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, 2009





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-la-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.





79,125,000 Common Shares, $1.00 Par
      Value





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


[X   ]
Yes  [  ] 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


[   ]
Yes  [   ] No





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





Large
      accelerated filer  [  ]
            Accelerated
      filer  [ X  ]
            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
              
              PAGEITEM
      1.
              IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
              1ITEM
      2.
              OFFER
      STATISTICS AND EXPECTED TIMETABLE
              1ITEM
      3.
              KEY
      INFORMATION
              1ITEM
      4.
              INFORMATION
      ON THE COMPANY
              23ITEM
      4A.
              UNRESOLVED
      STAFF COMMENTS
              42ITEM
      5.
              OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS
              42ITEM
      6.
              DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES
              68ITEM
      7.
              MAJOR
      SHAREHOLDERS AND RELATED PARTYTRANSACTIONS
              71ITEM
      8.
              FINANCIAL
      INFORMATION
              74ITEM
      9.
              THE
      OFFER AND LISTING
              76ITEM
      10.
              ADDITIONAL
      INFORMATION
              77ITEM
      11.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              95ITEM
      12.
              DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES
              96
 
 
 PART
      IIITEM
      13.
              DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES
              97ITEM
      14.
              MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS
              97ITEM
      15.
              CONTROLS
      AND PROCEDURES
              97ITEM
      16A.
              AUDIT
      COMMITTEE FINANCIAL EXPERT
              98ITEM
      16B.
              CODE
      OF ETHICS
              98ITEM
      16C.
              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
              98ITEM
      16D.
              EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
              99ITEM
      16E.
              PURCHASE
      OF EQUITY SECURITIES BY ISSUER AND AFFILIATED PURCHASERS
              99ITEM
      16G.
              CORPORATE
      GOVERNANCE
              99
 
 
 PART
      IIIITEM
      17.
              FINANCIAL
      STATEMENTS
              101ITEM
      18.
              FINANCIAL
      STATEMENTS
              101ITEM
      19.
              EXHIBITS
              102


CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS





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





Ship
Finance International Limited, or the Company, desires to take advantage of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
and is including this cautionary statement in connection with this safe harbor
legislation.  This document and any other written or oral statements
made by us or on our behalf may include forward-looking statements, which
reflect our current views with respect to future events and financial
performance.  The words "believe," "anticipate," "intends,"
"estimate," "forecast," "project," "plan," "potential," "will," "may," "should,"
"expect" and similar expressions identify forward-looking statements. The
Company assumes no obligation to update or revise any forward-looking
statements. Forward-looking statements in this annual report on Form 20-F and
written or oral forward-looking statements attributable to the Company or its
representatives after the date of this Form 20-F are qualified in their entirety
by the cautionary statement contained in this paragraph and in other reports
hereafter filed by the Company with the Securities and Exchange
Commission.




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 the Organization of the Petroleum
      Exporting Countries', or OPEC's, petroleum production levels and worldwide
      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, or the
      SEC.














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", "Ship Finance", "we", "us" and "our" all refer to
Ship Finance International Limited and its subsidiaries. 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 that 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





Our
selected income statement and cash flow statement data with respect to the
fiscal years ended December 31 2009, 2008 and 2007 and our selected balance
sheet data with respect to the fiscal years ended December 31 2009 and 2008 have
been derived from our consolidated financial statements included in Item 18 of
this annual report, prepared in accordance with accounting principles generally
accepted in the United States, which we refer to as US GAAP.





The
selected income statement and cash flow statement data for the fiscal years
ended December 31 2006 and 2005 and the selected balance sheet data for the
fiscal years ended December 31 2007, 2006 and 2005 have been derived from our
consolidated financial statements not included herein.  The following
table should be read in conjunction with Item 5. "Operating and Financial Review
and Prospects" and our consolidated financial statements and the notes to those
statements included herein.




Year
      Ended December 312009
              
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005(in
      thousands of dollars except common share and per share
    data)Income
      Statement Data:Total
      operating revenues
              
              
              345,220
              
              
              
              457,805
              
              
              
              398,003
              
              
              
              424,658
              
              
              
              437,510Net
      operating income
              
              
              209,264
              
              
              
              337,402
              
              
              
              304,881
              
              
              
              293,697
              
              
              
              300,662Net
      income
              
              
              192,598
              
              
              
              181,611
              
              
              
              167,707
              
              
              
              180,798
              
              
              
              209,546Earnings
      per share, basic
              
              
              $2.59
              
              
              
              $2.50
              
              
              
              $2.31
              
              
              
              $2.48
              
              
              
              $2.84Earnings
      per share, diluted
              
              
              $2.59
              
              
              
              $2.50
              
              
              
              $2.30
              
              
              
              $2.48
              
              
              
              $2.84Dividends
      declared
              
              
              90,928
              
              
              
              166,584
              
              
              
              159,335
              
              
              
              149,123
              
              
              
              148,863Dividends
      declared per share
              
              
              $1.20
              
              
              
              $2.29
              
              
              
              $2.19
              
              
              
              $2.05
              
              
              
              $2.00
     1
    Year
      Ended December 312009
              
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005(in
      thousands of dollars except common share and per share
    data)Balance
      Sheet Data (at end of period):Cash
      and cash equivalents
              
              
              84,186
              
              
              
              46,075
              
              
              
              78,255
              
              
              
              64,569
              
              
              
              32,857Vessels
      and equipment, net
              
              
              627,654
              
              
              
              656,216
              
              
              
              629,503
              
              
              
              246,549
              
              
              
              315,220Investment
      in direct financing and sales-type leases (including current
      portion)
              
              
              1,793,715
              
              
              
              2,090,492
              
              
              
              2,142,390
              
              
              
              2,109,183
              
              
              
              1,925,354Investment
      in associated companies
              
              
              444,435
              
              
              
              420,977
              
              
              
              4,530
              
              
              
              3,698
              
              
              
              -Total
      assets
              
              
              3,001,428
              
              
              
              3,348,486
              
              
              
              2,950,028
              
              
              
              2,553,677
              
              
              
              2,393,913Short
      and long term debt  (including current portion)
              
              
              2,135,950
              
              
              
              2,595,516
              
              
              
              2,269,994
              
              
              
              1,915,200
              
              
              
              1,793,657Share
      capital
              
              
              79,125
              
              
              
              72,744
              
              
              
              72,744
              
              
              
              72,744
              
              
              
              73,144Stockholders'
      equity
              
              
              749,328
              
              
              
              517,350
              
              
              
              614,477
              
              
              
              600,530
              
              
              
              561,522Common
      shares outstanding
              
              
              79,125,000
              
              
              
              72,743,737
              
              
              
              72,743,737
              
              
              
              72,743,737
              
              
              
              73,143,737Weighted
      average common shares outstanding
              
              
              74,399,127
              
              
              
              72,743,737
              
              
              
              72,743,737
              
              
              
              72,764,287
              
              
              
              73,904,465Cash
      Flow Data:Cash
      provided by operating activities
              
              
              125,522
              
              
              
              211,386
              
              
              
              202,416
              
              
              
              210,160
              
              
              
              280,834Cash
      provided by (used in) investing activities
              
              
              424,068
              
              
              
              (433,945
              )
              
              
              (378,777
              )
              
              
              (127,369
              )
              
              
              (269,573
              )Cash
      provided by (used in) financing activities
              
              
              (511,479
              )
              
              
              190,379
              
              
              
              190,047
              
              
              
              (51,079
              )
              
              
              (7,597
              )






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 26 2010.





Risks
Relating to Our Industry





Disruptions
in world financial markets and the resulting governmental action in the United
States and in other parts of the world could have a material adverse impact on
our results of operations, financial condition and cash flows, and could cause
the market price of our common shares to decline.
   2


The
United States and other parts of the world have experienced and are continuing
to experience weakened economic conditions and have been in a recession. For
example, the credit markets in the United States have experienced significant
contraction, de-leveraging and reduced liquidity, and the U.S. federal
government and state governments have implemented and are considering a broad
variety of governmental actions and/or new regulations for the financial
markets. Securities markets, futures markets and the credit markets are subject
to comprehensive statutes, regulations and other requirements. The U.S.
Securities and Exchange Commission, or the SEC, other regulators,
self-regulatory organizations and exchanges may take extraordinary actions, and
may effect changes in law or interpretations of existing laws.





The
uncertainty surrounding the future of the credit markets in the United States
and the rest of the world has resulted in reduced access to credit worldwide. As
of December 31 2009, we had total outstanding indebtedness of $4.0 billion under
our various credit facilities.





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


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 is likely to
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.





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 exploration for and 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, including armed conflicts,
      terrorist activities, embargoes and
strikes;
 ·
              developments
      in international trade;
 ·
              changes
      in seaborne and other transportation patterns, including the distance
      cargo is transported by sea;
 ·
              environmental
      and other regulatory developments;
 ·
              currency
      exchange rates; and
 ·
              weather.


3





Factors
that influence the 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;
 ·
              vessel
      casualties;
 ·
              the
      number of vessels that are out of service;
and
 ·
              port
      or canal congestion.


Demand
for our vessels and charter rates are dependent upon, among other things,
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 global 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 United States 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. China has been one of the world's
fastest growing economies in terms of gross domestic product, and has had a
significant impact on shipping demand. If economic growth in China and the Asia
Pacific region continues to slow down, it may exacerbate the effect of recent
slowdowns in the economies of the United States 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. For the year ended
December 31 2009 the year-on-year growth rate of China's gross domestic product
was approximately 8.7%, compared with growth rates of 9.6% and 13.0% for the
years ended December 31 2008 and 2007, respectively. China has recently imposed
measures to restrain lending, which may further contribute to a slowdown in its
economic growth. It is possible that China and other countries in the Asia
Pacific region may continue to experience slowed or even negative economic
growth in the near future. Moreover, the current economic slowdown in the
economies of the United States, the European Union and other Asian countries may
further adversely affect economic growth in China and elsewhere. Our business,
financial condition and results of operations, as well as our future prospects,
are likely to be materially and adversely affected by a further economic
downturn in any of these countries.





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






4




The
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development 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 have been undertaken with the result that prices for certain
commodities are principally determined by market forces. Many of the reforms are
unprecedented or experimental and may be subject to revision, change or
abolition based upon the outcome of such experiments. If the Chinese government
does not continue to pursue a policy of economic reform, the level of imports to
and exports from China could be adversely affected by changes to these economic
reforms by the Chinese government, as well as by changes in political, economic
and social conditions or other relevant policies of the Chinese government, such
as changes in laws, regulations or export and import restrictions, all of which
could adversely affect our business, operating results and financial
condition.





An
acceleration of the current deadlines for prohibiting the trading of our
non-double hull tankers could adversely affect our operations.





The
United States, 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 seven non-double hull
tankers, including one which we have sold with delivery to its new owner
expected in April 2010 and another which we have sold on hire-purchase terms
scheduled to expire in 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.





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 the OPA, the U.S. Clean Water Act, the U.S.
Maritime Transportation Security Act of 2002 and regulations of the IMO,
including the International Convention on Civil Liability for Oil Pollution
Damage of 1969, as from time to time amended and generally referred to as the
CLC, the IMO International Convention for the Prevention of Pollution from Ships
of 1973, as from time to time amended and generally referred to as MARPOL, the
IMO International Convention for the Safety of Life at Sea of 1974, as from time
to time amended and generally referred to as SOLAS, and the IMO International
Convention on Load Lines of 1966, as from time to time amended.





5


In
addition, vessel classification societies and the requirements set forth in the
IMO's International Management Code for the Safe Operation of Ships and for
Pollution Prevention, or the ISM Code, 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 reductions 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 United States.  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 CLC, which has been adopted by most countries outside of the
United States, imposes liability for oil pollution in international waters. OPA
expressly permits individual states to impose their own liability regimes with
regard to hazardous materials and oil pollution incidents occurring within their
boundaries. Coastal states in the United States have enacted pollution
prevention liability and response laws, many providing for unlimited liability.
Furthermore, environmentallaws often
impose strict liability for remediation of spills and releases of oil and
hazardous substances, which could subject us to liability without regard to
whether we were negligent or at fault. Under OPA, for example, owners, operators
and bareboat charterers are jointly and severally strictly liable for the
discharge of oil in U.S. waters, including the 200 nautical mile exclusive
economic zone around the United States. An oil spill could also result in
significant liability, including fines, penalties, criminal liability and
remediation costs for natural resource damages under other international and
U.S. federal, state and local laws, as well as third-party damages, and could
harm our reputation with current or potential charterers of our vessels. We are
required to satisfy insurance and financial responsibility requirements for
potential oil (including marine fuel) spills and other pollution incidents.
Although we have arranged insurance to cover certain environmental risks, there
can be no assurance that such insurance will be sufficient to cover all such
risks or that any claims will not have a material adverse effect on our
business, results of operations, cash flows and financial condition and
available cash.





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 the frequency of piracy incidents increased
significantly, and continued at a relatively high level during 2009,
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 insurance 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, any
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.




In
the highly competitive international seaborne transportation industry, we may
not be able to compete for charters with new entrants or established companies
with greater resources, and as a result we may be unable to employ our vessels
profitably.





We employ
our vessels in a highly competitive market that is capital intensive and highly
fragmented.  Competition arises primarily from other vessel owners,
some of whom have substantially greater resources than we
do.  Competition for seaborne transportation of goods and products is
intense and depends on charter rate, location, size, age, condition and the
acceptability of the vessel and its operators to charterers.  Due in
part to the highly fragmented market, competitors with greater resources could
operate larger fleets than we may operate and thus be able to offer lower
charter rates and higher quality vessels than we are able to
offer.  If this were to occur, we may be unable to retain or attract
new charterers on attractive terms or at all, which may have a material adverse
effect on our business, financial condition and results of
operations.




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





The
supply of vessels generally increases with deliveries of new vessels and
decreases with the scrapping of older vessels, conversion of vessels to other
uses, such as floating production and storage facilities, and loss of tonnage as
a result of casualties. Currently, there is significant newbuilding activity
with respect to virtually all sizes and classes of vessels. An over-supply of
vessel capacity, combined with a decline in the demand for such vessels, may
result in a further reduction of charter hire rates.  If such a
reduction continues in the future, upon the expiration or termination of our
vessels' current charters, we may only be able to re-charter our vessels at
reduced or unprofitable rates or we may not be able to charter our vessels at
all, which would have a material adverse effect on our revenues and
profitability.




Increased
inspection procedures, tighter import and export controls and new security
regulations could increase costs and disrupt our business.





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





7








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




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.




The
offshore contract drilling industry is cyclical and volatile, and depends on the
level of activity in oil and gas exploration and development and production in
offshore areas worldwide. The availability of quality drilling prospects,
exploration success, relative production costs, the stage of reservoir
development 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.





Any
decrease in exploration, development or production expenditures by oil and gas
companies could materially and adversely affect the business of the charterers
of our drilling units and their ability to perform under their existing charters
with us. 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
      cost of exploring for, developing, producing and delivering oil and
      gas;


·
            expectations
      regarding future energy prices;


·
            advances
      in exploration and development
technology;


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


·
            the
      level of production in non-OPEC
countries;


·
            government
      regulations;


·
            local
      and international political, economic and weather
    conditions;


·
            domestic
      and foreign tax policies;


·
            the
      development and implementation of policies to increase the use of
      renewable energy;


·
            the
      policies of various governments regarding exploration and development of
      their oil and gas reserves; 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 the Middle East or other geographic areas,
      or further acts of terrorism in the United States or
      elsewhere.







8





Declines
in oil and gas prices for an extended period could negatively affect the
offshore drilling sector. 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 flows 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 and intensify competition in the
industry, which often results in drilling units, particularly lower
specification drilling units, being idle for long periods of time.  We
cannot predict the future level of demand for drilling units or future
conditions of the oil and gas industry.





In
addition to oil and gas prices, the offshore drilling industry is influenced by
additional factors, including:





·
            the
      availability of competing offshore drilling
  units;


·
            the
      level of costs for associated offshore oilfield and construction
      services;


·
            oil
      and gas transportation costs;


·
            the
      discovery of new oil and gas reserves;
and


·
            the
      cost of non-conventional hydrocarbons, such as the exploitation of oil
      sands.




An
over-supply of drilling units may lead to a reduction in day-rates and therefore
may adversely affect the ability of the Seadrill Charterers to make charterhire
payments to us.





We have
chartered our four drilling units to four subsidiaries of Seadrill Limited, or
Seadrill, namely Seadrill Invest II Limited, or Seadrill Invest II, Seadrill
Deepwater Charterer Ltd., or Seadrill Deepwater, Seadrill Offshore AS, or
Seadrill Offshore, and Seadrill Polaris Ltd., or Seadrill Polaris, which we
refer to collectively as the "Seadrill Charterers". During the recent period of
high utilization and high dayrates, industry participants have increased the
supply of drilling units by ordering the construction of new drilling
units.  Historically, this has resulted in an over-supply of drilling
units, resulting in a subsequent decline in utilization and dayrates when the
drilling units enter the market, sometimes for extended periods of time until
the units have been absorbed into the active fleet.  Moreover, not all
of the drilling units currently under construction have been contracted for
future work, which may intensify price competition as scheduled delivery dates
occur.  The entry into service of these new, upgraded or reactivated
drilling units will increase supply and could curtail a further strengthening,
or trigger a reduction, in dayrates as drilling units are absorbed into the
active fleet.  Any further increase in the construction of new
drilling units could have a negative impact on utilization and
dayrates.  In addition, the new construction of high-specification
rigs, as well as changes in the Seadrill Charterers' competitors' drilling rig
fleets, could cause our drilling units to become less
competitive.  Lower utilization and dayrates could adversely affect
the Seadrill Charterers' ability to secure drilling contracts and, therefore,
their ability to make charterhire payments to us, and may cause them to
terminate or renegotiate their charter agreements to our detriment.




Consolidation
of suppliers may limit the ability of the Seadrill Charterers to obtain supplies
and services for their offshore drilling operations at an acceptable cost, on
schedule or at all, which may have a material adverse effect on their ability to
make charterhire payments to us.





9





The
Seadrill Charterers may rely on certain third parties to provide supplies and
services necessary for their offshore drilling operations, including but not
limited to drilling equipment suppliers, catering and machinery suppliers.
Recent mergers have reduced the number of available suppliers, resulting in
fewer alternatives for sourcing key supplies. The Seadrill Charterers may not be
able to obtain supplies and services at an acceptable cost, at the times they
need them or at all. Such consolidation, combined with a high volume of drilling
units under construction, may result in a shortage of supplies and services
thereby potentially inhibiting the ability of suppliers to deliver on time.
These cost increases or delays could have a material adverse affect on the
Seadrill Charterers' results of operations and financial condition, and may
adversely affect their ability to make charterhire payments to us.





