UNITED
STATES




SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
20-F


[ 
 ]           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, 2008





OR


[   ]           TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934


For
      the transition period from





OR


[   ]           SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





Date
      of event requiring this shell company report





Commission
      file number
            001-32199Ship
      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)Georgina
      Sousa
              Par-la-Ville
      Place, 14 Par-le-Ville Road, Hamilton, HM 08, Bermuda
              Tel:
       +1 (441) 295-9500, Fax:  +1 (441) 295-3494(Name,
      Telephone, Email and/or Facsimile number and Address of Company Contact
      Person)





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








Title
      of each class
            
            Name
      of each 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.




[   ]
Yes  [ X ] 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.


[   ]
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  [   ] No





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





Large
      accelerated filer  [ X ]
            Accelerated
      filer  [   ]
            Non-accelerated
      filer  [   ]





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





[ X
      ]  U.S. GAAP
            [   ]  International
      Financial Reporting Standards as issued by the International Accounting
      Standards Board
            [   ]  Other







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


[    ]
Item 17  [   ] Item 18





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




[   ]
Yes  [ X ] No

















INDEX
TO REPORT ON FORM 20-F








PART
    I
              PAGE  ITEM
      1.
              IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
              1





ITEM
      2.
            OFFER
      STATISTICS AND EXPECTED TIMETABLE
            1





ITEM
      3.
              KEY
      INFORMATION
              1





ITEM
      4.
              INFORMATION
      ON THE COMPANY
              21





ITEM
      4A.
              UNRESOLVED
      STAFF COMMENTS
              41





ITEM
      5.
              OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS
              41





ITEM
      6.
              DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES
              63  ITEM
      7.
              MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
              66







ITEM
      8.
              FINANCIAL
      INFORMATION
              70





ITEM
      9.
              THE
      OFFER AND LISTING
              71





ITEM
      10.
              ADDITIONAL
      INFORMATION
              72  ITEM
      11.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT
      MARKET RISK
              87








ITEM
      12.
            DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY
      SECURITIES
            88





PART
II





ITEM
      13.
              DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES
              89




ITEM
      14.
              MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
                AND
      USE OF PROCEEDS
              89  ITEM
      15.
              CONTROLS
      AND PROCEDURES
              89





ITEM
      16A.
            AUDIT
      COMMITTEE FINANCIAL EXPERT
            90





ITEM
      16B.
            CODE
      OF ETHICS
            90





ITEM
      16C.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
            91








ITEM
      16D.
            EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT
      COMMITTEES
            91








ITEM
      16E.
              PURCHASE
      OF EQUITY SECURITIES BY ISSUER AND AFFILIATED
      PURCHASERS
              92  ITEM
      16G.
              CORPORATE
      GOVERNANCE
              93


PART
III





ITEM
      17.
              FINANCIAL
      STATEMENTS
              94





ITEM
      18.
              FINANCIAL
      STATEMENTS
              94





ITEM
      19.
              EXHIBITS
              95


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,” “intend,” “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, or 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.  We
use the term twenty-foot equivalent units, or TEU, in describing containerships
to refer to the number of standard twenty foot containers which the 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 2008 2007 and 2006 and the
selected balance sheet data of the Company with respect to the fiscal years
ended December 31 2008 and 2007 have been derived from the Company’s
Consolidated Financial Statements included in Item 18 of this annual report,
prepared in accordance with U.S. generally accepted accounting
principles.





The
selected income statement and cash flow statement data for the fiscal years
ended December 31 2005 and 2004 and the selected balance sheet data for the
fiscal years ended December 31 2006 2005 and 2004 have been derived from
consolidated financial statements of the Company 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.








Year
      Ended December 312008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(in
      thousands of dollars except common share and per share
    data)Income
      Statement Data:Total
      operating revenues
                
                
                458,346
                
                
                
                398,792
                
                
                
                424,658
                
                
                
                437,510
                
                
                
                492,069Net
      operating income
                
                
                337,402
                
                
                
                304,881
                
                
                
                293,697
                
                
                
                300,662
                
                
                
                347,157Net
      income
                
                
                181,611
                
                
                
                167,707
                
                
                
                180,798
                
                
                
                209,546
                
                
                
                262,659Earnings
      per share, basic
                
                $
                2.50
                
                
                $
                2.31
                
                
                $
                2.48
                
                
                $
                2.84
                
                
                $
                3.52Earnings
      per share, diluted
                
                $
                2.50
                
                
                $
                2.30
                
                
                $
                2.48
                
                
                $
                2.84
                
                
                $
                3.52Dividends
      declared
                
                
                166,584
                
                
                
                159,335
                
                
                
                149,123
                
                
                
                148,863
                
                
                
                78,905Dividends
      declared per share
                
                $
                2.29
                
                
                $
                2.19
                
                
                $
                2.05
                
                
                $
                2.00
                
                
                $
                1.05





1





Year
      Ended December 312008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(in
      thousands of dollars except common share and per share
    data)Balance
      Sheet Data (at end of period):Cash
      and cash equivalents
                
                
                46,075
                
                
                
                78,255
                
                
                
                64,569
                
                
                
                32,857
                
                
                
                29,193Vessels
      and equipment, net
                
                
                656,216
                
                
                
                629,503
                
                
                
                246,549
                
                
                
                315,220
                
                
                
                236,305Investment
      in finance leases (including current portion)
                
                
                2,090,492
                
                
                
                2,142,390
                
                
                
                2,109,183
                
                
                
                1,925,354
                
                
                
                1,718,642Investment
      in associated companies
                
                
                420,977
                
                
                
                4,530
                
                
                
                3,698
                
                
                
                -
                
                
                
                -Total
      assets
                
                
                3,348,486
                
                
                
                2,950,028
                
                
                
                2,553,677
                
                
                
                2,393,913
                
                
                
                2,152,937Short
      and long term debt  (including current portion)
                
                
                2,595,516
                
                
                
                2,269,994
                
                
                
                1,915,200
                
                
                
                1,793,657
                
                
                
                1,478,894Share
      capital
                
                
                72,744
                
                
                
                72,744
                
                
                
                72,744
                
                
                
                73,144
                
                
                
                74,901Stockholders’
      equity
                
                
                517,350
                
                
                
                614,477
                
                
                
                600,530
                
                
                
                561,522
                
                
                
                660,982Common
      shares outstanding
                
                
                72,743,737
                
                
                
                72,743,737
                
                
                
                72,743,737
                
                
                
                73,143,737
                
                
                
                74,900,837Weighted
      average common shares outstanding(1)
                
                
                72,743,737
                
                
                
                72,743,737
                
                
                
                72,764,287
                
                
                
                73,904,465
                
                
                
                74,610,946Cash
      Flow Data:Cash
      provided by operating activities
                
                
                211,386
                
                
                
                202,416
                
                
                
                210,160
                
                
                
                280,834
                
                
                
                178,528Cash
      provided by (used in) investing activities
                
                
                (433,945
                )
                
                
                (378,777
                )
                
                
                (127,369
                )
                
                
                (269,573
                )
                
                
                76,948Cash
      provided by (used in) financing activities
                
                
                190,379
                
                
                
                190,047
                
                
                
                (51,079
                )
                
                
                (7,597
                )
                
                
                (226,283
                )








(1)
 For 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.





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 16 2009.




2





Risks
Relating to Our Industry




Disruptions
in world financial markets and the resulting governmental action in the U.S. and
in other parts of the world could have a material adverse impact on our results
of operations, financial condition and cash flows, and could cause the market
price of our common shares to decline.
  Over the
last year, global financial markets have experienced extraordinary disruption
and volatility following adverse changes in the global credit markets. The
credit markets in the U.S. have experienced significant contraction,
deleveraging and reduced liquidity, and governments have taken highly
significant measures in response to such events, including the enactment of the
Emergency Economic Stabilization Act of 2008 in the U.S., and may implement
other significant responses in the future. Securities and futures markets and
the credit markets are subject to comprehensive statutes, regulations and other
requirements. The U.S. Securities and Exchange Commission, other regulators,
self-regulatory organizations and exchanges are authorized to take extraordinary
actions in the event of market emergencies, and may effect changes in law or
interpretations of existing laws.




A number
of financial institutions have experienced serious financial difficulties and,
in some cases, have entered into bankruptcy proceedings or are in regulatory
enforcement actions. These difficulties may adversely affect the financial
institutions that provide our capital commitments and may impair their ability
to continue to perform under their financing obligations to us, which could have
an impact on our ability to fund current and future obligations.




Major
market disruptions and the current adverse changes in market conditions and
regulatory climate in the U.S. and worldwide may adversely affect our business
or impair our ability to borrow amounts under our credit facilities or any
future financial arrangements. We cannot predict how long the current market
conditions will last. However, these recent and developing economic and
governmental factors may have a material adverse effect on our results of
operations, financial condition or cash flows. The price of our common shares
has declined significantly and if economic conditions continue or worsen it
could further impair our business, results of operations and ability to pay
dividends.




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. If we enter
into a charter when charterhire rates are low, our revenues and earnings will be
adversely affected.  In addition, a decline in charterhire rates
likely will cause the value of our vessels to decline.  We cannot
assure you that we will be able to successfully charter our vessels in the
future or renew our existing charters at rates sufficient to allow us to operate
our business profitably, meet our obligations or pay dividends to our
shareholders. 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.





3




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.


Factors
that influence supply of vessel capacity include:




·
              the
      number of newbuilding
deliveries;


·
              the
      scrapping rate of older
vessels;


·
              the
      price of steel and 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.





Demand
for our vessels and charter rates are dependent upon 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 be at a rate sufficient to utilize this new capacity.
Continued adverse economic, political or social conditions or other developments
could further negatively impact charter rates and therefore have a material
adverse effect on our business, results of operations and ability to pay
dividends.





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





Demand
for our vessels and charter rates are dependent upon economic conditions in
China, India and the rest of the world. Until recently, China has been one of
the world’s fastest growing economies in terms of gross domestic product, which
had a significant impact on shipping demand. If the economic slowdown in China,
as well as the Asia Pacific region, continues, it may exacerbate the effect of
recent slowdowns in the economies of the U.S. and the European Union and may
have a further material adverse effect on our business, financial condition and
results of operations, as well as our future prospects. Through the end of
the fourth quarter of 2008, China’s gross domestic product was
approximately 4.4% lower than it was during the same period in 2007, and it is
likely that China and other countries in the Asia Pacific region will continue
to experience slowed or even negative economic growth in the near future.
Moreover, the current economic slowdown in the economies of the U.S., the
European Union and other Asian countries may further adversely affect economic
growth in China and elsewhere. Our business, financial condition and results of
operations, as well as our future prospects, will likely be materially and
adversely affected by a further economic downturn in any of these
countries.






4





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





The Chinese economy differs from the
economies of most countries belonging to the Organization for Economic
Cooperation and Development, or OECD, in such respects as structure, government
involvement, level of development, growth rate, capital reinvestment, allocation
of resources, rate of inflation and balance of payments position. Prior to 1978,
the Chinese economy was a planned economy. Since 1978, increasing emphasis has
been placed on the utilization of market forces in the development of the
Chinese economy. Annual and five year state plans are adopted by the Chinese
government in connection with the development of the economy. Although
state-owned enterprises still account for a substantial portion of the Chinese
industrial output, in general, the Chinese government is reducing the level of
direct control that it exercises over the economy through state plans and other
measures. There is an increasing level of freedom and autonomy in areas such as
allocation of resources, production, pricing and management and a gradual shift
in emphasis to a “market economy” and enterprise reform. Limited price reforms
were undertaken with the result that prices for certain commodities are
principally determined by market forces. Many of the reforms are unprecedented
or experimental and may be subject to revision, change or abolition based upon
the outcome of such experiments. The level of imports to and exports from China
could be adversely affected by changes to these economic reforms by the Chinese
government, as well as by changes in political, economic and social conditions
or other relevant policies of the Chinese government, such as changes in laws,
regulations or export and import restrictions, all of which could adversely
affect our business, operating results and financial condition.




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




The U.S.,
the European Union and the International Maritime Organization, or the 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
2018.  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. Our fleet includes nine
non-double hull tankers, including two which we have sold on hire-purchase terms
scheduled to expire in November 2010 and October 2011.





This
change could result in some or all of our non-double hull tankers being unable
to trade in many markets after the relevant phase-out date in 2010. In addition,
non-double hull 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.






5




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 effect
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 U.S. Clean Water Act, the U.S. Clean
Air Act, the International Convention on Civil Liability for Oil Pollution
Damage of 1969, International Convention for the Prevention of Pollution from
Ships,  International Convention for the Prevention of Marine
Pollution of 1973, the 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 the
U.S.  OPA allows for potentially unlimited liability without regard to
fault for owners, operators and bareboat charterers of vessels for oil pollution
in U.S. waters.  Similarly, the International Convention on Civil
Liability for Oil Pollution Damage, 1969, as amended, which has been adopted by
most countries outside of the U.S., imposes liability for oil pollution in
international waters.  OPA expressly permits individual states to
impose their own liability regimes with regard to hazardous materials and oil
pollution incidents occurring within their boundaries.  Coastal states
in the U.S. have enacted pollution prevention liability and response laws, many
providing for unlimited liability.




6


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




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




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




The
market supply of container vessels has been increasing, and the number of
container vessels on order is at an historic high. This has led to an
over-supply of container vessel capacity, resulting in a reduction of charter
hire rates and a decrease in the value of our container vessels. The reduction
in rates may, 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 have significantly increased the
levels of inspection for all 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.






7





The
offshore drilling sector depends on the level of activity in the offshore oil
and gas industry, which is significantly affected by, among other things,
volatile oil and gas prices and may be materially and adversely affected by a
decline in the offshore oil and gas industry.





We have
made substantial investments to expand our business in the offshore drilling
sector, including the acquisition of three additional drilling units for a total
acquisition cost of approximately $2.5 billion. The offshore contract drilling
industry is cyclical and volatile. Our business in the offshore drilling sector
depends on the level of activity in oil and gas exploration and development and
production in offshore areas world-wide. The availability of quality drilling
prospects, exploration success, relative production costs and political and
regulatory environments affect our customers’ drilling campaigns. Oil and gas
prices and market expectations of potential changes in these prices also
significantly affect this level of activity and demand for drilling units.





The
recent decline in the price of oil and gas may negatively affect our business in
the offshore drilling sector and may adversely affect us. Sustained periods of
low oil prices typically result in reduced exploration and drilling because oil
and gas companies’ capital expenditure budgets are subject to their cash flow
and are therefore sensitive to changes in energy prices. These changes in
commodity prices can have a dramatic effect on the demand for drilling units,
and periods of low demand can cause an excess supply of drilling
units.





Any
decrease in exploration, development or production expenditures by oil and gas
companies could also materially and adversely affect the business of the
charterers of our drilling units and their ability to perform under their
existing charters with us. Any such decrease could also adversely affect our
offshore supply business. 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 and
Alaska. 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:





·
            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;


·
            the
      development 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 in oil producing areas or further acts of
      terrorism in the U.S., 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 drilling rigs. 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.






8




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.  Through the agreements with our vessel managers, we procure
insurance for most of the 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 per tanker per
occurrence.





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 flow of the charterer and/or the Company
and 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.





9





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 have been payable otherwise.  In addition, we
would bear all risk of loss or damage to a vessel under 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
vessels are typically 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 prohibit their operation in
certain geographic regions.  We cannot predict what alterations or
modifications our vessels may be required to undergo as a result of requirements
that may be promulgated 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.





There
are risks 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





Changes
in our dividend policy could adversely affect holders of our common
shares.




Any
dividend that we declare is at the discretion of our Board of Directors.
Although we have increased our dividend in prior quarters, our most recent
dividend payment of $0.30 per share, was a fifty percent reduction from the
prior quarter. While this does not constitute a change to our basic dividend
policy, we cannot assure you that our dividend will not be reduced further or
eliminated in the future. Our profitability and corresponding ability to pay
dividends is substantially affected by amounts we receive through profit sharing
payments from our charterers. Our entitlement to profit sharing payments, if
any, is based on the financial performance of our vessels which is outside of
our control. If our profit sharing payments decrease substantially, we may not
be able to continue to pay dividends at present levels, or at all. We are also
subject to contractual limitations on our ability to pay dividends pursuant to
certain debt agreements, and we may agree to additional limitations in the
future. Additional factors that could affect our ability to pay dividends
include statutory and contractual limitations on the ability of our subsidiaries
to pay dividends to us, including under current or future debt
arrangements.




10





We
depend on our charterers and principally the Frontline Charterers and the
Seadrill 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, or OBOs, in our fleet are
chartered to Frontline Shipping Limited, Frontline Shipping II Limited and
Frontline Shipping III Limited, which we refer to collectively as the Frontline
Charterers, subsidiaries of Frontline Ltd., or Frontline.  In
addition, we have chartered our five drilling units to four subsidiaries of
Seadrill Limited, or Seadrill, namely Seadrill Invest I Limited, Seadrill Invest
II Limited, Seadrill Deepwater Charterer Ltd. and Seadrill Polaris Ltd., which
we refer to collectively as the Seadrill Charterers.  Our other
vessels that have charters attached to them are chartered to other
customers under medium to long-term time and bareboat charters, except one which
is on a short-term time charter until April 2009.





The
charter hire payments that we receive from our customers constitute
substantially all of our operating cash flows.  The Frontline
Charterers have no business or sources of funds other than those related to
the chartering of our tanker fleet to third parties.





Frontline
Shipping Limited, or Frontline Shipping, Frontline Shipping II Limited, or
Frontline Shipping II, and Frontline Shipping III Limited, or Frontline
Shipping III, have, at March 16 2009, charter service reserves of $155
million,  $35 million and $26 million, respectively, which serves to
support the Frontline Charterers’ obligations to make charterhire payments to
us.  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.  The performance under the charters with the Seadrill
Charterers is guaranteed by Seadrill.  If the Frontline Charterers,
the Seadrill 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 expect a softer spot tanker market in 2009 compared to 2008.
Therefore, 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.





11


The
market values of our vessels and drilling units may decrease, which could limit
the amount of funds that we can borrow or trigger certain financial covenants
under our current or future credit facilities and we may incur a loss if we sell
vessels or drilling units following a decline in their market value. This could
affect future dividend payments.





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. Additionally, 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.





The fair
market values of our vessels and drilling units have generally experienced high
volatility.  According to shipbrokers, the market prices for
secondhand drybulk carriers, for example, have recently decreased sharply from
their historically high levels.





The fair
market value of our vessels and drilling units may increase and decrease
depending on a number of factors including, but not limited to, the prevailing
level of charter rates and dayrates, general economic and market conditions
affecting the shipping and offshore drilling industries, types and sizes of
vessels and drilling units, supply of and demand for vessels and drilling units,
availability of or developments in other modes of transportation, cost of
newbuildings, governmental or other regulations and technological
advances.





In
addition, as vessels and drilling units grow older, they generally decline in
value.  If the fair market value of our vessels and drilling units
declines, we may not be in compliance with certain provisions of our credit
facilities and we may not be able to refinance our debt, obtain additional
financing or make distributions to our shareholders.  Additionally, if
we sell one or more of our vessels or drilling units at a time when vessel and
drilling unit prices have fallen and before we have recorded an impairment
adjustment to our consolidated financial statements, the sale price may be less
than the vessel’s or drilling unit’s carrying value on our consolidated
financial statements, resulting in a loss and a reduction in
earnings.  Furthermore, if vessel and drilling unit values fall
significantly, we may have to record an impairment adjustment in our financial
statements, which could adversely affect our financial results and
condition.





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





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






12


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 vessels and rigs in 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-out of non-double hull 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,
one of our directors, Kate Blankenship, is also a director of Frontline, Golden
Ocean Group Limited, or Golden Ocean, and Seadrill, while another of our
directors, Cecilie Fredriksen, is also a director of
Golden Ocean.  These companies and Deep Sea Supply Plc,
or Deep Sea, are indirectly controlled by John Fredriksen, who
also controls our principal shareholders Hemen Holding Ltd. and Farahead
Investment Inc., which we refer to jointly as Hemen.  These two directors
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, due to their ownership of Frontline,
Golden Ocean, Deep Sea or Seadrill common shares, they may have
conflicts of interest when faced with decisions that could have different
implications for Frontline, Golden Ocean, Deep Sea or Seadrill than
they do for us.  We cannot assure you that any of these conflicts of
interest will be resolved in our favor.






13





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, 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 time daily charter 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.,
which we refer to as Frontline Management, Frontline, Golden Ocean,
Deep Sea and Seadrill or any of our other customers under the charters, or
any of the other agreements to which we are party.  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
remedies against those counterparties.





There
is a risk that U.S. tax authorities could treat us as a “passive foreign
investment company,” which would have adverse U.S. federal income tax
consequences to U.S. holders.




A foreign
corporation will be treated as a “passive foreign investment company,” or PFIC,
for U.S. federal income tax purposes if either (1) at least 75% of its
gross income for any taxable year consists of certain types of “passive income”
or (2) at least 50% of the average value of the corporation’s assets
produce or are held for the production of those types of “passive
income.”  For purposes of these tests, “passive income” includes
dividends, interest and gains from the sale or exchange of investment property
and rents and royalties other than rents and royalties which are received from
unrelated parties in connection with the active conduct of a trade or
business.  For purposes of these tests, income derived from the
performance of services does not constitute “passive income,” but income from
bareboat charters does constitute passive income.





U.S.
shareholders of a PFIC are subject to a disadvantageous U.S. federal income tax
regime with respect to the income derived by the PFIC, the distributions they
receive from the PFIC and the gain, if any, they derive from the sale or other
disposition of their shares in the PFIC.





14


Under
these rules, if our income from our time charters is considered to be passive
rental income (rather than income from the performance of services), we will be
considered to be a PFIC. However, our U.S. tax counsel, Seward &
Kissel LLP, believes that it is more likely than not that our income from
time charters will not be treated as passive rental income for purposes of
determining whether we are a PFIC.  Correspondingly, we believe that
the assets that we own and operate in connection with the production of such
income do not constitute passive assets for purposes of determining whether we
are a PFIC.




Consequently, based
upon our current method of operations and upon representations previously made
by us, our U.S. tax counsel believes it is more likely than not that we
will not be treated as a PFIC for our taxable years ending December 31, 2008 and
December 31, 2009.  This position is principally based upon the positions
that (1) our time charter income will constitute services income, rather than
rental income and (2) Frontline Management, which provides services to most
of our time-chartered vessels, will be respected as a separate entity from the
Frontline Charterers, with which it is affiliated.




For taxable years after 2009, depending
upon the relative amounts of income we derive from our various assets as well as
their relative fair market values, we may be treated as a PFIC.  For
example, the bareboat charters of our drillrigs may produce passive income and
such drillrigs may be treated as assets held for the production of passive
income.  In such a case, depending upon the amount of income so
generated and the fair market value of the drillrigs, we may be treated as a
PFIC for any taxable year after 2009.





We note that thereis no direct legal authority under the
PFIC rules addressing ourcurrent andproposed 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, or the IRS, or a court of law will accept our
position, and there is a significant risk that the IRS or a court of law could
determine that we are a PFIC.Furthermore, even if we would not be a
PFIC under the foregoing tests, 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, our U.S.
shareholders will face adverse U.S. tax consequences.  For example,
U.S. non-corporate shareholders would not be eligible for the 15% maximum tax
rate on dividends that we pay, and other adverse tax consequences may
arise.





