 $280million (2006: $155 million) of our outstanding debt was also
subject to interest adjustment clauses under charter contracts with the relevant
charterers. At December 31 2007we had also entered into total return
bond swaps in respect of$122million (2006: $52 million) of our 8.5% debentures, which
effectively translates the underlying principal amount into floating rate
debt.





At December 31 2007our net exposure to interest rate
fluctuations on our outstanding debt was$779million (2006: $791million). Our net exposure to interest
fluctuations is based on our total floating rate debt outstanding at December 31
2007, plus the outstanding under the bond
swap line at December 31 2007, less the outstanding floating rate
debt subject to interest adjustment clauses and the notional principal of our
floating to fixed interest rate swaps outstanding at December 31 2007.  A one per cent change in
interest rates wouldthusincrease or decrease
interest expense by$8million per year as of December 31
2007(2006: $8million).





The
fair market value of our fixed rate debt was $457 million as of December 31 2007
(2006: $449 million).





In
October 2007 the Board of Directors of the Company approved a share repurchase
program of up to seven million shares. Initially the program is to be financed
through the use of Total Return
Swaps (“TRS”) indexed to the Company’s own shares, whereby the counterparty
acquires shares in the Company, and the Company carries the risk of fluctuations
in the share price of the acquired shares.At December 31
2007 the counterparty had acquired approximately 349,000 shares in the Company
under this arrangement and a further 343,000 shares have been acquired so far in
2008.  These open positions expose the Company to market risk
associated with fluctuations in the Company’s share price.
It is estimated that a 10% reduction in the Company’s share price below the
price at which the counterparty acquired the shares would generate an adverse
fair value adjustment of up to $1.7 million, depending to a small degree
on the counterparty’s funding costs and the Company’s dividend
payments.





In
addition to the above TRS transactions indexed to the Company’s own securities,
the Company may from time to time enter into short-term TRS arrangements
relating to securities in other companies.





The
majority of our transactions, assets and liabilities are denominated in U.S.
dollars, our functional currency.





ITEM
      12.
            DESCRIPTION
      OF SECURITIES





Not
Applicable


82


PART
II





ITEM
      13.
            DEFAULTS,
      DIVIDEND ARREARAGES AND
DELINQUENCIES





Neither
we nor any of our subsidiaries have been subject to a material default in the
payment of principal, interest, a sinking fund or purchase fund installment or
any other material default that was not cured within 30 days. In addition, the
payment of our dividends are not, and have not been in arrears or have not been
subject to material delinquency that was not cured within 30 days.





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





None





ITEM
      15.
            CONTROLS
      AND PROCEDURES




a) Disclosure
Controls and Procedures




Management assessed the effectiveness of
the design and operation of the Company’s disclosure controls and procedures
pursuant to Rule 13a-15(e) of the Securities Exchange Act of 1934, as of the end
of the period covered by this annual report as of December 31
2007. Based upon that evaluation, the
Principal Executive Officer and Principal Financial Officer concluded that the
Company’s disclosure controls and procedures are effective as of the evaluation
date.




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




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




Internal control over financial
reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the
Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the Company’s principal executive and principal financial
officers and effected by the Company’s Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:




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




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




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




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






83






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




Our management with the participation of
our Principal Executive Officer and Principal Financial Officer assessed the
effectiveness of the design and operation of the Company’s internal controls
over financial reporting pursuant to Rule 13a-15 of the Securities Exchange Act
of 1934, as of December 31 2007. Based upon that evaluation, the
Principal Executive Officer and Principal Financial Officer concluded that the
Company’s internal controls over financial reporting are effective as of
December 31 2007.




The effectiveness of the Company’s
internal control over financial reporting as of December 31 2007 has been
audited by Moore Stephens, P.C., an independent registered public accounting
firm, as stated in their report which appears herein.







c) Changes
in internal control over financial reporting




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







ITEM
16 A.     AUDIT COMMITTEE FINANCIAL EXPERT





Our
Board of Directors has determined that our Audit Committee has one Audit
Committee Financial Expert. Kate Blankenship is an independent Director and is
the Audit Committee Financial Expert.







ITEM
16 B.     CODE OF ETHICS





We
have adopted a Code of Ethics that applies to all entities controlled by us and
our employees, directors, officers and agents of the Company. The Code of Ethics
has previously been filed as Exhibit 11.1 to our Annual Report on Form 20-F for
the fiscal year ended December 31 2004, filed with the Securities and Exchange
Commission on June 30 2005, and is hereby incorporated by reference into this
Annual Report.







ITEM
16 C.     PRINCIPAL ACCOUNTANT FEES AND
SERVICES





Our
principal accountant for 2007 and 2006 was Moore Stephens, P.C. The following
table sets forth the fees related to audit and other services provided by Moore
Stephens, P.C.







2007
            2006Audit
      Fees (a)
            $475,000
            $300,000Audit-Related
      Fees (b)
            $37,500
            $43,771Tax
      Fees (c)
            -
            -All
      Other Fees (d)
            8,500
            -Total
            $521,000
            $343,771









84





(a) Audit
Fees


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





(b)
      Audit -Related Fees


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





(c)
Tax Fees


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





(d)
All Other Fees


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





Our
Board of Directors has adopted pre-approval policies and procedures in
compliance with paragraph (c) (7)(i) of Rule 2-01 of Regulation S-X that require
the Board to approve the appointment of our independent auditor before such
auditor is engaged and approve each of the audit and non-audit related services
to be provided by such auditor under such engagement by the
Company.   All services provided by the principal auditor in 2007
and 2006 were approved by the Board pursuant to the pre-approval
policy.







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





Not
applicable





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








Period
            Total
      Number of Shares (or Units) Purchased
            Average
      Price Paid per Share (or Units)
            Total
      Number of Shares (or Units) Purchased as Part of Publicly Announced Plans
      or Programs
            Maximum
      Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be
      Purchased Under the Plans or Programs06/01/05
      to 06/30/05
            300,000
      (1)
            $19.58
            -
            -10/01/05
      to 10/31/05
            336,400
      (1)
            $19.43
            -
            -11/01/05
      to 11/30/05
            520,700
      (1)
            $18.95
            -
            -12/01/05
      to 12/31/05
            600,000
      (1)
            $18.01
            -
            -01/10/06
      to 01/20/06
            400,000
      (1)
            $18.03
            -
            -19/10/2007to31/21/2007
            -
            -
            -
            7,000,000 (2)Total
            2,157,100
            $18.68
            -
            7,000,000






85







1.
            The
      shares repurchased in the period were not part of a publicly announced
      plan or program. The repurchases were made in open-market
      transactions.2.
            In
      October 2007 the Board of Directors of the Company approved a share
      repurchase program of up to seven million shares. Initially the program is
      to be financed through the use of Total Return Swaps (“TRS”) indexed to
      the Company’s own shares, whereby the counterparty acquires shares in the
      Company, and the Company carries the risk of fluctuations in the share
      price of the acquired shares. The settlement amount for each TRS
      transaction will
      be (A) the proceeds on sale of the shares plus all dividends received by
      the counterparty while holding the shares, less (B) the cost of purchasing
      the shares and the counterparty’s financing costs. Settlement will be
      either a payment from or to the counterparty, depending on whether A is
      more or less than B.At December 31 2007 the
      counterparty had acquired approximately 349,000 shares in the Company
      under this arrangement and a further 343,000 shares have been acquired so
      far in 2008. At present there is no obligation for the Company to purchase
      any shares from the counterparty, and this arrangement has been recorded
      as a derivative transaction (see Note
20).





86


PART
III





ITEM
      17.
            FINANCIAL
      STATEMENTS





Not
Applicable





ITEM
      18.
            FINANCIAL
      STATEMENTS





The
following financial statements listed below and set forth on pages F-1 through
F-28 are filed as part of this annual report:








Report
      of Independent Registered Public Accounting Firm
            F-2Consolidated
      Statements of Operations for the years ended December 31 2007, 2006 and
      2005
            F-3Consolidated
      Balance Sheets as of December 31 2007 and 2006
            F-4Consolidated
      Statements of Cash Flows for the years ended December 31 2007, 2006 and
      2005
            F-5Consolidated
      Statement of Changes in Stockholders’ Equity and Comprehensive Income for
      the years ended December 31 2007, 2006 and 2005
            F-6Notes
      to Consolidated Financial Statements
            F-7




ITEM
19.         EXHIBITS





Number
            Description
      of Exhibit





1.1*
            Memorandum
      of Association of Ship Finance International Limited (the “Company”),
      incorporated by reference to Exhibit 3.1 of the Company’s Registration
      Statement, SEC File No. 333-115705, filed on May 21 2004 (the “Original
      Registration Statement”).





1.4*
            Amended
      and Restated Bye-laws of the Company, as adopted on September 28 2007,
      incorporated by reference to Exhibit 1 of the Company’s 6-K filed on
      October 22 2007.





2.1*
            Form
      of Common Stock Certificate of the Company, incorporated by reference to
      Exhibit 4.1 of the Company’s Original Registration
    Statement.





4.1*
            Indenture
      relating to 8.5% Senior Notes due 2013, dated December 18 2003,
      incorporated by reference to Exhibit 4.4 of the Company’s Original
      Registration Statement.





4.2*
            Form
      of $1.058 billion Credit Facility, incorporated by reference to
      Exhibit 10.1 of the Company’s Original Registration
    Statement.





4.3*
            Fleet
      Purchase Agreement dated December 11 2003, incorporated by reference
      to Exhibit 10.2 of the Company’s Original Registration
      Statement.





4.4*
            Form
      of Performance Guarantee issued by Frontline Limited, incorporated by
      reference to Exhibit 10.3 of the Company’s Original Registration
      Statement.


87








4.5*
            Form
      of Time Charter, incorporated by reference to Exhibit 10.4 of the
      Company’s Original Registration
Statement.




4.6*
            Form
      of Vessel Management Agreements, incorporated by reference to Exhibit 10.5
      of the Company’s Original Registration
  Statement.





4.7*
            Form
      of Charter Ancillary Agreement dated January 1 2004, incorporated by
      reference to Exhibit 10.6 of the Company’s Original Registration
      Statement.





4.8
            Amendments
      dated August 21 2007, to Charter Ancillary
  Agreements.





4.9*
            Form
      of Administrative Services Agreement, incorporated by reference to Exhibit
      10.7 of the Company’s Original Registration
  Statement.





4.10
            New
      Administrative Services Agreement dated November 29
  2007.





4.11*
            Form
      of Loan
      Agreement datedFebruary 3 2005, incorporated by reference to
      Exhibit 4.9 of the Company’s 2006 Annual Report as filed on Form 20-F on
      July 2 2007.