Governmental
laws and regulations, including environmental laws and regulations, may add to
the costs of the Seadrill Charterers or limit their drilling activity, and may
adversely affect their ability to make charterhire payments to us.





The
Seadrill Charterers' business in the offshore drilling industry is affected by
public policy and laws and regulations relating to the energy industry and the
environment in the geographic areas where they operate.





The
offshore drilling industry is dependent on demand for services from the oil and
gas exploration and production industry, and accordingly the Seadrill Charterers
are directly affected by the adoption of laws and regulations that for economic,
environmental or other policy reasons curtail exploration and development
drilling for oil and gas. The Seadrill Charterers may be required to make
significant capital expenditures to comply with governmental laws and
regulations. It is also possible that these laws and regulations may in the
future add significantly to the Seadrill Charterers' operating costs or
significantly limit drilling activity. Governments in some countries are
increasingly active in regulating and controlling the ownership of concessions,
the exploration for oil and gas, and other aspects of the oil and gas
industries. In recent years, increased concern has been raised over protection
of the environment. Offshore drilling in certain areas has been opposed by
environmental groups, and has in certain cases been restricted.





To the
extent that new laws are enacted or other governmental actions are taken that
prohibit or restrict offshore drilling or impose additional environmental
protection requirements that result in increased costs to the oil and gas
industry in general or the offshore drilling industry in particular, the
Seadrill Charterers' business or prospects could be materially adversely
affected. The operation of our drilling units will require certain governmental
approvals, the number and prerequisites of which cannot be determined until the
Seadrill Charterers identify the jurisdictions in which they will operate upon
securing contracts for the drilling units. Depending on the jurisdiction, these
governmental approvals may involve public hearings and costly undertakings on
the part of the Seadrill Charterers. The Seadrill Charterers may not obtain such
approvals or such approvals may not be obtained in a timely manner. If the
Seadrill Charterers fail to secure the necessary approvals or permits in a
timely manner, their customers may have the right to terminate or seek to
renegotiate their drilling services contracts to the Seadrill Charterers'
detriment. The amendment or modification of existing laws and regulations or the
adoption of new laws and regulations curtailing or further regulating
exploratory or development drilling and production of oil and gas could have a
material adverse effect on the Seadrill Charterers' business, operating results
or financial condition. Future earnings of the Seadrill Charterers may be
negatively affected by compliance with any such new legislation or regulations.
In addition, the Seadrill Charterers may become subject to additional laws and
regulations as a result of future rig operations or repositioning. These factors
may adversely affect the ability of the Seadrill Charterers to make charterhire
payments to us.





10





Acts
of terrorism and political and social unrest could adversely affect our results
of operations and financial condition.





Political
and social unrest and terrorist attacks, such as those in New York on September
11 2001 and in London on July 7 2005, and the continuing response of the United
States to these attacks, as well as the threat of future terrorist attacks
around the world, continue to cause uncertainty in the world's financial markets
and may affect our business, operating results and financial condition.
Continuing conflicts in the Middle East and Iraq may lead to additional acts of
terrorism and armed conflict around the world, which may contribute to further
economic instability in the global financial markets. These uncertainties could
also adversely affect our ability to obtain additional financing on terms
acceptable to us or at all. In the past, political conflicts have also resulted
in attacks on vessels, mining of waterways and other efforts to disrupt
international shipping, particularly in the Arabian Gulf region. Acts of
terrorism and piracy have also affected vessels trading in regions such as the
South China Sea.  Insurance premiums could increase and coverage may
be unavailable in the future.  U.S. government regulations may
effectively preclude us from actively engaging in business activities in certain
countries.  These regulations could be amended to cover countries
where we currently operate or where we may wish to operate in the
future.  Any of these occurrences could have a material adverse impact
on our operating results, revenues and costs.




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, due to events
such as marine disasters, bad weather, mechanical failures, human error,
environmental accidents, war, terrorism, piracy, political circumstances and
hostilities in foreign countries, labor strikes and boycotts, changes in tax
rates or policies, and governmental 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 $1.0 billion per
vessel 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 one or more of 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.








11





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





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.








12











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. We
cannot assure you that our dividend will not be reduced 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.








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 subsidiaries of Frontline Ltd, or Frontline, namely Frontline
Shipping Limited, Frontline Shipping II Limited and Frontline Shipping III
Limited, which we refer to collectively as the Frontline Charterers. In
addition, we have chartered our four drilling units to 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 May 2010.





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 26 2010, established restricted cash deposits of $52
million,  $10 million and $27 million, respectively, which serve to
support their obligations to make charterhire payments to us.  In
addition, Frontline Limited guarantees the payment of charterhire with respect
to Frontline Shipping and Frontline Shipping II. 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 they may be unable to make charterhire payments to us without
support from Frontline. 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 exception to this is our
non-double hull vessels, which are excluded from the annual profit sharing
payment calculation after the relevant vessels' anniversary dates in
2010.  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.
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 us 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.






13





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. Conversely, 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 decreased sharply from their
recent 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 international shipping and offshore drilling industries, types and
sizes of vessels and drilling units, supply 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.








14





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.





Our
principal shareholders Hemen Holding Ltd. and Farahead Investment Inc., which we
refer to jointly as Hemen, are indirectly controlled by trusts established by
Mr. John Fredriksen for the benefit of his immediate family. Hemen also has
significant shareholdings in Frontline, Seadrill, Golden Ocean Group Limited, or
Golden Ocean, and Deep Sea Supply Plc, or Deep Sea, which are all our customers.
Currently, one of our directors, Kate Blankenship, is also a director of
Frontline, Golden Ocean and Seadrill and another of our directors, Cecilie A.
Fredriksen, the daughter of Mr. John Fredriksen, is also a director of Golden
Ocean. 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.





15





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., or
Frontline Management, Frontline, Golden Ocean, Deep Sea, the Seadrill Charterers
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 shareholders.





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."







16





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.





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 the connection with the production of such income do not
constitute passive assets for purposes of determining whether we are a
PFIC.





Consequently,
based on our current method of operations, and on representations previously
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 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
drilling units may produce passive income and such drilling units 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 drilling units 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. 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. federal income tax
consequences.  For example, U.S. non-corporate shareholders would not
be eligible for the 15% maximum tax rate on dividends that we pay.





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 as amended, or the Code, 50% of the gross
shipping income of a vessel owning or chartering corporation, such as ourselves
and our subsidiaries, that is attributable to transportation that begins or
ends, but that does not both begin and end, in the United States 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 promulgated thereunder.








17





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 shipping
income.  For example, Hemen owned 43.1% of our common shares at March
26 2010.   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 common
shares were, in combination with Hemen, to own 50% or more of our outstanding
common shares on more than half the days during the taxable year. Due to the
factual nature of the issues involved, we can give no assurances on our
tax-exempt status or that of any of our subsidiaries.





If we, or
our subsidiaries, are not entitled to exemption under Section 883 of the Code
for any taxable year, we, or our subsidiaries, could be subject for those years
to an effective 2% U.S. federal income tax on the gross shipping income these
companies derive during the year that is attributable to the transport of
cargoes to or from the United States.  The imposition of this tax
would have a negative effect on our business and would result in decreased
earnings available for distribution to our shareholders.








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 act 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. If any of these charters continue beyond 2010 they will earn a reduced
rate of time charter hire of $7,500 per day until the existing charter agreement
terminates.





18





Apart
from Front Sabang,which is subject to a hire-purchase contract scheduled to expire in
October 2011, and SFL
Europa, which is on a charter due to expire in May 2010, the vessels in
our fleet that have charters attached to them are generally contracted to expire
between three and 17 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 at an earlier
date.  One or more of the charters with respect to our vessels may
also terminate in the event of a requisition for title or a loss of a
vessel.





In
addition, under our vessel management agreements with Frontline Management, for
a fixed management fee Frontline Management is responsible for all of the
technical and operational management of the vessels chartered by the Frontline
Charterers, and will indemnify us against certain loss of hire and various other
liabilities relating to the operation of these vessels.  We may
terminate our management agreements with Frontline Management for any reason at
any time on 90 days' notice or an 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 26 2010, we have entered into agreements to acquire one additional
containership and seven additional drybulk carriers. 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 may be 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, thereby 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.







19





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





As of
December 31 2009, the Company and its consolidated subsidiaries had
approximately $1.7 billion in floating rate debt outstanding under our credit
facilities, and a further $1.9 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.





As of
December 31 2009, the Company and its consolidated subsidiaries have entered
into interest rate swaps to fix the interest on $1.1 billion of our outstanding
indebtedness, and have also entered into interest rate swaps to fix the interest
on $1.3 billion of the outstanding indebtedness of our equity-accounted
subsidiaries.





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 at December 31 2009 was approximately $1.2 billion, including
our equity-accounted subsidiaries.  A one percentage change in
interest rates would at most increase or decrease interest expense by
approximately $12 million per year as of December 31 2009.  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 a deemed outstanding debt related to the
assets on charter. At December 31 2009, $2.0 billion of our floating rate debt
was subject to such interest adjustment clauses, including our equity-accounted
subsidiaries. Of this amount, a total of $1.3 billion was subject to interest
rate swaps and the balance of $733 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 our 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 our wholly-owned
subsidiary Ship Finance Management AS.





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 you 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 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.






20





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
      a ratio of shareholder adjusted book equity to total assets 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 interests.





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





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








21





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 drilling units,
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 January 1 2009, the
closing market price of our common shares has ranged from a low of $4.05 on
March 9 2009 to a high of $19.36 on March 12 2010. 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, any reductions in the payment of our dividends
or 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. For example, in December 2008 we filed a prospectus
supplement pursuant to which we could sell up to 7,000,000 common shares from
time-to-time in the open market. The maximum number of shares that were issuable
under the prospectus supplement for this program represented less than 10% of
our then outstanding shares. This has served as a source of additional equity
capital, and 1,372,100 shares were issued and sold up to the termination of the
program in August 2009.





Because
we are a foreign corporation, you may not have the same rights as 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 jurisdictions in the United States. In addition, most of our
directors and officers are not resident in the United States and the majority of
our assets are located outside of the United States. As a result, investors may
have more difficulty in protecting their interests and enforcing judgments in
the face of actions by our management, directors or controlling shareholders
than would shareholders of a corporation incorporated in a jurisdiction in the
United States.





22





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 26 2010, Hemen owned approximately 43.1% of our outstanding common shares.
As a result of its ownership of our common shares, Hemen may influence our
business, including the outcome of any vote of our shareholders. Hemen also
currently beneficially owns substantial stakes in Frontline, Golden Ocean,
Seadrill and Deep Sea. The interests of Hemen may be different from your
interests.




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, 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, the United States of America, 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 32 oil
tankers, eight OBOs currently configured to carry drybulk cargo, one drybulk
carrier, eight container vessels, one jack-up drilling rig, three
ultra-deepwater drilling units, six offshore supply vessels and two chemical
tankers.





Additionally
we have contracted to purchase the following vessels:





·
            one
      newbuilding container vessel, with estimated delivery in 2010;
      and





·
            seven
      newbuilding Handysize drybulk carriers, with estimated delivery in 2011
      and 2012.






23





We expect
that the newbuilding container vessel and drybulk carriers 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, North
China Shipping Holdings Co. Ltd., or NCS, Bryggen Shipping & Trading AS, or
Bryggen , Heung-A Shipping Co. Ltd., or Heung-A, Deep Sea and CMA
CGM.  Existing charters for most of our vessels range from three to 17
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 doing so, our strategy is
to generate stable and increasing cash flows by chartering our assets primarily
under medium to long-term bareboat or time charters.





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 NYSE under the ticker symbol "SFL" on June 17 2004. Frontline
subsequently made six further dividends of our shares to its shareholders and
its 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.





Since
2006 we have reduced our non-double hull tanker fleet from 18 vessels to seven
vessels, including the single-hull VLCC Golden River, which we have
sold with delivery to its new owner expected in April 2010, and the VLCC Front Sabang, which we have
sold on hire-purchase terms scheduled to expire in October 2011.





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 three to 17 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.  The Frontline Charterers have established restricted cash
deposits, which currently total $89 million, held by them as security against
their charter commitments. In addition, Frontline guarantees the payment of
charter hire with respect to Frontline Shipping and Frontline Shipping
II.






24





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 anniversary dates in 2010, all of our
non-double hull vessels will be excluded from the annual profit sharing payment
calculation, and the time charter received from Frontline will reduce to $7,500
per day.





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 is
also a profit sharing agreement relating to the charter of the jack-up drilling
rig West Prospero,
whereby we will receive a profit share calculated as a percentage of the annual
earnings above specified thresholds relating to milestones set under the
charter. This profit sharing agreement became effective in 2009.





The
charters for the drybulk carrier, the jack-up drilling rig, three
ultra-deepwater drilling units, seven container vessels, six offshore supply
vessels, two chemical tankers, the Suezmax tankers Glorycrown and Everbright and the VLCC 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 2009 we acquired the following vessel:





·
            In
      November 2009 we took delivery of Glorycrown, one of the
      two newbuilding Suezmax tankers, which we had agreed to purchase in
      November 2006. Immediately upon delivery from the shipyard, Glorycrown was sold on
      hire-purchase terms and commenced a five year bareboat charter with annual
      purchase options during the charter period and a purchase obligation at
      the end of the charter in November
2014.





Since
January 1 2010 we have entered into agreements relating to the acquisition of
vessels as follows:





·
            In
      February 2010 we agreed to terminate agreements made in June 2007 relating
      to the acquisition of four newbuilding containerships for an aggregate
      cost of approximately $155 million. Concurrently, we have agreed to
      acquire seven newbuilding Handysize drybulk carriers with delivery
      expected in 2011 and 2012, for an aggregate construction cost of
      approximately $188 million.





·
            In
      March 2010 we took delivery of Everbright, the second
      newbuilding Suezmax tanker which we had agreed to purchase in November
      2006. Immediately upon delivery from the shipyard, the Everbright was sold on
      hire-purchase terms and commenced a five year bareboat charter with annual
      purchase options during the charter period and a purchase obligation at
      the end of the charter in March
2015.








25








Disposals





In the
year ended December 31 2009 we sold the following vessels:





·
            In
      July 2009 we agreed to sell the single-hull VLCC Front Duchessto an
      unrelated third party for a total consideration of approximately $19
      million. The vessel was delivered to its new owner in September
      2009.





·
            In
      July 2009 the jack-up drilling rig West Ceres was
      delivered to a subsidiary of Seadrill pursuant to the exercise of a
      pre-agreed option for a total consideration of approximately $135
      million.





·
            In
      November 2009 the single-hull VLCC Front Vanadis was
      delivered to its charterer, an unrelated third party, pursuant to the
      exercise of a pre-agreed option for a total consideration of approximately
      $12 million..








Since
January 1 2010 we have entered into the following agreements relating to the
disposal of vessels:





·
            In
      February 2010 we sold the VLCC Front Vistato a
      subsidiary of Frontline for an aggregate amount of approximately $59
      million.





·
            In
      March 2010 we agreed to sell the single hull VLCC Golden River to an
      unrelated third party for a total consideration of approximately $13
      million, with delivery to the new owner expected in April
      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:





(1)
            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.





(2)
            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.









26


(3)
            Expand and
      diversify our customer relationships.  Since January 1
      2005 we have increased our customer base from one to ten customers. Of
      these ten customers, Frontline, Golden Ocean, Deep Sea and Seadrill are
      directly or indirectly controlled by trusts established by Mr. John
      Fredriksen for the benefit of his immediate family.  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 2007 and 2008 we made substantial
investments in offshore drilling units which are chartered to the Seadrill
Charterers, and the percentage of our business attributable to the Frontline
Charterers has decreased following the delivery and commencement of the charters
of the drilling units. We anticipate that the percentage of our business
attributable to both the Frontline Charterers and the Seadrill Charterers will
decrease as we continue to expand our business and our customer
base.




Competition





We
currently operate or will operate in several sectors 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.





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.





27





Our
jack-up drilling rig, 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 sectors 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 jack-up drilling rig 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.





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.








28







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 units,
container vessels and offshore supply vessels.  We are subject to
various international conventions, laws and regulations in force in the
countries in which our vessels and drilling units may operate or are registered.
Compliance with such laws, regulations and other requirements entails
significant expense, including vessel and drilling unit modification and
implementation of certain operating procedures.





A variety
of governmental, 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.





The laws
and regulations discussed below may not constitute a comprehensive list of all
such laws and regulations that are applicable to the operation of our vessels
and drilling units.








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 United States, Panama, Hong Kong and the
Isle of Man.








29





International
Maritime Organization





The 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 subject to regulatory requirements imposed by the IMO, including the
phase-out of single-hull tankers. 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.





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:





30





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
            2015Ticen
      Sun
            VLCC
            SH
            1991
            2010
            2015Ticen
      Ocean
            VLCC
            SH
            1991
            2010
            2015Golden
      River (1)
            VLCC
            SH
            1991
            2010
            2015Front
      Sabang (2)
            VLCC
            SH
            1990
            2010
            2015





(1)
            Golden River has been
      sold, with delivery to its new owner expected in April
    2010.


(2)
            Front Sabang has been
      sold on hire-purchase terms, with delivery to its new owner scheduled in
      October 2011.





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






31





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, upon 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.










32





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 MARPOL to address air pollution from
ships.  Effective May 2005, Annex VI sets limits on sulfur oxide and
nitrogen oxide emissions from all commercial vessel exhausts and prohibits
deliberate emissions of ozone depleting substances (such as halons and
chlorofluorocarbons), emissions of volatile organic 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.  Additional or new conventions, laws and regulations may be
adopted that could require the installation of expensive emission control
systems and adversely affect our business, cash flows, results of operations and
financial condition.





In
October 2008, the IMO adopted amendments to Annex VI regarding emissions of
sulfur oxide, nitrogen oxide, particulate matter, and ozone-depleting
substances, which enter into force on July 1 2010.  The amended Annex
VI will reduce air pollution from vessels by, among other things, (i)
implementing a progressive reduction of sulfur oxide emissions from ships, by
reducing the global sulfur fuel cap 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. The
United States ratified the Annex VI amendments in October 2008 and the U.S.
Environmental Protection Agency, or EPA, promulgated equivalent emissions
standards in late 2009.





In March
2010, the IMO accepted the proposal by the United States and Canada to designate
the area extending 200 nautical miles from the Atlantic/Gulf and Pacific coasts
of the United States and Canada and the Hawaiian Islands as Emission Control
Areas under the MARPOL Annex VI amendments, which will subject ocean-going
vessels in these areas to stringent emissions controls and may cause us to incur
additional costs. Even though the proposal was adopted, we cannot assure you
that jurisdictions in which our vessels operate will not adopt more stringent
emissions standards independent of the IMO.