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




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





We
believe that we and each of our subsidiaries qualify for this statutory tax
exemption and we will take this position for U.S. federal income tax return
reporting purposes.  However, there are factual circumstances beyond
our control that could cause us to lose the benefit of this tax exemption and
thereby become subject to U.S. federal income tax on our U.S. source
income.  For example, Hemen owned 41.4% of our outstanding stock at
March 16 2009.  On or about April 17 2009,
Hemen will receive approximately 1.6 million additional shares, as they elected
to receive the dividend we issued for the fourth quarter of 2008 in newly issued
common shares.  This may result in an increase of Hemen’s ownership to
approximately 42.7% of our outstanding stock, depending on the extent to which
other shareholders elect to receive their dividend in the form of newly issued
common shares.  There is therefore a risk that we could no
longer qualify for exemption under Section 883 of the Code 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.





15


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% U.S. 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 U.S.  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.





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.




The
Republic of Liberia enacted an income tax law generally effective as of
January 1 2001, or 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, or 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 between 2013 and 2027, the Frontline Charterers
have the option to terminate the charters of our non-double hull tanker vessels
from 2010.





Apart
from the Front
Vanadis and Front
Sabang which are both subject to three and a half year
hire-purchase contracts scheduled to expire in November 2010 and October 2011,
respectively, and the Montemar Europa, which is on
a charter due to expire in April 2009, the vessels in our fleet that have
charters attached to them are generally contracted to expire between four and 18
years from now. However, we have granted some of our charterers purchase or
early termination 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.





16


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.





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.




As at
March 16 2009, we have entered into agreements to acquire two additional Suezmax
tankers and five additional container vessels.  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 charter, financing and sales agreements 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 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.





A
change in interest rates could materially and adversely affect our financial
performance.




As of
December 31 2008, the Company and its consolidated subsidiaries had
approximately $2.0 billion in floating rate debt outstanding under our credit
facilities, and a further $1.8 billion in unconsolidated wholly-owned
subsidiaries accounted for under the equity method.  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 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.


17





As of
December 31 2008, the Company and its consolidated subsidiaries have entered
into interest rate swaps to fix the interest on $1.2 billion of our outstanding
indebtedness, and have also entered into interest rate swaps to fix the interest
on $1.1 billion of the outstanding indebtedness of our unconsolidated
subsidiaries.  In addition we have entered into total return bond
swaps in respect of $148 million of our 8.5% senior notes as of December 31
2008.  The total return bond swaps effectively translate the
underlying principal amount into floating rate debt.





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.  Our maximum exposure to interest rate fluctuations on our
outstanding debt and our outstanding total return bond swaps at December 31
2008, was approximately $1.7 billion, including our unconsolidated
subsidiaries.  A one percentage change in interest rates would at most
increase or decrease interest expense by approximately $17 million per year as
of December 31 2008.  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
2008, $2.1 billion of our floating rate debt was subject to such interest
adjustment clauses, including our equity-accounted subsidiaries.  Of
this, a total of $1.1 billion was subject to interest rate swaps, and the
balance of $939 million remained on a floating rate basis.





The
interest rate swaps that have been entered into by the Company and its
subsidiaries are derivative financial instruments that effectively translate
floating rate debt into fixed rate debt. US GAAP requires that these derivatives
be valued at current market prices in the Company’s financial statements, with
increases or decreases in valuations reflected in results of operations or, if
the instrument is designated as a hedge, in other comprehensive income. Changes
in interest rates give rise to changes in the valuations of interest rate swaps
and could adversely affect results of operations and other comprehensive
income.





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.





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 notes or
loan facilities and 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.





18


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 facilities contain 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
      (ranging from 100% to 140%) of the principal amount outstanding under the
      loan facility;




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




·
            maintain
      positive working capital on a consolidated basis;
  and




·
            maintain
      an adjusted book equity ratio of not less than
  20%.




Under the
terms of our loan facilities, we may not make distributions to 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.  Our lenders’ interests may be
different from ours and we cannot guarantee that we will be able to obtain our
lenders’ permission when needed.  This may 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 total return swap transactions in respect of our shares and
our 8.5% senior notes, and a decrease in the market price of our shares or our
8.5% senior notes could adversely affect our financial results.




The Board
of Directors of the Company has approved a share repurchase program of up to
seven million shares, which is initially being financed through the use of total
return equity swaps indexed to the Company’s own shares and maturing within 12
months. The Company has also entered into total return bond swaps, indexed to
the Company’s 8.5% Senior Notes. Under both arrangements the counterparty
acquires the Company’s shares or bonds, and the Company carries the risk of
fluctuations in the price of the acquired shares or bonds. The settlement amount
for each total return swap transaction will be (A) the proceeds
on sale of the shares or bonds plus all dividends or interest received by the
counterparty while holding the shares or bonds, less (B) the cost of purchasing
the shares or bonds plus an agreed compensation for cost of carriage for the
counterparty. 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
total return swap is recognized as an asset or liability, with the changes in
fair values recognized in the consolidated statement of operations. As at March
16 2009 approximately 692,000 of our shares and $148 million of our 8.5%
senior notes were held under these arrangements. Should the price of our shares
or 8.5% senior notes fall materially below the level at which the shares or
bonds were acquired, the total return swap mark to market valuations could
adversely affect our results.






19





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.





The
market price of our common shares may be unpredictable and
volatile.




The
market price of our common shares has been volatile. Since December 31,
2007 the closing market price of our common shares has ranged from a high of
$32.43 per share on May 20, 2008 to a low of $4.05 per share on March 9, 2009.
The market price of our common shares may continue to fluctuate due to factors
such as actual or anticipated fluctuations in our quarterly and annual results
and those of other public companies in our industry, the reduction of our latest
dividend by fifty percent from the prior dividend, further changes in our
dividend policy, mergers and strategic alliances in the shipping industry,
market conditions in the shipping industry, changes in government regulation,
shortfalls in our operating results from levels forecast by securities analysts,
announcements concerning us or our competitors and the general state of the
securities market. The shipping industry has been highly unpredictable and
volatile. The market for common shares in this industry may be equally volatile.
Therefore, we cannot assure you that you will be able to sell any of our common
shares you may have purchased at a price greater than or equal to its original
purchase price.





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




The
market price of our common shares could decline due to sales of a large number
of our shares in the market or the perception that such sales could occur. This
could depress the market price of our common shares and make it more difficult
for us to sell equity securities in the future at a time and price that we deem
appropriate, or at all. In December 2008, we filed a prospectus supplement
pursuant to which we may sell up to 7,000,000 common shares from time-to-time in
the open market. We view this as a potential source of additional equity
capital. The maximum number of shares issuable represents less than 10% of
our outstanding shares, and to date no shares have been issued and sold.
There is no specific deadline for the utilization of the prospectus
supplement.





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




We are a
Bermuda exempted company.  Bermuda law may not as clearly establish
your rights and the fiduciary responsibilities of our directors as do statutes
and judicial precedent in some U.S. jurisdictions.  In addition, most
of our directors and officers are not resident in the U.S. and the majority of
our assets are located outside of the U.S.  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 the
U.S.






20





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




As of
March 16 2009, Hemen owned approximately 41.4% of our outstanding common
shares.  On or about April 17 2009, Hemen will receive approximately
1.6 million additional shares, as they elected to receive the dividend we
issued for the fourth quarter of 2008 in newly issued common shares. This may
result in an increase of Hemen’s ownership to approximately 42.7% of our
outstanding common shares, depending on the extent to which other shareholders
elect to receive their dividend in the form of newly issued 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, Golden Ocean,
Seadrill and Deep Sea.  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, 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 exempted 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.





We
operate through subsidiaries, partnerships and branches located in Bermuda,
Cyprus, Malta, Liberia, Norway, Delaware, Singapore, the United Kingdom 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, three
ultra-deepwater drilling units, six offshore supply vessels and two chemical
tankers.




Additionally
we have contracted to purchase the following vessels:
 
 ·
              two
      newbuilding Suezmax oil tankers, with estimated delivery in 2009 and 2010;
      and
  ·
              five
      newbuilding container vessels, with estimated delivery in
      2010.
  21




We have
entered into an agreement to sell the two newbuilding Suezmax oil tankers
immediately upon their delivery from the shipyard. The five newbuilding
container vessels will be marketed for medium to long-term
employment.





Our
customers currently include Frontline, Horizon Lines Inc., or Horizon
Lines, Golden Ocean, Seadrill, Taiwan Maritime Transportation Co. Ltd.,
or TMT, Bryggen Shipping & Trading AS, or Bryggen , Heung-A
Shipping Co. Ltd., or Heung-A, Deep Sea and Compania Sud Americana de
Vapores, or CSAV.  Existing charters for most of our vessels
range from four to 18 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, or 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,
ultra-deepwater drilling units and offshore supply vessels.





During
2006 and 2007 we 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 four to 18 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 option to terminate the charter for non-double hull vessels from
2010.




Each of
the Frontline Charterers has established a charter service reserve provided by
Frontline to support their obligation to make payments to us under the charters.
The charter service reserves in Frontline Shipping and Frontline Shipping II
were initially $250 million and $21 million, respectively. Frontline
Shipping III was established in 2008, whereby the charters for five single-hull
VLCCs were transferred from Frontline Shipping to Frontline Shipping III. In
connection with the transfer of these charters, the charter service reserve
relating to the five vessels was transferred from Frontline Shipping to
Frontline Shipping III.  As a result of sales, acquisitions and
transfers of charters, the current charter service reserves in Frontline
Shipping, Frontline Shipping II and Frontline Shipping III are $155 million, $35
million and $26 million, respectively.
 
 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, 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 the relevant phase-out dates in 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.
   22





The
charters for the drybulk carrier, two jack-up drilling rigs, three
ultra-deepwater drilling units, seven container 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.





Acquisitions
and Disposals





Acquisitions





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, or 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, or 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., or 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 entered into two newbuilding Suezmax contracts with
      delivery currently expected to be in the fourth quarter of 2009 and first
      quarter of 2010.





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, or 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.  This agreement was terminated in February
      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.  This agreement was terminated in
      November 2008.





·
            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 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.





In the
year ended December 31 2008 we agreed to acquire the following vessels or
newbuildings:





·
            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 Maria Victoria V and
      SC Guangzhou were
      delivered, respectively, in April and October
  2008.





·
            In
      May 2008 we entered into an agreement to acquire the newbuilding
      ultra-deepwater drillship West Polaris from a
      subsidiary of Seadrill for a purchase price of $845 million.  The
      vessel was delivered in July 2008.






23


·
              In
      September 2008 we entered into an agreement to acquire two ultra-deepwater
      semi-submersible drilling rigs from subsidiaries of Seadrill for a total
      purchase price of $1.7 billion.  The rigs West Hercules and West Taurus were both
      delivered in November 2008.


Disposals





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.





In the
year ended December 31 2008 we sold 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 commenced in April 2008.





·
            In
      July 2008 we agreed to sell the two newbuilding Suezmax tankers under
      construction. The gross sales price of each vessel was agreed at $111
      million and they will be delivered to the new owner immediately after
      delivery from the shipyard, currently expected to be in the fourth quarter
      of 2009 and first quarter of 2010.





B.  
BUSINESS OVERVIEW





Our
Business Strategies




Our
primary objectives are to profitably grow our business and increase long-term
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 we
      can provide for long-term growth of our assets and continue to decrease
      the average age of our fleet.




24




·
            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, ultra-deepwater drilling units
      and offshore supply 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 nine customers and
      have expanded our relationship with our original customer, Frontline,
      through the purchase of additional vessels.  Of these nine
      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, we will also seek to
      enter into charter agreements that are shorter and 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. However, in the past two years we have made substantial
investments in offshore drilling units which are chartered to the Seadrill
Charterers, and we anticipate that the percentage of our business attributable
to the Frontline Charterers will decrease as revenue from the Seadrill
Charterers increases and 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 and offshore supply
vessels.





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.





25


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, ultra-deepwater drilling units and offshore supply
vessels are chartered out on long-term charters to contractors, and we are
therefore not directly exposed to the short term fluctuation in these markets.
Jack-up drilling rigs, ultra-deepwater drilling units 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. Offshore supply vessels,
ultra-deepwater drillships and semi-submersible drilling rigs 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
bareboat charterers 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.






26





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, drilling rigs,
containerships and offshore supply 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. Compliance with such laws,
regulations and other requirements entails significant expense, including vessel
modification and implementation of certain operating procedures.





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 older
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 is in substantial compliance with applicable environmental laws and
regulations and that our vessels have all material permits, licenses,
certificates or other authorizations necessary for the conduct of our
operations; however, because such laws and regulations are frequently changed
and may impose increasingly stricter requirements, we cannot predict the
ultimate cost of complying with these requirements, or the impact of these
requirements on the resale value or useful lives of our vessels.  In
addition, a future serious marine incident that 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, Malta, the
Marshall Islands, Norway, France, the U.S.A., Panama, Hong Kong and the Isle of
Man.






27




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 newbuild tanker of 5,000 dwt and above 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, as described above, 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.





28


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:




Category
      of Single Hull Oil 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 regulations 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
            2018
            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





29


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





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:




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


·
            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


·
            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/m3 but
lower than 945 kg/m3, 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.






30





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 600m3 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.




Air
Emissions




In
September 1997, the IMO adopted Annex VI to the MARPOL Convention to
address air pollution from ships.  Effective in May 2005, Annex VI
sets limits on sulfur oxide and nitrogen oxide emissions from all commercial
vessel exhausts and prohibits deliberate emissions of ozone depleting substances
(such as halons and chlorofluorocarbons), emissions of volatile compounds from
cargo tanks, and the shipboard incineration of specific
substances.  Annex VI also includes a global cap on the sulfur content
of fuel oil and allows for special areas to be established with more stringent
controls on sulfur emissions.  We believe that all our vessels are
currently compliant in all material respects with these
regulations.  Additional or new conventions, laws and regulations may
be adopted that could require the installation of expensive emission control
systems and that could adversely affect our business, cash flows, results of
operations and financial condition.





In
October 2008, the IMO adopted amendments to Annex VI regarding particulate
matter, nitrogen oxide and sulfur oxide emission standards which are expected to
enter into force on July 1 2010.  The amended Annex VI would reduce
air pollution from vessels by, among other things, (i) implementing a
progressive reduction of sulfur oxide, emissions from ships, with the global
sulfur cap reduced initially to 3.50% (from the current cap of 4.50%), effective
from January 1 2012, then progressively to 0.50%, effective from January 1 2020,
subject to a feasibility review to be completed no later than 2018; and (ii)
establishing new tiers of stringent nitrogen oxide emissions standards for new
marine engines, depending on their date of installation.  Once these
amendments become effective, we may incur costs to comply with these revised
standards.




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.
 
 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.






31





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




The IMO
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 U.S. 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, or $6.58 million, plus 631 SDR, or $919.98, for each
additional gross ton over 5,000. For vessels over 140,000 gross tons, liability
will be limited to 89.77 million SDR, or $130.88 million. The exchange rate
between SDRs and U.S. Dollars was 0.685886 SDR per U.S. dollar on March 4
2009.  As the convention calculates liability in terms of a basket of
currencies, these figures are based on currency exchange rates on March 4 2009.
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 2001,
the IMO adopted the International Convention on Civil Liability for Bunker Oil
Pollution Damage, or the Bunker Convention, which imposes strict liability on
ship owners for pollution damage in jurisdictional waters of ratifying states
caused by discharges of bunker fuel. The Bunker Convention requires registered
owners of ships over 1,000 gross tons to maintain insurance for pollution damage
in an amount equal to the limits of liability under the applicable national or
international limitation regime (but not exceeding the amount calculated in
accordance with the Convention on Limitation of Liability for Maritime Claims of
1976, as amended). The Bunker Convention has been ratified by a sufficient
number of nations for entry into force, and became effective on November 21
2008.
 
 Anti-Fouling
Requirements
 
 In 2001,
the IMO adopted the International Convention on the Control of Harmful
Anti-fouling Systems on Ships, or the Anti-fouling
Convention.  The Anti-fouling Convention prohibits the use of
organotin compound coatings to prevent the attachment of mollusks and other sea
life to the hulls of vessels after September 1 2003.  The exteriors of
vessels constructed prior to January 1 2003 that have not been in dry-dock must,
as of September 17 2008, either not contain the prohibited compounds or have
coatings applied to the vessel exterior that act as a barrier to the leaching of
the prohibited compounds.  Vessels of over 400 gross tons engaged in
international voyages must obtain an International Anti-fouling System
Certificate and undergo a survey before the vessel is put into service or when
the antifouling systems are altered or replaced.  We have obtained
Anti-fouling System Certificates for all of our vessels that are subject to the
Anti-Fouling Convention.
 
 The IMO
continues to review and introduce new regulations.  It is difficult to
accurately predict what additional regulations, if any, may be passed by the IMO
in the future and what effect, if any, such regulations might have on our
operations.




32




U.S.
Requirements




In 1990,
the U.S. 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 the U.S. or its territories or
possessions, or whose vessels operate in the waters of the U.S., which include
the U.S. territorial sea and the 200 nautical mile exclusive economic zone
around the U.S. The Comprehensive Environmental Response, Compensation and
Liability Act, or CERCLA, imposes liability for clean-up 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;





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


·
            loss
      of subsistence use of natural
resources.




Under
amendments to OPA that became effective on July 11 2006, the liability of
responsible parties is limited, with respect to tanker vessels, to the greater
of $1,900 per gross ton or $16.0 million per vessel that is over 3,000 gross
tons, and with respect to non-tanker vessels, to the greater of $950 per gross
ton or $0.8 million per vessel (subject to periodic adjustment for
inflation).  On September 24 2008, the U.S. Coast Guard proposed
adjustments to the limits of liability that would increase the limits for tank
vessels to the greater of $2,000 per gross ton or $17.0 million per vessel that
is over 3,000 gross tons and for non-tank vessels to the greater of $1,000 per
gross ton or $848,000 and establish a procedure for adjusting the limits for
inflation every three years.  The comment period for the proposed rule
closed on November 24 2008.  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 that 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 clean-up,
removal and natural resource damages relating to the discharge of hazardous
substances (other than oil). Liability under CERCLA is limited to the greater of
$300 per gross ton or $5.0 million for vessels carrying a hazardous
substance as cargo or residue and the greater of $300 per gross ton or $0.5
million for any other vessel.





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





OPA also
requires owners and operators of vessels to establish and maintain with the U.S.
Coast Guard evidence of financial responsibility sufficient to meet the limit of
their potential strict liability under the act. U.S. Coast Guard regulations
currently require evidence of financial responsibility in the amount of $2,200
per gross ton for tankers, coupling the OPA limitation on liability of $1,900
per gross ton with the CERCLA liability limit of $300 per gross
ton.  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.





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.





33


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 are prohibited from trading
in U.S. waters as of dates ranging 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 within U.S. waters are limited to discharging at the
Louisiana Offshore Oil Port 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 the U.S. must 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 by the U.S. Coast Guard for our vessels
operating in the waters of the U.S. 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, the U.S. Clean Water Act, or CWA, prohibits the discharge of oil or
hazardous substances in U.S. navigable waters unless authorized by a
duly-issued permit or exemption, and imposes strict liability in the form of
penalties for unauthorized discharges.  The CWA also imposes
substantial liability for the costs of removal, remediation and damages and
complements the remedies available under OPA and CERCLA, discussed
above.  Furthermore, most U.S. states that border a navigable waterway
have enacted environmental pollution laws that impose strict liability on a
person for removal costs and damages resulting from a discharge of oil or a
release of a hazardous substance. These laws may be more stringent than U.S.
federal law.





The U.S.
Environmental Protection Agency, or EPA, historically exempted the discharge of
ballast water and other substances incidental to the normal operation of vessels
in U.S. waters from CWA permitting requirements.  However, on March 31
2005, a U.S. District Court ruled that the EPA exceeded its authority in
creating an exemption for ballast water.  On September 18 2006, the
court issued an order invalidating the exemption in the EPA’s regulations for
all discharges incidental to the normal operation of a vessel as of September 30
2008, and directed the EPA to develop a system for regulating all discharges
from vessels by that date.  The EPA has enacted rules governing the
regulation of ballast water discharges and other discharges incidental to the
normal operation of vessels within U.S. waters.  Under the new rules,
which took effect February 6 2009, commercial vessels 79 feet in length or
longer (other than commercial fishing vessels), or Regulated Vessels, are
required to obtain a CWA permit regulating and authorizing such normal
discharges.  This permit, which the EPA has designated as the Vessel
General Permit for Discharges Incidental to the Normal Operation of Vessels, or
VGP, incorporates the current U.S. Coast Guard requirements for ballast water
management as well as supplemental ballast water requirements, and includes
limits applicable to specific discharge streams.





34


Although
the VGP became effective on February 6 2009, the VGP application procedure,
known as the Notice of Intent, or NOI, has yet to be
finalized.  Accordingly, Regulated Vessels will effectively be covered
under the VGP from February 6 2009 until September 19 2009. Thereafter, owners
and operators of Regulated Vessels must file their NOIs between June 19, 2009,
when the "eNOI" electronic filing interface will become operational, and
September 19 2009, or the Deadline. Any Regulated Vessel that does not file an
NOI by the Deadline will not be allowed to discharge into U.S. navigable waters
until it has obtained a VGP.  Our fleet is composed entirely of
Regulated Vessels, and we intend to submit NOIs for each vessel in our fleet as
soon after June 19 2009 as practicable.





Owners
and operators of vessels visiting U.S. waters will be required to comply
with this VGP program or face penalties.  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 entering U.S. waters.  In
addition, the CWA requires each state to certify federal discharge permits such
as the VGP.  Certain states have enacted more stringent discharge
standards as conditions to their certification of the VGP.  The VGP
and its state-specific regulations and any similar restrictions enacted in the
future will increase the costs of operating in the relevant waters.





The U.S.
National Invasive Species Act, or NISA, was enacted in 1996 in response to
growing reports of harmful organisms being released into U.S. ports through
ballast water taken on by ships in foreign ports. The U.S. 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 U.S. Coast Guard. (However, mid-ocean ballast exchange is mandatory for
ships heading to the Great Lakes or Hudson Bay, or vessels engaged in the
foreign export of Alaskan North Slope crude oil.) Mid-ocean ballast exchange is
the primary method for compliance with the U.S. Coast Guard regulations, since
holding ballast water can prevent ships from performing cargo operations upon
arrival in the U.S., 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.


Our
operations occasionally generate and require the transportation, treatment and
disposal of both hazardous and non-hazardous 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 of by
third parties, or otherwise result in contamination at a disposal
location, we could be held liable for clean up costs under applicable
laws and regulations.





In
addition, most U.S. states that border a navigable waterway have enacted
environmental pollution laws that impose strict liability on a person for
removal costs and damages resulting from a discharge of oil or a release of a
hazardous substance. These laws may be more stringent than U.S. federal
law.





35


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.





On
October 9 2008, the U.S. ratified the amended Annex VI to the MARPOL Convention,
addressing air pollution from ships, which went into effect on January 8
2009.  The EPA and the state of California, however, have each proposed
more stringent regulations of air emissions from ocean-going vessels.  On
July 24 2008, the California Air Resources Board of the State of California, or
CARB, approved clean-fuel regulations applicable to all vessels sailing within
24 miles of the California coastline whose itineraries call for them to enter
any California ports, terminal facilities, or internal or estuarine waters.
 The new CARB regulations require such vessels to use low sulfur marine
fuels rather than bunker fuel.  By July 1 2009, such vessels are required
to switch either to marine gas oil with a sulfur content of no more than 1.5% or
marine diesel oil with a sulfur content of no more than 0.5%. By 2012, only
marine gas oil and marine diesel oil fuels with 0.1% sulfur will be allowed.
 CARB unilaterally approved the new regulations in spite of legal defeats
at both the district and appellate court levels, including that the CAA requires
CARB to obtain authorization for the new regulations form the U.S.
Environmental Protection Agency. If CARB prevails and the new regulations
go into effect as scheduled on July 1 2009, in the event our vessels were to
travel within such waters, these new regulations would require significant
expenditures on low-sulfur fuel and would increase our operating
costs.  However, the more stringent proposed CARB regime was
superseded when the U.S. ratified and implemented the amended Annex VI.