4.12*
            Form
      of Amended Loan Agreement dated September 18 2006, incorporated by
      reference to Exhibit 4.10 of the Company’s 2006 Annual Report as filed on
      Form 20-F on July 2 2007.





4.13*
            Share
      Option Scheme, incorporated by reference to Exhibit 2.2 of the Company’s
      2006 Annual Report as filed on Form 20-F on July 2
  2007.





8.1
            Subsidiaries
      of the Company.





11.1*
            Code
      of Ethics, incorporated by reference to Exhibit 11.1 of the Company’s 2004
      Annual Report as filed on Form 20-F on June 30
  2005.





12.1
            Certification
      of the Principal Executive Officer pursuant to Rule 13a-14(a) and Rule
      15d-14(a) of the Securities Exchange Act, as
  amended.





12.2
            Certification
      of the Principal Financial Officer pursuant to Rule 13a-14(a) and Rule
      15d-14(a) of the Securities Exchange Act, as
  amended.





13.1
            Certification
      of the Principal Executive Officer pursuant to 18 USC Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.





13.2
            Certification
      of the Principal Financial Officer pursuant to 18 USC Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.





*
Incorporated herein by reference.


88





SIGNATURES





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





Ship Finance International
Limited


(Registrant)





Date March 17
2008





By/s/ Ole B.
Hjertaker


Ole B.
Hjertaker


Principal Financial
Officer











Ship
Finance International Limited,


Index
to Consolidated Financial Statements








Report
      of Independent Registered Public Accounting Firm
            F-2Consolidated
      Statements of Operations for the years ended December 31 2007, 2006 and
      2005
            F-3Consolidated
      Balance Sheets as of December 31 2007 and 2006
            F-4Consolidated
      Statements of Cash Flows for the years ended December 31 2007, 2006 and
      2005
            F-5Consolidated
      Statement of Changes in Stockholders’ Equity and Comprehensive Income for
      the years ended December 31 2007, 2006 and 2005
            F-6Notes
      to the Consolidated Financial Statements
            F-7


F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM








To the Board of Directors and
Stockholders


Ship Finance International
Limited





We have audited the accompanying
consolidated balance sheets of Ship Finance International Limited as of December
31, 2007 and 2006, and the related consolidated statements of operations,changes instockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 2007.  We also have audited Ship Finance International
Limited’s internal control over financial reporting as of December 31, 2007,
based oncriteria
established in Internal Control— Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.Ship Finance International Limited's
management is responsible for these consolidated financial statements, for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanyingManagement’s annual report on internal
controls over financial reporting.  Our responsibility is to express
an opinion on these consolidated financialstatements and an opinion on the
company's internal control over financial reporting 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 audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in
all material respects.  Our audits of the consolidated financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall consolidated financial statement
presentation.  Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audits also included performing such other
procedures as we considered necessary in the circumstances.  We
believe that our audits provide a reasonable basis for our
opinions.





A company's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
consolidated 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 consolidated 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 consolidated
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, the consolidated
financial statements referred to above present fairly, in all material respects,
the financial position of Ship Finance International Limited as of December 31,
2007 and 2006, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2007, in conformity
with accounting principles generally accepted in the United States of
America.  Also in our opinion, Ship Finance International Limited
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2007, based oncriteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.










MooreStephens, P.C.


New York,New York


March 13, 2008





F-2


Ship
Finance International Limited





CONSOLIDATED
STATEMENTS OF OPERATIONS


for
the years ended December 31 2007,  2006 and 2005


(in thousands of $, except
per share amounts)





2007
            
            
            2006
            
            
            2005Operating
      revenuesFinance
      lease interest income from related parties
            
            
            185,032
            
            
            
            177,840
            
            
            
            176,030Finance
      lease interest income from non-related parties
            
            
            1,648
            
            
            
            4,740
            
            
            
            1,444Finance
      lease service revenues from related parties
            
            
            102,070
            
            
            
            106,791
            
            
            
            92,265Profit
      sharing revenues from related parties
            
            
            52,527
            
            
            
            78,923
            
            
            
            88,096Time
      charter revenues
            
            
            23,675
            
            
            
            53,087
            
            
            
            62,605Bareboat
      charter revenues from related parties
            
            
            7,417
            
            
            
            -
            
            
            
            -Bareboat
      charter revenues from non-related parties
            
            
            24,588
            
            
            
            3,986
            
            
            
            7,325Other
      operating income/(expense)
            
            
            1,835
            
            
            
            (709
            )
            
            
            9,745Total
      operating revenues
            
            
            398,792
            
            
            
            424,658
            
            
            
            437,510Gain
      / (loss) on sale of assets
            
            
            41,669
            
            
            
            9,806
            
            
            
            (654
            )Operating
      expensesShip
      operating expenses to related parties
            
            
            103,399
            
            
            
            116,362
            
            
            
            108,957Ship
      operating expenses to non-related parties
            
            
            2,841
            
            
            
            1,595
            
            
            
            1,283Voyage
      expenses and commission
            
            
            921
            
            
            
            1,736
            
            
            
            3,600Depreciation
            
            
            20,636
            
            
            
            14,490
            
            
            
            19,907Administrative
      expenses to related parties
            
            
            1,245
            
            
            
            1,184
            
            
            
            1,013Administrative
      expenses to non-related parties
            
            
            6,538
            
            
            
            5,400
            
            
            
            1,434Total
      operating expenses
            
            
            135,580
            
            
            
            140,767
            
            
            
            136,194Net
      operating income
            
            
            304,881
            
            
            
            293,697
            
            
            
            300,662Non-operating
      income / (expense)Interest
      income
            
            
            6,781
            
            
            
            3,978
            
            
            
            3,343Interest
      expense
            
            
            (130,401
            )
            
            
            (113,588
            )
            
            
            (111,935
            )Other
      financial items, net
            
            
            (14,477
            )
            
            
            (3,556
            )
            
            
            17,476Net
      income before equity in earnings of associated companies
            
            
            166,784
            
            
            
            180,531
            
            
            
            209,546Equity
      in earnings of associated companies
            
            
            923
            
            
            
            267
            
            
            
            -Net
      income
            
            
            167,707
            
            
            
            180,798
            
            
            
            209,546Per
      share information:Basic
      earnings per share
            
            
            $2.31
            
            
            
            $2.48
            
            
            
            $2.84Diluted
      earnings per share
            
            
            $2.30
            
            
            
            $2.48
            
            
            
            $2.84Cash
      dividends paid
            
            
            $2.19
            
            
            
            $2.05
            
            
            
            $2.00





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





F-3


Ship
Finance International Limited





CONSOLIDATED
BALANCE SHEETS


as
of December 31 2007 and December 31 2006


(in
thousands of $)





2007
              
              
              2006ASSETSCurrent
      assetsCash
      and cash equivalents
              
              
              78,255
              
              
              
              64,569Restricted
      cash
              
              
              26,983
              
              
              
              12,937Trade
      accounts receivable
              
              
              28
              
              
              
              491Due
      from related parties
              
              
              42,014
              
              
              
              63,024Other
      receivables
              
              
              116
              
              
              
              3,906Inventories
              
              
              267
              
              
              
              331Prepaid
      expenses and accrued income
              
              
              301
              
              
              
              180Investment
      in finance leases, current portion
              
              
              178,920
              
              
              
              150,492Financial
      instruments: mark to market valuation of receivable
amounts
              
              
              6,711
              
              
              
              20,738Other
      current assets
              
              
              -
              
              
              
              11,223Total
      current assets
              
              
              333,595
              
              
              
              327,891Vessels
      and equipment
              
              
              607,978
              
              
              
              308,313Accumulated
      depreciation on vessels and equipment
              
              
              (24,734
              )
              
              
              (69,422
              )Vessels
      and equipment, net
              
              
              583,244
              
              
              
              238,891Newbuilding
      contracts
              
              
              46,259
              
              
              
              7,658Investment
      in finance leases, long-term portion
              
              
              1,963,470
              
              
              
              1,958,691Investment
      in associated companies
              
              
              4,530
              
              
              
              3,698Other
      long-term investments
              
              
              2,008
              
              
              
              -Deferred
      charges
              
              
              16,922
              
              
              
              16,848Total
      assets
              
              
              2,950,028
              
              
              
              2,553,677LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesShort-term
      debt and current portion of long-term debt
              
              
              179,428
              
              
              
              144,451Trade
      accounts payable
              
              
              97
              
              
              
              533Due
      to related parties
              
              
              5,693
              
              
              
              14,411Accrued
      expenses
              
              
              16,972
              
              
              
              11,262Financial
      instruments: mark to market valuation of payable amounts
              
              
              21,224
              
              
              
              8,743Other
      current liabilities
              
              
              4,511
              
              
              
              2,998Total
      current liabilities
              
              
              227,925
              
              
              
              182,398Long-term
      liabilitiesLong-term
      debt
              
              
              2,090,566
              
              
              
              1,770,749Other
      long-term liabilities
              
              
              17,060
              
              
              
              -Total
      liabilities
              
              
              2,335,551
              
              
              
              1,953,147Commitments
      and contingent liabilities
              
              
              -
              
              
              
              -Stockholders’
      equityShare
      capital
              
              
              72,744
              
              
              
              72,744Contributed
      surplus
              
              
              485,856
              
              
              
              464,478Accumulated
      other comprehensive loss
              
              
              (13,894
              )
              
              
              (71
              )Retained
      earnings
              
              
              69,771
              
              
              
              63,379Total
      stockholders’ equity
              
              
              614,477
              
              
              
              600,530Total
      liabilities and stockholders’ equity
              
              
              2,950,028
              
              
              
              2,553,677


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


F-4


Ship
Finance International Limited





CONSOLIDATED
STATEMENTS OF CASH FLOWS


for
the years ended December 31 2007, 2006 and 2005


(in
thousands of $)





2007
            
            
            2006
            
            
            2005Operating
      activitiesNet
      income
            
            
            167,707
            
            
            
            180,798
            
            
            
            209,546Adjustments
      to reconcile net income to net cash provided by
              operating
      activities:Depreciation
            
            
            20,636
            
            
            
            14,490
            
            
            
            19,907Amortization
      of deferred charges
            
            
            3,358
            
            
            
            3,069
            
            
            
            16,524Amortization
      of seller’s credit
            
            
            (440
            )
            
            
            -
            
            
            
            -Equity
      in earnings of associated companies
            
            
            (923
            )
            
            
            (4,205
            )
            
            
            -(Gain)/
      loss on sale of assets
            
            
            (41,669
            )
            