With
effect from January 1 2010, the Directive 2005/33/EC of the European Parliament
and of the Council of July 6 2005 amending Directive 1999/32/EC came into force.
The objective of the directive is to reduce emission of sulfur dioxide from the
combustion of petroleum derived fuels. This shall be achieved by imposing limits
on the sulfur content of such fuels as a condition for their use within a Member
State territory. The maximum sulfur content in fuels to be used by merchant
ships whilst alongside a berth or wharf in EU countries after January 1 2010 is
0.10% by volume. Ships owned by us may be supplied with low sulfur Marine Gas
Oil as replacement for Marine Diesel Oil in the future. Although our vessels
have carried out extensive tests and discharge operations using fuels which meet
the specification of less than 0.10% sulfur, the technical complexity of meeting
the new requirements may require costly modifications in the
future.








33





Safety
Requirements





The IMO
has also adopted SOLAS 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 and LL Convention standards are revised
periodically. We believe that all our vessels are in substantial compliance with
SOLAS and LL Convention standards.





Under
Chapter IX of SOLAS, the requirements contained in the 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. These documents of compliance and safety management certificates are
renewed as required.





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, or EU, authorities have indicated that vessels not in compliance with the
ISM Code by the applicable deadlines will be prohibited from trading in U.S. and
EU ports, as the case may be.





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








Ballast
Water Requirements





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.





34





Oil
Pollution Liability





Although
the United States is not a party, many countries have ratified and follow the
liability plan adopted by the IMO and set out in 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 $6.91 million) plus 631
SDR (or $0.967 million) for each additional gross ton over 5,000. For vessels
over 140,000 gross tons, liability will be limited to 89.77 million SDR ($137.58
million). The exchange rate between SDRs and U.S. Dollars was 0.652493 SDR per
U.S. dollar on February 26 2010. As the convention calculates liability in terms
of a basket of currencies, these figures are based on currency exchange rates on
February 26 2010. 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.





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.








United
States 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;


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


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









35





Effective
July 31 2009, the U.S. Coast Guard adjusted the limits of OPA liability to the
greater of $2,000 per gross ton or $17.088 million for any double-hull tanker
that is over 3,000 gross tons (subject to possible adjustment for inflation),
and the greater of $3,200 per gross ton or $23.496 million for any single-hull
tanker that is over 3,000 gross tons (subject to possible adjustment for
inflation). CERCLA, which applies to owners and operators of vessels, contains a
similar liability regime and provides for cleanup, removal and natural resource
damages. Liability under CERCLA is limited to the greater of $300 per gross ton
or $5 million for vessels carrying a hazardous substance as cargo, and the
greater of $300 per gross ton or $0.5 million for any other vessel. These OPA and CERCLA
limits of liability do not apply if an incident is directly caused by violation
of applicable U.S. federal safety, construction or operating regulations or by a
responsible party's gross negligence or willful misconduct, or if a responsible
party fails or refuses to report the incident or to cooperate and assist in
connection with oil removal activities.





OPA and
the U.S. Coast Guard also require 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 liability under OPA and CERCLA.
Vessel owners and operators may satisfy their financial responsibility
obligations by providing a proof of insurance, a surety bond, self-insurance or
a guaranty. We plan to comply with the U.S. Coast Guard's financial
responsibility regulations by providing a certificate of responsibility
evidencing self-insurance.





We expect
to maintain pollution liability insurance coverage in the amount of $1.0 billion
per incident for each of our vessels. If the damages from a catastrophic spill
were to exceed our insurance coverage, it could have a material adverse effect
on our business, financial condition, results of operations and cash
flows.





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
any unauthorized discharges.  The CWA also imposes substantial
liability for the costs of removal and 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.








36







The EPA
regulates the discharge of ballast water and other substances in U.S. waters
under the CWA.  Effective February 6 2009, EPA regulations require
vessels 79 feet in length or longer (other than commercial fishing vessels and
recreational vessels) to comply with a Vessel General Permit authorizing ballast
water discharges and other discharges incidental to the operation of
vessels.  The Vessel General Permit imposes technology and
water-quality based effluent limits for certain types of discharges and
establishes specific inspection, monitoring, recordkeeping and reporting
requirements to ensure the effluent limits are met. U.S. Coast Guard regulations
adopted under the U.S. National Invasive Species Act, or NISA, also impose
mandatory ballast water management practices for all vessels equipped with
ballast water tanks entering or operating in U.S. waters, and in 2009 the Coast
Guard proposed new ballast water management standards and practices, including
limits regarding ballast water releases.  Compliance with the EPA and
the U.S. Coast Guard regulations 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.





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.





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 Regulations




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





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





37





Greenhouse
Gas Regulation





In
February 2005, the Kyoto Protocol to the United Nations Framework Convention on
Climate Change, or UNFCCC, 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, international
negotiations are continuing with respect to a successor to the Kyoto Protocol,
which sets emission reduction targets through 2012, and restrictions on shipping
emissions may be included in any new treaty. In December 2009, more than 27
nations, including the U.S. and China, signed the Copenhagen Accord, which
includes a non-binding commitment to reduce greenhouse gas emissions. The EU has
indicated that it intends to propose an expansion of the existing EU emissions
trading scheme to include emissions of greenhouse gases from vessels, if such
emissions are not regulated through the IMO or the UNFCCC by December 31
2010.  In the U.S., the EPA has issued a final finding that greenhouse
gases threaten public health and safety, and has promulgated regulations,
expected to be finalized in March 2010, regulating the emission of greenhouse
gases from motor vehicles and stationary sources.  The EPA may decide
in the future to regulate greenhouse gas emissions from ships and has already
been petitioned by the California Attorney General to regulate greenhouse gas
emissions from ocean-going vessels. Other federal and state regulations relating
to the control of greenhouse gas emissions may follow, including the climate
change initiatives that are being considered in the U.S. Congress.  In
addition, the IMO is evaluating various mandatory measures to reduce greenhouse
gas emissions from international shipping, including market-based instruments.
Any passage of climate control legislation or other regulatory initiatives by
the EU, U.S., IMO or other countries where we operate that restrict emissions of
greenhouse gases could require us to make significant financial expenditures
which 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,
or 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;





·
            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;








38





·
            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.






39





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.





Vessels
less than 15 years of age are drydocked every 60 months while older vessels are
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 26 2010.





Vessel
            Approximate
            Construction
            
            Charter
            Charter TerminationBuilt
            Dwt.
            Flag
            Classification
            DateVLCCsFront
      Sabang
            1990
            286,000
            Single-hull
            SG
            Capital
      lease
            2011
      (5)Ticen
      Sun (ex Front Highness)
            1991
            284,000
            Single-hull
            PAN
            Capital
      lease
            2015
      (1)Ticen
      Ocean (ex Front Lady)
            1991
            284,000
            Single-hull
            PAN
            Capital
      lease
            2015
      (1)Golden
      River (ex Front Lord)
            1991
            284,000
            Single-hull
            SG
            Capital
      lease
            2010
      (6)Front
      Duke
            1992
            284,000
            Single-hull
            SG
            Capital
      lease
            2014
      (1)Front
      Ace
            1993
            276,000
            Single-hull
            LIB
            Capital
      lease
            2014
      (1)Edinburgh
            1993
            302,000
            Double-side
            LIB
            Capital
      lease
            2013
      (1)Front
      Century
            1998
            311,000
            Double-hull
            MI
            Capital
      lease
            2021Front
      Champion
            1998
            311,000
            Double-hull
            BA
            Capital
      lease
            2022Front
      Vanguard
            1998
            300,000
            Double-hull
            MI
            Capital
      lease
            2021Front
      Circassia
            1999
            306,000
            Double-hull
            MI
            Capital
      lease
            2021Front
      Opalia
            1999
            302,000
            Double-hull
            MI
            Capital
      lease
            2022Front
      Comanche
            1999
            300,000
            Double-hull
            FRA
            Capital
      lease
            2022Golden
      Victory
            1999
            300,000
            Double-hull
            MI
            Capital
      lease
            2022Ocana
      (ex Front Commerce)
            1999
            300,000
            Double-hull
            IoM
            Capital
      lease
            2022Front
      Scilla
            2000
            303,000
            Double-hull
            MI
            Capital
      lease
            2023Oliva
      (ex Ariake)
            2001
            299,000
            Double-hull
            IoM
            Capital
      lease
            2023Front
      Serenade
            2002
            299,000
            Double-hull
            LIB
            Capital
      lease
            2024Otina
      (ex Hakata)
            2002
            298,465
            Double-hull
            IoM
            Capital
      lease
            2025Ondina
      (ex Front Stratus)
            2002
            299,000
            Double-hull
            IoM
            Capital
      lease
            2025Front
      Falcon
            2002
            309,000
            Double-hull
            BA
            Capital
      lease
            2025Front
      Page
            2002
            299,000
            Double-hull
            LIB
            Capital
      lease
            2025Front
      Energy
            2004
            305,000
            Double-hull
            CYP
            Capital
      lease
            2027Onoba
      (ex Front Force)
            2004
            305,000
            Double-hull
            CYP
            Capital
      lease
            2027SuezmaxesFront
      Pride
            1993
            150,000
            Double-hull
            NIS
            Capital
      lease
            2017Front
      Glory
            1995
            150,000
            Double-hull
            NIS
            Capital
      lease
            2018Front
      Splendour
            1995
            150,000
            Double-hull
            NIS
            Capital
      lease
            2019Front
      Ardenne
            1997
            153,000
            Double-hull
            NIS
            Capital
      lease
            2020Front
      Brabant
            1998
            153,000
            Double-hull
            NIS
            Capital
      lease
            2021Mindanao
            1998
            159,000
            Double-hull
            SG
            Capital
      lease
            2021Glorycrown
            2009
            156,000
            Double-hull
            HK
            Capital
      lease
            2014
      (2)Everbright
            2010
            156,000
            Double-hull
            HK
            Capital
      lease
            2015
      (2)   40
   Chemical 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
            Capital
      lease
            2015Front
      Climber
            1991
            169,000
            Double-hull
            SG
            Capital
      lease
            2015Front
      Driver
            1991
            169,000
            Double-hull
            MI
            Capital
      lease
            2015Front
      Guider
            1991
            169,000
            Double-hull
            SG
            Capital
      lease
            2015Front
      Leader
            1991
            169,000
            Double-hull
            SG
            Capital
      lease
            2015Front
      Rider
            1992
            170,000
            Double-hull
            SG
            Capital
      lease
            2015Front
      Striver
            1992
            169,000
            Double-hull
            SG
            Capital
      lease
            2015Front
      Viewer
            1992
            169,000
            Double-hull
            SG
            Capital
      lease
            2015Panamax Drybulk CarrierGolden
      Shadow
            1997
            73,732
            n/a
            HK
            Capital
      lease
            2016
      (2)Handysize Drybulk
      CarrierTBN/SFL
      Clyde (NB)
            2011
            32,000
            n/a
            HK
            n/a
            n/aTBN/SFL
      Dee (NB)
            2012
            32,000
            n/a
            HK
            n/a
            n/aTBN/SFL
      Trent (NB)
            2012
            34,000
            n/a
            HK
            n/a
            n/aTBN/SFL
      Kent (NB)
            2012
            34,000
            n/a
            HK
            n/a
            n/aTBN/SFL
      Tyne (NB)
            2012
            32,000
            n/a
            HK
            n/a
            n/aTBN/SFL
      Spey (NB)
            2011
            34,000
            n/a
            HK
            n/a
            n/aTBN/SFL
      Medway (NB)
            2011
            34,000
            n/a
            HK
            n/a
            n/aContainershipsSFL
      Europa (ex Montemar Europa)
            2003
            1,700
      TEU
            n/a
            MI
            Operating
      lease
            2010Asian
      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/aJack-Up Drilling RigWest
      Prospero
            2007
            400
      ft
            n/a
            PAN
            Capital
      lease
            2022
      (2)Ultra-Deepwater Drill UnitsWest
      Polaris
            2008
            10,000
      ft
            n/a
            PAN
            Capital
      lease
            2023
      (2)West
      Hercules
            2008
            10,000
      ft
            n/a
            PAN
            Capital
      lease
            2023
      (2)West
      Taurus
            2008
            10,000
      ft
            n/a
            PAN
            Capital
      lease
            2023
      (2)Offshore supply vesselsSea
      Leopard
            1998
            AHTS
      (3)
            n/a
            CYP
            Capital
      lease
            2020
      (2)Sea
      Bear
            1999
            AHTS
      (3)
            n/a
            CYP
            Capital
      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)





NB –
Newbuilding




41





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. - United States of
America.








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




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




(3)
            Anchor
      handling tug supply vessel (AHTS).




(4)
            Platform
      supply vessel (PSV).




(5)
            Front Sabang has been
      sold on hire-purchase terms, whereby the vessel is chartered to the buyer
      until October 2011 with a purchase obligation at the end of the charter.
      The buyer also has purchase options during the term of the
      charter.




(6)
            Golden River has been
      sold, with delivery to its new owner expected in April
    2010.







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.







42





Fleet
Development





The
following table summarizes the development of our active fleet of
vessels.





Vessel
      type
            Total
      fleet
            Additions/
              Disposals
              2008
            Total
      fleet
            Additions/
              disposals
      2009
            Total
      fleetDecember
      31
            December
      31
            December
      312007
            2008
            2009Oil
      Tankers
            34
            
            -1
            33
            +1
            -2
            32Chemical
      tankers
            0
            +2
            
            2
            
            
            2OBO
      / Dry bulk carriers
            9
            
            
            9
            
            
            9Container
      vessels
            8
            
            
            8
            
            
            8Jack-up
      drilling rigs
            2
            
            
            2
            
            -1
            1Ultra-deepwater
      drill units
            0
            +3
            
            3
            
            
            3Offshore
      supply vessels
            5
            +2
            -1
            6
            
            
            6Total
      Active Fleet
            58
            +7
            -2
            63
            +1
            -3
            61








The
following deliveries have taken place or are scheduled to take place after
December 31 2009:





·
            the
      VLCC Front Vista
      was sold in February 2010;





·
            the
      sale of the single hull VLCC Golden River was agreed
      in March 2010, with delivery to its new owner scheduled in April 2010;





·
            the
      newbuilding Suezmax tanker Everbright was
      delivered to us in March 2010, and commenced a five year bareboat charter
      with a purchase obligation at the end of the charter in
    2015;





·
            the
      VLCC Front Sabang
      and the Suezmax Glorycrown are
      scheduled for delivery to their new owners in 2011 and 2014,
      respectively;





·
            one
      newbuilding container vessel is scheduled for delivery to us in 2010;
      and





·
            seven
      newbuilding Handysize drybulk carriers are scheduled for delivery to us in
      2011 and 2012.







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, the Seadrill 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.








43





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 sales-type leases.





Direct
financing and sales-type lease interest income reduces over the terms of our
leases as progressively a lesser proportion of the lease rental payment is
allocated as lease interest income, and a higher amount is treated as repayment
of the 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.





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.  These subsidiaries each pay
Frontline Management a fixed fee of $6,500 per day per vessel for all of the
above services. Three of our vessels on charter to the Frontline Charterers are
currently sub-chartered on bareboat terms, under which the charterer is
responsible for all vessel management and operating costs. During the period of
the sub-charters, the fixed fee of $6,500 per day per vessel payable to
Frontline Management is suspended.





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.







44





We have
entered into an administrative services agreement with Frontline Management
under which they provide us with certain administrative support
services.  For the year 2009 we paid Frontline Management a total of
$0.4 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.
Accordingly, our financial results may be affected by fluctuations in interest
rates.








Critical
Accounting Policies and Estimates





The
preparation of our consolidated financial statements in accordance with US GAAP
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.








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 capital lease (see Leases below). Rental
receipts from operating leases are recognized to income over the period to which
the payment relates.





Rental
payments from direct financing and sales-type leases are allocated between lease
service revenues, if applicable, lease interest income and repayment of net
investment in leases. The amount allocated to 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 lease interest income element is calculated so
as to provide a constant rate of return on the net investment in the 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 capital leases. Global effects
of supply and demand for oil and other cargoes, 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.






45





We
estimate the unguaranteed residual value of our direct financing lease assets at
the end of the lease period by calculating depreciation in accordance with our
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. In the second quarter of 2009 the Company reviewed
the carrying values of its six single-hull oil tankers, excluding the Front Sabang which has been
sold on hire-purchase terms, and concluded that their values were impaired.
Accordingly, the unguaranteed residual values of these six vessels were reduced
by a total of $27 million in 2009.  This impairment was principally
the result of regulations which limit the ability of single-hull tankers to
operate with effect from each of their anniversary dates in 2010. The Company
has not changed its original estimates of residual values for any other assets,
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 direct financing leases is
derived according to ASC Topic 840 "Leases" 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.





For
sales-type leases, the present value of the contractual lease payments
(discounted to equal the fair value or sales price)  is recorded as
the sales proceeds, from which the carrying value of the asset is deducted in
order to determine the profit or loss on sale. The discount rate used in
determining the present value is the interest rate implicit in the lease, as
defined in ASC Topic 840-10-20.





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 or estimated residual value of a particular
vessel is incorrect, or circumstances change and the estimated economic useful
life and/or residual value have to be revised, an impairment loss could result
in future periods. During 2009 it was determined that the carrying values of six
single-hull oil tankers, all direct financing lease assets, were impaired and
their residual values were reduced by a total of $27 million (see above). We
will continue to monitor the carrying values of our vessels, including direct
financing lease assets, and revise the estimated useful lives and residual
values of any vessels were appropriate, particularly when new regulations are
implemented.








Leases





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





46





For
direct financing leases, the difference between the gross investment in the
lease and the carrying value of the vessel is recorded as unearned lease
interest income. The net investment in the lease consists of the gross
investment less the unearned income. Over the period of the lease each charter
payment received, net of vessel operating costs if applicable, is allocated
between "lease interest income" and "repayment of investment in lease" in such a
way as to produce a constant percentage rate of return on the balance of the net
investment in the lease. Thus, as the balance of the net investment in each
direct financing lease decreases, less of each lease payment received is
allocated to lease interest income and more is allocated to lease repayment. For
direct financing leases relating to time chartered vessels, the portion of each
time charter payment received that is allocated to vessel operating costs is
classified as "lease service revenue".