Our
vessels carry cargoes to U.S. waters regularly, and we believe that all of our
vessels are suitable to meet OPA and other U.S. environmental requirements and
that they would also qualify for trade if chartered to serve U.S.
ports.





European
Union Restrictions




In July
2003, in response to the MT
Prestige oil spill in November 2002, the European Union adopted
legislation, which was amended in October 2003, that prohibits all single
hull tankers from entering into its ports or offshore terminals by 2010 or
earlier, depending on their age.  The European Union has also already
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.






36




The
European Union has also adopted legislation that would: (1) strengthen
regulation against 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. It is difficult to accurately
predict what legislation or additional regulations, if any, may be promulgated
by the European Union or any other country or authority.





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





Greenhouse
Gas Regulation





In
February 2005, the Kyoto Protocol to the United Nations Framework
Convention on Climate Change, which we refer to as the Kyoto Protocol, entered
into force. Pursuant to the Kyoto Protocol, adopting countries are required to
implement national programs to reduce emissions of certain gases, generally
referred to as greenhouse gases, which are suspected of contributing to global
warming. Currently, the emissions of greenhouse gases from international
shipping are not subject to the Kyoto Protocol. However, the European Union has
indicated that it intends to propose an expansion of the existing European Union
emissions trading scheme to include emissions of greenhouse gases from vessels.
In the U.S., the California Attorney General and a coalition of environmental
groups in October 2007 petitioned the EPA to regulate greenhouse gas
emissions from ocean-going vessels under the CAA. Any passage of climate control
legislation or other regulatory initiatives by the IMO, European Union, the U.S.
or other countries where we operate that restrict emissions of greenhouse gases
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 the U.S. Similarly,
in December 2002 amendments to SOLAS created a new chapter of the convention
dealing specifically with maritime security. The new chapter became effective in
July 2004 and imposes various detailed security obligations on vessels and port
authorities, most of which are contained in the International Ship and Port
Facilities Security Code, or the ISPS Code. The ISPS Code is designed to protect
ports and international shipping against terrorism. After July 1 2004, to trade
internationally a vessel must attain an International Ship Security Certificate
(“ISSC”) 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;




37




·
            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;




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




·
            compliance
      with flag state security certification
  requirements.




The U.S.
Coast Guard regulations, intended to align with international maritime security
standards, exempt from MTSA vessel security measures non-U.S. vessels that have
on board, as of July 1 2004, a valid 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.






38




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 16 2009.





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





39





SuezmaxesFront
      Pride
                              1993
                              150,000
                              Double-hull
                              NIS
                              Finance
      lease
                              2017Front
      Glory
                              1995
                              150,000
                              Double-hull
                              NIS
                              Finance
      lease
                              2018Front
      Splendour
                              1995
                              150,000
                              Double-hull
                              NIS
                              Finance
      lease
                              2019Front
      Ardenne
                              1997
                              153,000
                              Double-hull
                              NIS
                              Finance
      lease
                              2020Front
      Brabant
                              1998
                              153,000
                              Double-hull
                              NIS
                              Finance
      lease
                              2021Mindanao
                              1998
                              159,000
                              Double-hull
                              SG
                              Finance
      lease
                              2021Hull
      No. H1020 (NB)
                              2009
                              156,000
                              Double-hull
                              n/a
                              n/a
      (5)
                              n/aHull
      No. H1027 (NB)
                              2010
                              156,000
                              Double-hull
                              n/a
                              n/a
      (5)
                              n/aChemical TankersMaria
      Victoria V
                              2008
                              17,000
                              Double-hull
                              PAN
                              Operating
      lease
                              2018SC
      Guangzhou
                              2008
                              17,000
                              Double-hull
                              PAN
                              Operating
      lease
                              2018OBO CarriersFront
      Breaker
                              1991
                              169,000
                              Double-hull
                              MI
                              Finance
      lease
                              2015Front
      Climber
                              1991
                              169,000
                              Double-hull
                              SG
                              Finance
      lease
                              2015Front
      Driver
                              1991
                              169,000
                              Double-hull
                              MI
                              Finance
      lease
                              2015Front
      Guider
                              1991
                              169,000
                              Double-hull
                              SG
                              Finance
      lease
                              2015Front
      Leader
                              1991
                              169,000
                              Double-hull
                              SG
                              Finance
      lease
                              2015Front
      Rider
                              1992
                              170,000
                              Double-hull
                              SG
                              Finance
      lease
                              2015Front
      Striver
                              1992
                              169,000
                              Double-hull
                              SG
                              Finance
      lease
                              2015Front
      Viewer
                              1992
                              169,000
                              Double-hull
                              SG
                              Finance
      lease
                              2015Panamax Drybulk CarrierGolden
      Shadow
                              1997
                              73,732
                              n/a
                              HK
                              Finance
      lease
                              2016
      (2)ContainershipsMontemar
      Europa
                              2003
                              1,700
      TEU
                              n/a
                              MI
                              Operating
      lease
                              2009Asian
      Ace (ex Sea Alfa)
                              2005
                              1,700
      TEU
                              n/a
                              MAL
                              Operating
      lease
                              2020
      (2)Green
      Ace (ex Sea Beta)
                              2005
                              1,700
      TEU
                              n/a
                              MAL
                              Operating
      lease
                              2020
      (2)Horizon
      Hunter
                              2006
                              2,800
      TEU
                              n/a
                              U.S.
                              Operating
      lease
                              2018
      (2)Horizon
      Hawk
                              2007
                              2,800
      TEU
                              n/a
                              U.S.
                              Operating
      lease
                              2019
      (2)Horizon
      Falcon
                              2007
                              2,800
      TEU
                              n/a
                              U.S.
                              Operating
      lease
                              2019
      (2)Horizon
      Eagle
                              2007
                              2,800
      TEU
                              n/a
                              U.S.
                              Operating
      lease
                              2019
      (2)Horizon
      Tiger
                              2006
                              2,800
      TEU
                              n/a
                              U.S.
                              Operating
      lease
                              2019
      (2)TBN/SFL
      Avon (NB)
                              2010
                              1,700
      TEU
                              n/a
                              MI
                              n/a
                              n/aTBN/SFL
      Clyde (NB)
                              2010
                              1,700
      TEU
                              n/a
                              MI
                              n/a
                              n/aTBN/SFL
      Dee (NB)
                              2010
                              1,700
      TEU
                              n/a
                              MI
                              n/a
                              n/aTBN/SFL
      Humber (NB)
                              2010
                              2,500
      TEU
                              n/a
                              MI
                              n/a
                              n/aTBN/SFL
      Tamar (NB)
                              2010
                              2,500
      TEU
                              n/a
                              MI
                              n/a
                              n/aJack-Up Drilling RigsWest
      Ceres
                              2006
                              300
      ft
                              n/a
                              PAN
                              Finance
      lease
                              2021
      (2)West
      Prospero
                              2007
                              300
      ft
                              n/a
                              PAN
                              Finance
      lease
                              2022
      (2)Ultra-Deepwater Drill UnitsWest
      Polaris
                              2008
                              10,000
      ft
                              n/a
                              PAN
                              Finance
      lease
                              2023
      (2)West
      Hercules
                              2008
                              10,000
      ft
                              n/a
                              PAN
                              Finance
      lease
                              2023
      (2)West
      Taurus
                              2008
                              10,000
      ft
                              n/a
                              PAN
                              Finance
      lease
                              2023
      (2)Offshore supply vesselsSea
      Leopard
                              1998
                              AHTS
      (3)
                              n/a
                              CYP
                              Finance
      lease
                              2020
      (2)Sea
      Bear
                              1999
                              AHTS
      (3)
                              n/a
                              CYP
                              Finance
      lease
                              2020
      (2)Sea
      Cheetah
                              2007
                              AHTS
      (3)
                              n/a
                              CYP
                              Operating
      lease
                              2019
      (2)Sea
      Jaguar
                              2007
                              AHTS
      (3)
                              n/a
                              CYP
                              Operating
      lease
                              2019
      (2)Sea
      Halibut
                              2007
                              PSV
      (4)
                              n/a
                              CYP
                              Operating
      lease
                              2019
      (2)Sea
      Pike
                              2007
                              PSV
      (4)
                              n/a
                              CYP
                              Operating
      lease
                              2019
      (2)





40





NB –
Newbuilding


Key to
Flags:




BA –
Bahamas, CYP - Cyprus, MAL – Malta, 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. - U.S. 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).




(5)
            The
      Company has agreed to sell this vessel upon delivery from the
      shipyard.







Other
than our interests in the vessels and drilling units 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, in London from Golar LNG Limited
and in Singapore from Seadrill, all 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.





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 summarize the development of our active fleet of
vessels.





Vessel
      type
                                                          Total
      fleet
                                                          Additions/
                                                            Disposals
                                                            2007
                                                          Total
      fleet
                                                          Additions/disposals
      2008
                                                          Total
      fleetDecember
      31
                                                          December
      31
                                                          December
      312006
                                                          2007
                                                          2008Oil
      Tankers
                                                          41
                                                          -7
                                                          
                                                          34
                                                          -1
                                                          
                                                          33Chemical
      tankers
                                                          0
                                                          
                                                          
                                                          0
                                                          
                                                          +2
                                                          2OBO
      / Dry bulk carriers
                                                          9
                                                          
                                                          
                                                          9
                                                          
                                                          
                                                          9Container
      vessels
                                                          3
                                                          
                                                          +5
                                                          8
                                                          
                                                          
                                                          8Jack-up
      drilling rigs
                                                          1
                                                          
                                                          +1
                                                          2
                                                          
                                                          
                                                          2Ultra-deepwater
      drill units
                                                          0
                                                          
                                                          
                                                          0
                                                          
                                                          +3
                                                          3Offshore
      supply vessels
                                                          0
                                                          
                                                          +5
                                                          5
                                                          -1
                                                          +2
                                                          6Total
      Active Fleet
                                                          54
                                                          -7
                                                          +11
                                                          58
                                                          -2
                                                          +7
                                                          63





41





The
following deliveries are scheduled to take place after December 31
2008:





·
            two
      newbuilding Suezmax oil tankers are expected to be delivered to us in 2009
      and 2010, which we have agreed to sell immediately upon delivery from the
      shipyard;




·
            five
      newbuilding container vessels are scheduled for delivery to us in 2010;
      and




·
            the
      VLCCs Front
      Vanadis and Front
      Sabang are 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 to the
      Frontline Charterers and other charterers;




·
            the
      amount we receive under the profit sharing arrangements with the Frontline
      Charterers and other charterers;




·
            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;




·
            interest
      expenses; and




·
            mark-to-market
      adjustments to the valuation of our interest rate swaps and other
      derivative financial instruments.




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 with some of our charterers, in particular with
the 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.





42


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 one
1,700 TEU container vessel employed on time charter. We have outsourced the
technical management for this vessel and we pay operating expenses for the
vessel 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 2008 we paid them a total of $1.0 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.





In order
to hedge against fluctuations in interest rates, we have entered into interest
rate swaps which effectively fix the interest payable on a portion of our
floating rate debt. Although the intention is to hold such financial instruments
until maturity, US GAAP requires us to record them at market valuation in our
financial statements. Adjustments to the mark-to-market valuation of these
derivative financial instruments, which are caused by variations in interest
rates, are reflected in results of operations and other comprehensive income. We
have also entered into total return equity and bond swap agreements indexed to
the market price of our shares and 8.5% Senior Notes, respectively. The
mark-to-market valuations of these total return swaps are also recorded in the
financial statements, with adjustments to valuations reflected in results of
operations. Accordingly, our financial results may be affected by derivative
financial instruments which we enter into, and fluctuations in interest rates
and the market prices of our shares and 8.5% Senior Notes.





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
U.S. 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.





43




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.




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 offshore assets, including drilling rigs
and drillships, is 30 years and for all other vessels it is 25 years. These
are common life expectancies applied in the shipping and offshore industries.





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.






44




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.





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.






45





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
February 2008 the Financial Accounting Standards Board, or FASB, issued
Staff Position No.157-2 “Effective Date of FASB Statement
No.157,” or FSP 157-2, which defers the effective date of SFAS No. 157
“Fair Value
Measurements,” or FAS 157, for one year relative to certain
nonfinancial assets and liabilities. As a result, the application of FAS 157 for
the definition and measurement of fair value and related disclosures for all
financial assets and liabilities was effective for the Company beginning
January 1 2008 on a prospective basis. This adoption did not have a
material impact on the Company’s consolidated results of operations or financial
condition. The remaining aspects of FAS 157, for which the effective date was
deferred under FSP 157-2, relate to nonfinancial assets and liabilities that are
measured at fair value, but are recognized or disclosed at fair value on a
nonrecurring basis. This deferral applies to items such as long-lived asset
groups measured at fair value for an impairment assessment. The effects of the
remaining aspects of FAS 157 are being evaluated by the Company and are to be
applied to fair value measurements prospectively beginning January 1 2009.
The Company does not expect them to have a material impact on its consolidated
results of operations or financial condition.





In
October 2008 the FASB issued Staff Position No. 157-3 “Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active,” or FSP
157-3.  FSP 157-3 clarifies the application of FAS 157, which the
Company adopted as of January 1 2008, in cases where a market is not
active. The Company has considered the guidance provided by FSP 157-3 and has
determined that the impact did not materially affect estimated fair values as of
December 31 2008.






46





In
March 2008 the FASB issued SFAS No. 161 “Disclosures about Derivative
Instruments and Hedging Activities—An Amendment of FASB Statement No. 133,”
orFAS 161.  FAS 161 applies to all
derivative instruments and related hedged items accounted for under SFAS
No. 133, “Accounting for
Derivative Instruments and Hedging Activities,”or FAS 133, and requires
entities to provide greater transparency about (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under FAS 133 and its related interpretations,
and (c) how derivative instruments and related hedged items affect an
entity’s financial position, results of operations, and cash flows. FAS 161 is
effective for fiscal years and interim periods beginning after November 15
2008. Since FAS 161 applies only to financial statement disclosures, it will not
have a material impact on the Company’s consolidated financial position, results
of operations, and cash flows.





In May
2008 the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted
Accounting Principles,” or FAS 162.  FAS 162 identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of non-governmental entities
that are presented in conformity with generally accepted accounting principles
(GAAP) in the U.S. FAS 162 simply formalizes the application of GAAP within the
accounting literature established by the FASB, and is not generally expected to
result in any changes to accounting practice. FAS 162 has no material impact on
the Company’s consolidated financial position, results of operations, and cash
flows.




Market
Overview




The
Oil Tanker Market




The
tanker market remained strong in 2008, despite a slowdown in spot rates in the
fourth quarter. According to industry sources, average one year time charter
rates for a modern VLCC were up from $55,500 per day in 2007 to $73,400 per day
in 2008. Average one year time charter rates for a modern Suezmax tanker were up
from $44,400 per day in 2007 to $47,200 per day in 2008.





According
to industry sources, the total VLCC fleet increased by about 3% in 2008 measured
in number of vessels. The total orderbook for VLCCs at the end of 2008
represented approximately 49% of the existing fleet. The total Suezmax fleet
remained essentially unchanged in 2008 measured in number of vessels. The total
orderbook for Suezmaxes at the end of 2008 represented approximately 48% of the
existing fleet.





There is
a trend for major oil companies 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
24% of the VLCC fleet and 12% 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.





The
International Energy Agency, or the IEA, estimates that the average world oil
demand was 85.7 million barrels per day in 2008, a slight decline from 2007. The
IEA forecasts an average world oil demand of 84.7 million barrels per day in
2009, a 1.1 % decrease compared to 2008.





47




The
Drybulk Shipping Market




The
drybulk shipping market experienced a turbulent year in 2008, with the Baltic
Dry Index falling from an all time high in May 2008 to an all time low in early
December 2008. The demand for drybulk cargoes is mainly dependent on the demand
for steel, steel products and electricity. Cargoes for these industries are
mainly iron ore and coal, which account for a substantial part of the dry bulk
seaborne trade.  China is the main importer of iron ore and coal, and
there was a substantial reduction in imports from the third quarter to the
fourth quarter 2008. In addition, there was an increase in the drybulk fleet
supply, due to the delivery of newbuildings, conversions and an unlocking of
tonnage because of easing of port congestion.





Order
book volumes have continued to grow in 2008, representing approximately 70% of
the current fleet by the end of 2008 measured in dwt. With the current depressed
drybulk and financial markets, the orderbook may be reduced due to cancellations
and bankruptcies. Further, the depressed market may lead to increased scrapping
of vessels.





We
believe the development in the drybulk market will be highly dependent on the
Chinese economy, the number of newbuildings actually being delivered and the
level of scrapping.




The
Containership Market




In the
first half of 2008 the container market continued its fairly strong development
seen during 2007 with strong growth rates in volumes, particularly between
the Far East and Europe, good utilization factors and profitable box rates. The
volume growth stagnated during the third quarter and contracted
significantly during the fourth quarter of 2008 mainly as a consequence of
the credit crisis – the first time this has been seen in the container market
for many years. This inevitably led to sharply decreasing utilization factors on
the major routes and very low box and charter rates, which consequently led
to fairly severe reduction in revenues for the entire industry. This was
exacerbated by the approximate 15 % growth in capacity delivered during 2008,
resulting in container operators having to lay up tonnage and virtually freeze
all new chartering activity.





Time
charter rates for container tonnage decreased by more than 60 % during 2008 and
by the end of 2008 and early 2009 the rates were at an all-time low for all
sizes – slightly below operating cost. As a positive side-effect of the
deteriorating trading environment, newbuilding orders came to a complete halt in
the third and fourth quarter of 2008 and full year contracting for
2008 was only at 700,000-800,000 TEU (down from approximately 3.3 million TEU in
2007). The order book in relation to the existing fleet consequently decreased
to some 48-49 % by the end of the year compared to a high of 63-64 % at the end
of the preceding year. During November and December 2008, and also the first
months of 2009, we further experienced a very substantial increase in scrapping
activities with total scrapping for 2009 expected to reach 200,000-300,000
TEU.





2009 is
expected to be a very challenging year for the container market, with estimates
of around 0% growth in the volume of demand combined with growth in capacity of
11-13 %. This is in addition to an estimated 1.0-1.3 million TEU excess capacity
existing at the beginning of the year.




The
Offshore Market




The drop
in oil and gas prices from the record levels experienced early in 2008, together
with the current depressed financial markets, are impacting the activity levels
in most rig segments as several of the drilling programs that are in the
planning phase are likely to be less profitable under the current market
conditions. This has caused a drop in activity level for jack-up drilling
rigs and also has reduced activities for conventional floating drilling
units.






48





The
ultra-deepwater market has so far not been affected due to the limited supply of
such rigs in the near term. The more favorable outlook for ultra-deepwater
units is also supported by most oil companies’ belief in higher oil and gas
prices in the longer term, as well as a need to improve reserve replacement
ratios based on sound long-term demand for energy. The numbers of tenders
for ultra-deepwater unit capacity have decreased in response to the growing
uncertainty regarding the development of the global economy and near term oil
and gas prices. Looking at the demand/supply balance for deepwater
units, there is limited available supply in 2009 and 2010 for both
drillships and semi-submersible drilling rigs. As such, the market for
individual ultra-deepwater units is considered attractive in the current
environment.





The
market for jack-up drilling rigs is of a more short-term nature, as the
majority of assignments have durations from three to 12 months and wells
are often tiebacks to existing infrastructure. The market is also much more
fragmented on the customer side, and debt-leverage and breakeven oil price
for marginal projects are higher on average. As a result, the market
for jack-up drilling rigs has felt the drop in oil and gas prices together
with the credit crunch in the short-term harder than the other rig
segments. The number of units that are idle has increased over recent
months, as drilling programs are rescheduled or postponed. In the
medium term, operators are expected to replace older and incumbent drilling
units with newer ones due to wells being increasingly more technically
challenging and consequently more demanding with respect to rig equipment.
This replacement could take more time than previously anticipated given the
prevailing economic environment.





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.





49




Results
of Operations





Year
ended December 31 2008 compared with the year ended December 31
2007





Operating
revenues




(in thousands of
      $)
                
                2008
                
                
                2007Finance
      lease interest income
                
                
                178,622
                
                
                
                186,680Finance
      lease service revenues
                
                
                93,553
                
                
                
                102,070Profit
      sharing revenues
                
                
                110,962
                
                
                
                52,527Time
      charter revenues
                
                
                19,187
                
                
                
                23,675Bareboat
      charter revenues
                
                
                55,794
                
                
                
                32,005Other
      operating income
                
                
                228
                
                
                
                1,835Total
      operating revenues
                
                
                458,346
                
                
                
                398,792





We have
three ultra-deepwater drilling units and one drybulk carrier owned by three
wholly-owned subsidiaries which are accounted for under the equity method.
Accordingly, the operating revenues of these subsidiaries are not included
above, but are included below under “equity in earnings of associated
companies”, where they are reported net of operating and non-operating
expenses.




Total
operating revenues increased 15% in the year ended December 31 2008 compared
with 2007.





In
general, finance lease interest income reduces over the terms of our leases as
progressively a lesser proportion of the lease rental payment is allocated to
income, and a higher amount is treated as repayment of finance lease. This
effect and sales of crude oil tankers in 2008 (one) and 2007 (seven) have
resulted in our total finance lease interest income decreasing compared to 2007,
although the decrease is mitigated by the acquisition in 2008 of two offshore
supply vessels accounted for as finance leases.





The
reduction in finance lease service revenue reflects the reduction in the number
of tankers leased to the Frontline Charterers, resulting from the sale of eight
oil tankers in 2007 and 2008 and also the re-chartering of two tankers (one in
2007 and one in 2008) to third party charterers under hire purchase
terms.





Profit
sharing revenues increased owing to the much higher average charter rates earned
by Frontline from our vessels in 2008 compared to 2007, partly offset by the
lower number of vessels chartered to Frontline.





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.





50


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 with third parties was completed in April 2007, leaving only
three 1,700 TEU container vessels employed on time charters in 2008. For this
reason, time charter revenue decreased from 2007 to 2008. Currently only one
vessel in the fleet generates time charter revenue.





Bareboat
charter revenues arise from our vessels which are leased under operating leases.
These revenues have increased with the addition to our fleet of five container
ships in 2007, five offshore supply vessels in 2007 (one of which was sold in
2008) and two chemical tankers in 2008.




Cash
flows arising from finance leases




The
following table analyzes our cash flows from the charters to the Frontline
Charterers, Seadrill, Deep Sea and TMT during 2008 and 2007 and shows how they
are accounted for:





(in
      thousands of $)2008
                                
                                
                                2007Charterhire
      payments accounted for as:Finance
      lease interest income
                                
                                
                                178,622
                                
                                
                                
                                186,680Finance
      lease service revenues
                                
                                
                                93,553
                                
                                
                                
                                102,070Finance
      lease repayments
                                
                                
                                210,348
                                
                                
                                
                                173,193Deemed
      dividends received
                                
                                
                                -
                                
                                
                                
                                4,642Total
      charterhire received
                                
                                
                                482,523
                                
                                
                                
                                466,585




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 no longer arise, following the completion in 2007 of the third party
charter arrangements and cross-over voyages mentioned above.