            
            (9,806
            )
            
            
            654Adjustment
      of derivatives to market value
            
            
            12,557
            
            
            
            6,375
            
            
            
            (14,732
            )Other
            
            
            2,034
            
            
            
            (5,091
            )
            
            
            (4,708
            )Changes
      in operating assets and liabilities, net of effect of
      acquisitionsTrade
      accounts receivable
            
            
            463
            
            
            
            3,455
            
            
            
            6,241Due
      from related parties
            
            
            19,950
            
            
            
            30,803
            
            
            
            40,374Other
      receivables
            
            
            790
            
            
            
            525
            
            
            
            940Inventories
            
            
            64
            
            
            
            352
            
            
            
            3,191Prepaid
      expenses and accrued income
            
            
            (121
            )
            
            
            (74
            )
            
            
            129Other
      current assets
            
            
            11,223
            
            
            
            (12,245
            )
            
            
            5,266Trade
      accounts payable
            
            
            (436
            )
            
            
            (445
            )
            
            
            (1,291
            )Accrued
      expenses
            
            
            5,710
            
            
            
            476
            
            
            
            (2,139
            )Other
      current liabilities
            
            
            1,513
            
            
            
            1,683
            
            
            
            932Net
      cash provided by operating activities
            
            
            202,416
            
            
            
            210,160
            
            
            
            280,834Investing
      activitiesInvestment
      in finance lease assets
            
            
            (210,000
            )
            
            
            -
            
            
            
            -Repayments
      from investments in finance leases
            
            
            173,193
            
            
            
            136,760
            
            
            
            94,777Acquisition
      of subsidiaries, net of cash acquired
            
            
            -
            
            
            
            (34,810
            )
            
            
            (518,182
            )Additions
      to newbuildings
            
            
            (47,383
            )
            
            
            (7,658
            )
            
            
            -Purchase
      of vessels
            
            
            (434,283
            )
            
            
            (266,750
            )
            
            
            (79,772
            )Proceeds
      from sales of vessels
            
            
            152,659
            
            
            
            58,943
            
            
            
            229,800Investments
      in associated companies
            
            
            91
            
            
            
            508
            
            
            
            -Net
      proceeds from /(cost of) other investments
            
            
            992
            
            
            
            (3,000
            )
            
            
            -Net
      (placement)/maturity of restricted cash
            
            
            (14,046
            )
            
            
            (11,362
            )
            
            
            3,804Net
      cash (used in) investing activities
            
            
            (378,777
            )
            
            
            (127,369
            )
            
            
            (269,573
            )Financing
      activitiesRepurchases
      of shares
            
            
            -
            
            
            
            (7,212
            )
            
            
            (33,083
            )Proceeds
      from issuance of long-term debt
            
            
            620,224
            
            
            
            312,588
            
            
            
            1,571,429Repayments
      of long-term debt
            
            
            (265,430
            )
            
            
            (190,716
            )
            
            
            (1,253,503
            )Debt
      fees paid
            
            
            (3,432
            )
            
            
            (1,047
            )
            
            
            (7,347
            )Cash
      dividends paid
            
            
            (159,335
            )
            
            
            (149,123
            )
            
            
            (148,863
            )Deemed
      dividends received
            
            
            4,642
            
            
            
            31,741
            
            
            
            50,560Deemed
      dividends paid
            
            
            (6,622
            )
            
            
            (47,310
            )
            
            
            (186,790
            )Net
      cash provided by / (used in) financing activities
            
            
            190,047
            
            
            
            (51,079
            )
            
            
            (7,597
            )Net
      change in cash and cash equivalents
            
            
            13,686
            
            
            
            31,712
            
            
            
            3,664Cash
      and cash equivalents at start of the year
            
            
            64,569
            
            
            
            32,857
            
            
            
            29,193Cash
      and cash equivalents at end of the year
            
            
            78,255
            
            
            
            64,569
            
            
            
            32,857Supplemental
      disclosure of cash flow information:Interest
      paid, net of capitalized interest
            
            
            123,777
            
            
            
            111,823
            
            
            
            92,315




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


F-5


Ship
Finance International Limited





CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND


COMPREHENSIVE
INCOME


for
the years ended December 31 2007, 2006 and 2005


(in
thousands of $, except number of shares)





2007
            
            
            2006
            
            
            2005Number
      of shares outstandingAt
      beginning of year
            
            
            72,743,737
            
            
            
            73,143,737
            
            
            
            74,900,837Shares
      repurchased and cancelled
            
            
            -
            
            
            
            (400,000
            )
            
            
            (1,757,100
            )At
      end of year
            
            
            72,743,737
            
            
            
            72,743,737
            
            
            
            73,143,737Share
      capitalAt
      beginning of year
            
            
            72,744
            
            
            
            73,144
            
            
            
            74,901Shares
      repurchased and cancelled
            
            
            -
            
            
            
            (400
            )
            
            
            (1,757
            )At
      end of year
            
            
            72,744
            
            
            
            72,744
            
            
            
            73,144Contributed
      surplusAt
      beginning of year
            
            
            464,478
            
            
            
            441,105
            
            
            
            463,261Shares
      repurchased and cancelled
            
            
            -
            
            
            
            (6,811
            )
            
            
            (31,327
            )Employee
      stock options issued
            
            
            785
            
            
            
            49
            
            
            
            -Amortization
      of deferred equity contributions
            
            
            20,593
            
            
            
            30,135
            
            
            
            9,171At
      end of year
            
            
            485,856
            
            
            
            464,478
            
            
            
            441,105Accumulated
      other comprehensive lossAt
      beginning of year
            
            
            (71
            )
            
            
            -
            
            
            
            -Other
      comprehensive loss
            
            
            (13,823
            )
            
            
            (71
            )
            
            
            -At
      end of year
            
            
            (13,894
            )
            
            
            (71
            )
            
            
            -Retained
      earningsAt
      beginning of year
            
            
            63,379
            
            
            
            47,273
            
            
            
            122,820Net
      income
            
            
            167,707
            
            
            
            180,798
            
            
            
            209,546Cash
      dividends paid
            
            
            (159,335
            )
            
            
            (149,123
            )
            
            
            (148,863
            )Deemed
      dividends received
            
            
            4,642
            
            
            
            31,741
            
            
            
            50,560Deemed
      dividends paid
            
            
            (6,622
            )
            
            
            (47,310
            )
            
            
            (186,790
            )At
      end of year
            
            
            69,771
            
            
            
            63,379
            
            
            
            47,273Total
      Stockholders’ Equity
            
            
            614,477
            
            
            
            600,530
            
            
            
            561,522Comprehensive
      incomeNet
      income
            
            
            167,707
            
            
            
            180,798
            
            
            
            209,546Fair
      value adjustment to hedging financial instruments
            
            
            (13,948
            )
            
            
            -
            
            
            
            -Other
      comprehensive income (loss)
            
            
            125
            
            
            
            (71
            )
            
            
            -Total
      other comprehensive loss
            
            
            (13,823
            )
            
            
            (71
            )
            
            
            -Comprehensive
      income
            
            
            153,884
            
            
            
            180,727
            
            
            
            209,546




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






F-6






SHIP
FINANCE INTERNATIONAL LIMITED


Notes
to the Consolidated Financial Statements




1.
              GENERAL


Ship
Finance International Limited (“Ship Finance” or the “Company”), a publicly
listed company on the New York Stock Exchange (ticker SFL), was incorporated in
Bermuda in October 2003 as a subsidiary of Frontline Ltd. (“Frontline”) for the
purpose of acquiring certain of the shipping assets of Frontline. In December
2003 Ship Finance issued $580 million of 8.5% senior notes and in the first
quarter of 2004 the Company used the proceeds of the notes issue, together with
a refinancing of existing debt, to fund the acquisition from Frontline of a
fleet of 47 crude oil tankers (including one purchase option for a tanker). The
ships were all chartered back to two Frontline subsidiaries, Frontline Shipping
Limited and Frontline Shipping II Limited (the “Frontline Charterers”) for most
of their estimated remaining lives. The Company also entered into fixed rate
management and administrative services agreements with Frontline to provide for
the operation and maintenance of the Company’s tankers and administrative
support services. The charters and the management services agreements were each
given economic effect as of January 1 2004 (see Note 19). Since then the Company
has acquired additional vessels, in line with its strategy to diversify its
asset and customer base, and several of the non-double hull tankers acquired in
the original fleet have been sold, as part of the planned management of the
fleet.





As of
December 31 2007, the Company owned 27 very large crude oil carriers (“VLCCs”),
seven Suezmax crude oil carriers, eight oil/bulk/ore carriers (“OBOs”), one
Panamax drybulk carrier, eight container vessels, two jack-up drilling rigs and
five offshore supply vessels. Included in the above is the single-hull VLCC
Front Vanadis,
which is subject to a hire-purchase agreement, the Suezmax
crude oil carrier Front
Maple, which was sold and delivered in January 2008, and the offshore
supply vessel Sea
Trout, which was also sold and delivered in January 2008. The Panamax
drybulk carrier referred to above is owned by a wholly-owned subsidiary of the
Company that is accounted for using the equity method (see Note 13). In
addition, as at December 31 2007, the Company had contracted to acquire two
Suezmax tankers, five container vessels, two Capesize drybulk carriers, three
seismic vessels and two offshore supply vessels.





Since
its incorporation in 2003 and public listing in 2004, Ship Finance has
established itself as a leading international ship-owning company, expanding
both its asset and customer base.  The Company’s principal strategy is
to generate stable and increasing cash flows by chartering its assets under
medium to long-term time or bareboat charters to a diverse group of customers
across the maritime and offshore industries.





2.
            ACCOUNTING
      POLICIES


Basis
of Accounting




The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States (“US GAAP”). The consolidated
financial statements include the assets and liabilities and results of
operations of the Company
and its subsidiaries.  All inter-company balances and transactions
have been eliminated on consolidation.





Consolidation
of variable interest entities




A
variable interest entity is defined by Financial Accounting Standards Board
Interpretation (“FIN”) 46(R) as a legal entity where either (a) equity interest
holders as a group lack the characteristics
of a controlling financial interest, including decision making ability and an
interest in the entity's residual risks and rewards, or (b) the equity holders
have not provided sufficient equity investment to permit the entity to finance
its activities without additional subordinated financial support, or (c) the
voting rights of some investors are not proportional to their obligations to
absorb the expected losses of the entity, their rights to receive the expected
residual returns of the entity, or both and substantially all of the entity's
activities either involve or are conducted on behalf of an investor that has
disproportionately few voting rights.