For
sales-type leases, 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 lease interest income. The discount rate used in
determining the present values (or fair value) is the interest rate implicit in
the lease. The present value of the minimum lease payments, computed using the
interest rate implicit in the lease, is recorded as the sales price, from which
the carrying value of the vessel at the commencement of the lease is deducted in
order to determine the profit or loss on sale. As is the case for direct
financing leases, the unearned lease interest income is amortized to income over
the period of the lease so as to produce a constant periodic rate of return on
the net investment in the lease. In addition, in the case of a sales-type lease,
the difference between the fair value (or sales price) and the carrying value
(or cost) of the asset is recognized as "profit on sale" in the period in which
the lease commences.





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 direct financing or sales-type lease relates to a charter arrangement
containing fixed price purchase options, the projected carrying value of the net
investment in the 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
lease at an option date, the rate of amortization of unearned finance lease
interest income is adjusted to reduce the net investment in the lease 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 lease to the un-guaranteed
residual value or the option price at the next option date, as
appropriate.






47





Thus, for
operating assets and direct financing and sales-type 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 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.





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 ASC Topic 815 "Derivatives and Hedging", 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, we seek 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. ASC Topic 810 "Consolidation" ("ASC 810")
requires a variable interest entity to be consolidated if any of its interest
holders has the power to direct the activities which most significantly impact
on the VIE's economic success, and the obligation to absorb losses or the right
to receive benefits which are significant to the VIE.




In
applying the provisions of ASC 810, we must make assessments in respect of, but
not limited to, the sufficiency of the equity investment in the underlying
entity and the extent to which interest holders have the power to direct
activities. These assessments include assumptions about the future revenues,
operating costs,  fair value of assets and estimated economic useful
lives of assets of the underlying entity.






48





Recent
accounting pronouncements





In
September 2006, the Financial Accounting Standards Board, or FASB, issued FAS
No. 157 "Fair Value
Measurements" ("FAS 157": now ASC Topic 820 "Fair Value Measurement and
Disclosures"), which establishes a framework for measuring fair value in
accordance with Generally Accepted Accounting Principles, or GAAP, and expands
disclosures about fair value measurements. This statement was effective for
financial assets and liabilities as well as for any other assets and liabilities
that are carried at fair value on a recurring basis in financial statements as
of the beginning of the entity's first fiscal year that begins after November
15, 2007.  In February 2008 the FASB issued Staff Position No.157-2
"Effective Date of FASB
Statement No.157" ("FSP 157-2") which defers the effective date of FAS
157 for one year relative to certain non-financial 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 relating to
non-financial assets and liabilities became effective for the Company with
effect from January 1, 2009 and did not have a material impact on its
consolidated results of operations or financial condition.





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": now ASC Topic 815 "Derivatives and Hedging").
FAS 161 applies to all derivative instruments and related hedged items accounted
for under ASC 815 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 ASC 815 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 did not have a material impact on the Company's consolidated
financial position, results of operations, and cash flows.





In
May 2009, the FASB issued guidance on accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. The guidance, which is outlined in ASC
Topic 855 "Subsequent
Events" and updated in Accounting Standards Update 2010-09 "Subsequent
Events (Topic 855)", establishes the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements, the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements,
and the disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. The adoption of these changes did not
have an impact on our consolidated financial statements because the Company
already followed a similar approach prior to the adoption of this
guidance.





In June
2009, the FASB issued ASC Topic 105 "The Codification and the Hierarchy
of Generally Accepted Accounting Principles" ("ASC 105").  The
guidance stipulates the Codification as the single source of authoritative
nongovernmental U.S. GAAP.  The statement is effective for interim and
annual periods ending after September 15, 2009.  The Company has
updated its references to GAAP in its consolidated financial statements for the
year ended December 31, 2009.  As the Codification was not intended to
change or alter existing GAAP, it did not have any impact on the Company's
consolidated financial statements.





In June
2009, the FASB issued FAS No. 167 "Amendments to FASB Interpretation
No. 46(R)" ("FAS 167": now ASC Topic 810 "Consolidation"). FAS 167
amends the evaluation criteria to identify the primary beneficiary of a variable
interest entity provided by FASB Interpretation No.
46(R).  Additionally, FAS 167 requires ongoing reassessments of
whether an enterprise is the primary beneficiary of the variable interest entity
and additional disclosures. The Company will adopt FAS 167 in fiscal year 2010
and does not expect it to have any material impact on its consolidated financial
position, results of operations, and cash flows.











49





Market
Overview








The
Oil Tanker Market





The oil
tanker market entered 2009 on a strong note despite the overall very weak global
economy and decreasing oil consumption. According to industry sources, the
average VLCC rate for the first quarter of 2009 was $55,400 per day but rates
gradually weakened during the year due to high deliveries of new tonnage and
overall weak oil demand. Overall for 2009 the average VLCC TCE rate was $36,500
per day, a reduction from an average of $73,400 per day in 2008, with similar
reductions in time charter rates for Suezmax tankers.





According
to industry sources, the total VLCC fleet increased by about approximately 8 %
during 2009, measured by number of vessels. The total orderbook for VLCCs at the
end of 2009 consisted of 178 vessels, representing approximately 34 % of the
existing fleet. The total Suezmax fleet increased by approximately 13% in 2009,
and the orderbook at the end of 2009 was also high.





According
to industry sources, global oil demand decreased by 1.5% in 2009 and ton-miles
subsequently dropped by about 4.3%. However, the prevailing "contango" in the
oil markets, especially during the first half of the year, assisted the tanker
market to a significant extent with up to 45-50 VLCCs being utilized principally
for storage of oil.





The trend
continued for the major oil companies to discriminate against non-double hull
tankers when transporting crude oil and refined oil products. An increasing
number of port and flag-states also announced their reluctance to accept such
vessels, leaving only a few areas in South East Asia where single-hull tankers
are allowed to trade. According to industry sources, by the end of 2009 there
were still some 84 single-hull VLCCs and 33 single-hull Suezmaxes, or some 16%
and 8% respectively of the entire fleet. Scrapping of these vessels is expected
to accelerate during 2010, which will cushion the market from the negative
impact of the influx of new tonnage.





The
Drybulk Shipping Market





The
drybulk shipping market experienced yet another turbulent year in 2009, and the
year began on a highly depressed note. However, driven by a seemingly insatiable
demand for iron ore in China, the drybulk shipping market experienced a much
stronger-than-expected year in 2009, with average spot rates for a Capesize
bulker of $42,650 per day. Although this represents a 60% decline on the average
rates for 2008, this is still relatively high on a historical basis. The
unexpectedly strong market was also driven by significant short-falls in
expected deliveries of newbuildings, with actual deliveries some 40% below
consensus expectations. Overall, the utilization of the world-wide drybulk fleet
from the second quarter onwards exceeded 90%.





According
to industry sources, by the end of 2009 the total order-book for the delivery of
newbuilding drybulk carriers in the coming years amounted to 255 million dwt, or
some 55% of the current fleet in capacity terms. This is a sharp decline from
the level of 70% at the end of 2008.  There continues to be
considerable doubt surrounding the extent to which cancellations can be expected
from the current order-book for drybulk carriers, and this, together with the
pace of development of China's economy, will be a highly significant factor for
the short to medium term development of the drybulk market.








50





The
Containership Market





As was
anticipated, the container market was extremely weak in 2009, especially for the
first three quarters, with charter-rates for all sizes well below operating
costs and with the idle fleet peaking at 13-14 % of the global fleet during
September and October 2009. The global volumes for 2009 as a whole were some 7-9
% lower than volumes during 2008, which is the first time in the history of
container shipping that the market has experienced declining volumes. The
inevitable consequences of this very severe downturn were serious financial
problems for most of the larger container ship operators, who in some cases had
to seek help from their banks, shareholders or respective governments.
Surprisingly, the industry succeeded in avoiding major bankruptcies, probably as
a consequence of the high exit-costs for the banks involved, and also due to
strong improvements in box-rates and cash-flows in the second half of 2009. The
major challenge going forward for operators and owners is the substantial level
of capital commitments for newbuilding containerships ordered at peak levels
during 2007 and 2008.





Towards
the end of 2009, year-on-year volumes began to grow and box-rates, especially
for Far East-Europe, started to increase fairly substantially. Also the idle
fleet gradually declined and by the year end amounted to approximately 11 % of
the global fleet, split fairly evenly between operators and tonnage providers.





Virtually
no newbuilding orders for container vessels were placed during 2009 and, with
approximately 400,000 TEU of capacity scrapped during 2009 and some orders
cancelled or converted, the order-book as a percentage of the existing fleet
decreased from 48-49 % at the end of 2008 to 36-37% at the end of 2009. This is
the lowest level for six years, although it should be seen in the context of the
current idle fleet.







The
Offshore Market





The
increase in oil and gas prices to record levels in 2008 created a world-wide
increase in offshore exploration drilling activity, prompting a significant
increase in dayrates for drilling units and high levels of orders for
newbuilding jack-up rigs and ultra-deepwater drilling units. The subsequent
reduction in oil prices from a high of approximately $140 per barrel in 2008 to
a low of $40 per barrel in February 2009 adversely affected the market for
jack-up rigs in 2009, as these are generally associated with existing oil fields
which are not particularly attractive development prospects at relatively low
oil prices. There are significant numbers of newbuilding jack-up rigs on order,
but many rigs in the existing fleet are more than twenty years old and we expect
operators to gradually replace older rigs with newer and more efficient rigs,
such as the one we own. The oil price recovered to around $80 per barrel towards
the end of 2009.





The
ultra-deepwater market has so far not been affected by recent oil price
fluctuations due to the limited supply of such rigs in the short term. The more
favorable outlook for ultra-deepwater units is also supported by most oil
companies' strong 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. Looking at the demand/supply balance for deepwater units,
there was little available capacity in 2009 and 2010 for both drillships and
semi-submersible drilling rigs, and consequently the market for individual
ultra-deepwater units was strong in 2009, and is expected to continue to be
attractive in the near term.






51





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 jack-up
drilling rig and most of our tankers and OBOs are subject to profit sharing
agreements and to the extent that seasonal factors affect the profits of the
charterers of these vessels we will also be affected. However, profit sharing is
calculated annually and the effects of seasonality will be limited to the timing
of our profit sharing revenues.








Inflation





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








Results
of Operations





Year
ended December 31 2009 compared with the year ended December 31
2008





Net
income for the year ended December 31 2009 was $192.6 million, an increase of 6%
from the year ended December 31 2008.





(in thousands of
      $)
            
            2009
            
            
            2008Total
      operating revenues
            
            
            345,220
            
            
            
            457,805Gain
      on sale of assets
            
            
            24,721
            
            
            
            17,377Total
      operating expenses
            
            
            (160,677
            )
            
            
            (137,780
            )Net
      operating income
            
            
            209,264
            
            
            
            337,402Interest
      income
            
            
            240
            
            
            
            3,478Interest
      expense
            
            
            (117,075
            )
            
            
            (127,192
            )Other
      financial items (net)
            
            
            24,540
            
            
            
            (54,876
            )Equity
      in earnings of associated companies
            
            
            75,629
            
            
            
            22,799Net
      income
            
            
            192,598
            
            
            
            181,611





The
reduction in net operating income, caused mainly by a reduction in
profit-sharing revenue, asset impairment charges and lower lease revenues, was
more than offset by increased equity in earnings of associated companies and a
net gain on other financial items.





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. The
operating revenues of these subsidiaries are included under "equity in earnings
of associated companies", where they are reported net of operating and
non-operating expenses.







52





Operating
revenues





(in thousands of
      $)
            
            2009
            
            
            2008Direct
      financing and sales-type lease interest income
            
            
            151,368
            
            
            
            178,622Finance
      lease service revenues
            
            
            88,953
            
            
            
            93,553Profit
      sharing revenues
            
            
            33,018
            
            
            
            110,962Time
      charter revenues
            
            
            2,836
            
            
            
            18,646Bareboat
      charter revenues
            
            
            68,854
            
            
            
            55,794Other
      operating income
            
            
            191
            
            
            
            228Total
      operating revenues
            
            
            345,220
            
            
            
            457,805





Total
operating revenues decreased 25% in the year ended December 31 2009 compared
with 2008.





In
general, direct financing and sales-type lease interest income reduces over the
terms of our leases, as progressively a lesser proportion of the lease rental
payment is allocated to interest income and a higher amount is treated as
repayment of the lease. This effect and the disposal in 2009 of one jack-up
drilling rig and two oil tankers have resulted in a reduction in our total lease
interest income compared to 2008, although the decrease is slightly mitigated by
the delivery in November 2009 of an oil tanker, which is accounted for as a
sales-type lease.





The
reduction in finance lease service revenue mainly reflects the position on two
tankers chartered to the Frontline Charterers, for which the underlying
time-charter rates are reduced by $6,500 per day while they are sub-chartered on
a bareboat basis. Also, in 2008 a tanker was re-chartered to a third-party on
bareboat terms and in 2009 a tanker was sold.





Profit
sharing revenues decreased owing to the much lower average charter rates earned
by Frontline from our vessels in 2009 compared to 2008.





During
2008 we had three 1,700 TEU container vessels employed on time charters
accounted for as operating leases. In the first quarter of 2009, the charters
for two of these vessels were converted to bareboat charters, resulting in a
significant reduction in time charter revenues. There was also a reduction
during 2009 in the daily charter rate on our remaining time-chartered container
vessel.





Bareboat
charter revenues arise from our vessels which are leased under operating leases
on a bareboat basis. These revenues have increased principally due to the
conversion to bareboat charters of two container vessels in 2009, and the
addition of two chemical tankers under bareboat charters in
2008.








Cash
flows arising from direct financing and sales-type leases





The
following table analyzes our cash flows from the direct financing and sales-type
leases with the Frontline Charterers, Seadrill Invest I Limited, or Seadrill
Invest I, Seadrill Invest II, Deep Sea, TMT and NCS during 2009 and 2008, and
shows how they are accounted for:





(in
      thousands of $)
            
            2009
            
            
            2008Charterhire
      payments accounted for as:Direct
      financing and sales-type lease interest income
            
            
            151,368
            
            
            
            178,622Finance
      lease service revenues
            
            
            88,953
            
            
            
            93,553Direct
      financing and sales-type lease repayments
            
            
            209,368
            
            
            
            210,348Total
      direct financing and sales-type  lease payments
      received
            
            
            449,689
            
            
            
            482,523





53





Tankers
and OBOs chartered to the Frontline Charterers are leased on time charter terms,
where we are responsible for the management and operation of such 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". If any of the vessels chartered to the Frontline Charterers is
sub-chartered on a bareboat basis, then the charter payments for that vessel are
reduced by $6,500 per day for the duration of the bareboat
sub-charter.








Gain
on sale of assets





Gains
were recorded in the year ended December 31 2009 on the disposal of the VLCC
Front Duchess and the
newbuilding Suezmax tanker Glorycrown, the latter
accounting for most of the gain when it was sold under a sales-type lease
arrangement immediately upon its delivery from the shipyard. In 2008 two vessels
were disposed of and one was sold under a sales-type lease
arrangement.





Operating
expenses





(in thousands of
      $)
            
            2009
            
            
            2008Ship
      operating expenses
            
            
            91,494
            
            
            
            99,906Depreciation
            
            
            30,236
            
            
            
            28,038Vessel
      impairment charge
            
            
            26,756
            
            
            
            -Administrative
      expenses
            
            
            12,191
            
            
            
            9,836160,677
            
            
            
            137,780





Ship
operating expenses 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. However, no operating expenses
are paid to Frontline Management in respect of any vessel which is sub-chartered
on a bareboat basis. Ship operating expenses also include operating expenses for
the container vessels operated on a time-charter basis and managed by unrelated
third parties.





Ship operating expenses
decreased by 8% from 2008 to 2009, primarily as a result oftwo of the
tankers leased to the Frontline Charterers being sub-chartered on a bareboat
basis, and amendments to the charters for two container vessels leased to
Heung-A from a time-charter basis to a bareboat basis. Also, during 2008 a
tanker was re-chartered from the Frontline Charterers to a third-party on
bareboat terms and in 2009 a tanker was sold.





Depreciation
expenses relate to the vessels on charters accounted for as operating leases.
The increase from 2008 to 2009 is primarily due to the delivery in 2008 of two
chemical tankers.





The
marked downturn in charter rates for oil tankers which occurred in 2009 prompted
a review of the carrying values of our assets, and in the second quarter of 2009
impairment charges totaling $26.8 million were taken against the values of six
of our single-hull VLCCs. These vessels are subject to IMO regulations which
restrict their ability to operate from 2010 onwards, and the Frontline
Charterers have the option to terminate the charters on each of these vessels on
its anniversary date in 2010.  Our only other single-hull VLCC, Front Sabang, has been sold
on hire-purchase terms with delivery to the new owner in 2011.






54





The
increase in administrative expenses from 2008 to 2009 is primarily due to the
establishment of our Singapore office in September 2008, pre-agreed compensation
payable to our former Chief Executive Officer who resigned in July 2009, and
professional fees associated with the increase in issued share capital in
2009.








Interest
income





Interest
income decreased substantially in 2009, mainly as a result of a decline in
short-term LIBOR interest rates from an average of 2.93% in 2008 to 0.69% in
2009. We also had significantly lower cash balances in 2009 compared with
2008.








Interest
expense





(in
      thousands of $)
            
            2009
            
            
            2008
            
            
            Change
      (%)Interest
      on floating rate loans
            
            
            43,196
            
            
            
            81,042
            
            
            
            (47
            %)Interest
      on 8.5% Senior Notes
            
            
            31,322
            
            
            
            38,172
            
            
            
            (18
            %)Swap
      interest
            
            
            21,120
            
            
            
            823
            
            
            
            n/aOther
      interest
            
            
            15,930
            
            
            
            3,378
            
            
            
            372
            %Amortization
      of deferred charges
            
            
            5,507
            
            
            
            3,777
            
            
            
            46
            %117,075
            
            
            
            127,192
            
            
            
            (8
            %)





At
December 31 2009 the Company and its consolidated subsidiaries had total debt
outstanding of $2.1 billion (2008: $2.6 billion) comprised of $301 million net
outstanding principal amount of 8.5% senior notes (2008: $449 million), $1.7
billion under floating rate secured long term credit facilities (2008: $2.0
billion), $90 million of unsecured fixed rate long-term debt (2008: $115
million) and $27 million of unsecured floating rate short-term debt (2008:
$nil). The average three-month US$ LIBOR rate was 0.69% in 2009 and 2.93% in
2008. The overall decrease in interest expense is due to the decrease in
interest-bearing debt and interest rates from 2008 to 2009, largely offset by
increased swap and other interest payable.





The
increase in other interest payable is due to the borrowings of unsecured fixed
rate long-term debt in November 2008 and unsecured floating rate short-term debt
in March 2009.





At
December 31 2009 the Company and its consolidated subsidiaries were party to
interest rate swap contracts which effectively fix our interest rate on $1.1
billion of floating rate debt at a weighted average rate of 3.92% per annum
(2008: $1.2 billion of floating rate debt fixed at a weighted average rate of
3.95% per annum).