Voyage
expenses




Voyage
expenses in 2008 were incurred by the three time-chartered 1,700 TEU container
vessels.




Ship
operating expenses




Ship
operating expenses in 2008 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 were operated in 2008 on
time charter basis and managed by unrelated third parties.





Ship
operating expenses decreased by 6% from $106 million for the year ended December
31 2007 to $100 million for the year ended December 31 2008, primarily due to
the disposal of tankers.





51




Administrative
expenses




Administrative
expenses increased from $7.8 million in 2007 to $9.8 million in 2008, primarily
due to an increase in our management organization and corresponding staff costs,
including the fair value cost of share options granted to directors and
employees of $0.8 million in 2007 and $1.5 million in 2008.




Depreciation
expense




Depreciation
expenses relate to the vessels on charters accounted for as operating leases.
For the year ended December 31 2008 depreciation expenses were $28.0 million,
compared to $20.6 million for the year ended December 31 2007.  The
increase is due to the delivery in 2007 and 2008 of five containerships, five
offshore supply vessels (one of which was sold in 2008) and two chemical
tankers, all of which were chartered under arrangements accounted for as
operating leases.




Interest
income




Interest
income has decreased by $3.3 million for the year ended December 31 2008, mainly
owing to the reduction in interest rates from 2007 to 2008.




Interest
expense




(in
      thousands of $)
                              
                              2008
                              
                              
                              2007
                              
                              
                              Change
      (%)Interest
      on floating rate loans
                              
                              
                              81,042
                              
                              
                              
                              101,261
                              
                              
                              
                              (20
                              %)Interest
      on 8.5% Senior Notes
                              
                              
                              38,172
                              
                              
                              
                              38,113
                              
                              
                              
                              (0
                              %)Swap
      interest (income)
                              
                              
                              823
                              
                              
                              
                              (12,331
                              )
                              
                              
                              n/aOther
      interest
                              
                              
                              3,378
                              
                              
                              
                              -
                              
                              
                              
                              n/aAmortization
      of deferred charges
                              
                              
                              3,777
                              
                              
                              
                              3,358
                              
                              
                              
                              12
                              %127,192
                              
                              
                              
                              130,401
                              
                              
                              
                              (2
                              %)




At
December 31 2008 the Company and its consolidated subsidiaries had total debt
outstanding of $2.6 billion comprised of $449 million principal amount of 8.5%
senior notes, $2.0 billion under floating rate secured long term credit
facilities and $115 million of unsecured fixed rate debt.  At December
31 2007 we had total debt outstanding of $2.3 billion, of which $449 million
related to the 8.5% senior notes and $1.8 billion was floating rate long term
debt. The overall decrease in interest expense is due to the decrease in
interest rates from 2007 to 2008, largely offset by the increased level of
borrowing.




At
December 31 2008 the Company and its consolidated subsidiaries were party to
interest rate swap contracts which effectively fixed our interest rate on $1.2
billion of floating rate debt at a weighted average rate of 3.95% per annum
(2007: $884 million of floating rate debt fixed at a weighted average rate of
4.29% per annum).





Amortization
of deferred charges increased by 12% in 2008 to $3.8 million, as a result of new
financing facilities established during 2008.





As
reported above, we have three subsidiaries accounted for under the equity
method. Their non-operating expenses including interest expenses are not
included above, but are reflected in “equity in earnings of associated
companies” below.





52




Other
financial items




Other
financial items amounted to a net cost of $54.9 million in the year ended
December 31 2008 (2007: net cost $14.5 million). These consist mainly of
mark-to-market valuation changes on financial instruments, including our
interest rate swap contracts, our bond swaps and equity swaps.




Equity
in earnings of associated companies




During
2008 the Company established two new wholly-owned subsidiaries which, like
another wholly-owned subsidiary established in 2006, have been accounted for
under the equity method, as discussed in Note 2 of the Consolidated Financial
Statements included herein. The equity in earnings of these associated companies
in the year ended December 31 2008 was $22.8 million (2007: $0.9
million).




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.





Our total
finance lease interest income increased from 2006 to 2007 due to the investment
in two offshore jack-up rigs. The additional finance lease income from the two
new leases exceeded other reductions of finance lease income, including
reductions arising from the sale of seven oil tankers and termination of their
leases to the Frontline Charterers.





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





Time
charter revenues declined as each of the existing charter arrangements and
cross-over voyages with third parties was 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, leaving
only the three 1,700 TEU container vessels employed on time
charters.





Bareboat
charter revenues arise from our vessels which are leased under operating leases.
These revenues increased in 2007 with the addition in that year of five
container ships and five offshore supply vessels to our fleet.





53




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 received
                
                
                466,585
                
                
                
                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 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.





Ship
operating expenses in 2007 consisted 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 included ship
operating expenses for three of our containerships that were operated on a time
charter basis and 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.






54




Interest
income




Interest
income increased by $2.8 million for the year ended December 31 2007, mainly
owing to the increase in funds on deposit during that 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 $2.3 billion comprised of $449
million principal amount of 8.5% senior notes and $1.8 billion under floating
rate secured credit facilities.  At December 31 2006 we had total debt
outstanding of $1.9 billion, of which $449 million related to the 8.5% senior
notes and $1.5 billion was floating rate debt. The overall increase in interest
expense is primarily due to this increased level of borrowing in
2007.




At
December 31 2007 we were party to interest rate swap contracts which effectively
fixed 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).




Equity
in earnings of associated companies




Throughout
the year ended December 31 2007 we had 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.




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.






55





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, Singapore dollars and
Pound Sterling.





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 the following borrowings of the Company and its consolidated
subsidiaries:




-
            8.5%
      senior notes due 2013


-
            $70
      million secured term loan facility due
2010


-
            $100
      million secured term loan facility due
2010


-
            $1.1
      billion secured credit facility due
2011


-
            $350
      million secured term loan facility due
2012


-
            $165
      million secured term loan facility due
2012


-
            $170
      million secured term loan facility due
2013


-
            $58
      million secured term loan facility due
2013


-
            $149
      million secured loan facility due
2014


-
            $77
      million secured term loan facility due
2015


-
            $30
      million secured revolving credit facility due
  2015


-
            $49
      million secured term loan facility due
2018


-
            $210
      million secured term loan facility due
2019





Our long
term liquidity requirements also include repayment of the following long term
debt balances of our equity-accounted subsidiaries:




-
            $700
      million secured term loan facility due
2013


-
            $1.4
      billion secured term loan facility due
2013


-
            $23
      million secured term loan facility due
2016





At March
16 2009 the Company had remaining contractual commitments relating to
newbuilding contracts totaling $254 million. Of this total, $103 million relates
to two Suezmax oil tankers, the sale of which has been agreed immediately upon
their delivery from the shipyard.





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 2008 and December 31 2007, we had cash and cash equivalents
(including restricted cash) of $106 million and $105 million,
respectively.  In the year ended December 31 2008 we generated cash
from operations of $211 million, used $434 million in investing activities
and raised $190 million net in financing activities.





During
the year ended December 31 2008 we paid cash dividends of $1.69 per common share
(2007: $2.19), or a total of $123 million.  A cash dividend of $0.60
per share was declared in November 2008 and paid in January 2009, totaling $44
million. A dividend of $0.30 per share was declared in February 2009 totaling
$22 million, to be paid in April 2009 in cash or, at the election of the
shareholder, in newly issued common shares.






56




Borrowings




As of
December 31 2008 we had total long term debt outstanding of $2.6 billion (2007:
$2.3 billion).  In addition, as of December 31 2008 our wholly-owned
subsidiaries Front Shadow, SFL West Polaris Limited, or SFL West Polaris, and
SFL Deepwater Ltd., or SFL Deepwater, had long term debt of $19 million, $688
million and $1.1 billion respectively (2007: $21 million, $nil and $nil
respectively).  These three subsidiaries are accounted for using the equity
method, and their outstanding long term debt does not appear in our consolidated
balance sheet.





The total
long term debt at December 31 2008 includes $449 million outstanding from the
issue in 2003 of $580 million of 8.5% senior notes due 2013, and $115 million
outstanding under a fixed rate unsecured loan from a related party.





In
February 2005 we entered into a $1.1 billion 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 $1.1
billion.  The increase is available on a revolving basis.  At
December 31 2008 the outstanding amount on this facility was $856 million, and
the available undrawn amount was $nil. 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
adjusted book 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 2008 the
outstanding amount on this facility was $271 million.  The facility bears
interest at LIBOR plus a margin and is repayable over a term of seven years,
with terms and covenants similar to those on the $1.1 billion
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.  At December 31 2008 the
outstanding amount under this facility was $198 million. 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 2008 the outstanding amount under this facility was $107 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 adjusted book 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.




In
September 2006 our equity-accounted 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 2008 the outstanding amount under this facility was $19
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.


57


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 2008 the outstanding amount under this facility
was $121 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 adjusted book
equity ratios. The lenders have limited recourse to Ship Finance International
Limited as the holding company only guarantees $20 million of the
debt.





In August
2007 five vessel owning subsidiaries entered into a $149 million secured term
loan facility with a syndicate of banks, in order to partly fund the acquisition
of five offshore supply vessels. One of the vessels was sold in January 2008 and
the loan facility now relates to the remaining four vessel owning subsidiaries.
At December 31 2008 the outstanding amount under this facility was $116 million.
The facility bears interest at LIBOR plus a margin and is repayable over seven
years. The facility contains a minimum value covenant
and covenants that require us to maintain certain minimum levels of free cash,
working capital and adjusted book equity ratios. The facility requires the four
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 $35
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. At December 31 2008 the outstanding
amount under this facility was $71 million. 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 is secured 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 containsa minimum value covenant
andcovenants
that require us to maintain certain minimum levels of free cash, working capital
andadjusted
bookequity
ratios.





In
February 2008 our subsidiary SFL Europa entered into a $30 million secured
revolving credit facility in order to part finance the container vessel Montemar Europa. At December
31 2008 the outstanding amount under this facility was $26 million. The facility
bears interest of LIBOR plus a margin and is secured by the
subsidiary’s assets and a guarantee from Ship Finance International Limited. The
facility is available on a revolving basisand has a term of seven years.
The facility
containsa
minimum value covenant andcovenants that require us
to maintain certain minimum levels of free cash, working capital andadjusted bookequity
ratios.





In March
2008 two subsidiaries entered into a $49 million secured term loan facility in
order to partly fund the acquisition of two newbuilding chemical tankers. At
December 31 2008 the outstanding amount under this facility was $49 million.
The facility bears
interest of LIBOR plus a margin and is repayable over a term oftenyears. The facilitycontains a
minimum value covenant and issecured by the
subsidiaries’ assets. The lenders have limited recourse to Ship Finance
International Limited as the holding company only guarantees 30% of the
outstanding debt. The facility contains covenants that require us to maintain
certain minimum levels of free cash and adjusted book equity
ratios.





In June
2008 three vessel owning subsidiaries entered into a $70 million secured
revolving credit facility, secured by the subsidiaries’ assets and a guarantee
from Ship Finance International Limited. At December 31 2008 the
amount outstanding under this facilitywas $61million.The facility bears
interest of LIBOR plus a margin and is repayable over a term oftwoyears. The facilitycontains a
minimum value covenantand contains
covenants that require us to maintain certain minimum levels of free cash and
adjusted book equity ratios.




In July
2008 our equity-accounted subsidiary SFL West Polaris entered into a $700
million secured term loan facility with a syndicate of banks, in order to partly
fund the acquisition of the newbuilding ultra deepwater drillship West Polaris. At December 31
2008 the amount outstanding under this facility was $688 million. The facility
bears interest at LIBOR plus a margin and is repayable over a term of five
years. The facility contains a minimum value covenant and is secured by the
subsidiary’s assets.  The lenders have limited
recourse to Ship Finance International Limited as the holding company currently
only guarantees $100 million of the debt.The facilitycontains covenants that
require us to maintain certain minimum levels of free cash, working capital and
adjusted book equity ratios.




58


In
September 2008 two vessel owning subsidiaries entered into a $58 million secured
revolving credit facility with a syndicate of banks, secured by the
subsidiaries’ assets and a guarantee from Ship Finance International
Limited.  At December 31 2008 the amount outstanding under this
facility was $57 million. The facility bears interest at LIBOR plus a margin and
is repayable over a term of five years.  The facility contains a
minimum value covenant and covenants that require us
to maintain certain minimum levels of free cash, working capital and adjusted
book equity ratios.




In
September 2008 our equity-accounted subsidiary SFL Deepwater entered into a $1.4
billion secured term loan facility with a syndicate of banks, in order to partly
fund the acquisition of two newbuilding ultra deepwater drilling rigs, West HerculesandWest Taurus. At December 31
2008 the amount outstanding under this facility was $1.1 billion. An additional
$250 million was drawn in February 2009 under this facility. The facility bears
interest at LIBOR plus a margin and is repayable over a term of five years. The
facility is secured by the subsidiary’s assets and a guarantee from Ship Finance
International Limited.  The lenders have limited
recourse to Ship Finance International Limited as the holding company only
guarantees $200 million of the debt.The facility contains a minimum value
covenant and covenants that require us to maintain certain minimum levels of
free cash, working capital and adjusted book equity ratios.


In
November 2008 we entered into a $100 million secured revolving credit facility,
secured against the assets of five vessel owning subsidiaries. At December 31
2008 the amount outstanding under this facility was $100
million.  The facility bears
interest at LIBOR plus a margin and is repayable over a term of two
years.  The facilitycontains a minimum value covenant and
covenants that require us to maintain certain minimum levels of free cash,
working capital and adjusted book equity ratios.





In
November 2008 we entered into a $115 million unsecured loan agreement with a
related party. The loan bears interest at a fixed rate and matures in December
2009.





In
January 2009 we entered into an $18 million unsecured short-term loan agreement
with a related party. The loan bears interest at LIBOR plus a
margin.





In March
2009 we amended the Charter Ancillary Agreement with Frontline Shipping III,
whereby the charter service reserve totaling $26.5 million relating to the
vessels on charter to Frontline Shipping III may be in the form of a loan to the
Company. The loan will bear interest at LIBOR plus a margin and is due for
repayment within 364 days of the loan being provided, or earlier in accordance
with the agreement.






59





We are in
compliance with all loan covenants as at December 31 2008.  At
December 31 2008 three month U.S. dollar LIBOR was 1.425%.




Derivatives




We use
financial instruments to reduce the risk associated with fluctuations in
interest rates. At December 31 2008 the Company and its consolidated
subsidiaries had entered into interest rate swap contracts with a combined
notional principal amount of $1.2 billion at rates between 2.87% per annum and
5.65% per annum. In addition, our equity-accounted subsidiaries had entered into
interest swaps with a combined notional principal amount of $1.1 billion at
rates between 1.91% per annum and 3.92% per annum.





The
overall effect of these swaps is to fix the interest rate on $2.3 billion of
floating rate debt at a weighted average interest rate of 3.59% 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 2008, a total
of $2.1 billion was subject to such interest adjustment clauses, including
our equity-accounted subsidiaries.  Of this, a total of $1.1 billion was
subject to interest rate swaps, and the balance of $939 million remained on a
floating basis.





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 plus an agreed compensation for
cost of carriage for the counterparty. 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 2008, bond swaps held by the Company
under these arrangements had principal amounts totaling $148 million (2007: $122
million), effectively translating the underlying principle amounts into floating
rate debt. The settlement dates for these transactions range between June 2009
and August 2009, although early termination is possible. The Company also has
the option of extending the term of the transactions for a further two
years.




At
December 31 2008 our net exposure, including equity-accounted subsidiaries, to
interest rate fluctuations on our outstanding debt was $746 million, compared
with $779 million at December 31 2007. Our net exposure to interest fluctuations
is based on our total of $3.9 billion floating rate debt outstanding at December
31 2008, plus the outstanding balance of $148 million under the bond swap line
at December 31 2008, less the $939 million outstanding floating rate debt
subject to interest adjustment clauses under charter contracts and the $2.4
billion notional principal of our floating to fixed interest rate swaps
outstanding at December 31 2008.





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 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 2008 the counterparty had acquired
approximately 692,000 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 the TRS
recognized as an asset or liability and changes in fair values recognized in the
consolidated statement of operations. The settlement date for the transaction is
November 25 2009, although early termination is possible.






60





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 2008. 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 2009 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 (i.e. the fair
value of the vessel at the inception of 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 2008 we accounted for $12 million as amortization of such deemed equity
contributions (2007: $21 million). The unamortized balance of deferred deemed
equity contributions at December 31 2008 is $214 million (2007: $226
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 additional paid in capital (see Note 20 to the
Consolidated Financial Statements). The additional paid in capital arising from
share options was $1.4 million in the year ended December 31 2008.





In April 2008, the Company filed a
dividend reinvestment plan and a direct stock purchase plan to facilitate the
purchase of shares by individual shareholders who wish to invest in shares in
the Company on a regular basis. Mellon Bank N.A. is the plan administrator, and
the shares may be purchased in the open market or, at our option, directly from
the Company.  As of December 31 2008 no additional shares had been issued
under this plan.





Following
these transactions, as of December 31 2008 our issued and fully paid share
capital balance was $72.7 million and our contributed surplus balance was $499.1
million.





In
December 2008 the Company filed a prospectus supplement to enable the Company to
issue and sell up to 7,000,000 common shares from time to time. Sales of the
common shares, if any, will be made by means of ordinary brokers’ transactions
on the New York Stock Exchange or otherwise at market prices prevailing at the
time of the sale, at prices related to the prevailing market prices, or at
negotiated prices.  As of March 16 2009, no shares in the Company have been
issued and sold under this arrangement.





On
February 26 2009 the Board of Ship Finance declared a dividend of $0.30 per
share to be paid on or about April 17 2009 in cash or, at the election of the
shareholder, in newly issued common shares.  The total amount of this
dividend is $21.8 million and the issue price of the shares is $5.68 per
share.  If all shareholders elect to receive common shares, the Company
will issue up to 3.8 million newly issued common shares.






61





Contractual
Commitments




At
December 31 2008 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
                
                
                
                -
                
                
                
                449Fixed
      rate long-term debt
                
                
                115
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                115Floating
      rate long-term debt
                
                
                271
                
                
                
                981
                
                
                
                423
                
                
                
                356
                
                
                
                2,031Floating
      rate long-term debt in unconsolidated subsidiaries
                
                
                209
                
                
                
                448
                
                
                
                1,185
                
                
                
                8
                
                
                
                1,850Total
      debt repayments
                
                
                595
                
                
                
                1,429
                
                
                
                2,057
                
                
                
                364
                
                
                
                4,445Total
      interest payments (1)
                
                
                181
                
                
                
                295
                
                
                
                170
                
                
                
                35
                
                
                
                681Total
      vessel purchases (2)
                
                
                536
                
                
                
                140
                
                
                
                -
                
                
                
                -
                
                
                
                676Total
      contractual cash obligations
                
                
                1,312
                
                
                
                1,864
                
                
                
                2,227
                
                
                
                399
                
                
                
                5,082




(1)
            Interest
      payments are based on the existing borrowings of both fully consolidated
      and equity-accounted subsidiaries, including drawings made between January
      1 and March 16 2009. It is assumed that no refinancing of existing loans
      takes place and that there is no repayment on revolving credit facilities.
      Interest rate swaps have not been included in the calculation. The
      interest has been calculated using the five year US$ swap as of March 16
      2009 of 2.55% plus agreed margins. Interest on fixed rate loans is
      calculated using the contracted interest
rates.




(2)
            Vessel
      purchase commitments relate to the final installment on the West Taurus
      acquired in November 2008 ($250 million), five newbuilding containerships
      scheduled for delivery in 2010 ($151 million), two newbuilding Capesize
      drybulk carriers scheduled for delivery in 2009 ($160 million) and two
      newbuilding Suezmax tankers scheduled for delivery in 2009 and 2010 ($114
      million). In July 2008 the Company announced that it has entered into
      agreement to sell the two Suezmax tankers immediately upon their delivery
      from the shipyard. In February 2009 the Company announced that it has
      terminated the agreement to purchase the two Capesize drybulk
      carriers.






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.”





The
current trend is for prices of both second-hand vessels and newbuilding
contracts to decrease, with the same being the case for drilling rigs. This
trend is associated with the decrease in markets in most sectors in which we
operate, and also reflects market expectations going forward.





Interest
rates have increased since December 31 2008, which will increase our interest
expenses on our floating rate debt. We have effectively hedged 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.






62





Towards
the end of 2008 the spot market for tankers weakened from the exceptionally high
levels seen earlier in 2008. Going
forward the tanker industry may beexposed to the decrease in oil
consumption projected by the IEA, further cuts in OPEC production, US crude
inventories at seasonal highs and record numbers of expected newbuilding
tanker deliveries in the next 12 months.  Factors that could somewhat
improve these weak fundamentals are delays in delivery schedules at the yards,
cancellations of newbuilding orders and scrapping of single hull vessels due to
phase out.  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 the
spot 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
relatively soft, and we may thus not receive any profit sharing from our two
jack-up drilling rigs.




Off
balance sheet arrangements




At
December 31 2008 the only arrangement we are party to which
may be considered to be an off balance sheet arrangement are the TRS
agreements in our own securities.  The fair value of this position as at
December 31 2008 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
              PositionHans
      Petter Aas
              63
              Director
      and Chairman of the BoardKate
      Blankenship
              44
              Director
      of the Company and Chairperson of the Audit CommitteeCecilie
      A. Fredriksen
              25
              Director
      of the CompanyPaul
      Leand
              42
              Director
      of the CompanyCraig
      H. Stevenson Jr.
              55
              Director
      of the CompanyLars
      Solbakken
              51
              Chief
      Executive Officer of Ship Finance Management ASOle
      B. Hjertaker
              42
              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.





Hans
Petter Aashas served as a director of the Company since August 2008 and as Chairman of the
Board since January 2009.Mr. Aas has a long career as a
banker in the international shipping and offshore market, and retired from his
position as Global Head of the Shipping, Offshore and Logistics Division of DnB
NOR in August 2008. He joined DnB NOR (then Bergen Bank) in 1989, and has
previously worked for the Petroleum Division of the Norwegian Ministry of
Industry and the Ministry of Energy, as well as for Vesta Insurance and Nevi
Finance. Mr. Aas is also a director of Golar LNG Limited and Knightsbridge
Tankers Ltd.






63





Kate
Blankenship has served as 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.




Cecilie Astrup
Fredriksen has served as a director of the Company since November 2008.
Ms. Fredriksen is the daughter of Mr. John Fredriksen and is currently employed
by Frontline Corporate Services in London and serves as a director on several
boards including Aktiv Kapital ASA and Golden Ocean. Ms. Fredriksen received a
BA in Business and Spanish from the London Metropolitan University in
2006.




Paul
Leand has served as a director since
2003.  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.





Craig H.
Stevenson Jr. has served as a director since September 2007 and was
Chairman of the Board until January 2009. 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.





Lars
Solbakken has served as Chief Executive Officer of Ship Finance
Management AS since May 2006. In the period from 1997 until 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
(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, 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 2008 we paid to our directors and executive officers
aggregate cash compensation of $2.8 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.






64





In
addition to cash compensation, during 2008 we also recognized an expense of $1.5
million relating to 150,000, 210,000 and 195,000 stock options issued in 2006,
2007 and 2008, 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
2013.  The exercise price of the options is currently between $17.54
and $26.93 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.





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.  At December 31 2008 the accrued liability for the share price
element of the share-based bonus was $nil.





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 five
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 to U.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 see Item 16G.





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 nine 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.