F-7







FIN
46(R) requires a variable interest entity to be consolidated if any of its
interest holders are entitled to a majority of the entity's residual return or
are exposed to a majority of its expected losses.





We
evaluate our subsidiaries, and any other entity in which we hold a variable
interest, in order to determine whether we are the primary beneficiary of the
entity, and where it is determined that we are the primary beneficiary we fully
consolidate the entity.





Investments
in associated companies




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





Use
of accounting estimates




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




Foreign
currencies




The
Company’s functional currency is the U.S. dollar as the majority of revenues are
received in U.S. dollars and a majority of the Company’s expenditures are made
in U.S. dollars. The Company’s reporting currency is also the U.S. dollar. Most
of the Company’s subsidiaries report in U.S. dollars. Transactions in foreign
currencies during the year are translated into U.S. dollars at the rates of
exchange in effect at the date of the transaction. Foreign currency monetary
assets and liabilities are translated using rates of exchange at the balance
sheet date. Foreign currency non-monetary assets and
liabilities are translated using historical rates of exchange. Foreign currency
transaction gains or losses are included in the consolidated statements of
operations.




Revenue
and expense recognition




Revenues
and expenses are recognized on the accrual basis. Revenues
are generated from time charter hire, bareboat charter hire, finance lease
interest income, finance lease service revenues and profit sharing
arrangements.




Each charter
agreement is evaluated and classified as an operating or a capital lease. Rental
receipts from operating leases are recognized to income over the period to which
the payment relates.


F-8


Rental
payments from capital leases are allocated between lease service revenues, if
applicable, finance lease interest income and repayment of net investment in
finance leases. The amount allocated to lease service revenue is based on the
estimated fair value, at the time of entering the lease agreement, of the
services provided which consist of ship management and operating
services.


Any
contingent elements of rental income, such as profit share or interest rate
adjustments, are recognized when the contingent conditions have materialized and
the rentals are due and collectible.





Cash
and cash equivalents




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





Depreciation
of vessels and equipment (including operating lease assets)




The
cost of fixed assets less estimated residual value is depreciated on a
straight-line basis over the estimated remaining economic useful life of the
asset. The estimated economic useful life for the Company’s rigs is 30 years,
and for other vessels it is 25 to 30 years depending on the vessel
type.





Where
an asset is subject to an operating lease that includes fixed price purchase
options, the projected net book value of the asset is compared to the option
price at the various option dates. If any option price is less than the
projected net book value at an option date, the initial depreciation schedule is
amended so that the carrying value of the asset is written down on a straight
line basis to the option price at the option date. If the option is not
exercised, this process is repeated so as to amortize the remaining carrying
value, on a straight line basis, to the estimated scrap value or the option
price at the next option date, as appropriate.





This
accounting policy for the depreciation of fixed assets has the effect that if an
option is exercised there will be either a) no gain or loss on the sale of the
asset or b) in the event that the option is exercised at a price in excess of
the net book value at the option date, a gain will be reported in the statement
of operations at the date of delivery to the new owners, under the heading
“gain/(loss) on sale of assets”.





Newbuildings




The
carrying value of vessels under construction (“newbuildings”) represents the
accumulated costs to the balance sheet date which the Company has paid by way of
purchase installments and other capital expenditures together with capitalized
loan interest and associated finance costs. During the year ended December 31
2007, we capitalized $1.0 million of interest.  No charge for
depreciation is made until a newbuilding is put into operation.





Investment
in Finance Leases




Leases
(charters) of our vessels where we are the lessor are classified as either
finance leases or operating leases, based on an assessment of the terms of the
lease. For charters classified as finance leases, the minimum lease payments
(reduced in the case of time-chartered vessels by projected vessel operating
costs) plus the estimated residual value of the
vessel are recorded as the gross investment in the finance lease. The difference
between the gross investment in the lease and the sum of the present values of
the two components of the gross investment is recorded as unearned finance lease
interest income. Over the period of the lease each charter payment received, net
of vessel operating costs if applicable, is allocated between “finance lease interest
income” and “repayments from investments in finance leases” in such a way as to
produce a constant percentage rate of return on the balance of the net
investment in the finance lease. Thus, as the balance of the net investment in
each finance lease decreases, less of each lease payment received is allocated
to finance lease interest income and more is allocated to finance lease
repayment. The portion of each time charter payment received that is allocated
to vessel operating costs is classified as “finance lease service
revenue”.







F-9






Where
a finance lease relates to a charter arrangement containing fixed price purchase
options, the projected carrying value of the net investment in the finance lease
is compared to the option price at the various option dates. If any option price
is less than the projected net investment in the finance lease at an option
date, the rate of amortization of unearned finance lease interest income is
adjusted to reduce the net investment to the option price at the option date. If
the option is not exercised, this process is repeated so as to reduce the net
investment in the finance lease to the un-guaranteed residual value or the
option price at the next option date, as appropriate.





This
accounting policy for investments in finance leases has the effect that if an
option is exercised there will either be a) no gain or loss on the exercise of
the option or b) in the event that an option is exercised at a price in excess
of the net investment in the finance lease at the option date, a gain will be
reported in the statement of operations at the date of delivery to the new
owners.





Deemed
Dividends




Until
April 2007 certain of the vessels acquired from Frontline remained on charter to
third parties under charters which commenced before January 1 2004, the date
upon which the Company’s charter arrangements to the Frontline Charterers became
economically effective.  The Company’s arrangement with Frontline was
that while the Company’s vessels were completing performance of third party
charters, the Company paid the Frontline Charterers all revenues earned under
the third party charters in exchange for the Frontline Charterers paying the
Company the charter rates under the charter agreements with the Frontline
Charterers.  The revenues received from these third party charters
were accounted for as time charter, bareboat or voyage revenues, as applicable,
and the subsequent payment of these amounts to the Frontline Charterers as
deemed dividends paid.  The Company accounts for revenues received
from the Frontline Charterers prior to the charters becoming effective for
accounting purposes as deemed dividends received. This treatment has been
applied due to the related party nature of the charter
arrangements.





Deemed
Equity Contributions




The Company
has accounted for the acquisition of vessels from Frontline at Frontline’s
historical carrying value.  The difference between the historical
carrying value and the net investment in the lease has been recorded as a
deferred deemed equity contribution. This deferred deemed equity contribution is
presented as a reduction in the net investment in finance leases in the balance
sheet.  This results from the related party nature of both the transfer of
the vessel and the subsequent finance lease.  The deferred deemed equity
contribution is amortized as a credit to contributed surplus over the life of
the new lease arrangement, as lease payments are applied to the principal
balance of the lease receivable.





Impairment
of long-lived assets


The
carrying value of long-lived assets that are held and used by the Company are
reviewed whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company assesses recoverability
of the carrying value of the asset by estimating the future net cash flows
expected to result from the asset, including eventualdisposition.
If the future net cash flows are less than the carrying value of the asset, an
impairment loss is recorded equal to the difference between the asset's carrying
value and fair value. In addition, long-lived assets to be disposed of are
reported at the lower of carrying amount and fair value less estimated costs to
sell.







F-10




Deferred
charges




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





Financial
Instruments




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





Derivatives




Interest
rate swaps




The
Company enters into interest rate swap transactions from time to time to hedge a
portion of its exposure to floating interest rates. These transactions involve
the conversion of floating rates into fixed rates over the life of the
transactions without an exchange of underlying principal.  The fair
values of the interest rate swap contracts are recognized as assets or
liabilities and for certain of the Company’s swaps changes in fair values are
recognized in the consolidated statements of operations. When the interest rate
swap qualifies for hedge accounting under Statement of Financial Accounting
Standards No.133 (FAS 133), and the Company has formally designated the swap
instrument as a hedge to the underlying loan, and when the hedge is effective,
the changes in the fair value of the swap are recognized in other comprehensive
income.





Total
return bond swaps




The
Company has entered into short-term total return bond swap lines with banks,
whereby the banks acquire the Company’s senior notes and the Company carries the
risk of fluctuations in the market price of the acquired notes. The company pays
variable rate interest to the banks calculated on the nominal value of the bonds
held under the swap arrangement, and receives the fixed rate coupon interest
paid on the bonds held by the banks. The fair value of the bond swaps are
recognized as an asset or liability, with the changes in fair values recognized
in the consolidated statement of operations.





Total
return equity swaps




In
October 2007 the Board of Directors of the Company approved a share repurchase
program of up to seven million shares. Initially the program is to be financed
through the use of Total Return Swaps (“TRS”) indexed to the Company’s own
shares, whereby the counterparty acquires shares in the Company, and the Company
carries the  risk of fluctuations in the share price of the acquired
shares. The settlement amount for each TRS transactionwill be (A) the proceeds on sale of the shares plus all dividends
received by the counterparty while holding the shares, less (B) the cost of
purchasing the shares and the counterparty’s financing costs. Settlement will be
either a payment from or to the counterparty, depending on whether A is more or
less than B. The fair value of
each TRS is recorded as an asset or liability, with the changes in fair values
recognized
in the consolidated statement of operations. The Company may, from time to time,
enter into TRS arrangements indexed to shares in other companies and these are
reported in the same way (see Note 20).


F-11





Drydocking
provisions




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





Earnings
per share




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





Stock-based
compensation




Effective
January 1 2006, the Company adopted FAS 123(R) “Share-Based
Payment”.  Under FAS 123(R) we are required to expense the fair value
of stock options issued to employees over the period the options
vest.





Reclassifications




Certain
prior year balances have been reclassified to conform to current year
presentation.







3.
            RECENTLY
      ISSUED ACCOUNTING STANDARDS


In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”
(“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. FAS 157 applies under most other accounting
pronouncements that require or permit fair value measurements and does not
require any new fair value measurements. FAS 157 is effective for fiscal years
beginning after November 15, 2007.




In
February 2008 the FASB issued FSP No. FAS157-1 “Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
under Statement 13” (“FSP FAS157-1”). FSP FAS157-1 amends FAS 157 to
exclude FASB Statement No. 13 “Accounting for Leases” (“FAS 13”) and its related
interpretive accounting pronouncements that address leasing transactions. The
FASB decided to exclude leasing transactions covered by FAS 13 in order to allow
it to more broadly consider the use of fair value measurements for these
transactions as part of its project to comprehensively reconsider the accounting
for leasing transactions.The Company does not expect
the adoption of FAS 157 and FSP FAS157-1 to have a material impact on its
financial statements.





In
February 2007 the FASB issued SFAS No. 159 “The Fair Value Option for Financial
Assets and Financial
Liabilities – including an amendment of FASB Statement No. 115” (“FAS
159”). FAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value. The objective is to improve financial
reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. FAS 159 is effective for fiscal years
beginning after November 15 2007. The Company does not expect the adoption of
FAS 159 to have a material impact on its financial
statements.