Amortization
of deferred charges increased by 46% in 2009 to $5.5 million, as a result of the
early repayment of certain loans and new financing facilities established during
2008 and 2009.





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.








Other
financial items





Other
financial items amounted to a net gain of $25 million in 2009, compared to a net
cost of $55 million in 2008. The net cost in 2008 consisted predominantly of
adverse mark-to-market valuation changes on financial instruments, including
interest rate swap contracts, bond swaps and equity swaps. In 2009 there were
favorable mark-to-market valuation changes on financial instruments totaling $13
million, and an extraordinary gain of $21 million on the purchase at a discount
of  8.5% Senior Notes with a principal value of $148 million. Partly
offsetting these gains in 2009 were an impairment charge of $7 million on the
long-term investment in SeaChange Maritime LLC and $2 million of other costs,
mainly bank and loan commitment fees. The impairment charge on the investment in
SeaChange Maritime LLC reflects impairment charges taken by them, associated
with a decline in the value of their container
vessels.






55





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 three associated
companies increased substantially from $23 million in 2008 to $76 million in
2009, due to 2009 being the first full year of operations for the two new
entities.




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





Net
income for the year ended December 31 2008 was $181.6 million, an increase of 8%
from the year ended December 31 2007.





(in thousands of
      $)
            
            2008
            
            
            2007Total
      operating revenues
            
            
            457,805
            
            
            
            398,003Gain
      on sale of assets
            
            
            17,377
            
            
            
            41,669Total
      operating expenses
            
            
            (137,780
            )
            
            
            (134,791
            )Net
      operating income
            
            
            337,402
            
            
            
            304,881Interest
      income
            
            
            3,478
            
            
            
            6,781Interest
      expense
            
            
            (127,192
            )
            
            
            (130,401
            )Other
      financial items (net)
            
            
            (54,876
            )
            
            
            (14,477
            )Equity
      in earnings of associated companies
            
            
            22,799
            
            
            
            923Net
      income
            
            
            181,611
            
            
            
            167,707





The
increases in net operating income, primarily due to an increase in
profit-sharing revenue, and equity in earnings of associated companies, were
partly offset by the increased cost of other financial items.







Operating
revenues





(in thousands of
      $)
            
            2008
            
            
            2007Direct
      financing and sales-type lease interest income
            
            
            178,622
            
            
            
            186,680Finance
      lease service revenues
            
            
            93,553
            
            
            
            102,070Profit
      sharing revenues
            
            
            110,962
            
            
            
            52,527Time
      charter revenues
            
            
            18,646
            
            
            
            22,886Bareboat
      charter revenues
            
            
            55,794
            
            
            
            32,005Other
      operating income
            
            
            228
            
            
            
            1,835Total
      operating revenues
            
            
            457,805
            
            
            
            398,003






56





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





Direct
financing and sales-type lease interest income decreased from 2007 to 2008, as a
result of sales of crude oil tankers in 2008 (one) and 2007 (seven) and the
progressive reduction inherent in accounting for such leases. The decrease was
mitigated by the acquisition in 2008 of two offshore supply vessels accounted
for as direct financing 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 sales-type leases.





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. The subsequent payment of these
amounts to the Frontline Charterers was accounted for as deemed dividends paid,
with the corresponding charter revenues received from them accounted for as
deemed dividends received.





Time
charter revenues have declined as each of these pre-existing charter
arrangements and cross-over voyages were completed, after which income from the
vessels has been accounted for as direct financing lease interest income. The
last of these pre-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.





Bareboat
charter revenues increased in 2008 with the addition to our fleet of five
container vessels in 2007, five offshore supply vessels in 2007 (one of which
was sold in 2008) and two chemical tankers in 2008.








57





Cash
flows arising from direct financing and sales-type leases





The
following table analyzes our cash flows from the direct financing and sales-type
leases with the Frontline Charterers, Seadrill Invest I, Seadrill Invest II,
Deep Sea and TMT during 2008 and 2007 and shows how they were accounted
for:





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





As
described above, $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.








Gain
on sale of assets





Gains
were recorded in the year ended December 31 2008 on the disposal of the oil
tanker Front Maple and
the offshore supply vessel Sea
Trout, and also the sale of Front Sabang on a sales-type
lease arrangement. In 2007, seven oil tankers were disposed and one was sold
under a sales-type lease arrangement.





Operating
expenses





(in thousands of
      $)
            
            2008
            
            
            2007Ship
      operating expenses
            
            
            99,906
            
            
            
            106,240Voyage
      expenses
            
            
            -
            
            
            
            132Depreciation
            
            
            28,038
            
            
            
            20,636Administrative
      expenses
            
            
            9,836
            
            
            
            7,783137,780
            
            
            
            134,791









58





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.





Following
the completion in April 2007 of pre-existing charter and cross-over voyages on
certain vessels acquired from Frontline, voyage expenses are no longer
incurred.





Depreciation
increased 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 are chartered under arrangements accounted for as
operating leases.





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








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 (2007: $2.3 billion) comprised of $449 million
principal amount of 8.5% senior notes (2007: $449 million), $2.0 billion under
floating rate secured long term credit facilities (2007: $1.8 billion) and $115
million of unsecured fixed rate debt (2007: $nil). The average three-month US$
LIBOR rate was 2.93% in 2008 and 5.30% in 2007. The overall decrease in interest
expense was due to the decrease in interest rates from 2007 to 2008, largely
offset by the increased level of borrowing. Other interest arose on the
unsecured fixed rate debt drawn in November 2008.









59





At
December 31 2008 the Company and its consolidated subsidiaries were party to
interest rate swap contracts which effectively fix our interest rate on $1.2
billion of floating rate debt at a weighted average rate of 3.95% per annum
(2007: $0.9 billion of floating rate debt fixed at a weighted average rate of
4.29% per annum).





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








Other
financial items





Other
financial items amounted to a net cost of $55 million in the year ended December
31 2008 (2007: net cost $14 million). These consist mainly of mark-to-market
valuation changes on financial instruments, including interest rate swap
contracts, bond swaps and equity swaps.








Equity
in earnings of associated companies





The
equity in earnings of the three wholly-owned subsidiaries accounted for under
the equity method increased from $0.9 million in 2007 to $23 million in 2008, as
two of these entities were newly established in 2008.








Liquidity
and Capital Resources





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





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


-
            $115
      million term loan facility due 2011


-
            $60
      million secured term loan facility due
2011


-
            $30
      million secured term loan facility due
2012






60




-
            $350
      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


-
            $43
      million secured term loan facility due
2014


-
            $77
      million secured term loan facility due
2015


-
            $30
      million secured revolving credit facility due
  2015


-
            $725
      million secured credit facility due
2015


-
            $43
      million secured term loan 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
26 2010 we had remaining contractual commitments relating to newbuilding
contracts totaling approximately $162 million.





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 2009 we had cash and cash equivalents (including restricted cash) of
$88 million (2008: $106 million). In the year ended December 31 2009 we
generated cash of $125 million from operations and $424 million net from
investing activities, and used $511 million net in financing
activities.





During
the year ended December 31 2009 we paid dividends of $1.50 per common share
(2008: $1.69), or a total of $111 million (2008: $123
million).  Dividend payments in 2009 comprised $76 million of cash
payments (2008: $123 million) and $35 million in the form of newly issued common
shares (2008: $nil). On November 27 2009 a dividend of $0.30 per share was
declared totaling $23 million, which was settled on January 27 2010 by the
payment of $11 million in cash and the issuance of $12 million in newly issued
common shares. On February 26 2010 a dividend of $0.30 per share was declared
totaling $24 million, to be paid in cash on or about March 30 2010.








Borrowings





As of
December 31 2009 we had total short-term and long-term debt outstanding of $2.1
billion (2008: $2.6 billion).  In addition, as of December 31 2009 our
wholly-owned subsidiaries Front Shadow Inc., or Front Shadow, SFL West Polaris
Limited, or SFL West Polaris, and SFL Deepwater Ltd., or SFL Deepwater, had long
term debt of $17 million, $619 million and $1.3 billion respectively (2008: $19
million, $688 million and $1.1 billion 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 2009 includes $301 million outstanding from the
issue in 2003 of $580 million of 8.5% senior notes due 2013, and $90 million
outstanding under a fixed rate unsecured loan from a related party.







61





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 2009 the outstanding
amount on this facility was $248 million. The facility bears interest at LIBOR
plus a margin, is repayable over a term of seven years and is secured by the
vessel-owning subsidiaries' assets. The facility contains covenants that require
us to maintain a minimum aggregate value of the vessels as collateral and also
certain minimum levels of free cash, working capital and adjusted book equity
ratios.





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 2009 the
outstanding amount under this facility was $191 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
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 2009 the outstanding amount under this facility
was $111 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 2009 the outstanding amount under this facility was $108 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 2009 the outstanding
amount under this facility was $65 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 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
February 2008 our subsidiary SFL Europa entered into a $30 million secured
revolving credit facility in order to partially finance the container vessel
SFL Europa. At December
31 2009 the outstanding amount under this facility was $15 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
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.








62


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 2009 the outstanding amount under this facility was $47
million. The
facility bears interest of LIBOR plus a margin and is repayable over a term of
ten years. The facility contains 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.One of the vessels was sold in September 2009 and
the charterer of a second vessel exercised an option to acquire the vessel in
November 2009.  The facility now relates to the remaining
vessel-owning subsidiary. At December 31 2009 the amount outstanding under this
facility was $15 million. The facility bears interest of LIBOR plus a margin and
is repayable over a term of two years. The facility contains a minimum value
covenant andcontains covenants that require us to maintain certain minimum levels of free
cash and adjusted book equity ratios.





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 2009 the amount outstanding under this
facility was $26 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
November 2008 we entered into a $100 million secured revolving credit facility,
secured against the assets of five vessel owning subsidiaries. At December 31
2009 the amount outstanding under this facility was $42
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. At December 31 2009 the amount outstanding under this facility
was $90 million. The loan  bears interest at a fixed rate and matures
in January 2011.





In March
2009 we amended the Charter Ancillary Agreement with Frontline Shipping III,
whereby the charter service reserve relating to the vessels on charter to
Frontline Shipping III may be in the form of a loan to the Company. At December
31 2009 the amount outstanding under this agreement was $27 million. The loan
bears interest at LIBOR plus a margin and is due for repayment in
2010.





In June
2009 a subsidiary entered into a $60 million credit facility, secured against a
portion of our 8.5% Senior Notes which are being held as treasury notes and a
guarantee from the Company. At December 31 2009 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 two 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.






63





In June
2009 a subsidiary entered into a $30 million credit facility, secured against a
portion of our 8.5% Senior Notes which are being held as treasury notes and a
guarantee from the Company. At December 31 2009 the amount outstanding under
this facility was $29 million. The facility bears interest at LIBOR plus a
margin and is repayable over a term of 364 days, with an option for the
subsidiary to extend the maturity of the facility by two 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 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 2009 the outstanding amount under this facility was $17
million.  The facility bears interest at LIBOR plus a margin, is
repayable over a term of ten years and is secured by the vessel-owning
subsidiary's assets.  The facility contains a minimum value covenant
and a covenant requiring the subsidiary to maintain certain minimum levels of
free cash. The requirement for certain minimum levels of free cash is only
applicable after four years. The lender has limited recourse to Ship Finance
International Limited as the holding company guarantees $2.1 million of this
debt.





In 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
2009 the amount outstanding under this facility was $619 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 $90 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.





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
2009 the amount outstanding under this facility was $1.3 billion. 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 March
2010 we entered into a $725 million secured credit facility with a syndicate of
banks, to partially finance 26 vessels chartered to Frontline Shipping. The
facility bears interest at LIBOR plus a margin and is repayable over a term of
five years. It replaces a secured term loan facility, which had been established
in 2005 and which had an outstanding balance of $767 million at December 31
2009. The new facility contains covenants that require us to maintain aggregate
value of the vessels secured as collateral and also certain minimum levels of
free cash, working capital and adjusted book equity ratios.





In
February 2010 a subsidiary entered into a $43 million secured term loan facility
in order to
partially finance the Suezmax tankerGlorycrown.
The facility bears
interest of LIBOR plus a margin and issecured by the subsidiary's assets
and a guarantee from Ship Finance International Limited. The facility has a term of five years,
and 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.






64




In March
2010 a subsidiary entered into a $43 million secured term loan facility in order to partially
finance the Suezmax tankerEverbright.
The facility bears
interest of LIBOR plus a margin and issecured by the subsidiary's assets
and a guarantee from Ship Finance International Limited. The facility has a term of five years,
and 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.





We are in
compliance with all loan covenants as at December 31 2009.  At
December 31 2009 three month U.S. dollar LIBOR was 0.25%.








Derivatives





We use
financial instruments to reduce the risk associated with fluctuations in
interest rates. At December 31 2009 the Company and its consolidated
subsidiaries had entered into interest rate swap contracts with a combined
notional principal amount of $1.1 billion, whereby variable LIBOR interest rates
excluding additional margins is swapped for fixed interest rates between 1.88%
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
$1.3 billion, whereby variable LIBOR interest rates excluding additional margins
is swapped for fixed interest rates between 1.91% per annum and 3.92% per annum.
The overall effect of these swaps is to fix the interest rate on $2.4 billion of
floating rate debt at a weighted average interest rate of 4.54% per annum
including margin.





Several
of our charter contracts contain interest adjustment clauses, whereby the
charter rate is adjusted to reflect the actual interest paid on a deemed
outstanding loan, effectively transferring the interest rate exposure to the
counterparty under the charter contract. At December 31 2009, a total of $2.0
billion of our floating rate debt was subject to such interest adjustment
clauses, including our equity accounted subsidiaries. However, $1.3 billion of
this was subject to interest rate swaps entered into for the benefit of the
charterer, and the balance of $733 million remained on a floating
basis.





At
December 31 2009 our net exposure, including that within our equity-accounted
subsidiaries, to interest rate fluctuations on our outstanding debt was $548
million, compared with $746 million at December 31 2008. Our net exposure to
interest fluctuations is based on our total of $3.6 billion floating rate debt
outstanding at December 31 2009, less the $2.4 billion notional principal of our
interest rate swaps and the $733 million outstanding floating rate debt subject
to interest adjustment clauses under charter contracts.





Apart
from the above interest rate swap contracts, at December 31 2009 and the date of
this report we were not party to any other derivative contracts, having settled
in 2009 the total return swap, or TRS, contracts indexed to our 8.5% Senior
Notes and our own shares, which we had been holding at December 31 2008. We may
in the future from time to time enter into short-term TRS arrangements relating
to our own shares and Senior Notes or securities in other
companies.








Equity





In
December 2008 we filed a prospectus supplement to enable us to sell and issue up
to 7,000,000 common shares from time to time. Sales of the common shares under
this prospectus supplement were made by means of ordinary brokers' transactions
on the NYSE or otherwise at market prices prevailing at the time of the sale, at
prices related to the prevailing market prices, or at negotiated prices. In the
year ended December 31 2009 the Company issued and sold 1,372,100 shares under
this arrangement, with total proceeds of $16.5 million net of costs, giving a
premium on issue of $15.1 million.






65





In April 2008 we filed a dividend
reinvestment and direct stock purchase plan, to facilitate the purchase of
shares by individual shareholders who wish to invest in our common shares 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 us. As of December
31 2009, no additional shares had been issued under this
plan.





During
the year ended December 31 2009 we declared four dividends and in each case
shareholders were given the option to elect to receive their dividend in cash or
in the form of newly issued common shares at a 5% discount to the
volume-weighted-average-price of the shares for the three trading days prior to
the ex-dividend date. Details of the dividends declared during the year and the
associated issue of new shares are as follows:








Date
      of dividend declaration
            February
      26 2009
            May
      14 2009
            August
      20 2009
            November
      27 2009Dividend
      per share
            $0.30
            $0.30
            $0.30
            $0.30Ex-dividend
      date
            March
      5 2009
            May
      22 2009
            August
      27 2009
            December
      4 2009Date
      of dividend payment
            April
      17 2009
            July
      6 2009
            October
      16 2009
            January
      27 2010Price
      at which new shares issued
            $5.68
            $11.31
            $12.86
            $13.16Last
      date for election to receive dividend in the form of
shares
            April
      13 2009
            June
      26 2009
            October
      7 2009
            January
      19 2010Approximate
      proportion of shareholders electing to receive shares
            55%
            47%
            51%
            52%Number
      of new shares issued
            2,112,422
            1,038,777
            916,921
            930,483
      (see Note)Total
      share premium on issue
            $9.9
      million
            $10.7
      million
            $10.9
      million
            $11.3
      million





Note: The
issue of new shares on January 27 2010 has been reflected in the consolidated
balance sheet as at December 31 2009, since at the date of this report the
outcome of the shareholders' elections was fully known.





The above
dividends have all been paid at the date of this report. On average,
approximately 51% of shareholders elected to receive shares, resulting in the
issue of 4,998,603 new shares at a total premium of $42.8 million. Our principal
shareholders, Hemen and Farahead, elected to receive their full entitlement to
these dividends in the form of shares, resulting in 3,951,116 new shares being
issued to them.





In June
2009 10,560 new common shares, at a premium of approximately $0.05million, were
issued to an employee in lieu of the dividend portion of his share-based bonus
payment.  The total value of the payment was $0.06 million, which was
equal to the accrued dividend bonus as at December 31 2008.





The total
premium on the 6,381,263 common shares issued in the year ended December 31 2009
amounted to $57.9 million.





Following
the above issues of new shares, we had 79,125,000 common shares issued and
outstanding as at December 31 2009, including 930,483 shares issued on or about
January 27 2010 to shareholders who elected to receive in the form of shares the
dividend which they became entitled to on December 4 2009.





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 2009 we accounted for $7.4 million as amortization of such deemed equity
contributions (2008: $11.8 million). The unamortized balance of deferred deemed
equity contributions at December 31 2009 is $206.5 million (2008: $213.9
million).






66





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 2009.





At our
Annual General Meeting held in September 2009, our shareholders approved the
transfer of $2.2 million from additional paid in capital to contributed surplus
with immediate effect.





Following
the above transactions, as of December 31 2009 our issued and fully paid share
capital balance was $79.1 million, our additional paid in capital was $59.3
million and our contributed surplus balance was $506.6 million.





On
February 26 2010 our board of directors declared a dividend of $0.30 per share
totaling $23.7 million, to be paid in cash on or about March 30
2010.