65





E.    SHARE
OWNERSHIP





The
beneficial interests of our Directors and officers in our common shares as of
March 16 2009 are as follows:





Director or Officer
            Common Shares of $1.00 each
            Percentage of Common Shares
      OutstandingHans
      Petter Aas
            -
            *Paul
      Leand
            5,000
            *Kate
      Blankenship
            4,807
            *Craig
      H. Stevenson Jr.
            181,667
      (1)
            *Cecilie
      A. Fredriksen
            -
            *Lars
      Solbakken
            12,000
            *Ole
      B. Hjertaker
            124,000
      (2)
            *




*    Less
than one percent.


(1)
Including 66,667 options to acquire common shares that have vested.


(2)
Including 120,000 options to acquire common shares that have vested






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 16 2009 were as follows:





Director or Officer
            Number of options
            Exercise price
            Expiration DateCraig
      H. Stevenson Jr.
            200,000
      (a)
            $26.85*
            December
      2012Ole
      B. Hjertaker
            150,000
      (b)
              60,000
      (c)
            $17.54
              $24.51
            November
      2011
              February
      2013





*      The
initial exercise price is adjusted upwards by 6% on each anniversary date of the
grant.


(a)     66,667
of the options have vested.


(b)    100,000
of the options have vested.


(c)     20,000
of the options have vested.








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
2008 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.






66




Owner
                        Amount of Common Shares
                        Percent of Common SharesHemen
      Holding Ltd. (1)
                        4,128,177
                        5.68%Farahead
      Investment Inc. (1)
                        26,000,000
                        35.74%





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






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





As at
March 16 2009 the Company had 328 holders of record in the U.S. We had a total
of 72,743,737 of Common Shares outstanding as of March 16 2009.





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





A
significant proportion of our assets were acquired from Frontline in 2004 soon
after we were first established as a subsidiary of Frontline. As of March 16
2009 our fleet consists of 63 operating vessels and a further seven which are
under construction. The total of 70 vessels includes the Front Vanadis and Front Sabang, which are
subject to hire purchase agreements. Also, the vessels under construction
include two Suezmax tankers which we have agreed to sell immediately upon their
delivery from the shipyard.  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 16 2009 we charter 39 of our vessels to the Frontline Charterers under
long-term leases, most of which were given economic effect from January 1
2004.  At December 31 2008 the balance of net investments in finance
leases to the Frontline Charterers was $1.6 billion (2007: $1.8 billion) of
which $116 million (2007: $116 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 $94
million for the year ended December 31 2008 (2007: $103 million). The management
fees are classified as ship operating expenses.






67





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 certain
specified base charter rates. During the year ended December 31 2008 we earned
and recognized revenue of $111 million (2007: $53 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.





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, or 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 entered into two newbuilding Suezmax tanker contracts, with
delivery currently expected in the fourth quarter of 2009 and first quarter of
2010. In July 2008 we announced the sale of these two tankers for delivery to
their new owner immediately upon delivery from the shipyard.






68





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 upon delivery from the shipyard. In February
2009 this agreement was terminated.





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.





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 paid a compensation payment of
approximately $26.8 million to Frontline for the early termination of the
charter.





In May
2008 we entered into an agreement to acquire the newbuilding ultra-deepwater
drillship West Polaris
from a subsidiary of Seadrill for a purchase price of $845 million. Upon
delivery in July 2008 the vessel was chartered to Seadrill Polaris Ltd., or
Seadrill Polaris, for 15 years on bareboat terms, fully guaranteed by Seadrill,
the ultimate parent company of Seadrill Polaris. Seadrill Polaris has been
granted fixed price purchase options to buy back the drillship after four, six,
eight, 10, 12 and 15 years. In addition we have a fixed price option to sell the
vessel to Seadrill Polaris after 15 years.






69





In
September 2008 we entered into an agreement to acquire two ultra-deepwater
semi-submersible drilling rigs from subsidiaries of Seadrill for a purchase
price of $1.7 billion. Upon delivery in November 2008, each of the rigs were
chartered to Seadrill Deepwater Charterer Ltd., or Seadrill Deepwater, for 15
years on bareboat terms, fully guaranteed by Seadrill, the ultimate parent
company of Seadrill Deepwater. Seadrill Deepwater has been granted fixed price
purchase options to buy back the rigs after three, six, eight, 10 and 12 years
in the case of West
Hercules and after six, eight, 10 and 12 years in the case of West Taurus. In addition
there are obligations for Seadrill Deepwater to purchase the rigs at fixed
prices after 15 years.





In
November 2008 we entered into a $115 million unsecured loan agreement with a
related party. The loan bears interest at a fixed rate and is repayable in
2009.





In
January 2009 we entered into an $18 million unsecured loan agreement with a
related party. The loan bears interest at LIBOR plus a margin and is repayable
in 2009.





In March
2009 we amended the Charter Ancillary Agreement with Frontline Shipping III,
whereby the charter service reserve totaling $26.5 million relating to the
vessels on charter to Frontline Shipping III may be in the form of a loan to the
Company. The loan will bear interest at LIBOR plus a margin and is due for
repayment within 364 days of the loan being provided, or earlier in accordance
with the agreement as further described under Item 10.C “Material
Contracts.”




C.         INTERESTS
OF EXPERTS AND COUNSEL





Not
Applicable.






ITEM
      8.
            FINANCIAL
      INFORMATION





A.         CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION





See Item
18.





Legal
Proceedings





We and
our ship-owning 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 seek to pay 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 sole
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.





70





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
                $0.552008March
      10 2008
                $0.55June
      30 2008
                $0.56September
      15 2008
                $0.58






On
December 1 2008 the Board declared a dividend of $0.60 per share which was paid
on January 7 2009.  On February 26 2009 the Board declared a dividend
of $0.30 per share which will be paid on or about April 17 2009 in cash or, at
the election of the shareholder, in newly issued common shares.





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.”





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 312008
                $32.43
                
                $9.012007
                $31.54
                
                $22.242006
                $23.80
                
                $16.332005
                $24.00
                
                $16.702004
                $26.16
                
                $11.55


71




The
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 31 2008First
      quarter
              $28.01
              
              $23.64Second
      quarter
              $32.43
              
              $26.58Third
      quarter
              $29.74
              
              $19.55Fourth
      quarter
              $20.53
              
              $9.01
 
 High
              
              LowFiscal
      year ended December 31 2007First
      quarter
              $27.90
              
              $22.24Second
      quarter
              $31.42
              
              $27.44Third
      quarter
              $31.54
              
              $24.70Fourth
      quarter
              $28.46
              
              $24.64
 
 
 The
following table sets forth, for the most recent six months, the high and low
prices for the common shares on the NYSE.
 
 High
                      
                      LowFebruary
      2009
                      $11.77
                      
                      $8.36January
      2009
                      $13.47
                      
                      $11.05December
      2008
                      $12.62
                      
                      $9.86November
      2008
                      $15.76
                      
                      $9.01October
      2008
                      $20.53
                      
                      $10.92September
      2008
                      $27.83
                      
                      $19.55




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.






72




At the
2007 Annual General Meeting of the Company the shareholders voted to 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 on September 28 2007 have been filed as Exhibit 1 to the
Company’s 6-K filed on October 22 2007, and are hereby incorporated by reference
into this 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, ratably, 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.






73





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 four to 18 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.






74




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:


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 are 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.




75




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. Each
of the Frontline Charterers has established a charter services reserve to
support their obligation to make payments to us under the charters. The
aggregate charter reserve is currently $216 million, including $154.6 million,
$35.0 million and $26.5 million in Frontline Shipping, Frontline Shipping II and
Frontline Shipping III, respectively. 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
relating to the vessels. The Frontline Charterers are required to provide us
with monthly certifications of the balances of and activity in the charter
service reserve.





The
charter service reserve in Frontline Shipping III may also be provided as a loan
to the relevant vessel-owning subsidiary of Ship Finance. Any such loan shall be
repaid within 364 days of the loan being provided, or earlier if (a) Frontline
Shipping III would otherwise be unable to pay the charter hire under the charter
with the relevant vessel-owning subsidiary, (b) if there is a termination of the
charter between the relevant vessel-owning subsidiary and Frontline Shipping
III, or (c) if insolvency or similar proceedings are initiated in respect of the
relevant vessel-owning subsidiary.





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 $154.6 million in
the case of Frontline Shipping, $35.0 million in the case of Frontline Shipping
II and $26.5 million in the case of Frontline Shipping III (which threshold will
be reduced by $5.3 million in the case of Frontline Shipping and Frontline
Shipping III and $7.0 million in the case of Frontline Shipping II in each event
that a charter to which the relevant Frontline Charterer is a party is
terminated other than by reason of a default by the relevant 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);




76




·
            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;




·
            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 in the case of Frontline Shipping and Frontline Shipping II and
$250,000 in the case of Frontline Shipping III.




77




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;




·
            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.




78




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 the Frontline
Charterers do so under the charters. Frontline Management outsources many of
these services to third party providers.




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 a Frontline Charterer 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 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 paid 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.





In 2008
we established a UK branch and a Singapore branch of our wholly-owned subsidiary
Ship Finance Management AS. We have service agreements with Golar Management UK
Limited and Seadrill Management (S) Pte Ltd, both related parties, for the
provision of office facilities.





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.






79





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





U.S.
Taxation




The
following discussion is based upon the provisions of the U.S. Internal Revenue
Code of 1986, as amended, or the Code, existing and proposed U.S. Treasury
Department regulations, which we refer to as Treasury 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 U.
S.




Taxation
of the Company’s Shipping Income: In General




The
Company anticipates that it will derive a significant portion 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 U.S. will be considered to be 50% derived from
sources within the U.S. Shipping income attributable to transportation that both
begins and ends in the U.S. will be considered to be 100% derived from sources
within the U.S. 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 U.S. Shipping
income derived from sources outside the U.S. 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 U.S.




Application
of Code Section 883




Under the
relevant provisions of Section 883 of the Code, or 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 U.S. 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 U.S. 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.






80




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.




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.
  As
to the Publicly-Traded Test, the Treasury Regulations under Section 883 provide,
in pertinent part, that stock of a foreign corporation will be considered to be
“primarily traded” on an established securities market in a country if the
number of shares of each class of stock that is traded during any taxable year
on all established securities markets in that country exceeds the number of
shares in each such class that is traded during that year on established
securities markets in any other single country.
  The
Publicly-Traded Test also requires our common stock be “regularly traded” on an
established securities market.  Under the Treasury Regulations, our
common stock is considered to be “regularly traded” on an established securities
market if one or more classes of our stock representing more than 50% of our
outstanding shares, by both total combined voting power of all classes of stock
entitled to vote and total value, are listed on the market, referred to as the
“listing threshold.” The Treasury Regulations further require that with respect
to each class of stock relied upon to meet the listing threshold, (i) such
class of stock is traded on the market, other than in minimal quantities, on at
least 60 days during the taxable year or 1/6 of the
days in a short taxable year; and (ii) the aggregate number of shares of
such class of stock traded on such market during the taxable year is at least
10% of the average number of shares of such class of stock outstanding during
such year (as appropriately adjusted in the case of a short taxable
year).  Even if we do not satisfy both the trading frequency and
trading volume tests, the Treasury Regulations provide that the trading
frequency and trading volume tests will be deemed satisfied if our common stock
is traded on an established market in the U.S. and such stock is regularly
quoted by dealers making a market in such stock.
  For the
2008 tax year, we believe the Company satisfied the Publicly-Traded Test
since, on more than half the days of the taxable year, we believe the Company’s
stock was primarily and regularly traded on an established securities market,
the New York Stock Exchange.




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




In
order to determine the persons who actually or constructively own 5% or more of
our stock, or 5% Stockholders, we are permitted to rely on those persons that
are identified on Schedule 13G and Schedule 13D filings with the U.S. Securities
and Exchange Commission, or the SEC, as having a 5% or more beneficial interest
in our common stock. In addition, an investment company identified on a Schedule
13G or Schedule 13D filing which is registered under the Investment Company Act
of 1940, as amended, will not be treated as a 5% Stockholder for such
purposes.


Therefore,
there are factual circumstances beyond our control that could cause the Company
to lose the benefit of this tax exemption and thereby become subject to U.S.
federal income tax on its U.S. source income.  For example, Hemen
owned approximately 41.4% of the Company’s outstanding stock at December 31
2008.  There is therefore a risk that the Company could no longer
qualify for exemption under Section 883 for a particular taxable year if other
5% Stockholders were, in combination with Hemen, to own 50% or more of the
outstanding shares of the Company’s stock on more than half the days during the
taxable year. Due to the factual nature of the issues involved, there can be no
assurances on the tax-exempt status of the Company or any of its
subsidiaries.




In
the event the 5 Percent Override Rule is triggered, the 5 Percent Override Rule
will nevertheless not apply if we can establish that among the closely-held
group of 5% Stockholders, there are sufficient 5% Stockholders that are
considered to be “qualified stockholders” for purposes of Section 883 to
preclude non-qualified 5% Stockholders in the closely-held group from owning 50%
or more of each class of our stock for more than half the number of days during
the taxable year.
  In any year that the 5 Percent Override
Rule is triggered with respect to us, we are eligible for the exemption from tax
under Section883 only if we can nevertheless satisfy
the Publicly-Traded Test (which requires, among other things, showing that the
exception to the 5 Percent Override Rule applies) or if we can satisfy the 50%
Ownership Test. In either case, we would have to satisfy certain substantiation
requirements regarding the identity of our stockholders in order to qualify for
the Section883 exemption. These requirements are
onerous and there is no assurance that we would be able to satisfy
them.


81


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, to the extent not
considered to be “effectively connected” with the conduct of a U.S. trade or
business as described below, would be subject to a 4% tax imposed by
Section 887 of the Code on a gross basis, without the benefit of deductions.
Since, under the sourcing rules described above, no more than 50% of 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, to the extent not considered to be “effectively
connected”
with the conduct of a U.S. trade or business, as below, would never exceed
2% under the 4% gross basis tax regime.
  To
the extent the benefits of the Section 883 exemption are unavailable and our
U.S. source shipping income is considered to be “effectively connected” with the
conduct of a U.S. trade or business, as described below, any such “effectively
connected” U.S. source shipping income, net of applicable deductions, would be
subject to the U.S. federal corporate income tax currently imposed at rates of
up to 35%. In addition, we may be subject to the 30% “branch profits” taxes on
earnings effectively connected with the conduct of such trade or business, as
determined after allowance for certain adjustments, and on certain interest paid
or deemed paid attributable to the conduct of such trade or
business.
  Our
U.S. source shipping income would be considered “effectively connected” with the
conduct of a U.S. trade or business only if:
  ·
                we
      had, or were considered to have, a fixed place of business in the U.S.
      involved in the earning of U.S. source shipping income;
  and
  ·
                substantially
      all of our U.S. source shipping income were attributable to regularly
      scheduled transportation, such as the operation of a vessel that followed
      a published schedule with repeated sailings at regular intervals between
      the same points for voyages that begin or end in the
  U.S.
  We
do not have, nor will we permit circumstances that would result in having, any
vessel sailing to or from the U.S. on a regularly scheduled basis. Based on the
foregoing and on the expected mode of our shipping operations and other
activities, we believe that none of our U.S. source shipping income is or will
be “effectively connected” with the conduct of a U.S. trade or
business.
  Gain
on Sale of Vessels
  Regardless
of whether we qualify for exemption under Section 883, we will not be
subject to U.S. federal income taxation with respect to gain realized on a sale
of a vessel, provided the sale is considered to occur outside of the U.S. under
U.S. federal income tax principles.  In general, a sale of a vessel
will be considered to occur outside of the U.S. for this purpose if title to the
vessel, and risk of loss with respect to the vessel, pass to the buyer outside
of the U.S.  It is expected that any sale of a vessel by us will be
considered to occur outside of the U.S.


U.S.
Taxation of Our Other Income




In
addition to our shipping operations, we charter drillrigs to third parties who
conduct drilling operations in various parts of the world.  Since we
are not engaged in a trade or business in the U.S., we do not expect to be
subject to U.S. federal income tax on any of our income from such
charters.




Taxation
of U.S. Holders




The
following is a discussion of the material U.S. federal income tax considerations
relevant to an investment decision by a U.S. Holder, as defined below, with
respect to 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 U.S. 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 U.S. 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, (ii) owns our common stock as a capital asset,
generally, for investment purposes, and (iii) owns less than 10% of our common
stock for U.S. federal income tax purposes.





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






82




Distributions




Subject
to the discussion of passive foreign investment companies below, or PFICs, 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 U.S.
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 U.S. corporation, U.S. Holders that are corporations will not be
entitled to claim a dividends-received deduction with respect to any
distributions they receive from us.





Dividends
paid on our common stock to a U.S. Holder who is an individual, trust or estate,
which we refer to as 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 U.S. (such as the
New York Stock Exchange on which our common stock is listed); (2) we are
not a PFIC for the taxable year during which the dividend is paid or the
immediately preceding taxable year (see discussion below); 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 previously 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
U.S. federal income tax rules apply to a U.S. Holder that holds stock in a
foreign corporation classified as a PFIC for U.S. 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.





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% 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.





Although
there is no legal authority directly on point, our U.S. tax counsel
believes that, for purposes of determining whether we are a PFIC, the gross
income we derive or are deemed to derive from the time-chartering activities of
our wholly-owned subsidiaries more likely than not constitutes 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.





83




Consequently, based
upon our current method of operations and upon representations made by us,
our U.S. tax counsel believes that it is more likely than not
that we will not be treated as a PFIC for our taxable years ending December 31
2008 and December 31 2009.  This position is principally based upon
the positions that (1) our time charter income will constitute services income,
rather than rental income, and (2) Frontline Management, which provides services
to most of our time-chartered vessels, will be respected as a separate entity
from the Frontline Charterers, with which it is affiliated.





For
taxable years after 2009, depending upon the relative amount of income we derive
from our various assets as well as their relative fair market values, we may be
treated as a PFIC.  For example, the bareboat charters of our
drillrigs may produce passive income and such drillrigs may be treated as assets
held for the production of “passive income.”  In such a case,
depending upon the amount of income so generated and the fair market value of
the drillrigs, we may be treated as a PFIC for any taxable year after
2009.





We
note that  there is no direct legal authority under the PFIC rules
addressing our current and 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.  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.  Accordingly, no assurance can be given that the IRS or a
court of law will accept our position, and there is a significant risk that the
IRS or a court of law could determine that we are a PFIC.




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 U.S. 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. A
U.S. Holder would make a QEF election with respect to any year that we are a
PFIC by filing one copy of IRS Form 8621 with his U.S. federal income tax
return.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,
provided the U.S. Holder completes and files IRS Form 8621 in accordance with
the relevant instructions and related Treasury Regulations.  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.






84




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




Taxation
of Non-U.S. Holders




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




Dividends
on common stock




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




Sale,
exchange or other disposition of common stock




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


·
              the
      gain is effectively connected with the Non-U.S. Holder’s conduct of a
      trade or business in the U.S. (and, if the Non-U.S. Holder is entitled to
      the benefits of an income tax treaty with respect to that gain, that gain
      is attributable to a permanent establishment maintained by the Non-U.S.
      Holder in the U.S.); or
 ·
                the
      Non-U.S. Holder is an individual who is present in the U.S. for 183 days
      or more during the taxable year of disposition and other conditions are
      met.
  If
the Non-U.S. Holder is engaged in a U.S. trade or business for U.S. federal
income tax purposes, the income from the common stock, including dividends and
the gain from the sale, exchange or other disposition of the stock, that is
effectively connected with the conduct of that trade or business will generally
be subject to regular U.S. federal income tax in the same manner as discussed in
the previous section relating to the taxation of U.S. Holders. In addition, if
you are a corporate Non-U.S. Holder, your earnings and profits that are
attributable to the effectively connected income, which are subject to certain
adjustments, may be subject to an additional branch profits tax at a rate of
30%, or at a lower rate as may be specified by an applicable income tax
treaty.





85


Backup
Withholding and Information Reporting
  In
general, dividend payments, or other taxable distributions, made within the U.S.
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.
  Non-U.S.
Holders may be required to establish their exemption from information reporting
and backup withholding by certifying their status on IRS Form W-8BEN, W-8ECI or
W-8IMY, as applicable.
  If you
are a Non-U.S. Holder and 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 certify that you are a non-U.S.
person, under penalties of perjury, or otherwise 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 U.S.
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 U.S., 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 U.S. Such information reporting requirements will not apply, however,
if the broker has documentary evidence in its records that you are a non-U.S.
person and certain other conditions are met, or you otherwise establish an
exemption.
  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.


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,
or the New Act.  In contrast to the income tax law previously in
effect since 1977, or 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, or 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%.





86




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 F
Street, N.E., 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.




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. We may enter into derivative
instruments from time to time for speculative purposes.





At
December 31 2008 the Company and its consolidated subsidiaries had entered into
interest rate swap contracts with a combined notional principal amount of $1.2
billion at rates between 2.87% per annum and 5.65% per annum. In addition, our
equity-accounted subsidiaries had entered into interest swaps with a combined
notional principal amount of $1.1 billion at rates between 1.91% per annum and
3.92% per annum. The swap agreements mature between February 2009 and May 2019,
and we estimate that we would pay $144 million to terminate these agreements as
of December 31 2008 (2007: pay $18 million).





The
overall effect of these swaps is to fix the interest rate on $2.3 billion of
floating rate debt at a weighted average interest rate of 3.59% 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 2008, a total of $2.1
billion was subject to such interest adjustment clauses, including our
equity-accounted subsidiaries.  Of this, a total of 1.1 billion was subject
to interest rate swaps, and the balance of $939 million remained on a flotating
basis.





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 plus agreed compensation for
cost of carriage for the counterparty. 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 2008, bond swaps held by the Company
under these arrangements had principal amounts totaling $148 million (2007: $122
million), effectively translating the underlying principle amounts into floating
rate debt. The settlement dates for these transactions range between June 2009
and August 2009, although early termination is possible. The Company also has
the option of extending the term of the transactions for a further two
years.






87


At
December 31 2008 our net exposure, including equity-accounted subsidiaries, to
interest rate fluctuations on our outstanding debt was $746 million, compared
with $779 million at December 31 2007. Our net exposure to interest fluctuations
is based on our total of $3.9 billion floating rate debt outstanding at December
31 2008, plus the outstanding balance of $148 million under the bond swap line
at December 31 2008, less the $939 million outstanding floating rate debt
subject to interest adjustment clauses under charter contracts and the $2.4
billion notional principal of our floating to fixed interest rate swaps
outstanding at December 31 2008. A one per cent change in interest rates would
thus increase or decrease interest expense by $7.5 million per year as of
December 31 2008 (2007: $7.8 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 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 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 2008 the counterparty had acquired
approximately 692,000 shares in the Company. The settlement date for the
transaction is November 25 2009, although early termination is possible. This
open position exposes the Company to market risk associated with fluctuations in
the Company’s share price. It is estimated that a 10% reduction in the share
price below the value at December 31 2008 would generate an adverse fair value
adjustment of up to $0.7 million, depending to a degree on the counterparty’s
funding costs and the Company’s dividend payments.





The fair
market value of our 8.5% Senior Notes was $335 million as of December 31 2008
(2007: $457 million).





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






88





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 2008. 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 of compliance
with the policies or procedures may deteriorate.




89


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
2008. 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 2008.




c)         Attestation
report of the registered public accounting firm




MSPC,
Certified Public Accountants and Advisors, a Professional Corporation, or MSPC,
our independent registered public accounting firm has issued their
attestation report on the effectiveness of our internal control over financial
reporting as of December 31 2008. Such report appears on page F-2.




d)         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.