F-12







In
December 2007 the FASB issued SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial
Statements – an amendment of ARB No.51” (“FAS 160”). FAS 160 is intended
to improve the relevance, comparability and transparency of financial
information that a reporting entity provides in its consolidated financial
statements with reference to a noncontrolling interest in a subsidiary. Such a
noncontrolling interest, sometimes called a minority interest, is the portion of
equity in a subsidiary not attributable, directly or indirectly, to the parent
entity. FAS 160 is effective for fiscal years beginning on or after December 15,
2008. The Company does not expect the adoption of FAS 160 to have a material
impact on its financial statements.





In
December 2007 the FASB issued SFAS No. 141 (revised 2007) “Business Combinations” (“FAS
141R”). The objective of FAS 141R is to improve the relevance, representational
faithfulness and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects.
To accomplish this, FAS 141R establishes principles and requirements for how the
acquirer a) recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed and any non-controlling interest in the
acquiree, b) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain price, and c)determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. FAS 141R is effective for fiscal
years beginning on or after December 15, 2008. The Company does not expect the
adoption of FAS 141R to have a material impact on its financial
statements.





In
December 2007 the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”),
relating to share-based payment. SAB 110 expresses the views of the staff
regarding the use of a "simplified" method, as discussed in SAB 107, in
developing an estimate of expected term of "plain vanilla" share options in
accordance with FAS 123 (revised 2004) “Share-Based Payment”. In
particular, the staff indicated in SAB 107 that it will accept a company's
election to use the simplified method, regardless of whether the company has
sufficient information to make more refined estimates of expected term. At the
time SAB 107 was issued, the staff believed that more detailed external
information about employee exercise behavior (e.g. employee exercise patterns by
industry and/or other categories of companies) would, over time, become readily
available to companies. Therefore, the staff stated in SAB 107 that it would not
expect a company to use the simplified method for share option grants after
December 31, 2007. The staff understands that such detailed information about
employee exercise behavior may not be widely available by December 31, 2007.
Accordingly, the staff will continue to accept, under certain circumstances, the
use of the simplified method beyond December 31, 2007. The Company continues to
use the simplified method for making estimates of expected term, as allowed by
SAB 110.





4.
            SEGMENT
      INFORMATION


The
Company has only one reportable segment.




5.
            TAXATION


Bermuda




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


F-13





United
      States




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







A
      reconciliation between the income tax expense resulting from applying
      statutory income tax rates and the reported income tax expense has not
      been presented herein, as it would not provide additional useful
      information to users of the financial statements as the Company’s net
      income is subject to neither Bermuda nor U.S.
  tax.





Other Jurisdictions




Certain
of the Company's subsidiaries in Singapore and Norway are subject to taxation.
The tax paid by subsidiaries of the Company that are subject to this taxation is
not material.




6.
            EARNINGS
      PER SHARE


The
computation of basic EPS is based on the weighted average number of shares
outstanding during the year. Diluted EPS includes the effect of the assumed
conversion of potentially dilutive instruments.





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






(in
      thousands of $)
            Year
      ended December 312007
            
            
            2006
            
            
            2005Net
      income available to stockholders
            
            
            167,707
            
            
            
            180,798
            
            
            
            209,546




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







(in
      thousands)
            Year
      ended December 312007
            
            
            2006
            
            
            2005Basic
      earnings per share:Weighted
      average number of common shares outstanding
            
            
            72,744
            
            
            
            72,764
            
            
            
            73,904Diluted
      earnings per share:Weighted
      average number of common shares outstanding
            
            
            72,744
            
            
            
            72,764
            
            
            
            73,904Effect
      of dilutive share options
            
            
            15
            
            
            
            -
            
            
            
            -72,759
            
            
            
            72,764
            
            
            
            73,904




7.
            OPERATING
      LEASES


Rental
income




The
      minimum future revenues to be received under the Company’s non-cancelable
      operating leases as of December 31, 2007 are as
  follows:





(in
      thousands of $)
              Year
      ending December 312008
            
            
            
            73,5182009
            
            
            
            65,9522010
            
            
            
            62,8232011
            
            
            
            62,6562012
            
            
            
            62,184Thereafter
            
            
            
            382,027Total
      minimum lease revenues
            
            
            709,160




F-14
 
 The
      cost and accumulated depreciation of vessels leased to third parties on
      operating leases at December 31, 2007 and 2006 were as
      follows:


(in
      thousands of $)
            2007
            2006Cost
            607,978
            308,313Accumulated
      depreciation
            24,734
            69,422








8.
            GAIN
      ON SALE OF ASSETS


During
the year ended December 31 2007 the Company realized the following gains on
sales of vessels:




(in thousands of
      $)
              Vessel
      disposed of
            Net
      Proceeds
            Book
      value on disposal
            Gain/(loss)Front
      Sunda
            24,489
            20,454
            4,035Front
      Comor
            24,688
            21,154
            3,534Front
      Granite
            22,249
            18,291
            3,958Front
      Traveller
            24,374
            16,858
            7,516Front
      Target
            23,398
            17,696
            5,702Front
      Transporter
            22,820
            16,851
            5,969Front
      Vanadis
            28,244
            23,862
            4,382Front
      Birch
            23,832
            17,259
            6,573194,094
            152,425
            41,669






As
      part of the Company’s strategy to manage its fleet, the vessels sold in
      2007 were all non-double hull tankers and all were finance lease assets.
      The proceeds on disposal are shown net of any charter termination
      payments.The
      Front
      Vanadiswas sold under hire purchase terms terminating in October 2010. Proceeds
      in respect of this vessel represent the fair value of the new capital
      lease, net of the charter termination payment of $13.2 million. TheFront
      Vanadiswill be included in net investment in finance leases until the termination
      of the hire purchase lease in 2010.
  9.
              RESTRICTED
      CASH


(in
      thousands of $)
              2007
              2006Restricted
      cash
              26,983
              12,937
  Restricted cash consists mainly of deposits held as collateral by
      the relevant banks in connection to interest rate swap, bond swap and TRS
      arrangements (see Note 20). Restricted cash does not include minimum
      consolidated cash balances required to be maintained as part of the
      financial covenants in some of the Company’s loan facilities, as these
      amounts are included in “Cash and cash
  equivalents”.




10.
            TRADE
      ACCOUNTS RECEIVABLE AND OTHER
  RECEIVABLES


Trade
accounts receivable




Trade
accounts receivable are presented net of allowances for doubtful accounts. The
allowance for doubtful trade accounts receivable was zero as of both December
31, 2007 and 2006.







F-15






Other
receivables




Other
receivables are presented net of allowances for doubtful accounts. As of
December 31, 2007 and 2006 there was no allowance.






11.
            VESSELS
      AND EQUIPMENT,
NET





(in thousands of
      $)
            
            2007
            2006Cost
            
            607,978
            308,313Accumulated
      depreciation and amortization
            
            24,734
            69,422Vessels
      and equipment, net
            
            583,244
            238,891




Depreciation
and amortization expense was $20.6 million, $14.5 million and $19.9 million for
the years ended December 31 2007, 2006 and 2005, respectively.







12.
            INVESTMENTS
      IN FINANCE LEASES


Most
of the Company’s VLCCs, Suezmaxes and OBOs are chartered on long term, fixed
rate charters to the Frontline Charterers which extend for various periods
depending on the age of the vessels, ranging from approximately five to
19 years. The terms of the charters do not provide the Frontline Charterers
with an option to terminate the charter before the end of its term, other than
with respect to the Company’s non-double hull vessels for which there are
termination options commencing in 2010.





The
Company’s two jack-up drilling rigs are chartered on long term bareboat charters
to SeaDrill Invest I Limited (“SeaDrill I”) and SeaDrill Invest II Limited
(“SeaDrill II”), respectively, both wholly owned subsidiaries of Seadrill
Limited (“Seadrill”).  The terms of the charters provide the
charterers with various call options to acquire the rigs at certain dates
throughout the charters, which expire in 2021 and 2022.





As
of December 31, 2007, 44 of the Company’s assets were accounted for as finance
leases, including the above vessels chartered to the Frontline Charterers and
subsidiaries of Seadrill. The following lists the components of the investments
in finance leases as of December 31, 2007, all of which are leased to related
parties, with the exception of the Front Vanadis, which
accounted for $24.9 million of the total investment in finance leases as of
December 31, 2007:











(in
      thousands of $)
            
            2007
            
            
            2006Total
      minimum lease payments to be received
            
            
            4,195,227
            
            
            
            4,330,607Less: amounts
      representing estimated executory costs including profit thereon, included
      in total minimum lease payments
            
            
            (1,034,255
            )
            
            
            (1,165,139
            )Net
      minimum lease payments receivable
            
            
            3,160,972
            
            
            
            3,165,468Estimated
      residual values of leased property (un-guaranteed)
            
            
            629,149
            
            
            
            644,188Less: unearned
      income
            
            
            (1,402,611
            )
            
            
            (1,425,740
            )2,387,510
            
            
            
            2,383,916Less: deferred deemed
      equity contribution
            
            
            (225,720
            )
            
            
            (237,208
            )Less: unamortized
      gains
            
            
            (19,400
            )
            
            
            (37,525
            )Total
      investment in finance leases
            
            
            2,142,390
            
            
            
            2,109,183Current
      portion
            
            
            178,920
            
            
            
            150,492Long-term
      portion
            
            
            1,963,470
            
            
            
            1,958,6912,142,390
            
            
            
            2,109,183




The
minimum future gross revenues to be received under the Company’s non-cancellable
finance leases as of December 31, 2007 are as follows:







F-16







(in
      thousands of $)
              Year
      ending December 312008
            
            
            453,2352009
            
            
            419,0332010
            
            
            358,1612011
            
            
            303,3472012
            
            
            295,136Thereafter
            
            
            2,366,315Total
      minimum lease revenues
            
            
            4,195,227




The
non-double hull vessel Front
Maple was sold in January 2008 and the above figures include minimum
lease payments for this vessel of $7.1 million, $6.5 million and $2.7 million
for the years 2008, 2009 and 2010 respectively.






13.
            INVESTMENT
      IN ASSOCIATED
COMPANIES


At
December 31, 2007 and 2006 the Company has the following participation in an
investment that is recorded using the equity method:








2007
            
            
            2006Front
      Shadow Inc.
            