Contractual
Commitments





At
December 31 2009 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
            
            
            -
            
            
            
            -
            
            
            
            301
            
            
            
            -
            
            
            
            301Fixed
      rate long-term debt
            
            
            -
            
            
            
            90
            
            
            
            -
            
            
            
            -
            
            
            
            90Floating
      rate short-term debt
            
            
            27
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            27Floating
      rate long-term debt
            
            
            266
            
            
            
            978
            
            
            
            281
            
            
            
            193
            
            
            
            1,718Floating
      rate long-term debt in unconsolidated subsidiaries
            
            
            231
            
            
            
            430
            
            
            
            1,223
            
            
            
            6
            
            
            
            1,890Total
      debt repayments
            
            
            524
            
            
            
            1,498
            
            
            
            1,805
            
            
            
            199
            
            
            
            4,026Total
      interest payments (1)
            
            
            172
            
            
            
            276
            
            
            
            113
            
            
            
            31
            
            
            
            592Total
      vessel purchases (2)
            
            
            99
            
            
            
            124
            
            
            
            -
            
            
            
            -
            
            
            
            223Total
      contractual cash obligations
            
            
            795
            
            
            
            1,898
            
            
            
            1,918
            
            
            
            230
            
            
            
            4,841





(1)
            Interest
      payments are based on the existing borrowings of both fully consolidated
      and equity-accounted subsidiaries. Other than the $725 million credit
      facility entered into in March 2010, it is assumed that no further
      refinancing of existing loans takes place and that there is no repayment
      on revolving credit facilities. Interest rate swaps have not been included
      in the calculation. The interest has been calculated using the five year
      US$ swap as of March 26 2010 of 2.70% plus agreed margins. Interest on
      fixed rate loans is calculated using the contracted interest
      rates.




(2)
            Vessel
      purchase commitments relate to the newbuilding Suezmax oil tanker which
      was delivered in March 2010 ($47 million), one newbuilding container
      vessel scheduled for delivery in 2010 ($27 million) and seven newbuilding
      Handysize drybulk carriers scheduled for delivery in 2011 and 2012 ($149
      million).





67





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".





Following
declines in newbuilding prices in 2009, prices for new vessels seem to have
stabilized both in China and Korea mainly driven by strong demand for dry bulk
vessels. Considering the overall healthy demand, long forward coverage by most
major shipyards, and increasing steel prices, some analysts expect that there is
limited likelihood of further significant price decreases. Prices for
second-hand bulkers have increased fairly substantially since the middle of 2009
and this trend has continued during 2010, mainly driven by very strong buying
demand from China. Prices for second-hand dry bulk vessels are expected to
continue to show high volatility, in part reflecting the very volatile charter
markets, and could soften later in 2010 and 2011 following recent fairly
significant price increases. Prices for second-hand tankers seem to have
stabilized, though with very limited supply in the market, and are still at a
historically healthy level. Second-hand prices for tankers are expected to be
less volatile, with limited risk for further price erosions. Prices for
second-hand container vessels have increased during 2010, albeit from a very low
level, and in the light of improved market prospects some market participants
believe that the bottom has been reached.





The spot
market for tankers weakened in 2009, especially during the third quarter. Going
forward, the tanker industry will be exposed to a continued high level of
newbuilding deliveries in the next 12 months and continuing below average oil
consumption, although International Energy Agency predicts that demand for oil
in 2010 will be 1.8% higher than in 2009. Factors that could improve the
fundamentals for the tanker markets are delays in delivery schedules from the
yards, cancellations of newbuilding orders and the scrapping of single hull
vessels due to their 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. Our single-hull tankers on charter to the
Frontline Charterers will not earn profit sharing after their anniversary date
in 2010. For the year ended December 31 2009, the profit share earned by the
single-hull tankers amounted to approximately $2.5 million





So far in
2010 charter rates for container vessels and drybulk carriers have remained at
the relatively low levels experienced throughout 2009, although there is some
indication that rates for drybulk carriers may increase over the coming months
as the world economy slowly emerges from recession and China resumes its high
rate of economic growth.





The
offshore drilling and supply markets continue to be strong, underpinned by
exploration and development activities linked to higher oil prices and the need
to replace reserves. Our jack-up drilling rig on charter to Seadrill includes
profit sharing payments above certain base levels from 2009 onwards. However,
the market for jack-up rigs was relatively soft in 2009, and it is unlikely that
we will receive any profit sharing from our jack-up drilling rig in
2010.





68





Interest
rates have remained at historically low levels since December 31 2009, although
they are expected to slowly increase later in 2010 if the tentative economic
recovery becomes established. 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 a deemed
outstanding loan relating to the asset, effectively transferring the interest
rate exposure to our counterparty under the charter contract.








Off
balance sheet arrangements





At
December 31 2009 we are not party to any arrangements which may be considered to
be off balance sheet arrangements.







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 the Chief Executive Officer of our wholly owned subsidiary Ship
Finance Management AS, who are responsible for overseeing our
management.





Name
            Age
            PositionHans
      Petter Aas
            64
            Director
      and Chairman of the BoardKate
      Blankenship
            45
            Director
      of the Company and Chairperson of the Audit CommitteeCecilie
      A. Fredriksen
            26
            Director
      of the CompanyPaul
      Leand
            43
            Director
      of the CompanyCraig
      H. Stevenson Jr.
            56
            Director
      of the Company and member of the Audit CommitteeOle
      B. Hjertaker
            43
            Chief
      Executive Officer and Interim 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 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.





69





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 July 2003,
a director of Golden Ocean since October 2004, a director of Seadrill since May
2005 and a director of Independent Tankers Corporation Limited since February
2008. She is a
member of the Institute of Chartered Accountants in England and
Wales.





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 Leandhas served as a director of the Company 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 of the Company 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.





Ole B.
Hjertaker has served Ship Finance Management AS as Chief Executive
Officer and Interim Chief Financial Officer since July 2009, prior to which he
served as Chief Financial Officer from 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 2009 we paid to our directors and executive officers
aggregate cash compensation of $3.6 million including an aggregate amount of
$0.04 million for pension and retirement benefits.  We reimburse
directors for reasonable out of pocket expenses incurred by them in connection
with their service to us.





In
addition to cash compensation, during 2009 we also recognized an expense of $1.4
million relating to stock options issued to certain of our directors and
employees. In July 2009 355,000 of the 555,000 previously awarded options were
cancelled, and 505,000 new options were awarded. In October 2009 a further
65,000 options were awarded, bringing the total outstanding options at December
31 2009 to 770,000.  Subsequently, in March 2010 a further 72,000
options have been awarded. The options vest over a three year period, with the
first of them vesting in September 2008, and expire between September 2012 and
March 2015.  The exercise price of the options is currently between
$9.74 and $27.34 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 options
awarded to a director have an exercise price that increases by 6% each
year.








70





C.
BOARD PRACTICES





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





We
currently have an Audit Committee, which is responsible for overseeing the
quality and integrity of our financial statements and our accounting, auditing
and financial reporting practices, our compliance with legal and regulatory
requirements, the independent auditor's qualifications, independence and
performance, and our internal audit function. Kate Blankenship is the
Chairperson of the Audit Committee and the Audit Committee Financial Expert.
Craig H. Stevenson Jr. is also a member of the Audit Committee.





As a
foreign private issuer, we are exempt from certain requirements of the NYSE 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 NYSE, please see Item 16G or visit the corporate
governance section of our website at www.shipfinance.bm.





Our
officers are elected by our 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 of directors 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 eight persons on a full-time basis. We have contracted with
Frontline Management and other third parties for certain managerial
responsibilities for our fleet, and with Frontline Management for some
administrative services, including corporate services.





E.
SHARE OWNERSHIP





The
beneficial interests of our Directors and officers in our common shares as of
March 26 2010 are as follows:


Director or Officer
            Common Shares of $1.00 each
            Percentage of Common
              Shares OutstandingHans
      Petter Aas
            -
            *Paul
      Leand
            50,334
            *Kate
      Blankenship
            5,211
            *Craig
      H. Stevenson Jr.
            252,293(1)
            *Cecilie
      A. Fredriksen
            -
            *Ole
      B. Hjertaker
            4,211
            *





*    Less
than one percent.





(1)
Including 133,333 options to acquire common shares that have
vested.





71





Share
Option Scheme





In
November 2006 our 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 26 2010 were as follows:





Director or Officer
            Number of options
            Exercise price
            Expiration DateHans
      Petter Aas
            25,000
            $12.40
            October
      2014Paul
      Leand
            10,000
            $12.40
            October
      2014Craig
      H. Stevenson Jr.
            200,000(a)
              10,000
            $27.34(b)
              $12.40
            December
      2012
              October
      2014Kate
      Blankenship
            10,000
            $12.40
            October
      2014Cecilie
      A. Fredriksen
            10,000
            $12.40
            October
      2014Ole
      B. Hjertaker
            300,000
              20,000
            $9.74
              $18.38
            July
      2014
              March
      2015





(a)    133,333
of the options have vested.


(b)    The
initial exercise price is adjusted upwards by 6% on each anniversary dated of
the grant.








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 March 26
2010 regarding the ownership of our Common Shares with respect to each
shareholder whom we know to beneficially own more than five percent of our
outstanding Common Shares.








Owner
            Amount of Common Shares
            Percent of Common SharesHemen
      Holding Ltd. (1)
            4,669,605
            5.90%Farahead
      Investment Inc. (1)
            29,409,688
            37.17%





(1)
            Hemen
      Holding Ltd. is a Cyprus holding company and Farahead Investment Inc. is a
      Liberian company, both indirectly controlled by trusts established by Mr.
      John Fredriksen for the benefit of his immediate family. Mr. Fredriksen
      disclaims beneficial ownership of the above shares of our common stock,
      except to the extent of his voting and dispositive interests in such
      shares of common stock. Mr. Fredriksen has no pecuniary interest in the
      above shares of common stock.





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





As at
March 26 2010 the Company had 463 holders of record in the United States. We had
a total of 79,125,000 of Common Shares outstanding as of March 26
2010.





72





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 NYSE in June
2004. A significant proportion of our assets were acquired from Frontline in
2004. The majority of our business continues to be transacted through
contractual relationships between us and the following parties, which are either
indirectly controlled by our principal shareholder Hemen, or which have
directors who are also directors of this Company:





-
            Frontline





-
            Seadrill





-
            Deep
      Sea





-
            Golden
      Ocean





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 26 2010 we charter 37 of our vessels to the Frontline Charterers under
long-term capital leases, most of which were given economic effect from January
1 2004.  At December 31 2009 the balance of net investments in capital
leases to the Frontline Charterers was $1,466 million (2008: $1,617 million) of
which $108 million (2008: $116 million) represents short-term maturities. These
balances include $57 million for Front Vista, which was sold
in February 2010.





As of
March 26 2010 we charter our four drilling units to the Seadrill Charterers
under long-term capital leases, including three units which are owned by
equity-accounted subsidiaries. At December 31 2009 the balance of net
investments in capital leases to the Seadrill Charterers was $2,456 million
(2008: $2,822 million), of which $238 million (2008: $234 million) represents
short-term maturities.





As of
March 26 2010 we charter our six offshore supply vessels to subsidiaries of Deep
Sea under long-term leases, two of which are accounted for as capital leases
with the remaining four being operating leases. At December 31 2009 the balance
of net investments in capital leases to subsidiaries of Deep Sea was $109
million (2008: $118 million), of which $8 million (2008: $9 million) represents
short-term maturities. At December 31 2009 the net book value of operating
assets leased to subsidiaries of Deep Sea was $147 million (2008: $157
million).





As of
March 26 2010 we charter our Panamax drybulk carrier Golden Shadow to a subsidiary
of Golden Ocean under a long-term capital lease. This vessel is owned by an
equity-accounted subsidiary. At December 31 2009 the balance of the net
investment in the capital lease to the subsidiary of Golden Ocean was $23
million (2008: $25 million), of which $2 million (2008: $2 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, apart from certain vessels where
the fee is suspended while they are sub-chartered on a bareboat basis, resulting
in expenses of $89 million for the year ended December 31 2009 (2008: $94
million). The management fees are classified as ship operating
expenses.





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





73





The
Frontline Charterers pay us profit sharing of 20% of earnings above certain
specified base charter rates. During the year ended December 31 2009 we earned
and recognized revenue of $33 million (2008: $111 million) under this
arrangement.





We pay
commission of 1% to Frontline Management in respect of all payments received in
respect of the five year sales-type leases on the newly delivered Suezmax
vessels Glorycrown and
Everbright. In 2009 we
paid $0.4 million to Frontline Management pursuant to this
arrangement.





In
January 2009 we entered into an $18 million unsecured loan agreement with a
related party, bearing interest at LIBOR plus a margin. The loan was fully
repaid in 2009.





In
February 2009 we terminated the agreement made in 2007, whereby we were to
acquire two newbuilding Capesize drybulk carriers from Golden Ocean upon their
delivery from the shipyard.





In March
2009 we made a repayment of $25 million on the unsecured $115 million loan
agreed with a related party in 2008. The remaining balance is repayable in
2011.





In March
2009 we amended the Charter Ancillary Agreement with Frontline Shipping III,
whereby the charter service reserve totaling $26.5 million relating to five
vessels on charter to Frontline Shipping III may be in the form of a loan of
$5.3 million to each of the vessel-owning subsidiaries, guaranteed by the
Company. The loan bears interest at LIBOR plus a margin and was originally due
for repayment within 364 days of the loan being provided, or earlier in
accordance with the agreement. In January 2010, we amended the agreement so that
each loan expires on the relevant vessel's anniversary date in
2010.





In July
2009 the jack-up drilling rig West Cereswas delivered to
Seadrill Invest I, its charterer since it was acquired from them in 2006,
pursuant to the exercise of a purchase option at the agreed option price of
$135.2 million.





In July 2009 wesold the single-hull VLCC Front Duchess to an unrelated
third party for a gross sales price of $19 million. We paid a termination fee of
$2 million to Frontline for the early termination of the related
charter.





In
January 2010 the Company agreed to grant purchase options for the VLCC Edinburghto an unrelated
third party, exercisable in March 2012 and March 2014 at a fixed price of
approximately $20.5 million, which is significantly above the vessel's projected
carrying value. Concurrently Frontline has agreed to increase the charterhire by
$1,000 per day until March 2012 and Frontline will be entitled to earn a
commission if one of the purchase options is exercised.





In
February 2010 we sold the VLCC Front Vista to Frontline for
a gross sales price of $59 million, including compensation of $0.4 million
payable by Frontline for the cancellation of the related charter. A short-term
seller's credit of $41.5 million was extended to Frontline, which bears interest
at LIBOR plus a margin.




In
February 2010 the Company announced that it has agreed certain amendments to the
charter agreements with Frontline Shipping and Frontline Shipping II, whereby
restricted cash deposits held by them as security against their charter
commitments will be reduced from an aggregate buffer of $174 million to a fixed
minimum level of $62 million, in exchange for a guarantee from Frontline for the
payment of charter hire. The restricted cash deposits will be reduced by $2
million per vessel if and when charters expire or are cancelled, but Frontline
Shipping and Frontline Shipping II will otherwise be prohibited from making
withdrawals from these deposits.






74





In March
2010 we agreed the sale of the single-hull VLCC Golden River to an unrelated
third party for a gross sales price of approximately $13 million. The vessel is
expected to be delivered to its new owner in April 2010 and a termination fee of
approximately $3 million will be paid to Frontline for the early termination of
the related charter.






C.  
INTERESTS OF EXPERTS AND COUNSEL





Not
Applicable.







ITEM
      8.
            FINANCIAL
      INFORMATION





A.  
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION





See Item
18.





Legal
Proceedings





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.








75




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
                $0.582009
 January
      7 2009
                $0.60
 April
      17 2009
              $0.30*July
      6 2009
              $0.30*October
      16 2009
              $0.30*


*   The
dividends paid on April 17 2009, July 6 2009 and October 16 2009 each gave
shareholders the choice of receiving payment in cash or newly issued common
shares. The number of new shares issued pursuant to these dividend payments is
given under the heading "Equity" in Item 5: "Operating and Financial Review and
Prospects."
 
 
 76
   On
November 27 2009 our board of directors declared a dividend of $0.30 per share
which was paid on January 27 2010. The dividend was payable in cash or, at the
election of the shareholder, in newly issued common shares. The number of new
shares issued pursuant to this dividend payment is also given in Item 5:
"Operating and Financial Review and Prospects."





On
February 26 2010 our board of directors declared a dividend of $0.30 per share
which will be paid in cash on or about March 30 2010.








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 NYSE on June 15 2004 and commenced
trading on that date under the symbol "SFL".








High
              
              
              LowFiscal
      year ended December 312009
              
              $
              14.32
              
              
              $
              4.052008
              
              $
              32.43
              
              
              $
              9.012007
              
              $
              31.54
              
              
              $
              22.242006
              
              $
              23.80
              
              
              $
              16.332005
              
              $
              24.00
              
              
              $
              16.70
 
 The
following table sets forth, for each full financial quarter for the two most
recent fiscal years and the first quarter of 2010, the high and low closing
prices of the common shares on the NYSE since the date of listing.
  High
              
              
              LowFiscal
      year ended December 31 2010First
      quarter
              
              $
              19.36
              
              
              $
              13.81
 High
              
              
              LowFiscal
      year ended December 31 2009First
      quarter
              
              $
              13.47
              
              
              $
              4.05Second
      quarter
              
              $
              13.03
              
              
              $
              6.75Third
      quarter
              
              $
              13.55
              
              
              $
              9.60Fourth
      quarter
              
              $
              14.32
              
              
              $
              11.00
 
 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
   77
  The
following table sets forth, for the most recent six months, the high and low
prices for the common shares on the NYSE.
  High
              
              
              LowMarch
      2010
              
              $
              19.36
              
              
              $
              16.54February
      2010
              
              $
              15.90
              
              
              $
              13.81January
      2010
              
              $
              15.79
              
              
              $
              14.07December
      2009
              
              $
              14.32
              
              
              $
              13.43November
      2009
              
              $
              13.36
              
              
              $
              11.00October
      2009
              
              $
              13.09
              
              
              $
              11.37





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 (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.





At our
2007 Annual General Meeting the shareholders voted to amend our 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 report on Form
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.






78





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 majority 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.





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 by our
Bye-laws to purchase insurance to cover, to the fullest extent
permitted by Bermuda law, any liability he may incur.





79








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 three to 17 years. We refer you to
Item 4.D. "Property, Plant and Equipment" for the relevant charter termination
dates for each of our vessels.  The daily base charter rates payable
to us under the charters have been fixed in advance and will decrease as our
vessels age, and the Frontline Charterers have the right to terminate a charter
for a non-double hull vessel beginning on each vessel's anniversary date in
2010.





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











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








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





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





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








In
addition, the base charter rate for our non-double hull vessels will decline to
$7,500 per day on each vessels 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.