90


ITEM
16 C.    PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 Our
principal accountant for 2008 and 2007 was MSPC. The following table sets forth
the fees related to audit and other services provided by MSPC.


2008
                  2007Audit
      Fees (a)
                  $500,000
                  $475,000Audit-Related
      Fees (b)
                  $110,000
                  $37,500Tax
      Fees (c)
                  -
                  -All
      Other Fees (d)
                  $2,000
                  $8,500Total
                  $612,000
                  $521,000





(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.





(e)     Audit
Committee’s Pre-Approval Policies and Procedures


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 2008
and 2007 were approved by the Board pursuant to the pre-approval
policy.






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





Not
applicable





91






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
              -
              -10/19/07
      to 12/31/07
              -
              -
              -
              7,000,000
      (2)Total
              2,157,100
              $18.68
              -
              7,000,000





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, or 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 plus an agreed compensation for cost of carriage for the
      counterparty. Settlement will be either a payment from or to the
      counterparty, depending on whether A is more or less than
      B.At December 31 2008 the counterparty had acquired
      approximately 692,000 shares in the Company under this arrangement. 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 22).




3.
              In
      December 2008 the Company filed a prospectus supplement to enable the
      Company to issue and sell up to 7,000,000 common shares from time to time.
      Sales of the common shares, if any, will be made by means of ordinary
      brokers’ transactions on the New York Stock Exchange or otherwise at
      market prices prevailing at the time of the sale, at prices related to the
      prevailing market prices, or at negotiated prices. As at March 16 2009, no
      shares in the Company have been issued and sold under this
      arrangement.




4.
              On
      February 26 2009 the Board of Ship Finance declared a dividend of $0.30
      per share to be paid on or about April 17 2009 in cash or, at the election
      of the shareholder, in newly issued common shares. The total amount of
      this dividend is $21.8 million and the issue price of the shares is $5.68.
      If all shareholders elect to receive common shares, the Company will issue
      up to 3.8 million newly issued common
shares.






92




ITEM
16 G.   CORPORATE GOVERNANCE





Pursuant
to an exception under the New York Stock Exchange, or the NYSE, listing
standards available to foreign private issuers, we are not required to comply
with all of the corporate governance practices followed by U.S. companies under
the NYSE listing standards.  The significant differences between our
corporate governance practices and the NYSE standards applicable to listed U.S.
companies are set forth below.





Executive
Sessions.The NYSErequires that
non-management directors meet regularly in executive sessions without
management. The NYSEalso requires that all
independent directors meet in an executive session at least once a
year.  As permitted under Bermuda law and our byelaws, our
non-management directors have not regularly held executive sessions without
management. However, we expect them to do so in the future.





Nominating/Corporate
Governance Committee.  The NYSErequires that a listed
U.S. company have a nominating/corporate governance committee of independent
directors and a committee charter specifying the purpose, duties and evaluation
procedures of the committee. As permitted under Bermuda law and our byelaws, we
do not currently have a nominating or corporate governance
committee.





Audit
Committee.  The NYSErequires, among other
things, that a listed U.S. company have an audit committee with a minimum of
three members. As permitted by Rule 10A-3 under the Securities Exchange Act of
1934, our audit committee consists of one independent member of our Board of
Directors.  Under the Audit Committee charter, the Audit Committee
confers with the Company’s independent registered public accounting firm and
reviews, evaluates and advises the Board of Directors concerning the adequacy of
the Company’s accounting systems, its financial reporting practices, the
maintenance of its books and records and its internal controls. In addition, the
Audit Committee reviews the scope of the audit of the Company’s financial
statements and results thereof.





Corporate
Governance Guidelines.  The NYSErequires U.S. companies
to adopt and disclose corporate governance guidelines. The guidelines must
address, among other things: director qualification standards, director
responsibilities, director access to management and independent advisers,
director compensation, director orientation and continuing education, management
succession and an annual performance evaluation. We are not required to adopt
such guidelines under Bermuda law and we have not adopted such
guidelines.






93







PART
III






ITEM
      17.
            FINANCIAL
      STATEMENTS





See Item
18.







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 2008, 2007 and
      2006
              F-3Consolidated
      Balance Sheets as of December 31 2008 and 2007
              F-4Consolidated
      Statements of Cash Flows for the years ended December 31 2008, 2007 and
      2006
              F-5Consolidated
      Statement of Changes in Stockholders’ Equity and Comprehensive Income for
      the years ended December 31 2008, 2007 and 2006
              F-6Notes
      to Consolidated Financial Statements
              F-7





94





ITEM
19.      EXHIBITS





Number
            Description
      of Exhibit





1.1*
            Memorandum
      of Association of Ship Finance International Limited, or 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, which we refer
      to as 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.





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*
            Amendment
      #3 to Charter Ancillary Agreement dated August 21 2007, incorporated by
      reference to Exhibit 4.8 of the Company's 2007 Annual Report as filed on
      Form 20-F on March 17, 2008.





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, incorporated by
      reference to Exhibit 4.10 of the Company's 2007 Annual Report as filed on
      Form 20-F on March 17, 2008.





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.






95





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
      2002.15.1
              Consent
      of Independent Registered Public Accounting
Firm




*
Incorporated herein by reference.






96





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 23, 2009By
                  /s/ Ole B. HjertakerOle
      B. Hjertaker
                    Principal
      Financial Officer





97






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 2008, 2007 and
      2006
                        F-3Consolidated
      Balance Sheets as of December 31 2008 and 2007
                        F-4Consolidated
      Statements of Cash Flows for the years ended December 31 2008, 2007 and
      2006
                        F-5Consolidated
      Statement of Changes in Stockholders’ Equity and Comprehensive Income for
      the years ended December 31 2008, 2007 and 2006
                        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 and subsidiaries (the “Company”) as of December 31, 2008
and 2007, and the related consolidated statements of operations, changes in
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2008.  We also have
audited the Company’s internal control over financial reporting as of December
31, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.  The Company’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 accompanying
Management’s annual report on internal controls over financial
reporting.  Our responsibility is to express an opinion on these
consolidated financial statements 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 financial statements for external purposes in accordance
with generally accepted accounting principles.  A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Ship Finance International
Limited and subsidiaries as of December 31, 2008 and 2007, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America.  Also in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.







/S/
MSPC


Certified
Public Accountants and Advisors


A
Professional Corporation


New York,
New York


March 16,
2009






F-2




Ship
Finance International Limited





CONSOLIDATED
STATEMENTS OF OPERATIONS


for
the years ended December 31 2008,  2007 and 2006


(in thousands of $, except
per share amounts)





2008
                
                
                2007
                
                
                2006Operating
      revenuesFinance
      lease interest income from related parties
                
                
                174,948
                
                
                
                185,032
                
                
                
                177,840Finance
      lease interest income from non-related parties
                
                
                3,674
                
                
                
                1,648
                
                
                
                4,740Finance
      lease service revenues from related parties
                
                
                93,553
                
                
                
                102,070
                
                
                
                106,791Profit
      sharing revenues from related parties
                
                
                110,962
                
                
                
                52,527
                
                
                
                78,923Time
      charter revenues from non-related parties
                
                
                19,187
                
                
                
                23,675
                
                
                
                53,087Bareboat
      charter revenues from related parties
                
                
                21,188
                
                
                
                7,417
                
                
                
                -Bareboat
      charter revenues from non-related parties
                
                
                34,606
                
                
                
                24,588
                
                
                
                3,986Other
      operating income/(expense)
                
                
                228
                
                
                
                1,835
                
                
                
                (709
                )Total
      operating revenues
                
                
                458,346
                
                
                
                398,792
                
                
                
                424,658Gain
      on sale of assets
                
                
                17,377
                
                
                
                41,669
                
                
                
                9,806Operating
      expensesShip
      operating expenses to related parties
                
                
                93,553
                
                
                
                103,399
                
                
                
                116,362Ship
      operating expenses to non-related parties
                
                
                6,353
                
                
                
                2,841
                
                
                
                1,595Voyage
      expenses and commission
                
                
                541
                
                
                
                921
                
                
                
                1,736Depreciation
                
                
                28,038
                
                
                
                20,636
                
                
                
                14,490Administrative
      expenses to related parties
                
                
                1,013
                
                
                
                1,245
                
                
                
                1,184Administrative
      expenses to non-related parties
                
                
                8,823
                
                
                
                6,538
                
                
                
                5,400Total
      operating expenses
                
                
                138,321
                
                
                
                135,580
                
                
                
                140,767Net
      operating income
                
                
                337,402
                
                
                
                304,881
                
                
                
                293,697Non-operating
      income / (expense)Interest
      income
                
                
                3,478
                
                
                
                6,781
                
                
                
                3,978Interest
      expense
                
                
                (127,192
                )
                
                
                (130,401
                )
                
                
                (113,588
                )Other
      financial items, net
                
                
                (54,876
                )
                
                
                (14,477
                )
                
                
                (3,556
                )Net
      income before equity in earnings of associated companies
                
                
                158,812
                
                
                
                166,784
                
                
                
                180,531Equity
      in earnings of associated companies
                
                
                22,799
                
                
                
                923
                
                
                
                267Net
      income
                
                
                181,611
                
                
                
                167,707
                
                
                
                180,798Per
      share information:Basic
      earnings per share
                
                $
                2.50
                
                
                $
                2.31
                
                
                $
                2.48Diluted
      earnings per share
                
                $
                2.50
                
                
                $
                2.30
                
                
                $
                2.48




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 2008 and 2007


(in
thousands of $)





2008
                                                
                                                
                                                2007ASSETSCurrent
      assetsCash
      and cash equivalents
                                                
                                                
                                                46,075
                                                
                                                
                                                
                                                78,255Restricted
      cash
                                                
                                                
                                                60,103
                                                
                                                
                                                
                                                26,983Trade
      accounts receivable
                                                
                                                
                                                435
                                                
                                                
                                                
                                                28Due
      from related parties
                                                
                                                
                                                45,442
                                                
                                                
                                                
                                                42,014Other
      receivables
                                                
                                                
                                                1,149
                                                
                                                
                                                
                                                116Inventories
                                                
                                                
                                                252
                                                
                                                
                                                
                                                267Prepaid
      expenses and accrued income
                                                
                                                
                                                3,638
                                                
                                                
                                                
                                                301Investment
      in finance leases, current portion
                                                
                                                
                                                173,982
                                                
                                                
                                                
                                                178,920Financial
      instruments (short term):  mark to market
    valuation
                                                
                                                
                                                466
                                                
                                                
                                                
                                                6,711Total
      current assets
                                                
                                                
                                                331,542
                                                
                                                
                                                
                                                333,595Vessels
      and equipment
                                                
                                                
                                                638,665
                                                
                                                
                                                
                                                607,978Accumulated
      depreciation on vessels and equipment
                                                
                                                
                                                (51,849
                                                )
                                                
                                                
                                                (24,734
                                                )Vessels
      and equipment, net
                                                
                                                
                                                586,816
                                                
                                                
                                                
                                                583,244Newbuildings
                                                
                                                
                                                69,400
                                                
                                                
                                                
                                                46,259Investment
      in finance leases, long-term portion
                                                
                                                
                                                1,916,510
                                                
                                                
                                                
                                                1,963,470Investment
      in associated companies
                                                
                                                
                                                420,977
                                                
                                                
                                                
                                                4,530Other
      long-term investments
                                                
                                                
                                                8,545
                                                
                                                
                                                
                                                2,008Deferred
      charges
                                                
                                                
                                                14,696
                                                
                                                
                                                
                                                16,922Total
      assets
                                                
                                                
                                                3,348,486
                                                
                                                
                                                
                                                2,950,028LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesShort-term
      debt and current portion of long-term debt
                                                
                                                
                                                385,577
                                                
                                                
                                                
                                                179,428Trade
      accounts payable
                                                
                                                
                                                19
                                                
                                                
                                                
                                                97Due
      to related parties
                                                
                                                
                                                6,472
                                                
                                                
                                                
                                                5,693Accrued
      expenses
                                                
                                                
                                                17,937
                                                
                                                
                                                
                                                16,972Financial
      instruments (short term): mark to market valuation
                                                
                                                
                                                34,300
                                                
                                                
                                                
                                                21,224Dividend
      payable
                                                
                                                
                                                43,646
                                                
                                                
                                                
                                                -Other
      current liabilities
                                                
                                                
                                                5,291
                                                
                                                
                                                
                                                4,511Total
      current liabilities
                                                
                                                
                                                493,242
                                                
                                                
                                                
                                                227,925Long-term
      liabilitiesLong-term
      debt
                                                
                                                
                                                2,209,939
                                                
                                                
                                                
                                                2,090,566Financial
      instruments (long term): mark to market valuation
                                                
                                                
                                                94,415
                                                
                                                
                                                
                                                -Other
      long-term liabilities
                                                
                                                
                                                33,540
                                                
                                                
                                                
                                                17,060Total
      liabilities
                                                
                                                
                                                2,831,136
                                                
                                                
                                                
                                                2,335,551Commitments
      and contingent liabilities
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Stockholders’
      equityShare
      capital
                                                
                                                
                                                72,744
                                                
                                                
                                                
                                                72,744Additional
      paid-in capital
                                                
                                                
                                                2,194
                                                
                                                
                                                
                                                737Contributed
      surplus
                                                
                                                
                                                496,922
                                                
                                                
                                                
                                                485,119Accumulated
      other comprehensive loss
                                                
                                                
                                                (90,064
                                                )
                                                
                                                
                                                (13,894
                                                )Accumulated
      other comprehensive loss – associated companies
                                                
                                                
                                                (49,244
                                                )
                                                
                                                
                                                -Retained
      earnings
                                                
                                                
                                                84,798
                                                
                                                
                                                
                                                69,771Total
      stockholders’ equity
                                                
                                                
                                                517,350
                                                
                                                
                                                
                                                614,477Total
      liabilities and stockholders’ equity
                                                
                                                
                                                3,348,486
                                                
                                                
                                                
                                                2,950,028


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 2008, 2007 and 2006


(in
thousands of $)





2008
                              
                              
                              2007
                              
                              
                              2006Operating
      activitiesNet
      income
                              
                              
                              181,611
                              
                              
                              
                              167,707
                              
                              
                              
                              180,798Adjustments
      to reconcile net income to net cash provided by
                                operating
      activities:Depreciation
                              
                              
                              28,038
                              
                              
                              
                              20,636
                              
                              
                              
                              14,490Amortization
      of deferred charges
                              
                              
                              3,777
                              
                              
                              
                              3,358
                              
                              
                              
                              3,069Amortization
      of seller’s credit
                              
                              
                              (2,144
                              )
                              
                              
                              (440
                              )
                              
                              
                              -Equity
      in earnings of associated companies
                              
                              
                              (22,799
                              )
                              
                              
                              (923
                              )
                              
                              
                              (4,205
                              )Gain
      on sale of assets
                              
                              
                              (17,377
                              )
                              
                              
                              (41,669
                              )
                              
                              
                              (9,806
                              )Adjustment
      of derivatives to market value
                              
                              
                              54,527
                              
                              
                              
                              12,557
                              
                              
                              
                              6,375Other
                              
                              
                              (122
                              )
                              
                              
                              2,034
                              
                              
                              
                              (5,091
                              )Changes
      in operating assets and liabilities, net of effect of
      acquisitionsTrade
      accounts receivable
                              
                              
                              (407
                              )
                              
                              
                              463
                              
                              
                              
                              3,455Due
      from related parties
                              
                              
                              (3,909
                              )
                              
                              
                              19,950
                              
                              
                              
                              30,803Other
      receivables
                              
                              
                              (1,996
                              )
                              
                              
                              790
                              
                              
                              
                              525Inventories
                              
                              
                              15
                              
                              
                              
                              64
                              
                              
                              
                              352Prepaid
      expenses and accrued income
                              
                              
                              (3,338
                              )
                              
                              
                              (121
                              )
                              
                              
                              (74
                              )Other
      current assets
                              
                              
                              -
                              
                              
                              
                              11,223
                              
                              
                              
                              (12,245
                              )Trade
      accounts payable
                              
                              
                              (78
                              )
                              
                              
                              (436
                              )
                              
                              
                              (445
                              )Accrued
      expenses
                              
                              
                              965
                              
                              
                              
                              5,710
                              
                              
                              
                              476Other
      current liabilities
                              
                              
                              (5,377
                              )
                              
                              
                              1,513
                              
                              
                              
                              1,683Net
      cash provided by operating activities
                              
                              
                              211,386
                              
                              
                              
                              202,416
                              
                              
                              
                              210,160Investing
      activitiesInvestment
      in finance lease assets
                              
                              
                              (104,000
                              )
                              
                              
                              (210,000
                              )
                              
                              
                              -Repayments
      from investments in finance leases
                              
                              
                              210,348
                              
                              
                              
                              173,193
                              
                              
                              
                              136,760Acquisition
      of subsidiaries, net of cash acquired
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (34,810
                              )Additions
      to newbuildings
                              
                              
                              (22,395
                              )
                              
                              
                              (47,383
                              )
                              
                              
                              (7,658
                              )Purchase
      of vessels
                              
                              
                              (60,200
                              )
                              
                              
                              (434,283
                              )
                              
                              
                              (266,750
                              )Proceeds
      from sales of vessels
                              
                              
                              23,005
                              
                              
                              
                              152,659
                              
                              
                              
                              58,943Proceeds
      on cancellation of newbuildings
                              
                              
                              1,845
                              
                              
                              
                              -
                              
                              
                              
                              -Investments
      in associated companies
                              
                              
                              (442,891
                              )
                              
                              
                              91
                              
                              
                              
                              508Proceeds
      from (costs of) other investments
                              
                              
                              (6,537
                              )
                              
                              
                              992
                              
                              
                              
                              (3,000
                              )Placement
      of restricted cash
                              
                              
                              (33,120
                              )
                              
                              
                              (14,046
                              )
                              
                              
                              (11,362
                              )Net
      cash used in investing activities
                              
                              
                              (433,945
                              )
                              
                              
                              (378,777
                              )
                              
                              
                              (127,369
                              )Financing
      activitiesRepurchases
      of shares
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (7,212
                              )Proceeds
      from issuance of short-term and long-term debt
                              
                              
                              576,973
                              
                              
                              
                              620,224
                              
                              
                              
                              312,588Repayments
      of short-term and long-term debt
                              
                              
                              (251,451
                              )
                              
                              
                              (265,430
                              )
                              
                              
                              (190,716
                              )Debt
      fees paid
                              
                              
                              (1,551
                              )
                              
                              
                              (3,432
                              )
                              
                              
                              (1,047
                              )Cash
      settlement of derivative instruments
                              
                              
                              (10,655
                              )
                              
                              
                              -
                              
                              
                              
                              -Cash
      dividends paid
                              
                              
                              (122,937
                              )
                              
                              
                              (159,335
                              )
                              
                              
                              (149,123
                              )Deemed
      dividends received
                              
                              
                              -
                              
                              
                              
                              4,642
                              
                              
                              
                              31,741Deemed
      dividends paid
                              
                              
                              -
                              
                              
                              
                              (6,622
                              )
                              
                              
                              (47,310
                              )Net
      cash provided by (used in) financing activities
                              
                              
                              190,379
                              
                              
                              
                              190,047
                              
                              
                              
                              (51,079
                              )Net
      change in cash and cash equivalents
                              
                              
                              (32,180
                              )
                              
                              
                              13,686
                              
                              
                              
                              31,712Cash
      and cash equivalents at start of the year
                              
                              
                              78,255
                              
                              
                              
                              64,569
                              
                              
                              
                              32,857Cash
      and cash equivalents at end of the year
                              
                              
                              46,075
                              
                              
                              
                              78,255
                              
                              
                              
                              64,569Supplemental
      disclosure of cash flow information:Interest
      paid, net of capitalized interest
                              
                              
                              126,759
                              
                              
                              
                              123,777
                              
                              
                              
                              111,823


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 2008, 2007 and 2006


(in
thousands of $, except number of shares)





2008
                                                                                                      
                                                                                                      
                                                                                                      2007
                                                                                                      
                                                                                                      
                                                                                                      2006Number
      of shares outstandingAt
      beginning of year
                                                                                                      
                                                                                                      
                                                                                                      72,743,737
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      72,743,737
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      73,143,737Shares
      repurchased and cancelled
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (400,000
                                                                                                      )At
      end of year
                                                                                                      
                                                                                                      
                                                                                                      72,743,737
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      72,743,737
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      72,743,737Share
      capitalAt
      beginning of year
                                                                                                      
                                                                                                      
                                                                                                      72,744
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      72,744
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      73,144Shares
      repurchased and cancelled
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (400
                                                                                                      )At
      end of year
                                                                                                      
                                                                                                      
                                                                                                      72,744
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      72,744
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      72,744Additional
      paid-in capitalAt
      beginning of year
                                                                                                      
                                                                                                      
                                                                                                      737
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      49
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -Employee
      stock options issued
                                                                                                      
                                                                                                      
                                                                                                      1,457
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      688
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      49At
      end of year
                                                                                                      
                                                                                                      
                                                                                                      2,194
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      737
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      49Contributed
      surplusAt
      beginning of year
                                                                                                      
                                                                                                      
                                                                                                      485,119
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      464,429
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      441,105Shares
      repurchased and cancelled
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (6,811
                                                                                                      )Amortization
      of deferred equity contributions
                                                                                                      
                                                                                                      
                                                                                                      11,803
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      20,690
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      30,135At
      end of year
                                                                                                      
                                                                                                      
                                                                                                      496,922
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      485,119
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      464,429Accumulated
      other comprehensive lossAt
      beginning of year
                                                                                                      
                                                                                                      
                                                                                                      (13,894
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (71
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      -Other
      comprehensive loss
                                                                                                      
                                                                                                      
                                                                                                      (76,170
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (13,823
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (71
                                                                                                      )At
      end of year
                                                                                                      
                                                                                                      
                                                                                                      (90,064
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (13,894
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (71
                                                                                                      )Accumulated
      other comprehensive loss – associated companiesAt
      beginning of year
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -Other
      comprehensive loss
                                                                                                      
                                                                                                      
                                                                                                      (49,244
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -At
      end of year
                                                                                                      
                                                                                                      
                                                                                                      (49,244
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -Retained
      earningsAt
      beginning of year
                                                                                                      
                                                                                                      
                                                                                                      69,771
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      63,379
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      47,273Net
      income
                                                                                                      
                                                                                                      
                                                                                                      181,611
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      167,707
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      180,798Dividends
      declared
                                                                                                      
                                                                                                      
                                                                                                      (166,584
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (159,335
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (149,123
                                                                                                      )Deemed
      dividends received
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      4,642
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      31,741Deemed
      dividends paid
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (6,622
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (47,310
                                                                                                      )At
      end of year
                                                                                                      
                                                                                                      
                                                                                                      84,798
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      69,771
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      63,379Total
      Stockholders’ Equity
                                                                                                      
                                                                                                      
                                                                                                      517,350
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      614,477
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      600,530Comprehensive
      incomeNet
      income
                                                                                                      
                                                                                                      
                                                                                                      181,611
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      167,707
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      180,798Fair
      value adjustment to hedging financial instruments
                                                                                                      
                                                                                                      
                                                                                                      (76,019
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (13,948
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      -Fair
      value adjustment to hedging financial instruments in associated
      companies
                                                                                                      
                                                                                                      
                                                                                                      (49,244
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -Other
      comprehensive income (loss)
                                                                                                      
                                                                                                      
                                                                                                      (151
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      125
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (71
                                                                                                      )Comprehensive
      income
                                                                                                      
                                                                                                      
                                                                                                      56,197
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      153,884
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      180,727




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 the Frontline subsidiary Frontline Shipping
Limited (“Frontline Shipping”) 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 21). 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 2008, the Company owned 27 very large crude oil carriers (“VLCCs”),
six Suezmax crude oil carriers, eight oil/bulk/ore carriers (“OBOs”), one
Panamax drybulk carrier, eight container vessels, two jack-up drilling rigs,
three ultra-deepwater drilling units, six offshore supply vessels and two
chemical tankers. Included in the above are the single-hull VLCCs Front VanadisandFront Sabang, which are
subject to hire-purchase agreements. The Panamax drybulk carrier and the three
ultra-deepwater drilling units referred to above are owned by wholly-owned
subsidiaries of the Company that are accounted for using the equity method (see
Note 14). In addition, as at December 31 2008, the Company had contracted to
acquire five container vessels, two Capesize drybulk carriers and two Suezmax
tankers. The Company has agreed to sell the two Suezmax tankers immediately upon
their delivery from the shipyard.