            
            100.00
            %
            
            
            100.00
            %





Summarized
      balance sheet information of the Company’s equity method investee is as
      follows:





(in
      thousands of $)
            
            2007
            
            
            2006Current
      assets
            
            
            2,625
            
            
            
            978Non
      current assets
            
            
            25,193
            
            
            
            28,099Current
      liabilities
            
            
            8,049
            
            
            
            8,170Non
      current liabilities
            
            
            18,580
            
            
            
            20,640





Summarized
      statement of operations information of the Company’s equity method
      investee is as follows:





(in
      thousands of $)
            
            2007
            
            
            2006Net
      operating revenues
            
            
            2,193
            
            
            
            694Net
      operating income
            
            
            2,190
            
            
            
            684Net
      income
            
            
            923
            
            
            
            267





Front
Shadow Inc. (“Front Shadow”) is a 100% owned subsidiary of Ship
Finance.  This entity is being accounted for using the equity method
as it has been determined that Ship Finance is not the primary beneficiary under
FIN 46 (R).





Front
Shadow was incorporated during 2006 for the purpose of holding a Panamax drybulk
carrier, and leasing that vessel to Golden Ocean Group Limited (“Golden Ocean”),
a related party.


In
September 2006 Front Shadow entered into a $22.7 million term loan facility. The
Company guarantees $2.1 million of this debt.





F-17







14.
            ACCRUED
      EXPENSES




(in
      thousands of $)
              
              2007
              
              
              2006Ship
      operating expenses
              
              
              275
              
              
              
              262Voyage
      expenses
              
              
              -
              
              
              
              51Administrative
      expenses
              
              
              2,143
              
              
              
              3,389Interest
      expense
              
              
              14,554
              
              
              
              7,56016,972
              
              
              
              11,262






15.
            LONG-TERM
      DEBT




(in thousands of $)
            
            2007
            
            
            20068.5%
      Senior Notes due 2013
            
            
            449,080
            
            
            
            449,080U.S.
      dollar denominated floating rate debt (LIBOR plus 0.65% - 1.40%) due
      through 2019
            
            
            1,820,914
            
            
            
            1,466,1202,269,994
            
            
            
            1,915,200Less: short-term
      portion
            
            
            (179,428
            )
            
            
            (144,451
            )2,090,566
            
            
            
            1,770,749








The
outstanding debt as of December 31, 2007 is repayable as follows:





(in
      thousands of $)
              Year
      ending December 312008
            
            
            179,4282009
            
            
            153,7522010
            
            
            147,6692011
            
            
            689,3212012
            
            
            304,125Thereafter
            
            
            795,699Total
      debt
            
            
            2,269,994





The
weighted average interest rate for floating rate debt denominated in U.S.
dollars was 5.72% per annum and 5.34% per annum for the years ended December 31
2007 and December 31 2006, respectively. These rates take into
consideration the effect of related interest rate swaps.





8.5%
Senior Notes due 2013




On
December 15, 2003 the Company issued $580 million of 8.5% senior
notes.  Interest on the notes is payable in cash semi-annually in
arrears on June 15 and December 15. The notes are not redeemable prior
to December 15 2008 except in certain circumstances.  After that date
the Company may redeem notes at redemption prices which reduce from 104.25% in
2008 to 100% in 2011 and thereafter.





The
Company bought back and cancelled notes in 2006, 2005 and 2004 with principal
amounts of $8.0 million, $73.2 million and $49.7 million, respectively. No notes
were bought in 2007 and thus there was $449.1 million outstanding at December 31
2007 and 2006.





The
Company has entered into short-term total return bond swap lines with banks (see
Note 2 Derivatives). As
of December 31, 2007 the Company had entered into total return bond swaps with a
principal amount totaling $122.1 million under these arrangements (2006: $52.0
million).




$1,131.4
million secured term loan facility




In February
2005 the Company entered into a $1,131.4 million term loan facility with a
syndicate of banks.  The proceeds from the facility were used to repay
the prior $1,058.0 million
syndicated senior secured credit facility and for general corporate purposes.
The facility bears interest at LIBOR plus a margin and is repayable over a term
of six years.






F-18





In
September 2006 the Company signed an agreement whereby the existing debt
facility, which had been partially repaid, was increased by $219.7 million to
the original amount of $1,131.4 million.  The increase is available on
a revolving basis and at  December 31 2007 there was $84.7 million
available to draw.





$350.0
million combined senior and junior secured term loan facility




In June 2005
the Company entered into a combined $350.0 million senior and junior secured
term loan facility with a syndicate of banks, for the purpose of funding the
acquisition of five VLCCs. The facility bears interest at LIBOR plus a margin
for the senior loan and LIBOR plus a different margin for the junior loan. The
facility is repayable over a term of seven years.





$210.0
million secured term loan facility




In
April 2006 the Company entered into a $210.0 million secured term loan facility
with a syndicate of banks to partly fund the acquisition of five new container
vessels.  The facility bears interest at LIBOR plus a margin and is
repayable over a term of 12 years.





$165.0
million secured term loan facility




In
June 2006 the Company entered into a $165.0 million secured term loan facility
with a syndicate of banks.  The proceeds of the facility were used to
partly fund the acquisition of the jack-up drilling rig West Ceres. The facility
bears interest at LIBOR plus a margin and is repayable over a term of six
years.





$170.0
million secured term loan facility




In
February 2007 the Company entered into a $170.0 million secured term loan
facility with a syndicate of banks.  The proceeds of the facility were
used to partly fund the acquisition of the jack-up drilling rig West Prospero. The facility
bears interest at LIBOR plus a margin and is repayable over a term of six years
from the date of delivery of the rig.





$148.9
million secured term loan facility




In
August 2007 the Company entered into a $148.9 million secured term loan facility
with a syndicate of banks.  The proceeds of the facility were used to
partly fund the acquisition of five new offshore supply vessels. The facility
bears interest at LIBOR plus a margin and is repayable over a term of seven
years.





At
December 31, 2007, in addition to the above loan facilities the Company has
established three further facilities (i) to partly finance the acquisition of
two newbuilding Capesize drybulk carriers ($130.0 million facility), (ii) to
partly finance the acquisition of three newbuilding seismic vessels ($120.0
million facility) and (iii) to partly fund the acquisition of two offshore
supply vessels ($77.0 million facility). No drawings had been made against these
facilities at December 31, 2007.


Agreements
related to long-term debt provide limitations on the amount of total borrowings
and secured debt, and acceleration of payment under certain circumstances,
including failure to satisfy certain financial covenants. As of December 31,
2007, the Company is in compliance with all of the covenants under its long-term
debt facilities.







F-19





16.
            OTHER
      LONG TERM LIABILITIES




In
August 2007 the Company acquired five offshore supply vessels from Deep Sea
Supply Plc (“Deep Sea”), a related party, and chartered the vessels back to Deep
Sea under bareboat charter agreements. As part of the purchase consideration,
the Company received seller’s credits totaling $17.5 million which are being
recognized as additional bareboat revenues over the period of the charters. The
unamortized balance of the seller’s credits is recorded in “Other long term
liabilities”.






17.
            SHARE
      CAPITAL AND CONTRIBUTED SURPLUS




Authorized
      share capital is as follows:





(in
      thousands of $, except share data)
            
            2007
            
            
            2006125,000,000
      common shares of $1.00 par value each
            
            
            125,000
            
            
            
            125,000





Issued
      and fully paid share capital is as
follows:





(in
      thousands of $, except share data)
            
            2007
            
            
            200672,743,737
      common shares of $1.00 par value each
            
            
            72,744
            
            
            
            72,744





The
Company’s common shares are listed on the New York Stock Exchange.





The
Company was formed in October 2003. Immediately after its partial spin-off from
Frontline in May 2004 the issued share capital amounted to 73,925,837 common
shares of $1 each, and in July 2004 the Company issued a further 1,600,000
shares in a private placement. Between November 2004 and January 2006 the
Company purchased and cancelled 2,782,100 shares, leaving issued share capital
of 72,743,737 common shares at December 31, 2007 and 2006.





The Company
has accounted for the acquisition of vessels from Frontline at Frontline’s
historical carrying value.  The difference between the historical
carrying values and the net investment in the leases has been recorded as a
deferred deemed equity contribution. This deferred deemed equity contribution is
presented as a reduction in the net investment in finance leases in the balance
sheet.  This results from the related party nature of both the transfer of
the vessels and the subsequent finance leases.  The deferred deemed equity
contribution is amortized as a credit to contributed surplus over the life of
the lease arrangements, as lease payments are applied to the principal balance
of the lease receivable. In the year ended
December 31 2007 the Company has credited contributed surplus with $20.6 million
of such deemed equity contributions (2006: $30.1 million).





In
November 2006 the Board of Directors approved the Ship Finance International
Limited Share Option Scheme (the “Option Scheme”). The Option Scheme permits the
Board of Directors, at its discretion, to grant options to employees and
directors of the Company or its subsidiaries. The fair value cost of options
granted is recognized in the statement of operations, with a corresponding
amount credited to contributed surplus. The contributed surplus arising from
share options was $0.8 million in the year ended December 31 2007 (see also Note
18).




The Board of Directors of the Company
has approved a share repurchase program of up to seven million shares, which
initially is to be financed through the use of total return swap transactions
indexed to the Company’s own shares (see Note 2Derivatives).





F-20




18.
              SHARE OPTION
      PLAN


The
Option Scheme adopted in November 2006 will expire in November
2016.  The subscription price for all options granted under the scheme
will be reduced by the amount of all dividends declared by the Company per share
in the period from the date of grant until the date the option is exercised,
provided the subscription price never shall be reduced below the par value of
the share.  Options granted under the scheme will vest at a date
determined by the board at the date of the grant.  The options granted
under the plan to date vest over a period of one to three
years.  There is no maximum number of shares authorized for awards of
equity share options, and either authorized unissued shares of Ship Finance or
treasury shares held by the Company may be used to satisfy exercised
options.





Two
grants of share options were made in 2007 and the fair value of each option is
estimated on the date of the grant using a Black Scholes option valuation model,
with the following assumptions:  risk-free interest rate of 4.21%
(weighted average across options), volatility of 29% (weighted average across
options), a dividend yield of 0% and a weighted average expected option term of
3.5 years.  The risk-free interest rates were estimated using the
interest rate on three year US treasury zero coupon issues.  The
volatility was estimated using historical share price data.  The
dividend yield has been estimated at 0% as the exercise price is reduced by all
dividends declared by the Company from the date of grant to the exercise
date.  It is assumed that all options granted under the plan will
vest.