80





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.








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. The guarantee from Frontline originally excluded the Frontline
Charterers' obligations to pay charterhire, but in March 2010 the guarantees
relating to Frontline Shipping and Frontline Shipping II were amended, whereby
Frontline also fully guarantees the payment of 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 $88.5 million, consisting of $52.0
million, $10.0 million and $26.5 million in Frontline Shipping, Frontline
Shipping II and Frontline Shipping III, respectively. The Frontline Charterers
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. Each loan expires on
the relevant vessel's anniversary date in 2010, 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.







81





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 $52.0 million in the case of Frontline
Shipping, $10.0 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 $2.0
million in the case of Frontline Shipping and Frontline Shipping II and $5.3
million in the case of Frontline Shipping III 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, and (3) any profit sharing payments
deferred pursuant to the profit sharing payment provisions described below have
been fully paid to us. In addition, each Frontline Charterer has agreed to
certain other restrictive covenants, including restrictions on its ability to,
without our consent:





·
            amend
      its organizational documents in a manner that would adversely affect
      us;





·
            violate
      its organizational documents;





·
            engage
      in businesses other than the operation and chartering of our vessels (not
      applicable for Frontline Shipping
II);





·
            incur
      debt, other than in the ordinary course of
  business;





·
            sell
      all or substantially all of its assets or the assets of the relevant
      Frontline Charterer and its subsidiaries taken as a whole, or enter into
      any merger, consolidation or business combination
    transaction;





·
            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.




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.  From the respective vessels' anniversary date in 2010, 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.






82






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, a pledge of the equity interests in the Frontline
Charterers and a guarantee from Frontline.




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 fail at any time to hold at least $2.0
      million per vessel in cash and cash
equivalents.





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 and the charter
ancillary agreements. Pursuant to the performance guarantee, Frontline has
guaranteed the following obligations of the Frontline Charterers:





·
            the
      performance of the obligations of the Frontline Charterers under the
      charters, including the payment of charter hire with respect to Frontline
      Shipping and Frontline Shipping II;
and





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





Frontline's
performance guarantee shall remain in effect until all obligations of the
Frontline Charterers that have been guaranteed by Frontline under the
performance guarantee have been performed and paid in full.





Vessel
Management Agreements





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






83





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.





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).





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.








Seadrill
Bareboat Charters





We have
one jack-up drilling rig (West
Prospero), one ultra-deepwater drillship (West Polaris) and two
ultra-deepwater semi-submersible drilling rigs (West Taurus and West Hercules) which are
chartered to the Seadrill Charterers on a bareboat basis for remaining periods
between 12 and 13 years. The daily charter rates payable to us under the
charters have been fixed in advance for 365 days per year (366 days per leap
year) and will decrease as the drilling units age. The charter agreements
contain purchase options at certain points within the periods of the charter and
each charter is guaranteed by Seadrill. Each charter also includes an interest
adjustment clause, whereby the daily charter rate is adjusted to reflect the
difference between the actual interest rate and a pre-agreed base interest rate
calculated on a deemed outstanding loan for the relevant asset on
charter.





Certain
information relating to the charters on these four drilling units is as
follows:








West
Prospero





Daily base charter rate
      *
            
            Period applicable
            Purchase option date
            Purchase option price$
            159,178
            
            June
      29 2007 to August 3  2008$
            81,678
            
            August
      4 2008 to June 28 2009$
            81,404
            
            June
      29 2009 to June 28 2010
            June
      29 2010
            $142.0
      million$
            53,904
            
            June
      29 2010 to June 28 2012
            June
      29 2012
            $124.0
      million$
            51,404
            
            June
      29 2012 to June 28 2013
            June
      29 2014
            $106.0
      million$
            51,678
            
            June
      29 2013 to June 28 2014
            June
      29 2017
            $90.0
      million$
            38,178
            
            June
      29 2014 to June 28 2017
            June
      29 2019
            $79.0
      million$
            36,678
            
            June
      29 2017 to June 28 2022
            June
      29 2022
            $60.0
      million





* based
on base interest rate of 6.30% per annum (including margin) on deemed
loan.








84








West
Polaris





Daily base charter rate
      *
            
            Period applicable
            Purchase option date
            Purchase option price$
            107,500
            
            July
      11 2008 to October 10 2008$
            329,650
            
            October
      11 2008 to October 10 2012
            October
      11 2012
            $548.0
      million$
            231,500
            
            October
      11 2012 to October 10 2013
            October
      11 2014
            $463.0
      million$
            176,500
            
            October
      11 2013 to October 10 2015
            October
      11 2016
            $396.0
      million$
            170,000
            
            October
      11 2015 to October 10 2018
            October
      11 2018
            $323.0
      million$
            145,000
            
            October11  2018
      to October 10 2020
            October
      11 2020
            $259.0
      million$
            125,000
            
            October
      11 2020 to July 10 2023
            July
      10 2023
            $177.5
      million


* based
on base interest rate of 2.85% per annum (excluding margin) on deemed
loan.





In
addition to the above purchase options, we have an option to sell West Polaris to its charterer
for $75.0 million at the end of its charter in July 2023.








West
Hercules





Daily base charter rate
      *
            
            Period applicable
            Purchase option date
            Purchase option price$
            404,500
            
            November
      6 2008 to November 5 2011
            November
      6 2011
            $579.5
      million$
            250,000
            
            November
      6 2011 to November 5 2014
            November
      6 2014
            $431.0
      million$
            180,000
            
            November
      6 2014 to November 5 2016
            November
      6 2016
            $366.0
      million$
            170,000
            
            November
      6 2016 to November 5 2018
            November
      6 2018
            $297.0
      million$
            142,500
            
            November
      6 2018 to November 5 2020
            November
      6 2020
            $236.0
      million$
            135,000
            
            November
      6 2020 to November 5 2023


* based
on base interest rate of 4.25% per annum (excluding margin) on deemed
loan.





In
addition to the above purchase options, the charterer of West Hercules is obliged to
purchase the drilling rig for $135.0 million at the end of its charter in
November 2023.








West
Taurus





Daily base
              charter rate *
            
            Period applicable
            Purchase option date
            Purchase option price$
            139,500
            
            November
      15 2008 to February 9 2009$
            339,500
            
            February
      10 2009 to February 9 2015
            February
      10 2015
            $418.0
      million$
            165,000
            
            February
      10 2015 to February 9 2017
            February
      10 2017
            $361.0
      million$
            157,500
            
            February
      10 2017 to February 9 2019
            February
      10 2019
            $302.0
      million$
            142,500
            
            February
      10 2019 to February 9 2021
            February
      10 2021
            $241.0
      million$
            135,000
            
            February
      10 2021 to November 14 2023


* based
on base interest rate of 4.25% per annum (excluding margin) on deemed
loan.





In
addition to the above purchase options, the charterer of West Taurusis obliged to
purchase the drilling rig for $149.0 million at the end of its charter in
November 2023.








85





D.
EXCHANGE CONTROLS





The
Bermuda Monetary Authority, or the BMA, must give permission for all issuances
and transfers of securities of a Bermuda exempt company like us. We have
received a general permission from the BMA to issue any unissued common shares,
and for the free transferability of the common shares as long as our common
shares are listed on the NYSE. Our common shares may therefore be freely
transferred among persons who are residents or non-residents of
Bermuda.





Although
we are incorporated in Bermuda, we are classified as non-resident of Bermuda for
exchange control purposes by the BMA. Other than transferring Bermuda Dollars
out of Bermuda, 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 our
common shares or other non-resident holders of our common shares in currency
other than Bermuda Dollars.





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 and pronouncements and judicial decisions, all as of the
date of this Annual Report.  Unless otherwise noted, references to the
"Company" include the Company's Subsidiaries.  This discussion assumes
that we do not have an office or other fixed place of business in the United
States.





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 United States will be considered to be 50%
derived from sources within the United States.  Shipping income
attributable to transportation that both begins and ends in the United States
will be considered to be 100% derived from sources within the United
States.  The Company is not permitted by law to engage in
transportation that gives rise to 100% U.S. source income.





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





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






86




Application
of Code Section 883 of the Code





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




(i)
            It
      is organized in a "qualified foreign country," which is one that grants an
      equivalent exemption from tax to corporations organized in the United
      States in respect of the shipping income for which exemption is being
      claimed under Section 883 and which the Company refers to as the Country
      of Organization Requirement; and  (ii)
            It
      can satisfy any one of the following two stock ownership requirements for
      more than half the days during the taxable
year:




·
            the
      Company's stock is "primarily and regularly traded on an established
      securities market" located in the United States or a "qualified foreign
      country," which we refer to as the Publicly-Traded Test;
  or




·
            more
      than 50% of the Company's stock, in terms of value, is beneficially owned
      by any combination of one or more individuals who are residents of a
      "qualified foreign country" or foreign corporations that satisfy the
      Country of Organization Requirement and the Publicly-Traded Test, which
      the Company refers to as the 50% Ownership
Test.







The U.S.
Treasury Department has recognized Bermuda, the country of incorporation of the
Company and certain of its subsidiaries, as a "qualified foreign country." In
addition, the U.S. Treasury Department has recognized Liberia, Panama, the Isle
of Man, Singapore, the Marshall Islands, Malta and Cyprus, the countries of
incorporation of certain of the Company's vessel-owning 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 shares be "regularly traded" on an
established securities market.  Under the Treasury Regulations, our
common shares are considered to be "regularly traded" on an established
securities market if shares representing more than 50% of our outstanding common
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, which
is referred to as the "trading frequency test;" 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), which is referred to a the "trading volume test."  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 shares are traded on an established market in the
United States and such stock is regularly quoted by dealers making a market in
our common shares.






87





For the
2009 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 common
shares were primarily and regularly traded on an established securities market
in the United States, namely the New York Stock Exchange.





Notwithstanding
the foregoing, our common shares 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 common shares 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 our
common shares, 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
common shares, 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 shares. 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 the Section 883 exemption and thereby become subject to
U.S. federal income tax on its U.S. source shipping income.  For
example, Hemen owned approximately 43.1% of our outstanding common shares at
March 26 2010. 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 common shares of the Company on more than half the days during the
taxable year. Due to the factual nature of the issues involved, there can be no
assurances as to 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 our common
shares 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 Section 883 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 Section 883 exemption. These requirements are
onerous and there is no assurance that we would be able to satisfy
them.








Taxation
in Absence of the 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, which we
refer to as the "4% gross basis tax regime." 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, or below, would never exceed 2% under the 4% gross basis tax
regime.









88





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" tax on
earnings "effectively connected" with the conduct of such U.S. trade or
business, as determined after allowance for certain adjustments, and on certain
interest paid or deemed paid attributable to the conduct of such U.S. trade or
business.





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





·
            we
      had, or were considered to have, a fixed place of business in the United
      States 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 United States, or, in
      the case of income from the chartering of a vessel, were attributable to a
      fixed place of business in the United
States.








We do not
have, nor will we permit circumstances that would result in having, any vessel
sailing to or from the United States on a regularly scheduled basis. Based on
the foregoing and on the expected mode of our shipping operations and other
activities, we believe that none of our U.S. source shipping income 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 United States
under U.S. federal income tax principles.  In general, a sale of a
vessel will be considered to occur outside of the United States for this purpose
if title to the vessel, and risk of loss with respect to the vessel, pass to the
buyer outside of the United States.  It is expected that any sale of a
vessel by us will be considered to occur outside of the United
States.





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 United States, 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 our common shares.  This discussion does not purport to
deal with the tax consequences of owning our common shares to all categories of
investors, some of which may be subject to special rules.  You are
encouraged to consult your own tax advisors concerning the overall tax
consequences arising in your own particular situation under U.S. federal, state,
local or foreign law of the ownership of our common shares.








89





As used
herein, the term U.S. Holder means a beneficial owner of our common shares that
(i) is a U.S. citizen or resident, a U.S. corporation or other U.S. entity
taxable as a corporation, an estate, the income of which is subject to U.S.
federal income taxation regardless of its source, or a trust if a court within
the United States is able to exercise primary jurisdiction over the
administration of the trust and one or more U.S. persons have the authority to
control all substantial decisions of the trust, (ii) owns our common shares as a
capital asset, generally, for investment purposes, and (iii) owns less than 10%
of our common shares for U.S. federal income tax purposes.





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








Distributions





Subject
to the discussion of passive foreign investment companies below, or PFICs, any
distributions made by us with respect to our common shares to a U.S. Holder will
generally constitute dividends, which may be taxable as ordinary income or
"qualified dividend income" as described in more detail below, to the extent of
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 shares 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 shares 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 shares are
readily tradable on an established securities market in the United States (such
as the New York Stock Exchange on which our common shares are 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 shares for more than 60 days in the
121-day period beginning 60 days before the date on which the common shares
becomes ex-dividend.





There is
no assurance that any dividends paid on our common shares 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 Shares





Assuming
we do not constitute a PFIC 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 shares in an amount equal to the difference between the amount realized
by the U.S. Holder from such sale, exchange or other disposition and the U.S.
Holder's tax basis in such common shares.  Such gain or loss will be
treated as long-term capital gain or loss if the U.S. Holder's holding period in
the common shares is greater than one year at the time of the sale, exchange or
other disposition.  Otherwise, it will be treated as short-term
capital gain or loss.  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
shares, 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."






90







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, Seward
& Kissel LLP, 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, or IRS, pronouncements concerning the characterization of
income derived from time charters and voyage charters as services income for
other tax purposes.





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 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 shares, as discussed below, and which election we
refer to as a Mark-to-Market Election.





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 its 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 shares will be increased to reflect taxed but undistributed
earnings and profits.  Distributions of earnings and profits that had
been previously taxed will result in a corresponding reduction in the adjusted
tax basis in the common shares and will not be taxed again once
distributed.  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 its U.S.
federal income tax return.  To make a QEF Election, a U.S. Holder must
receive annually certain tax information from us.  There can be no
assurances that we will be able to provide such information
annually.  An Electing Holder would generally recognize capital gain
or loss on the sale, exchange or other disposition of our common
shares.






91




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 common shares are treated as "marketable stock," a U.S. Holder would be
allowed to make a Mark-to-Market Election with respect to our common shares,
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
shares at the end of the taxable year over such holder's adjusted tax basis in
the common shares.  The U.S. Holder would also be permitted an
ordinary loss in respect of the excess, if any, of the U.S. Holder's adjusted
tax basis in the common shares over its fair market value at the end of the
taxable year, but only to the extent of the net amount previously included in
income as a result of the Mark-to-Market Election.  A U.S. Holder's
tax basis in its common shares would be adjusted to reflect any such income or
loss amount.  Gain realized on the sale, exchange or other disposition
of our common shares would be treated as ordinary income, and any loss realized
on the sale, exchange or other disposition of the common shares would be treated
as ordinary loss to the extent that such loss does not exceed the net
mark-to-market gains previously included in income by the U.S.
Holder.








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





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





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





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





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





Taxation
of Non-U.S. Holders





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





Dividends
on Common Shares





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 shares, unless that
dividend is effectively connected with the Non-U.S. Holder's conduct of a trade
or business in the United States.  If the Non-U.S. Holder is entitled
to the benefits of a U.S. income tax treaty with respect to those dividends,
that income is taxable, or taxable tax at the full rate, only if it is
attributable to a permanent establishment maintained by the Non-U.S. Holder in
the United States.






92





Sale,
Exchange or Other Disposition of Common Shares





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 shares, unless:





·
            the
      gain is effectively connected with the Non-U.S. Holder's conduct of a
      trade or business in the United States (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 United States);
or





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








If the
Non-U.S. Holder is engaged in a U.S. trade or business for U.S. federal income
tax purposes, the income from the common shares, including dividends and the
gain from the sale, exchange or other disposition of the common shares, 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, subject to certain
adjustments, may be subject to an additional branch profits tax at a rate of
30%, or at a lower rate as may be specified by an applicable income tax
treaty.





Backup
Withholding and Information Reporting





In
general, dividend payments, or other taxable distributions, made within the
United States to you will be subject to information reporting
requirements.  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 IRS that you have failed to report all interest or
      dividends required to be shown on your U.S. 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 United
States, then information reporting and backup withholding generally will not
apply to that payment.  However, U.S. information reporting, but not
backup withholding, will apply to a payment of sales proceeds, including a
payment made to you outside the United States., if you sell your common shares
through a non-U.S. office of a broker that is a U.S. person or has some other
contacts with the United States.  Such information reporting
requirements will not apply, however, if the broker has documentary evidence
that you are a non-U.S. person and certain other conditions are met, or you
otherwise establish an exemption.






93




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
IRS.





Bermuda
Taxation





Under
current Bermuda law, we are not subject to tax on income or capital gains. We
have received from the Minister of Finance under The Exempted Undertaking Tax
Protection Act 1966, as amended, an assurance that, in the event that Bermuda
enacts legislation imposing tax computed on profits, income, any capital asset,
gain or appreciation, or any tax in the nature of estate duty or inheritance,
then the imposition of any such tax shall not be applicable to us or to any of
our operations or shares, debentures or other obligations, until March 28, 2016.
We could be subject to taxes in Bermuda after that date. This assurance is
subject to the proviso that it is not to be construed to prevent the application
of any tax or duty to such persons as are ordinarily resident in Bermuda or to
prevent the application of any tax payable in accordance with the provisions of
the Land Tax Act 1967 or otherwise payable in relation to any property leased to
us. We and our subsidiaries incorporated in Bermuda pay annual government fees
to the Bermuda government.


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, 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 Liberian income tax as under
the Prior Law.





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




F.  
DIVIDENDS AND PAYING AGENTS





Not
Applicable





G.  
STATEMENT BY EXPERTS





Not
Applicable





H.  
DOCUMENTS ON DISPLAY





We are
subject to the informational requirements of the Securities Exchange Act of
1934, or the Exchange Act, 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. Our filings are also available on our website at www.shipfinance.bm.
This web address is provided as an inactive textual reference only. Information
on our website does not constitute part of this annual report.








94





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 2009 the Company and its consolidated subsidiaries had entered into
interest rate swap contracts with a combined notional principal amount of $1.1
billion at rates excluding margin over LIBOR of between 1.88% 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 $1.3 billion at
rates excluding margin over LIBOR of between 1.91% per annum and 3.92% per
annum. The swap agreements mature between December 2010 and May 2019, and we
estimate that we would pay $92 million to terminate these agreements as of
December 31 2009 (2008: pay $144 million). The overall effect of these swaps is
to fix the interest rate on $2.4 billion of floating rate debt at a weighted
average interest rate of 4.54% per annum including margin.