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.




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 returns 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.




F-7
  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.”
 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.




Rental
payments from finance leases are allocated between leases 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 enteringthe lease
agreement, of the services provided which consist of ship management and
operating services.






F-8




Any
contingentelements 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 of our offshore assets, including drilling rigs
and drillships, is 30 years and for all other vessels it is 25
years.  These are common life expectancies applied in the shipping and
offshore industries.





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
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
2008, we capitalized $1.6 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 the Company’s charter
arrangements to Frontline Shipping and Frontline Shipping II Limited (“Frontline
Shipping II”) became effective for accounting purposes.  The Company’s
arrangement with Frontline was that while the Company’s vessels were completing
performance of third party charters, the Company paid Frontline Shipping and
Frontline Shipping II all revenues earned under the third party charters in
exchange for Frontline Shipping and Frontline Shipping II paying the Company the
charter rates under the charter agreements with those companies.  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 Frontline Shipping and Frontline Shipping II as deemed
dividends paid.  The Company accounts for revenues received from
Frontline Shipping and Frontline Shipping II 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 eventual disposition. 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. The review
of the carrying value of long-lived assets at December 31, 2008, indicated that
none of the Company’s asset values are impaired.






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 (“FAS”) No.133 “Accounting for Derivative
Instruments and Hedging Activities” (“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 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 plus an agreed
compensation for cost of carriage for the counterparty. 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 22).






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” (“FAS
123(R)”).  Under FAS 123(R) we are required to expense the fair value
of stock options issued to employees over the period the options vest. The
Company continues to use the simplified method for making estimates of the
expected term of stock options.





Reclassifications




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








3.
              RECENTLY
      ISSUED ACCOUNTING STANDARDS




In
February 2008 the Financial Accounting Standards Board ("FASB") issued
Staff Position (“FSP”) No.157-2 “Effective Date of FASB Statement
No.157” ("FSP 157-2") which defers the effective date of FAS No. 157
“Fair Value
Measurements” ("FAS 157") for one year relative to certain nonfinancial
assets and liabilities. As a result, the application of FAS 157 for the
definition and measurement of fair value and related disclosures for all
financial assets and liabilities was effective for the Company beginning
January 1, 2008 on a prospective basis. This adoption did not have a
material impact on the Company’s consolidated results of operations or financial
condition. The remaining aspects of FAS 157, for which the effective date was
deferred under FSP 157-2, relate to nonfinancial assets and liabilities that are
measured at fair value, but are recognized or disclosed at fair value on a
nonrecurring basis. This deferral applies to items such as long-lived asset
groups measured at fair value for an impairment assessment. The effects of the
remaining aspects of FAS 157 are being evaluated by the Company and are to be
applied to fair value measurements prospectively beginning January 1, 2009.
The Company does not expect them to have a material impact on its consolidated
results of operations or financial condition.





In
October 2008 the FASB issued FSP No. 157-3 “Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active” ("FSP
157-3").  FSP 157-3 clarifies the application of FAS 157, which the
Company adopted as of January 1, 2008, in cases where a market is not
active. The Company has considered the guidance provided by FSP 157-3 and has
determined that the impact did not materially affect estimated fair values as of
December 31, 2008.





In
March 2008 the FASB issued FAS No. 161 “Disclosures about Derivative
Instruments and Hedging Activities—An Amendment of FASB Statement No. 133”(“FAS 161”). FAS 161 applies to all derivative instruments and related
hedged items accounted for under FAS 133 and requires
entities to provide greater transparency about (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under FAS 133 and its related interpretations,
and (c) how derivative instruments and related hedged items affect an
entity’s financial position, results of operations, and cash flows. FAS 161 is
effective for fiscal years and interim periods beginning after November 15,
2008. Since FAS 161 applies only to financial statement disclosures, it will not
have a material impact on the Company’s consolidated financial position, results
of operations, and cash flows.






F-12




In May
2008 the FASB issued FAS No. 162 “The Hierarchy of Generally Accepted
Accounting Principles” (“FAS 162”). FAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of non-governmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. FAS 162 simply formalizes the application of US GAAP within the
accounting literature established by the FASB, and is not generally expected to
result in any changes to accounting practice. FAS 162 has no material impact on
the Company’s consolidated financial position, results of operations, and cash
flows.







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.





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 and branches in Singapore, Norway and the United
Kingdom are subject to taxation. The tax paid by subsidiaries of the Company
that are subject to this taxation is not material.






F-13






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:





Year
      ended December 31(in
      thousands of $)
                                                
                                                
                                                2008
                                                
                                                
                                                
                                                2007
                                                
                                                
                                                
                                                2006Net
      income available to stockholders
                                                
                                                
                                                181,611
                                                
                                                
                                                
                                                167,707
                                                
                                                
                                                
                                                180,798






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




(in
      thousands)
                                                                                                                      Year
      ended December 312008
                                                                                                                      
                                                                                                                      
                                                                                                                      2007
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2006Basic
      earnings per share:Weighted
      average number of common shares outstanding
                                                                                                                      72,744
                                                                                                                      
                                                                                                                      
                                                                                                                      72,744
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      72,764Diluted
      earnings per share:Weighted
      average number of common shares outstanding
                                                                                                                      72,744
                                                                                                                      
                                                                                                                      
                                                                                                                      72,744
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      72,764Effect
      of dilutive share options
                                                                                                                      28
                                                                                                                      
                                                                                                                      
                                                                                                                      15
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -72,772
                                                                                                                      
                                                                                                                      
                                                                                                                      72,759
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      72,764




7.
              OPERATING
      LEASES




Rental
income




The
minimum future revenues to be received under the Company’s non-cancelable
operating leases as of December 31, 2008 are as follows:





(in
      thousands of $)
                  Year
      ending December 312009
                
                
                69,1072010
                
                
                65,4332011
                
                
                65,2662012
                
                
                64,9032013
                
                
                63,743Thereafter
                
                
                336,771Total
      minimum lease revenues
                
                
                665,223





The cost
and accumulated depreciation of vessels leased to third parties on operating
leases at December 31, 2008 and 2007 were as follows:




(in
      thousands of $)
                
                2008
                
                
                2007Cost
                
                
                638,665
                
                
                
                607,978Accumulated
      depreciation
                
                
                51,849
                
                
                
                24,734








F-14






8.   GAIN
ON SALE OF ASSETS





During
the year ended December 31, 2008 the Company realized the following gains on
sales of vessels:





(in thousands of
      $)
                                                                        Vessel
      disposed of
                                                                      
                                                                      Net
      Proceeds
                                                                      
                                                                      
                                                                      Book
      value on disposal
                                                                      
                                                                      
                                                                      GainFront
      Sabang
                                                                      
                                                                      
                                                                      30,152
                                                                      
                                                                      
                                                                      
                                                                      19,566
                                                                      
                                                                      
                                                                      
                                                                      10,586Front
      Maple
                                                                      
                                                                      
                                                                      23,322
                                                                      
                                                                      
                                                                      
                                                                      16,890
                                                                      
                                                                      
                                                                      
                                                                      6,432Sea
      Trout
                                                                      
                                                                      
                                                                      28,949
                                                                      
                                                                      
                                                                      
                                                                      28,590
                                                                      
                                                                      
                                                                      
                                                                      35982,423
                                                                      
                                                                      
                                                                      
                                                                      65,046
                                                                      
                                                                      
                                                                      
                                                                      17,377





Front Sabang and Front Maple were finance
lease assets and Sea
Trout was an operating lease asset. The proceeds on disposal are shown
net of any charter termination payments.





The FrontSabang was sold under hire
purchase terms terminating in October 2011. Proceeds in respect of this vessel
represent the fair value of the new capital lease, net of the charter
termination payment of $26.8 million. The FrontSabang will be included in
net investment in finance leases until the termination of the hire purchase
lease in 2011.






9.
              OTHER
      FINANCIAL ITEMS





Other
financial items comprise the following items:





Year
      ended December 31(in
      thousands of $)
                                          
                                          
                                          2008
                                          
                                          
                                          
                                          2007
                                          
                                          
                                          
                                          2006Decrease
      (net)  in mark-to-market valuation of financial
      instruments
                                          
                                          
                                          54,527
                                          
                                          
                                          
                                          12,558
                                          
                                          
                                          
                                          2,779Other
      items
                                          
                                          
                                          349
                                          
                                          
                                          
                                          1,919
                                          
                                          
                                          
                                          777Total
      other financial items
                                          
                                          
                                          54,876
                                          
                                          
                                          
                                          14,477
                                          
                                          
                                          
                                          3,556





The net
decrease in mark-to-market valuations relates to the total return equity and
bond swaps held by the Company, and also to those interest rate swaps that are
not designated as cash flow hedges. Changes in the valuations of interest rate
swaps that are designated as cash flow hedges are reported under “Other
comprehensive income.”





Other
items include bank charges, fees relating to loan facilities and foreign
currency translation adjustments.






10.
            RESTRICTED
      CASH




(in
      thousands of $)
                        
                        
                        2008
                        
                        
                        
                        2007Restricted
      cash
                        
                        
                        60,103
                        
                        
                        
                        26,983





Restricted
cash consists mainly of deposits held as collateral by the relevant banks in
connection with interest rate swap, bond swap and TRS arrangements (see Note
22). 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.”


11.
              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, 2008 and 2007.
 
 Other
receivables
  Other
receivables are presented net of allowances for doubtful accounts. As of
December 31, 2008 and 2007 there was no allowance.






F-15






12.
            VESSELS
      AND EQUIPMENT, NET







(in thousands of
      $)
                            
                            2008
                            
                            
                            2007Cost
                            
                            
                            638,665
                            
                            
                            
                            607,978Accumulated
      depreciation and amortization
                            
                            
                            51,849
                            
                            
                            
                            24,734Vessels
      and equipment, net
                            
                            
                            586,816
                            
                            
                            
                            583,244





Depreciation
and amortization expense was $28.0 million, $20.6 million and $14.5 million for
the years ended December 31 2008, 2007 and 2006, respectively.







13.
            INVESTMENTS
      IN FINANCE LEASES




Most of
the Company’s VLCCs, Suezmaxes and OBOs are chartered on long term, fixed rate
charters to Frontline Shipping, Frontline Shipping II and Frontline Shipping III
Limited (together the “Frontline Charterers”) which extend for various periods
depending on the age of the vessels, ranging from approximately four to
18 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”), a related party.  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.





Two of
the Company’s offshore supply vessels are chartered on long term bareboat
charters to DESS Cyprus Limited, a wholly owned subsidiary of Deep Sea Supply
Plc. (“Deep Sea”), a related party. The terms of the charters provide the
charterers with various call options to acquire the vessels at certain dates
throughout the charters, which expire in 2020.




As of
December 31, 2008, 45 of the Company’s assets were accounted for as finance
leases. The following lists the components of the investments in finance leases
as of December 31, 2008, all of which are leased to related parties, with the
exception of the Front VanadisandFront
Sabang, which accounted for $47.3 million of the total investment in
finance leases as of December 31, 2008:
 (in
      thousands of $)
                                                                      
                                                                      2008
                                                                      
                                                                      
                                                                      2007Total
      minimum lease payments to be received
                                                                      
                                                                      
                                                                      3,903,011
                                                                      
                                                                      
                                                                      
                                                                      4,195,227Less: amounts
      representing estimated executory costs including profit thereon, included
      in total minimum lease payments
                                                                      
                                                                      
                                                                      (926,987
                                                                      )
                                                                      
                                                                      
                                                                      (1,034,255
                                                                      )Net
      minimum lease payments receivable
                                                                      
                                                                      
                                                                      2,976,024
                                                                      
                                                                      
                                                                      
                                                                      3,160,972Estimated
      residual values of leased property (un-guaranteed)
                                                                      
                                                                      
                                                                      625,857
                                                                      
                                                                      
                                                                      
                                                                      629,149Less: unearned
      income
                                                                      
                                                                      
                                                                      (1,278,840
                                                                      )
                                                                      
                                                                      
                                                                      (1,402,611
                                                                      )2,323,041
                                                                      
                                                                      
                                                                      
                                                                      2,387,510Less: deferred deemed
      equity contribution
                                                                      
                                                                      
                                                                      (213,917
                                                                      )
                                                                      
                                                                      
                                                                      (225,720
                                                                      )Less: unamortized
      gains
                                                                      
                                                                      
                                                                      (18,632
                                                                      )
                                                                      
                                                                      
                                                                      (19,400
                                                                      )Total
      investment in finance leases
                                                                      
                                                                      
                                                                      2,090,492
                                                                      
                                                                      
                                                                      
                                                                      2,142,390Current
      portion
                                                                      
                                                                      
                                                                      173,982
                                                                      
                                                                      
                                                                      
                                                                      178,920Long-term
      portion
                                                                      
                                                                      
                                                                      1,916,510
                                                                      
                                                                      
                                                                      
                                                                      1,963,4702,090,492
                                                                      
                                                                      
                                                                      
                                                                      2,142,390


F-16




The
minimum future gross revenues to be received under the Company’s non-cancellable
finance leases as of December 31, 2008 are as follows:





(in
      thousands of $)
                      Year
      ending December 312009
                    
                    
                    432,5612010
                    
                    
                    379,0892011
                    
                    
                    330,2422012
                    
                    
                    311,4182013
                    
                    
                    305,214Thereafter
                    
                    
                    2,144,487Total
      minimum lease revenues
                    
                    
                    3,903,011








14.
            INVESTMENT
      IN ASSOCIATED COMPANIES





At
December 31, 2008 and 2007 the Company has the following participation in
investments that are recorded using the equity method:





2008
                
                
                2007Front
      Shadow Inc. (“Front Shadow”)
                
                
                100.00
                %
                
                
                100.00
                %SFL
      West Polaris Limited (“SFL West Polaris”)
                
                
                100.00
                %
                
                
                0.00
                %SFL
      Deepwater Ltd (“SFL Deepwater”)
                
                
                100.00
                %
                
                
                0.00
                %





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





As
      of December 31 2008(in
      thousands of $)
                
                TOTAL
                
                
                Front
      Shadow
                
                
                SFL
      West Polaris
                
                
                SFL
      DeepwaterCurrent
      assets
                
                
                229,801
                
                
                
                1,666
                
                
                
                84,780
                
                
                
                143,355Non
      current assets
                
                
                2,358,735
                
                
                
                23,518
                
                
                
                767,742
                
                
                
                1,567,475Current
      liabilities
                
                
                488,513
                
                
                
                6,535
                
                
                
                75,459
                
                
                
                406,519Non
      current liabilities
                
                
                1,690,276
                
                
                
                16,520
                
                
                
                662,033
                
                
                
                1,011,723


As
      of December 31 2007(in
      thousands of $)
                  
                  TOTAL
                  
                  
                  Front
      Shadow
                  
                  
                  SFL
      West Polaris
                  
                  
                  SFL
      DeepwaterCurrent
      assets
                  
                  
                  2,624
                  
                  
                  
                  2,624
                  
                  
                  
                  -
                  
                  
                  
                  -Non
      current assets
                  
                  
                  25,193
                  
                  
                  
                  25,193
                  
                  
                  
                  -
                  
                  
                  
                  -Current
      liabilities
                  
                  
                  8,049
                  
                  
                  
                  8,049
                  
                  
                  
                  -
                  
                  
                  
                  -Non
      current liabilities
                  
                  
                  18,580
                  
                  
                  
                  18,580
                  
                  
                  
                  -
                  
                  
                  
                  -


F-17




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





Year
      ended December 31 2008(in
      thousands of $)
                
                TOTAL
                
                
                Front
      Shadow
                
                
                SFL
      West Polaris
                
                
                SFL
      DeepwaterOperating
      revenues
                
                
                44,832
                
                
                
                1,632
                
                
                
                28,156
                
                
                
                15,035Net
      operating income
                
                
                44,560
                
                
                
                1,630
                
                
                
                28,024
                
                
                
                14,906Net
      income
                
                
                22,799
                
                
                
                939
                
                
                
                13,354
                
                
                
                8,506





Year
      ended December 31 2007(in
      thousands of $)
                
                TOTAL
                
                
                Front
      Shadow
                
                
                SFL
      West Polaris
                
                
                SFL
      DeepwaterOperating
      revenues
                
                
                2,193
                
                
                
                2,193
                
                
                
                -
                
                
                
                -Net
      operating income
                
                
                2,190
                
                
                
                2,190
                
                
                
                -
                
                
                
                -Net
      income
                
                
                923
                
                
                
                923
                
                
                
                -
                
                
                
                -





Year
      ended December 31 2006(in
      thousands of $)
                
                TOTAL
                
                
                Front
      Shadow
                
                
                SFL
      West Polaris
                
                
                SFL
      DeepwaterOperating
      revenues
                
                
                694
                
                
                
                694
                
                
                
                -
                
                
                
                -Net
      operating income
                
                
                684
                
                
                
                684
                
                
                
                -
                
                
                
                -Net
      income
                
                
                267
                
                
                
                267
                
                
                
                -
                
                
                
                -






Front
Shadow Inc. (“Front Shadow”) is a 100% owned subsidiary of Ship Finance,
incorporated in 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 and at December 31 2008 the balance outstanding under this facility was
$18.6 million. The Company guarantees $2.1 million of this debt. The vessel is
chartered on a bareboat basis and the terms of the charter provide the charterer
with various call options to acquire the vessel at certain dates throughout the
charter, which expires in 2016.





SFL West
Polaris Limited (“SFL West Polaris”) is a 100% owned subsidiary of Ship Finance,
incorporated in 2008 for the purpose of holding an ultra deepwater drillship and
leasing that vessel to Seadrill Polaris Ltd. (“Seadrill Polaris”), fully
guaranteed by Seadrill. In July 2008 SFL West Polaris entered into a $700.0
million term loan facility and at December 31 2008 the balance outstanding under
this facility was $688.5 million. The Company currently guarantees $100.0
million of this debt. The vessel is chartered on a bareboat basis and the terms
of the charter provide the charterer with various call options to acquire the
vessel at certain dates throughout the charter. In addition, SFL West Polaris
has a put option to sell the vessel to Seadrill Polaris at a fixed price at the
end of the charter, which expires in 2023.


SFL
Deepwater Ltd (“SFL Deepwater”) is a 100% owned subsidiary of Ship Finance,
incorporated in 2008 for the purpose of holding two ultra deepwater drilling
rigs and leasing those rigs to Seadrill Deepwater Charterer Ltd. (“Seadrill
Deepwater”), fully guaranteed by Seadrill. In September 2008 SFL Deepwater
entered into a $1,400.0 million term loan facility and at December 31 2008 the
balance outstanding under this facility was $1,142.8 million, with $250.0
million still available to draw. The Company guarantees $200.0 million of this
debt. The rigs are chartered on a bareboat basis and the terms of the charter
provide the charterer with various call options to acquire the rigs at certain
dates throughout the charter. In addition, there is an obligation for Seadrill
Deepwater to purchase the rigs at fixed prices at the end of the charters, which
expire in 2023.
 
 These
three entities are being accounted for using the equity method as it has been
determined that Ship Finance is not their primary beneficiary under FIN 46
(R).




F-18






15.
            ACCRUED
      EXPENSES




(in
      thousands of $)
                            
                            2008
                            
                            
                            2007Ship
      operating expenses
                            
                            
                            619
                            
                            
                            
                            275Administrative
      expenses
                            
                            
                            1,176
                            
                            
                            
                            2,143Interest
      expense
                            
                            
                            16,142
                            
                            
                            
                            14,55417,937
                            
                            
                            
                            16,972








16.
            DIVIDEND
      PAYABLE




On
December 1, 2008 the Board declared a dividend of $0.60 per share, for payment
on January 7, 2009. The whole amount payable of $43.6 million was accrued as at
December 31, 2008.







17.
            LONG-TERM
      DEBT




(in
      thousands of $)
                                
                                2008
                                
                                
                                2007Long-term
      debt:8.5%
      Senior Notes due 2013
                                
                                
                                449,080
                                
                                
                                
                                449,080U.S
      dollar loan due 2009 to a related party
                                
                                
                                115,000
                                
                                
                                
                                -U.S.
      dollar denominated floating rate debt (LIBOR plus 0.65% - 1.75%)
      due      through 2019
                                
                                
                                2,031,436
                                
                                
                                
                                1,820,9142,595,516
                                
                                
                                
                                2,269,994Less: current
      portion
                                
                                
                                (385,577
                                )
                                
                                
                                (179,428
                                )2,209,939
                                
                                
                                
                                2,090,566








The
outstanding debt as of December 31, 2008 is repayable as follows:





(in
      thousands of $)
                                                Year
      ending December 312009
                                              
                                              
                                              385,5772010
                                              
                                              
                                              290,0052011
                                              
                                              
                                              691,3872012
                                              
                                              
                                              311,3562013
                                              
                                              
                                              560,287Thereafter
                                              
                                              
                                              356,904Total
      debt
                                              
                                              
                                              2,595,516








The
weighted average interest rate for floating rate debt denominated in U.S.
dollars was 3.35% per annum and 5.72% per annum for the years ended December 31,
2008 and December 31, 2007, respectively. These rates take into
consideration the effect of related interest rate swaps. At December 31, 2008
the three month dollar LIBOR rate was 1.425%.





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 were not redeemable
prior to December 15, 2008 except in certain circumstances. After this date the
Company may redeem notes at redemption prices which reduce from 104.25% in 2009
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 2008 and thus there was $449.1 million outstanding at
December 31, 2008 and 2007.





The
Company has entered into short-term total return bond swap lines with banks (see
Note 2 Derivatives). As
of December 31, 2008 the Company had entered into total return bond swaps with a
principal amount totaling $148.0 million under these arrangements (2007: $122.1
million).






F-19


$1,131
million secured term loan facility
  In
February 2005 the Company entered into a $1,131 million term loan facility with
a syndicate of banks. The facility bears interest at LIBOR plus a margin and is
repayable over a term of six years.
 
 In
September 2006 the Company signed an agreement whereby the existing debt
facility, which had then been partially repaid, was increased by $220 million to
the original amount of $1,131 million.  The increase is available on a
revolving basis, and at December 31, 2008 the available amount under the
facility was fully drawn.
 $350
million combined senior and junior secured term loan facility
  In June
2005 the Company entered into a combined $350 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
million secured term loan facility
  In April
2006 the Company entered into a $210 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
million secured term loan facility
  In June
2006 the Company 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 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
million secured term loan facility




In
February 2007 the Company 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 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.





$149
million secured term loan facility




In August
2007 the Company entered into a $149 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. One of the vessels was
sold in January 2008 and the loan facility now relates to four vessel owning
subsidiaries. The facility bears interest at LIBOR plus a margin and is
repayable over a term of seven years.