The
following summarizes share option transactions related to the Option Scheme in
2007 and 2006:





2007
            
            
            2006Options
            
            
            Weighted
      average exercise price
              $
            
            
            Options
            
            
            Weighted
      average exercise price
              $Options
      outstanding at beginning of year
            
            
            150,000
            
            
            
            22.32
            
            
            
            -
            
            
            
            -Granted
            
            
            210,000
            
            
            
            28.15
            
            
            
            150,000
            
            
            
            22.85Exercised
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -Options
      outstanding at end of year
            
            
            360,000
            
            
            
            24.44
            
            
            
            150,000
            
            
            
            22.32Exercisable
      at end of year
            
            
            50,000
            
            
            
            20.13
            
            
            
            -
            
            
            
            -





The
weighted average grant-date fair value of options granted during 2007 is $6.06
per share (2006: $6.67 per share). The exercise price of all options is reduced
by the amount of any dividends declared; the above figures for options granted
show the average of the prices at the time of granting the options, and for
options outstanding at the beginning and end of the year the average of the
reduced option prices is shown.





As
of December 31, 2007 there was $1.4 million in unrecognized compensation costs
related to non-vested options granted under the Options Scheme (2006: $1.0
million). This cost will be recognized over the vesting periods, which average
1.9 years.







F-21


Share-based
bonus




The
employment contract for one employee contains a share-based bonus
provision.  Under the terms of the contract, the share based bonus is
calculated to be the annual increase in the share price of the Company, plus any
dividend per share paid, multiplied by a notional share holding of 200,000
shares.  Any bonus related to the increase in share price is payable
at the end of each calendar year, while any bonus linked to dividend payments is
payable on the relevant dividend payment date.  The share-based bonus
fair value of $1.0 million at December 31 2007 was recorded as a liability
(2006: $1.7 million).







19.
            RELATED
      PARTY
TRANSACTIONS


The
Company, which was formed in 2003 as a wholly-owned subsidiary of Frontline, was
partially spun-off in 2004 and its shares commenced trading on the New York
Stock Exchange in June 2004. A significant proportion of the Company’s business
continues to be transacted with Frontline and the following related parties,
being companies in which Hemen Holding Limited, our largest shareholder, has a
significant interest:




-
            Seadrill




-
            Golden  Ocean




-
            Deep Sea





The
Consolidated Balance Sheets include the following amounts due from and to
related parties, excluding finance lease balances (Note 12):




(in
      thousands of $)
            
            2007
            
            
            2006Amounts
      due from:Frontline
      Charterers
            
            
            38,853
            
            
            
            56,951Frontline
      Ltd
            
            
            3,161
            
            
            
            6,073Total
      amount due from related parties
            
            
            42,014
            
            
            
            63,024Amounts
      due to:Frontline
      Management
            
            
            5,292
            
            
            
            3,895Frontline
      Ltd
            
            
            -
            
            
            
            10,381Other
      related parties
            
            
            401
            
            
            
            135Total
      amount due to related parties
            
            
            5,693
            
            
            
            14,411





The
balances due to Frontline Ltd relate principally to refundable costs for the
conversion of certain of the vessels prior to sale and insurance proceeds
received in respect of one of the vessels being converted.




Related
party leasing and service contracts




As
at December 31, 2007, 41 of the Company’s vessels were leased to the Frontline
Charterers and two jack-up drilling rigs were leased to subsidiaries of
Seadrill: these leases have been recorded as finance leases. In addition, five
offshore supply vessels were leased to Deep Sea under operating
leases.




At
December 31, 2007 the combined balance of net investments in finance leases with
the Frontline Charterers and subsidiaries of Seadrill was $2,362.6 million
(2006: $2,383.9 million) of which $171.9 million (2006: $150.5 million)
represents short-term maturities.


At
December 31, 2007 the net book value of assets leased under operating leases to
Deep Sea was $193.8 million (2006: $nil).


F-22


A
summary of leasing revenues earned from Frontline Charterers, Seadrill and Deep
Sea is as follows:





Payments
      (in millions of $)
            
            2007
            
            
            2006
            
            
            2005Operating
      lease income
            
            
            7.4
            
            
            
            -
            
            
            
            -Finance
      lease interest income
            
            
            185.0
            
            
            
            182.6
            
            
            
            177.5Finance
      lease service revenue
            
            
            102.1
            
            
            
            106.8
            
            
            
            92.3Finance
      lease repayments
            
            
            156.7
            
            
            
            136.8
            
            
            
            94.8Deemed
      dividends received
            
            
            4.6
            
            
            
            31.7
            
            
            
            50.5Deemed
      dividends paid
            
            
            (6.6
            )
            
            
            (47.3
            )
            
            
            (67.0
            )





The
Frontline Charterers pay the Company profit sharing of 20% of their earnings on
a TCE basis from their use of the Company’s fleet above average threshold
charter rates each fiscal year.  During the year ended December 31,
2007, the Company earned and recognized revenue of $52.5 million (2006: $78.9
million, 2005: $88.1 million) under this arrangement.





In
the event that vessels on charter to the Frontline Charterers are agreed to be
sold, the Company may pay compensation for the termination of the lease. During
2007 leases to the Frontline Charterers were cancelled on the following vessels,
with termination fees agreed as shown:








Vessel
            Year
      Sold
            
            Termination
      Fee
              (in
      millions of $)Front
      Transporter
            2007
            
            
            14.8Front
      Target
            2007
            
            
            14.6Front
      Traveller
            2007
            
            
            13.6Front
      Granite
            2007
            
            
            15.8Front
      Comor
            2007
            
            
            13.3Front
      Sunda
            2007
            
            
            7.2Front
      Birch
            2007
            
            
            16.2Front
      Vanadis
            2007
            
            
            13.2





As
at December 31 2007 the Company was owed a total of $38.9 million (2006: $56.9
million) by the Frontline Charterers in respect of leasing contracts and profit
share.





The
vessels leased to the Frontline Charterers are on time charter terms and for
each such vessel the Company pays a management fee of $6,500 per day to
Frontline Management (Bermuda) Ltd, (“Frontline Management”), a wholly owned
subsidiary of Frontline, resulting in expenses of $103.4 million for the year
ended December 31, 2007 (2006: $116.1  million, 2005: $105.2 million).
The management fees are classified as ship operating expenses in the
consolidated statements of operations.





The
Company also paid $1.2 million in 2007 (2006: $1.0 million, 2005: $1.0 million)
to Frontline Management for the provision of management and administrative
services.





As
at December 31, 2007 the Company owes Frontline Management $5.3 million (2006:
$3.9 million).







F-23





Related
party purchases and sales of vessels - 2007


In
January 2007 the Company agreed to sell five single-hull Suezmax tankers to
Frontline.  The gross sales price for the vessels was $183.7 million,
and the Company received approximately $119.2 million in cash after paying
compensation of approximately $64.5 million to Frontline for the termination of
the charters. The vessels were delivered to Frontline in March
2007.




In
February 2007 the Company agreed to acquire newbuilding contracts for two
Capesize drybulk carriers from Golden Ocean for a total delivered cost of
approximately $160.0 million, with delivery expected in the last quarter of 2008
and the first quarter of 2009. Upon delivery the vessels will commence 15 year
bareboat charters to Golden Ocean.





In
June 2007 the Company purchased the jack-up rig West Prospero from a
subsidiary of Seadrill for a total consideration of $210.0 million. Upon
delivery the rig was immediately chartered back to the Seadrill subsidiary under
a 15 year bareboat charter agreement, fully guaranteed by Seadrill. The
subsidiary has options to buy back the rig after three, five, seven, 10, 12 and
15 years.





In
August 2007 the Company agreed to purchase five offshore supply vessels from
Deep Sea for a total consideration of $198.5 million, plus a sellers credit of
$17.5 million. Upon delivery in September and October 2007, the vessels were
immediately chartered back to Deep Sea under 12 year bareboat charter
agreements. Deep Sea has options to buy back the vessels after three, five,
seven, 10 and 12 years. In December 2007 it was agreed to sell one of these
vessels back to Deep Sea.





In
November 2007 the Company agreed to purchase a further two offshore supply
vessels from Deep Sea for a total consideration of $126.0 million. These vessels
are scheduled for delivery early in 2008 and will be chartered back to Deep Sea
on 12 year bareboat charters, with options for them to buy back the vessels
after three, five, seven, 10 and 12 years.





As
at December 31 2007, the Company was owed a total of $3.2 million (2006: $6.1
million) by Frontline as a result of vessel sales.







Related
party purchases and sales of vessels - 2006




In
January 2006 the Company acquired the VLCC Front Tobago from Frontline
for a consideration of $40.0 million. The vessel was chartered back to Frontline
following the structure in place for other vessels chartered to
Frontline.  The vessel was subsequently sold to an unrelated third
party in December 2006 for approximately $45.0 million and the Company paid
compensation to Frontline of approximately $9.6 million for the termination of
the charter .





In
June 2006 the Company purchased the jack-up rig West Ceres from a subsidiary
of Seadrill for a total consideration of $210.0 million. Upon delivery to the
Company the rig was immediately chartered back to the subsidiary under a 15-year
bareboat charter agreement, fully guaranteed by Seadrill, who has options to buy
back the rig after three, five, seven, 10, 12 and 15 years.





In
September 2006 Front Shadow, a wholly owned subsidiary of the Company, acquired
the Panamax Golden
Shadow for $28.4 million from Golden Ocean. The vessel was chartered back
to Golden Ocean for a period of 10 years.  As part of the agreement,
Golden Ocean provided an interest free and non-amortizing seller’s credit of
$2.6 million.  Golden Ocean has been granted fixed purchase options
after three, five, seven and 10 years.  At the end of the charter, the
Company has an option to sell the vessel back to Golden Ocean at an agreed fixed
price of $10.4 million, including the $2.6 million seller’s credit.





In
November 2006 the Company announced that the Company had assumed two newbuilding
Suezmax tanker contracts from Frontline, for delivery in the first and third
quarters of 2009.





F-24




Related
party purchases and sales of vessels - 2005




In
the first quarter of 2005 the Company acquired three VLCCs from Frontline for a
total consideration of $294.0 million. The vessels were chartered back to
Frontline following the structure in place for other vessels chartered to
Frontline. Frontline received discounted time charter rates for two of the new
vessels, as compensation for the early termination of one Suezmax charter, when
the vessel was sold to an unrelated third party.





In
May 2005 the Company entered into an agreement with parties affiliated with
Hemen Holding Limited to acquire two vessel owning companies, each owning a 2005
built containership, for a total consideration of $98.6 million. The vessels
were delivered in 2005 and are currently chartered to unrelated third
parties.