$77
million secured term loan facility




In
January 2008 the Company entered into a $77 million secured term loan facility
with a syndicate of banks.  The proceeds of the facility were used to
partly fund the acquisition of two offshore supply vessels. The facility bears
interest at LIBOR plus a margin and is repayable over a term of seven
years.




$30
million secured revolving credit facility




In
February 2008 the Company entered into a $30 million secured revolving credit
facility with a bank.  The proceeds of the facility were used to
partly fund the acquisition of the containership Montemar Europa. The facility
bears interest at LIBOR plus a margin and is repayable over a term of seven
years.  At December 31, 2008 the available amount under the facility
was fully drawn.





$49
million secured term loan facility




In March
2008 the Company entered into a $49 million secured term loan facility with a
bank.  The proceeds of the facility were used to partly fund the
acquisition of two newbuilding chemical tankers. The facility bears interest at
LIBOR plus a margin and is repayable over a term of ten years.






F-20


$70
million secured revolving credit facility
  In June
2008 the Company entered into a $70 million secured revolving credit facility
with a bank.  The proceeds of the facility were secured against three
single hull VLCCs.  The facility bears interest at LIBOR plus a margin
and is repayable over a term of two years.  At December 31, 2008 the
available amount under the facility was fully drawn.
  $58
million secured revolving credit facility
  In
September 2008 the Company entered into a $58 million secured revolving credit
facility with a syndicate of banks.  The proceeds of the facility were
secured against two containerships, Asian Ace and Green Ace. The facility bears
interest at LIBOR plus a margin and is repayable over a term of five
years.  At December 31, 2008 the available amount under the facility
was fully drawn.
 
 $100
million secured revolving credit facility
  In
November 2008 the Company entered into a $100 million secured revolving credit
facility with a bank.  The proceeds of the facility were secured
against five single hull VLCCs. The facility bears interest at LIBOR plus a
margin and is repayable over a term of two years.  At December 31,
2008 the available amount under the facility was fully drawn.


$115
million loan due to a related party




In
December 2008 the Company entered into a $115 million loan agreement with a
related party. The loan bears interest at a fixed rate and is repayable in
2009.




At
December 31, 2008, in addition to the above loan facilities the Company had
established one further facility to partly finance the acquisition of two
newbuilding Capesize drybulk carriers ($130.0 million facility). No drawings had
been made against this facility at December 31, 2008 and the transaction has
subsequently been cancelled.





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,
2008, the Company is in compliance with all of the covenants under its long-term
debt facilities.







18.
            OTHER
      LONG TERM LIABILITIES




The
Company’s six offshore supply vessels were acquired from Deep Sea and were
chartered back to Deep Sea under bareboat charter agreements. As part of the
purchase consideration, the Company received seller’s credits totaling $37.0
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.”







19.
            SHARE
      CAPITAL AND CONTRIBUTED SURPLUS




Authorized
      share capital is as follows:





(in
      thousands of $, except share data)
                
                2008
                
                
                2007125,000,000
      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)
                
                2008
                
                
                200772,743,737
      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, 2008 and 2007.






F-21


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, 2008 the Company has credited contributed surplus with $11.8
million of such deemed equity contributions (2007:  $20.6
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, and until December 31,
2008 the corresponding amount was credited to contributed surplus. As of
December 31, 2008 the credit corresponding to the fair value cost of options
granted has been reclassified as additional paid in capital.  (see also
Note 20).





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





In
December 2008 the Company filed a prospectus supplement to enable the Company to
issue and sell up to 7,000,000 common shares from time to time. Sales of the
common shares, if any, will be made by means of ordinary brokers’ transactions
on the New York Stock Exchange or otherwise at market prices prevailing at the
time of the sale, at prices related to the prevailing market prices, or at
negotiated prices. As of December 31, 2008, no shares in the Company had been
issued and sold under this arrangement.






20.
            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.





Five
grants of share options were made in 2008 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 2.37%
(weighted average across options), volatility of 27% (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.







F-22




The
following summarizes share option transactions related to the Option Scheme in
2008, 2007 and 2006:


2008
                                                                                                                                          
                                                                                                                                          2007
                                                                                                                                          
                                                                                                                                          2006Options
                                                                                                                                          
                                                                                                                                          Weighted
      average
                                                                                                                                            exercise
      price
                                                                                                                                            $
                                                                                                                                          
                                                                                                                                          Options
                                                                                                                                          
                                                                                                                                          Weighted
      average exercise price
                                                                                                                                            $
                                                                                                                                          
                                                                                                                                          Options
                                                                                                                                          
                                                                                                                                          Weighted
      average exercise price
                                                                                                                                            $Options
      outstanding at beginning of year
                                                                                                                                          
                                                                                                                                          360,000
                                                                                                                                          
                                                                                                                                          24.44
                                                                                                                                          
                                                                                                                                          150,000
                                                                                                                                          
                                                                                                                                          22.32
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          -Granted
                                                                                                                                          
                                                                                                                                          195,000
                                                                                                                                          
                                                                                                                                          27.52
                                                                                                                                          
                                                                                                                                          210,000
                                                                                                                                          
                                                                                                                                          28.15
                                                                                                                                          
                                                                                                                                          150,000
                                                                                                                                          
                                                                                                                                          22.85Exercised
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          -Forfeited
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          -Options
      outstanding at end of year
                                                                                                                                          
                                                                                                                                          555,000
                                                                                                                                          
                                                                                                                                          24.18
                                                                                                                                          
                                                                                                                                          360,000
                                                                                                                                          
                                                                                                                                          24.44
                                                                                                                                          
                                                                                                                                          150,000
                                                                                                                                          
                                                                                                                                          22.32Exercisable
      at end of year
                                                                                                                                          
                                                                                                                                          170,000
                                                                                                                                          
                                                                                                                                          21.55
                                                                                                                                          
                                                                                                                                          50,000
                                                                                                                                          
                                                                                                                                          20.13
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          -





Theweighted average grant-date fair value of options granted
during 2008 is $6.42 per share (2007: $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, 2008 there was $1.3 million in unrecognized compensation costs
related to non-vested options granted under the Options Scheme (2007: $1.4
million). This cost will be recognized over the vesting periods, which average
1.9 years.





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 amount accrued for
the share price component of the share-based bonus at December 31 2008 was $nil
(2007: $1.0 million).






21.
            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 our principal shareholders Hemen Holding Ltd. and
Farahead Investment Inc. (hereafter jointly referred to as “Hemen”) and
companies associated with Hemen have a significant interest:




-
            Seadrill




-
            Golden
      Ocean




-
            Deep
      Sea






F-23




The
Consolidated Balance Sheets include the following amounts due from and to
related parties, excluding finance lease balances (Note 13):




(in
      thousands of $)
                                              
                                              2008
                                              
                                              
                                              2007Amounts
      due from:Frontline
      Charterers
                                              
                                              
                                              42,643
                                              
                                              
                                              
                                              38,853Frontline
      Ltd
                                              
                                              
                                              2,799
                                              
                                              
                                              
                                              3,161Total
      amount due from related parties
                                              
                                              
                                              45,442
                                              
                                              
                                              
                                              42,014Amounts
      due to:Frontline
      Management
                                              
                                              
                                              6,293
                                              
                                              
                                              
                                              5,292Other
      related parties
                                              
                                              
                                              179
                                              
                                              
                                              
                                              401Total
      amount due to related parties
                                              
                                              
                                              6,472
                                              
                                              
                                              
                                              5,693Current
      portion of long-term debt: due to a related party
                                              
                                              
                                              115,000
                                              
                                              
                                              
                                              -







Related
party leasing and service contracts




As at
December 31, 2008, 39 of the Company’s vessels were leased to the Frontline
Charterers, two jack-up drilling rigs were leased to subsidiaries of Seadrill
and two offshore supply vessels were leased to subsidiaries of Deep Sea: these
leases have been recorded as finance leases. In addition, four offshore supply
vessels were leased to Deep Sea under operating leases.







At
December 31, 2008 the combined balance of net investments in finance leases with
the Frontline Charterers and subsidiaries of Seadrill and Deep Sea was $2,275.7
million (2007: $2,362.6 million) of which $157.5 million (2007: $171.9 million)
represents short-term maturities.





At
December 31, 2008 the net book value of assets leased under operating leases to
Deep Sea was $156.6 million (2007: $193.8 million).





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





Payments
      (in millions of $)
                
                2008
                
                
                2007
                
                
                2006Operating
      lease income
                
                
                21.2
                
                
                
                7.4
                
                
                
                -Finance
      lease interest income
                
                
                174.9
                
                
                
                185.0
                
                
                
                182.6Finance
      lease service revenue
                
                
                93.6
                
                
                
                102.1
                
                
                
                106.8Finance
      lease repayments
                
                
                175.7
                
                
                
                156.7
                
                
                
                136.8Deemed
      dividends received
                
                
                -
                
                
                
                4.6
                
                
                
                31.7Deemed
      dividends paid
                
                
                -
                
                
                
                (6.6
                )
                
                
                (47.3
                )





The
Frontline Charterers pay the Company profit sharing of 20% of their earnings on
a time-charter equivalent basis from their use of the Company’s fleet above
average threshold charter rates each fiscal year.  During the year
ended December 31, 2008, the Company earned and recognized revenue of $111.0
million (2007: $52.5 million, 2006: $78.9 million) under this
arrangement.






F-24


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 2008
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
      Maple
              2008
              16.7Front
      Sabang
              2008
              26.8





As at
December 31, 2008 the Company was owed a total of $42.6 million (2007: $38.9
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 $93.6 million for the year
ended December 31, 2008 (2007: $103.4  million, 2006: $116.1 million).
The management fees are classified as ship operating expenses in the
consolidated statements of operations.





The
Company also paid $1.0 million in 2008 (2007: $1.2 million, 2006: $1.0 million)
to Frontline Management for the provision of management and administrative
services.





As at
December 31, 2008 the Company owes Frontline Management $6.3 million (2007: $5.3
million).





The
Company paid $37,000 in 2008 (2007: $nil, 2006: $nil) to Golar Management UK
Limited for the provision of office facilities. This amount was included in
amounts due to other related parties at December 31, 2008.





Related
party purchases and sales of vessels - 2008




In July
2008 SFL West Polaris, a wholly owned subsidiary of the Company accounted for
under the equity method, acquired the ultra deepwater drill ship West Polaris for $845.0
million from a subsidiary of Seadrill. The vessel was chartered back to a
subsidiary of Seadrill for a period of 15 years, fully guaranteed by Seadrill.
The subsidiary has been granted fixed purchase options after four, six, eight,
10, 12 and 15 years. In addition, SFL West Polaris has a fixed price option to
sell the drillship to the subsidiary of Seadrill after 15 years.





In
November 2008 SFL Deepwater, a wholly owned subsidiary of the Company accounted
for under the equity method, acquired two ultra deepwater drilling rigs, West Hercules and West Taurus,for $1,690.0 million from subsidiaries of Seadrill. The rigs were each
chartered back to a subsidiary of Seadrill for a period of 15 years, fully
guaranteed by Seadrill.  The subsidiary has been granted fixed
purchase options after three, six, eight, 10, and 12 years in the case of West Hercules and after six,
eight, 10 and 12 years in the case of West Taurus.  In
addition, the subsidiary of Seadrill has a purchase obligation to buy the rigs
from SFL Deepwater after 15 years.





As at
December 31, 2008 the Company was owed a total of $2.8 million (2007: $3.2
million) by Frontline as a result of vessel sales.





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.






F-25





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 scheduled for the last quarter of
2008 and the first quarter of 2009.  In 2009 the transaction was
terminated, before either vessel had been delivered.





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 seller’s 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, and the vessel was delivered to Deep Sea in January
2008.





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, including a
seller’s credit of $22.0 million. These vessels were delivered to us in January
2008 and immediately chartered back to Deep Sea under 12 year bareboat
agreements. Deep Sea has options for them to buy back the vessels after three,
five, seven, 10 and 12 years.




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 accounted for under the equity method, 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, and at the end of the charter, the Company has
an option to sell the vessel back to Golden Ocean at a fixed price.





In
November 2006 the Company entered into an agreement to acquire two
newbuilding Suezmax tanker contracts from Frontline, with delivery expected
in the fourth quarter of 2009 and the first quarter on 2010.








F-26






22.
            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 Bank Finland Plc, HSH Nordbank AG, Fortis Bank
(Nederland) N.V., Fortis Bank NV/SA New York Branch, HBOS Treasury Services plc,
NIBC Bank N.V., Citibank N.A. London, Scotiabank Europe Plc, DnB NOR Bank ASA,
Skandinaviska Enskilda Banken AB (publ) Oslo, ING Bank N.V., Lloyds TSB Bank
Plc, Commmerzbank AG, Royal Bank of Scotland plc, and Calyon. Credit risk exists
to the extent that the counterparties are unable to perform under the contracts,
but this risk is considered remote as the counterparties are all banks which
have provided the Company with loans and the interest rate swaps are related to
financing arrangements.





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 2008 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.







Notional Principal(in thousands of
      $)
              Inception
      date
              Maturity
      date
              Fixed
      interest rate$50,000
              February
      2004
              February
      2009
              3.36%$558,248
      (reducing to $415,422)
              February
      2008
              February
      2011
              2.87%
      - 4.03%$197,507
      (reducing to $98,269)
              April
      2006
              May
      2019
              5.65%$116,187
      (reducing to $86,612)
              September
      2007
              September
      2012
              4.85%$71,126
      (reducing to $51,902)
              January
      2008
              December
      2011
              3.69%$48,040
      (reducing to $24,794)
              March
      2008
              August
      2018
              4.05%
      - 4.15%$164,478
      (reducing to $137,439)
              March
      2008
              September
      2011
              2.97%
      - 3.43%





As
      at December 31 2008 the total notional principal amounts subject to such
      swap agreements was $1,205.6 million (2007: $884.2
    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, 2008 was holding bond swaps with a principal amount totaling $148.0
million under these arrangements (2007: $122.1 million). The settlement dates
for these transactions range between June 2009 and August 2009, although early
termination is possible. The Company also has the option of extending the term
of the transactions for a further two years.




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 is being financed through the use of total return swap
transactions indexed to the Company’s own shares (see Note 2Derivatives).At December 31,
2008 the counterparty to the transactions has acquired approximately 692,000
shares in the Company at an average price of $9.79. 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. The settlement
date for these transactions is November 25, 2009, although early termination is
possible.






F-27




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.





Fair Values




The
carrying value and estimated fair value of the Company’s financial assets and
liabilities at December 31, 2008 and 2007 are as follows:





(in
      thousands of $)
                                                                                        
                                                                                        2008
                                                                                          Carrying
      value
                                                                                        
                                                                                        
                                                                                        2008
                                                                                          Fair value
                                                                                        
                                                                                        
                                                                                        2007
                                                                                          Carrying
      value
                                                                                        
                                                                                        
                                                                                        2007
                                                                                          Fair valueNon-derivatives:Cash
      and cash equivalents
                                                                                        
                                                                                        
                                                                                        46,075
                                                                                        
                                                                                        
                                                                                        
                                                                                        46,075
                                                                                        
                                                                                        
                                                                                        
                                                                                        78,255
                                                                                        
                                                                                        
                                                                                        
                                                                                        78,255Restricted
      cash
                                                                                        
                                                                                        
                                                                                        60,103
                                                                                        
                                                                                        
                                                                                        
                                                                                        60,103
                                                                                        
                                                                                        
                                                                                        
                                                                                        26,983
                                                                                        
                                                                                        
                                                                                        
                                                                                        26,983Fixed
      rate long term debt
                                                                                        
                                                                                        
                                                                                        115,000
                                                                                        
                                                                                        
                                                                                        
                                                                                        115,000
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -Floating
      rate long term debt
                                                                                        
                                                                                        
                                                                                        2,031,436
                                                                                        
                                                                                        
                                                                                        
                                                                                        2,031,436
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,820,914
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,820,9148.5%
      Senior Notes due 2013
                                                                                        
                                                                                        
                                                                                        449,080
                                                                                        
                                                                                        
                                                                                        
                                                                                        334,565
                                                                                        
                                                                                        
                                                                                        
                                                                                        449,080
                                                                                        
                                                                                        
                                                                                        
                                                                                        456,714Derivatives:TRS
      equity swap contracts – short term receivables
                                                                                        
                                                                                        
                                                                                        466
                                                                                        
                                                                                        
                                                                                        
                                                                                        466
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,045
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,045TRS
      bond swap contracts – short term receivables
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        2,713
                                                                                        
                                                                                        
                                                                                        
                                                                                        2,713Interest
      rate swap contracts – short term receivables
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        2,953
                                                                                        
                                                                                        
                                                                                        
                                                                                        2,953Total
      short term amounts receivable
                                                                                        
                                                                                        
                                                                                        466
                                                                                        
                                                                                        
                                                                                        
                                                                                        466
                                                                                        
                                                                                        
                                                                                        
                                                                                        6,711
                                                                                        
                                                                                        
                                                                                        
                                                                                        6,711TRS
      bond swap contracts –  short term payables
                                                                                        
                                                                                        
                                                                                        34,221
                                                                                        
                                                                                        
                                                                                        
                                                                                        34,221
                                                                                        
                                                                                        
                                                                                        
                                                                                        372
                                                                                        
                                                                                        
                                                                                        
                                                                                        372Interest
      rate swap contracts – short term payables
                                                                                        
                                                                                        
                                                                                        79
                                                                                        
                                                                                        
                                                                                        
                                                                                        79
                                                                                        
                                                                                        
                                                                                        
                                                                                        20,852
                                                                                        
                                                                                        
                                                                                        
                                                                                        20,852Total
      short term amounts payable
                                                                                        
                                                                                        
                                                                                        34,300
                                                                                        
                                                                                        
                                                                                        
                                                                                        34,300
                                                                                        
                                                                                        
                                                                                        
                                                                                        21,224
                                                                                        
                                                                                        
                                                                                        
                                                                                        21,224Interest
      rate swap contracts – long term payables
                                                                                        
                                                                                        
                                                                                        94,415
                                                                                        
                                                                                        
                                                                                        
                                                                                        94,415
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -Total
      amounts payable
                                                                                        
                                                                                        
                                                                                        128,715
                                                                                        
                                                                                        
                                                                                        
                                                                                        128,715
                                                                                        
                                                                                        
                                                                                        
                                                                                        21,224
                                                                                        
                                                                                        
                                                                                        
                                                                                        21,224








The
      above financial assets and liabilities are measured at fair value on a
      recurring basis as follows:




Fair
      value measurements at reporting date usingQuoted
      Prices in Active Markets for Identical Assets
                                                                                                          
                                                                                                          
                                                                                                          Significant
      Other Observable Inputs
                                                                                                          
                                                                                                          
                                                                                                          Significant
      Unobservable Inputs(in
      thousands of $)
                                                                                                          
                                                                                                          December 31,2008
                                                                                                          
                                                                                                          
                                                                                                          (Level 1)
                                                                                                          
                                                                                                          
                                                                                                          (Level 2)
                                                                                                          
                                                                                                          
                                                                                                          (Level 3)Assets:Cash
      and cash equivalents
                                                                                                          
                                                                                                          
                                                                                                          46,075
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          46,075Restricted
      cash
                                                                                                          
                                                                                                          
                                                                                                          60,103
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          60,103TRS
      equity swap contracts – short term receivables
                                                                                                          
                                                                                                          
                                                                                                          466
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          466Total
      assets
                                                                                                          
                                                                                                          
                                                                                                          106,644
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          106,178
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          466
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          -Liabilities:Fixed
      rate long term debt
                                                                                                          
                                                                                                          
                                                                                                          115,000
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          115,000Floating
      rate long term debt
                                                                                                          
                                                                                                          
                                                                                                          2,031,436
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          2,031,4368.5%
      Senior Notes due 2013
                                                                                                          
                                                                                                          
                                                                                                          334,565
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          334,565Bond
      swap contracts –  short term payables
                                                                                                          
                                                                                                          
                                                                                                          34,221
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          34,221Interest
      rate swap contracts – short term payables
                                                                                                          
                                                                                                          
                                                                                                          79
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          79Interest
      rate swap contracts –  long term payables
                                                                                                          
                                                                                                          
                                                                                                          94,415
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          94,415Total
      liabilities
                                                                                                          
                                                                                                          
                                                                                                          2,609,716
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          2,481,001
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          128,715
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          -
  F-28


FAS 157
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement, and should be determined based on the assumptions that market
participants would use in pricing the asset or liability. As a basis for
considering market participant assumptions in fair value measurements,
FAS 157 establishes a fair value hierarchy that distinguishes between
market participant assumptions based on market data obtained from sources
independent of the reporting entity (observable inputs that are classified
within levels one and two of the hierarchy) and the reporting entity’s own
assumptions about market participant assumptions (unobservable inputs classified
within level three of the hierarchy).





Level one
inputs utilize unadjusted quoted prices in active markets for identical assets
or liabilities that the Company has the ability to access. Level two inputs are
inputs other than quoted prices included in level one that are observable for
the asset or liability, either directly or indirectly. Level two inputs may
include quoted prices for similar assets and liabilities in active markets, as
well as inputs that are observable for the asset or liability, other than quoted
prices, such as interest rates, foreign exchange rates and yield curves that are
observable at commonly quoted intervals. Level three inputs are unobservable
inputs for the asset or liability, which are typically based on an entity’s own
assumptions, as there is little, if any, related market activity. In instances
where the determination of the fair value measurement is based on inputs from
different levels of the fair value hierarchy, the level in the fair value
hierarchy within which the entire fair value measurement falls is based on the
lowest level input that is significant to the fair value measurement in its
entirety. The Company’s assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.





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 the fixed rate short term debt is
estimated to be equal to the carrying value since it is repayable within twelve
months.





The fair
value of total return equity swaps is calculated using 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 calculated using a well-established independent
valuation technique applied to contracted cash flows and LIBOR interest rates as
at December 31, 2008.




The fair
value of the bond swaps is calculated using the market price of the underlying
bonds, bond interest paid since inception and the interest rate charged by the
counterparty.







F-29




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.




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, 2008
Frontline accounted for 75% of our operating revenues (2007: 78%, 2006: 83%).
There is thus a concentration of revenue risk with Frontline.






23.
            COMMITMENTS
      AND CONTINGENT LIABILITIES




Assets
      Pledged




2008Book
      value of assets pledged under ship mortgages
                $2,677
      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, 2008 the Company had contractual commitments under newbuilding
contracts and vessel
acquisition agreementstotaling $675.7 million (2007: $701.0 million).
There was also at that date a commitment to subscribe up to $1.5 million in
additional share capital to Sea Change Maritime LLC, a long term investment in
which the Company has a 7% shareholding.






24.
            SUBSEQUENT EVENTS




In
January 2009 the Company entered into an $18 million short term loan agreement
with a related party. The loan bears interest at LIBOR plus a
margin.





In
February 2009 the Company announced that the agreement made in February 2007 to
acquire two newbuilding Capesize drybulk carriers for a total cost of $160 million had been terminated. Ship Finance did
not pay in any of the capital prior to termination.





On
February 26, 2009 the Board of Ship Finance declared a dividend of $0.30 per
share to be paid on or about April 17, 2009 in cash or, at the election of the
shareholder, in newly issued common shares.





On March
3, 2009 we amended the Charter Ancillary Agreement with Frontline Shipping III,
whereby the charter service reserve totaling $26.5 million relating to the
vessels on charter to Frontline Shipping III may be in the form of a loan to the
Company. The loan will bear interest at LIBOR plus a margin and is due for
repayment within 364 days of the loan being provided, or earlier in accordance
with the agreement.






F-30