In
June 2005 the Company acquired three Suezmax tankers from Frontline for a total
consideration of $92.0 million. The vessels were immediately chartered back to
Frontline to replace time charters for three similar vessels whose charters were
terminated upon their sale to an unrelated third party.





In
June 2005 the Company entered into an agreement to acquire two 2004 built VLCCs
from parties affiliated with Hemen Holding Limited for a total consideration of
$184.0 million. This transaction has been recorded at the fair value of $270.0
million, resulting in an additional equity contribution from Hemen Holding
Limited of $85.0 million.  The vessels were delivered in June 2005 and
have been chartered to Frontline under long-term leases.  The ensuing
finance leases have been recorded based on the economic substance of the
transaction, with the fair value of minimum lease payments approximating the
purchase consideration. The resulting loss of $85.0 million on transfer of the
vessels to finance leases has been recorded as a negative equity
contribution.  The overall effect of this transaction on the Company’s
stockholders’ equity was nil.





In
June 2005 the Company sold the Suezmax tanker Front Hunter to an unrelated
third party as a result of which the charter and management agreements with
Frontline relating to this vessel were terminated, and the Company paid
Frontline a $3.8 million termination fee. In addition Frontline held a put
option to sell a newbuilding VLCC to the Company and charter back at reduced
charter rates. In June 2006 the parties agreed to cancel this agreement, and to
split the profit in accordance with the profit share agreement (80% to Frontline
and 20% to the Company), adjusted for the residual value belonging to the
Company. The cancellation of this agreement resulted in a net payment of $16.3
million to Frontline, in addition to the earlier termination payment of $3.8
million. The Company recorded a net gain of $9.0 million in 2006 relating to the
sale of Front Hunter
and the cancellation of the option agreement.






20.
            FINANCIAL
      INSTRUMENTS


Interest
      rate risk management




In
certain situations, the Company may enter into financial instruments to reduce
the risk associated with fluctuations in interest rates.  The Company
has a portfolio of swaps that swap floating rate interest to fixed rate, which
from a financial perspective hedge interest rate exposure. The counterparties to
such contracts are Nordea, HSH Nordbank, Fortis Bank, HBOS, NIBC, Citibank,
Scotiabank, DnB NOR and Skandinaviska Enskilda Banken.
Credit risk exists to the extent that the counterparties are unable to perform
under the contracts, but this risk is considered remote.


The
Company manages its debt portfolio with interest rate swap agreements
denominated in U.S. dollars to achieve an overall desired position of fixed and
floating interest rates. At December 31 2007 the Company, or subsidiaries of the
Company, had entered into interest rate swap transactions, involving the payment
of fixed rates in exchange for LIBOR, as summarized below. The summary includes
all swap transactions, including those that are designated as hedges against
specific loans.









F-25





Notional Principal(in thousands of
      $)
            Inception
      date
            Maturity
      date
            Fixed
      interest rate$75,000
            Feb
      2004
            Feb
      2009
            3.32%
      - 3.36%$458,853
      (reducing to $311,567)
            Nov
      2007
            Feb
      2011
            3.44%
      - 4.03%$203,979
      (reducing to $98,269)
            Apr
      2006
            May
      2019
            5.65%$146,394
      (reducing to $101,731)
            Sep
      2007
            Sep
      2012
            4.85%





As
at December 31 2007 the total notional principal amounts subject to such swap
agreements was $884.2 million (2006: $738.7 million).





Total
Return Bond Swap transactions




The
Company has entered into short-term total return bond swap transactions with
banks (see Note 2 Derivatives) and as of
December 31, 2007 was holding bond swaps with a principal amount totaling $122.1
million under these arrangements (2006: $52.0 million).




Total
Return Equity Swap transactions




The Board of Directors of the
Company has approved a share repurchase program of up to seven million shares,
which initially is to be financed through the use of total return swap
transactions indexed to the Company’s own shares (see Note 2Derivatives).At December 31 2007
the counterparty to the transactions has acquired approximately 349,000 shares
in the Company at an average price of $25.01. There is at present no obligation
for the Company to purchase any shares from the counterparty and this
arrangement has been recorded as a derivative transaction.





In
addition to the above TRS transactions linked to the Company’s own securities,
the Company may from time to time enter into short term TRS arrangements
relating to securities of other companies.





Foreign
      currency risk




The
majority of the Company’s transactions, assets and liabilities are denominated
in U.S. dollars, the functional currency of the Company.  There is a
risk that currency fluctuations will have a negative effect on the value of the
Company’s cash flows.  The Company has not entered into forward
contracts for either transaction or translation risk, which may have an adverse
effect on the Company’s financial condition and results of
operations.






F-26





Fair Values




The
carrying value and estimated fair value of the Company’s financial instruments
at December 31, 2007 and 2006 are as follows:





(in
      thousands of $)
            
            2007
              Carrying
      value
            
            
            2007
              Fair value
            
            
            2006
              Carrying
      value
            
            
            2006
              Fair valueNon-derivatives:Cash
      and cash equivalents
            
            
            78,255
            
            
            
            78,255
            
            
            
            64,569
            
            
            
            64,569Restricted
      cash
            
            
            26,983
            
            
            
            26,983
            
            
            
            12,937
            
            
            
            12,937Floating
      rate debt
            
            
            1,820,914
            
            
            
            1,820,914
            
            
            
            1,466,120
            
            
            
            1,466,1208.5%
      Senior Notes due 2013
            
            
            449,080
            
            
            
            456,714
            
            
            
            449,080
            
            
            
            448,799Derivatives:TRS
      equity swap contracts – amounts receivable
            
            
            1,045
            
            
            
            1,045
            
            
            
            -
            
            
            
            -Interest
      rate swap contracts – amounts receivable
            
            
            2,953
            
            
            
            2,953
            
            
            
            17,807
            
            
            
            17,807TRS
      bond swap contracts –  amounts receivable
            
            
            2,713
            
            
            
            2,713
            
            
            
            2,931
            
            
            
            2,931Total
      amounts receivable
            
            
            6,711
            
            
            
            6,711
            
            
            
            20,738
            
            
            
            20,738Interest
      rate swap contracts – amounts payable
            
            
            20,852
            
            
            
            20,852
            
            
            
            8,743
            
            
            
            8,743Bond
      swap contracts –  amounts payable
            
            
            372
            
            
            
            372
            
            
            
            -
            
            
            
            -Total
      amounts payable
            
            
            21,224
            
            
            
            21,224
            
            
            
            8,743
            
            
            
            8,743





The
carrying value of cash and cash equivalents, which are highly liquid, is a
reasonable estimate of fair value.





The
fair value for floating rate long-term debt is estimated to be equal to the
carrying value since it bears variable interest rates, which are reset on a
quarterly basis. The estimated fair value for fixed rate long-term senior notes
is based on the quoted market price.





The
fair value of total return equity swaps is based on the closing prices of the
underlying listed shares, dividends paid since inception and the interest rate
charged by the counterparty.





The
fair value of interest rate swaps is estimated by taking into account the cost
of entering into interest rate swaps to offset the Company's outstanding
swaps.




The
fair value of the bond swaps is estimated by taking into account the cost of
entering into bond swaps to offset the Company’s outstanding bond
swaps.




Concentrations of
risk




There
is a concentration of credit risk with respect to cash and cash equivalents to
the extent that most of the amounts are carried with Skandinaviska Enskilda
Banken, DnB NOR, Fortis Bank and Nordea. However, the Company believes this risk
is remote as these banks are high credit quality financial
institutions.





Since
the Company was spun-off from Frontline in 2004, Frontline has accounted for a
major proportion of our operating revenues. In the year ended December 31 2007
Frontline accounted for 78% of our operating revenues (2006: 83%, 2005: 81%).
There is thus a concentration of revenue risk with Frontline.






F-27






21
            COMMITMENTS
      AND CONTINGENT
LIABILITIES




Assets
      Pledged




2007Book
      value of assets pledged under ship mortgages
            $2,848
      million










Other
      Contractual Commitments




The
Company has arranged insurance for the legal liability risks for its shipping
activities with Assuranceforeningen SKULD, Assuranceforeningen Gard Gjensidig
and Britannia Steam
Ship Insurance Association Limited, all mutual protection and indemnity
associations. On certain of the vessels insured, the Company is subject to calls
payable to the associations based on the Company's claims record in addition to
the claims records of all other members of the associations.  A
contingent liability exists to the extent that the claims records of the members
of the associations in the aggregate show significant deterioration, which
result in additional calls on the members.





At
December 31, 2007 the Company had contractual commitments under newbuilding
contracts and vessel
acquisition agreementstotaling $701.0 million (2006: $362.5 million).
There was also at that date a commitment to subscribe up to $8.0 million in
additional share capital to Sea Change Maritime LLC, a long term investment in
which the Company has a 10% shareholding.






F-28






22
            SUBSEQUENT
      EVENTS


In
October 2007 the Company agreed to sell the single-hull VLCC Front Duchess
to an unrelated third party.  Subsequent to December 31 2007, the Company
has mutually agreed with the buyer to terminate the sale, and the vessel will
continue its original charter to Frontline Shipping Limited.




On
January 31 2008 the Company announced that it has signed new 12 year charters
for two container vessels, Sea
Alfa and Sea
Beta, which were previously employed on shorter term
charters.





In
January 2008 the Company took delivery of two offshore supply vessels from Deep
Sea, in accordance with the agreement announced in November 2007. In connection
with the delivery of the vessels, two vessel-owning subsidiaries entered into a
$77.0 million secured term loan facility to partly fund the
acquisition.





In
January 2008 the offshore supply vessel Sea Troutwas sold back to
Deep Sea, as agreed in December 2007.





Since
December 31, 2007 the Company has entered into further TRS transactions relating
to 343,000 of its own shares, increasing the number of shares held under the TRS
agreements to approximately 692,000.





In
February 2008 the Company announced its intention to implement a dividend
re-investment plan and a direct stock purchase plan.





In
February 2008 the Company entered into a $30.0 million secured loan facility,
related to the Montemar
Europa delivered in August 2007.





On
February 14 2008, the Board of Ship Finance declared a dividend of $0.55 per
share to be paid on or about March 10 2008.




In
February 2008 80,000 share options were granted to employees in accordance with
the Company's Option Scheme.




In March
2008 the Company announced the re-chartering of the single hull VLCC Front
Sabang to an unrelated third party in the form of a hire-purchase
agreement. The vessel will be chartered out for 3.5 years, with a purchase
obligation at the end of the charter period.




In March
2008 the Company announced that it has agreed to the acquisition of two chemical
tankers for a total consideration of $60.2 million.









SK 23153 0001 864009


F-29