Several
of our charter contracts 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 2009, a total of $2.0 billion of our
floating rate debt was subject to such interest adjustment clauses, including
our equity accounted subsidiaries. Of this, $1.3 billion was also subject to
interest rate swaps entered into for the benefit of the charterer, with the
balance of $733 million remained on a floating rate basis.





At
December 31 2009 our net exposure, including equity-accounted subsidiaries, to
interest rate fluctuations on our outstanding debt was $548 million, compared
with $746 million at December 31 2008. Our net exposure to interest fluctuations
is based on our total of $3.6 billion floating rate debt outstanding at December
31 2009, less the $2.4 billion notional principle of our interest rate swaps and
the $733 million outstanding floating rate debt subject to interest adjustment
clauses under charter contracts. A one per-cent change in interest rates would
thus increase or decrease interest expense by $5.5 million per year as of
December 31 2009 (2008: $7.5 million).





Apart
from the above interest rate swap contracts, at December 31 2009 and the date of
this report we were not party to any other derivative contracts, having settled
in 2009 the TRS contracts indexed to our 8.5% Senior Notes and our own shares,
which we had been holding at December 31 2008.





The fair
market value of our outstanding 8.5% Senior Notes was $290 million as of
December 31 2009 (2008: $335 million).





The
Company may in the future enter into short-term TRS arrangements relating to our
own shares and Senior Notes or 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


95


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
payments 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





Pursuant
to Rules 13a-15(e) and 15(d)-15(e) of the Exchange Act, management assessed the
effectiveness of the design and operation of the Company's disclosure controls
and procedures 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 Exchange Act.





Internal
control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Exchange Act as a process designed by, or under the
supervision of, our principal executive and principal financial officers and
effected by our 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.






96




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 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 Exchange Act, as of December 31 2009. 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 2009.




c)
Attestation report of the registered public accounting firm





MSPC,
Certified Public Accountants and Advisors, or MSPC, a Professional Corporation
and 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 2009. 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.








ITEM
16
C.                      PRINCIPAL
ACCOUNTANT FEES AND SERVICES





Our
principal accountant for 2009 and 2008 was MSPC. The following table sets forth
the fees related to audit and other services provided by MSPC.





2009
            
            
            2008Audit
      Fees (a)
            
            $
            515,000
            
            
            $
            500,000Audit-Related
      Fees (b)
            
            $
            71,000
            
            
            $
            110,000Tax
      Fees (c)
            
            
            -
            
            
            
            -All
      Other Fees (d)
            
            $
            33,109
            
            
            $
            2,000Total
            
            $
            619,109
            
            
            $
            612,000








97






(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 of directors 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 2009 and 2008 were approved by the board of directors pursuant
      to the pre-approval policy.
  98


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





Not
applicable





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





No shares
have been repurchased by the Company since January 2006.








ITEM
16
F.             CHANGE
IN REGISTRANT'S  CERTIFYING ACCOUNTANT





Not
applicable.








ITEM
16
G.            CORPORATE
GOVERNANCE





Pursuant
to an exception under 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 Bye-laws, 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 Bye-laws, 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 Exchange Act, our audit
committee consists of two independent members 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.








99







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-34 and A-1 through A-16 are filed as part of this annual report:





Financial Statements: Ship
Finance International Limited





Report
      of Independent Registered Public Accounting Firm
            F-2Consolidated
      Statement of Operations for the years ended December 31 2009, 2008 and
      2007
            F-3Consolidated
      Balance Sheets as of December 31 2009 and 2008
            F-4Consolidated
      Statements of Cash Flows for the years ended December 31 2009, 2008 and
      2007
            F-5Consolidated
      Statement of Changes in Stockholders' Equity and Comprehensive Income for
      the years ended December 31 2009, 2008 and 2007
            F-6Notes
      to Consolidated Financial Statements
            F-7





Financial Statements: SFL
Deepwater Ltd.





Report
      of Independent Registered Public Accounting Firm
            A-2Statement
      of Operations for the years ended December 31 2009 and
2008
            A-3Balance
      Sheets as of December 31 2009 and 2008
            A-4Statements
      of Cash Flows for the years ended December 31 2009 and
2008
            A-5Statement
      of Changes in Stockholders' Equity and Comprehensive Income for the years
      ended December 31 2009 and 2008
            A-6Notes
      to Financial Statements
            A-7





The
financial statements of SFL Deepwater Ltd. have been included in this document
pursuant to Rule 3-09 of Regulation S-X





100







ITEM
19.                                EXHIBITS





Number
            Description
      of Exhibit





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





1.2*
            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 Performance Guarantee dated January 1 2004 issued by Frontline Ltd,
      incorporated by reference to Exhibit 10.3 of the Company's Original
      Registration Statement.





4.3
            Amendment
      No. 4 to Performance Guarantee dated January 1
  2004.





4.4*
            Form
      of Time Charter, incorporated by reference to Exhibit 10.4 of the
      Company's Original Registration
Statement.





4.5*
            Form
      of Vessel Management Agreements, incorporated by reference to Exhibit 10.5
      of the Company's Original Registration
  Statement.





4.6*
            Form
      of Charter Ancillary Agreement dated January 1 2004, incorporated by
      reference to Exhibit 10.6 of the Company's Original Registration
      Statement.





4.7*
            Amendments
      dated August 21, 2007, to the Charter Ancillary Agreements, incorporated
      by reference to Exhibit 4.8 of the Company's 2007 Annual Report as filed
      on Form 20-F on March 17, 2008.





4.8
            Addendum
      No. 6 to Charter Ancillary Agreement dated January 1
  2004.





4.9*
            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.





4.10*
            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.






101







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.


102


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 31, 2010
            By:
            /s/
      Ole B. HjertakerOle
      B. HjertakerChief
      Executive Officer &
              Interim
      Chief Financial Officer








103





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 2009, 2008 and
      2007
            F-3Consolidated
      Balance Sheets as of December 31 2009 and 2008
            F-4Consolidated
      Statements of Cash Flows for the years ended December 31 2009, 2008 and
      2007
            F-5Consolidated
      Statement of Changes in Stockholders' Equity and Comprehensive Income for
      the years ended December 31 2009, 2008 and 2007
            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, 2009
and 2008, 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, 2009.  We also have
audited the Company's internal control over financial reporting as of December
31, 2009, 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, 2009 and 2008, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2009, 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, 2009, 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 31,
2010


F-2


Ship Finance International
Limited





CONSOLIDATED
STATEMENTS OF OPERATIONS


for
the years ended December 31 2009,  2008 and 2007


(in thousands of $, except
per share amounts)





2009
            
            
            2008
            
            
            2007Operating
      revenuesDirect
      financing lease interest income from related parties
            
            
            147,498
            
            
            
            174,948
            
            
            
            185,032Direct
      financing and sales-type lease interest income from non-related
      parties
            
            
            3,870
            
            
            
            3,674
            
            
            
            1,648Finance
      lease service revenues from related parties
            
            
            88,953
            
            
            
            93,553
            
            
            
            102,070Profit
      sharing revenues from related parties
            
            
            33,018
            
            
            
            110,962
            
            
            
            52,527Time
      charter revenues from non-related parties
            
            
            2,836
            
            
            
            18,646
            
            
            
            22,886Bareboat
      charter revenues from related parties
            
            
            20,402
            
            
            
            21,188
            
            
            
            7,417Bareboat
      charter revenues from non-related parties
            
            
            48,452
            
            
            
            34,606
            
            
            
            24,588Other
      operating income
            
            
            191
            
            
            
            228
            
            
            
            1,835Total
      operating revenues
            
            
            345,220
            
            
            
            457,805
            
            
            
            398,003Gain
      on sale of assets
            
            
            24,721
            
            
            
            17,377
            
            
            
            41,669Operating
      expensesShip
      operating expenses to related parties
            
            
            88,953
            
            
            
            93,553
            
            
            
            103,399Ship
      operating expenses to non-related parties
            
            
            2,541
            
            
            
            6,353
            
            
            
            2,841Voyage
      expenses and commission
            
            
            -
            
            
            
            -
            
            
            
            132Depreciation
            
            
            30,236
            
            
            
            28,038
            
            
            
            20,636Vessel  impairment
      charge
            
            
            26,756
            
            
            
            -
            
            
            
            -Administrative
      expenses to related parties
            
            
            411
            
            
            
            1,013
            
            
            
            1,245Administrative
      expenses to non-related parties
            
            
            11,780
            
            
            
            8,823
            
            
            
            6,538Total
      operating expenses
            
            
            160,677
            
            
            
            137,780
            
            
            
            134,791Net
      operating income
            
            
            209,264
            
            
            
            337,402
            
            
            
            304,881Non-operating
      income / (expense)Interest
      income
            
            
            240
            
            
            
            3,478
            
            
            
            6,781Interest
      expense to related parties
            
            
            (15,923
            )
            
            
            (1,260
            )
            
            
            -Interest
      expense to non-related parties
            
            
            (101,152
            )
            
            
            (125,932
            )
            
            
            (130,401
            )Extraordinary
      gain on purchase of  8.5% Senior Notes
            
            
            20,600
            
            
            
            -
            
            
            
            -Long-term
      investment impairment charge
            
            
            (7,110
            )
            
            
            -
            
            
            
            -Other
      financial items, net
            
            
            11,050
            
            
            
            (54,876
            )
            
            
            (14,477
            )Net
      income before equity in earnings of associated companies
            
            
            116,969
            
            
            
            158,812
            
            
            
            166,784Equity
      in earnings of associated companies
            
            
            75,629
            
            
            
            22,799
            
            
            
            923Net
      income
            
            
            192,598
            
            
            
            181,611
            
            
            
            167,707Per
      share information:Basic
      earnings per share
            
            
            $2.59
            
            
            
            $2.50
            
            
            
            $2.31Diluted
      earnings per share
            
            
            $2.59
            
            
            
            $2.50
            
            
            
            $2.30








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 2009 and 2008


(in
thousands of $)





2009
            
            
            2008ASSETSCurrent
      assetsCash
      and cash equivalents
            
            
            84,186
            
            
            
            46,075Restricted
      cash
            
            
            4,101
            
            
            
            60,103Trade
      accounts receivable
            
            
            1,873
            
            
            
            435Due
      from related parties
            
            
            33,861
            
            
            
            45,442Other
      receivables
            
            
            1,076
            
            
            
            1,149Inventories
            
            
            94
            
            
            
            252Prepaid
      expenses and accrued income
            
            
            177
            
            
            
            3,638Investment
      in direct financing and sales-type  leases, current
      portion
            
            
            139,889
            
            
            
            173,982Financial
      instruments (short term):  mark to market
    valuation
            
            
            -
            
            
            
            466Total
      current assets
            
            
            265,257
            
            
            
            331,542Vessels
      and equipment
            
            
            638,665
            
            
            
            638,665Accumulated
      depreciation on vessels and equipment
            
            
            (82,058
            )
            
            
            (51,849
            )Vessels
      and equipment, net
            
            
            556,607
            
            
            
            586,816Newbuildings
            
            
            71,047
            
            
            
            69,400Investment
      in direct financing and sales-type leases, long-term
    portion
            
            
            1,653,826
            
            
            
            1,916,510Investment
      in associated companies
            
            
            444,435
            
            
            
            420,977Other
      long-term investments
            
            
            2,329
            
            
            
            8,545Deferred
      charges
            
            
            7,927
            
            
            
            14,696Total
      assets
            
            
            3,001,428
            
            
            
            3,348,486LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesShort-term
      debt and current portion of long-term debt
            
            
            292,541
            
            
            
            385,577Trade
      accounts payable
            
            
            8
            
            
            
            19Due
      to related parties
            
            
            422
            
            
            
            6,472Accrued
      expenses
            
            
            9,098
            
            
            
            17,937Financial
      instruments (short term): mark to market valuation
            
            
            -
            
            
            
            34,300Dividend
      payable
            
            
            11,214
            
            
            
            43,646Other
      current liabilities
            
            
            6,600
            
            
            
            5,291Total
      current liabilities
            
            
            319,883
            
            
            
            493,242Long-term
      liabilitiesLong-term
      debt
            
            
            1,843,409
            
            
            
            2,209,939Financial
      instruments (long term): mark to market valuation
            
            
            58,346
            
            
            
            94,415Other
      long-term liabilities
            
            
            30,462
            
            
            
            33,540Total
      liabilities
            
            
            2,252,100
            
            
            
            2,831,136Commitments
      and contingent liabilities
            
            
            -
            
            
            
            -Stockholders'
      equityShare
      capital
            
            
            79,125
            
            
            
            72,744Additional
      paid-in capital
            
            
            59,307
            
            
            
            2,194Contributed
      surplus
            
            
            506,559
            
            
            
            496,922Accumulated
      other comprehensive loss
            
            
            (48,716
            )
            
            
            (90,064
            )Accumulated
      other comprehensive loss – associated companies
            
            
            (33,415
            )
            
            
            (49,244
            )Retained
      earnings
            
            
            186,468
            
            
            
            84,798Total
      stockholders' equity
            
            
            749,328
            
            
            
            517,350Total
      liabilities and stockholders' equity
            
            
            3,001,428
            
            
            
            3,348,486





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 2009, 2008 and 2007


(in
thousands of $)





2009
            
            
            2008
            
            
            2007Operating
      activitiesNet
      income
            
            
            192,598
            
            
            
            181,611
            
            
            
            167,707Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
            
            
            30,236
            
            
            
            28,038
            
            
            
            20,636Vessel
      impairment charge
            
            
            26,756
            
            
            
            -
            
            
            
            -Long-term
      investment impairment charge
            
            
            7,110
            
            
            
            -
            
            
            
            -Amortization
      of deferred charges
            
            
            5,507
            
            
            
            3,777
            
            
            
            3,358Amortization
      of seller's credit
            
            
            (2,065
            )
            
            
            (2,144
            )
            
            
            (440
            )Equity
      in earnings of associated companies
            
            
            (75,629
            )
            
            
            (22,799
            )
            
            
            (923
            )Gain
      on sale of assets
            
            
            (24,721
            )
            
            
            (17,377
            )
            
            
            (41,669
            )Adjustment
      of derivatives to market value
            
            
            (12,675
            )
            
            
            54,527
            
            
            
            12,557Gain
      on repurchase of 8.5% Senior Notes
            
            
            (20,600
            )
            
            
            -
            
            
            
            -Other
            
            
            98
            
            
            
            (122
            )
            
            
            2,034Changes
      in operating assets and liabilities, net of effect of
      acquisitionsTrade
      accounts receivable
            
            
            (1,438
            )
            
            
            (407
            )
            
            
            463Due
      from related parties
            
            
            5,531
            
            
            
            (3,909
            )
            
            
            19,950Other
      receivables
            
            
            73
            
            
            
            (1,996
            )
            
            
            790Inventories
            
            
            158
            
            
            
            15
            
            
            
            64Prepaid
      expenses and accrued income
            
            
            3,461
            
            
            
            (3,338
            )
            
            
            (121
            )Other
      current assets
            
            
            -
            
            
            
            -
            
            
            
            11,223Trade
      accounts payable
            
            
            (11
            )
            
            
            (78
            )
            
            
            (436
            )Accrued
      expenses
            
            
            (8,839
            )
            
            
            965
            
            
            
            5,710Other
      current liabilities
            
            
            (28
            )
            
            
            (5,377
            )
            
            
            1,513Net
      cash provided by operating activities
            
            
            125,522
            
            
            
            211,386
            
            
            
            202,416Investing
      activitiesInvestment
      in direct financing lease assets
            
            
            -
            
            
            
            (104,000
            )
            
            
            (210,000
            )Repayments
      from investments in direct financing and
      sales-type  leases
            
            
            209,368
            
            
            
            210,348
            
            
            
            173,193Additions
      to newbuildings
            
            
            (71,468
            )
            
            
            (22,395
            )
            
            
            (47,383
            )Purchase
      of vessels
            
            
            -
            
            
            
            (60,200
            )
            
            
            (434,283
            )Proceeds
      from sales of vessels
            
            
            163,086
            
            
            
            23,005
            
            
            
            152,659Proceeds
      on cancellation of newbuildings
            
            
            -
            
            
            
            1,845
            
            
            
            -Equity
      investments in associated companies
            
            
            -
            
            
            
            (435,000
            )
            
            
            -Net
      amounts received from (paid to) associated companies
            
            
            68,000
            
            
            
            (7,891
            )
            
            
            91Proceeds
      from (costs of) other investments
            
            
            (920
            )
            
            
            (6,537
            )
            
            
            992Placement
      of restricted cash
            
            
            56,002
            
            
            
            (33,120
            )
            
            
            (14,046
            )Net
      cash provided by (used in) investing activities
            
            
            424,068
            
            
            
            (433,945
            )
            
            
            (378,777
            )Financing
      activitiesShares
      issued under "ATM" registration, net of issue costs
            
            
            16,472
            
            
            
            -
            
            
            
            -Repurchase
      of 8.5% Senior Notes
            
            
            (125,405
            )
            
            
            -
            
            
            
            -Proceeds
      from issuance of short-term and long-term debt
            
            
            134,500
            
            
            
            576,973
            
            
            
            620,224Repayments
      of short-term and long-term debt
            
            
            (446,061
            )
            
            
            (251,451
            )
            
            
            (265,430
            )Debt
      fees paid
            
            
            (752
            )
            
            
            (1,551
            )
            
            
            (3,432
            )Cash
      settlement of derivative instruments
            
            
            (14,666
            )
            
            
            (10,655
            )
            
            
            -Cash
      dividends paid
            
            
            (75,567
            )
            
            
            (122,937
            )
            
            
            (159,335
            )Deemed
      dividends received
            
            
            -
            
            
            
            -
            
            
            
            4,642Deemed
      dividends paid
            
            
            -
            
            
            
            -
            
            
            
            (6,622
            )Net
      cash provided by (used in) financing activities
            
            
            (511,479
            )
            
            
            190,379
            
            
            
            190,047Net
      change in cash and cash equivalents
            
            
            38,111
            
            
            
            (32,180
            )
            
            
            13,686Cash
      and cash equivalents at start of the year
            
            
            46,075
            
            
            
            78,255
            
            
            
            64,569Cash
      and cash equivalents at end of the year
            
            
            84,186
            
            
            
            46,075
            
            
            
            78,255Supplemental
      disclosure of cash flow information:Interest
      paid, net of capitalized interest
            
            
            117,231
            
            
            
            126,759
            
            
            
            123,777


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 2009, 2008 and 2007


(in
thousands of $, except number of shares)





2009
            
            
            2008
            
            
            2007Number
      of shares outstandingAt
      beginning of year
            
            
            72,743,737
            
            
            
            72,743,737
            
            
            
            72,743,737Shares
      issued
            
            
            6,381,263
            
            
            
            -
            
            
            
            -At
      end of year
            
            
            79,125,000
            
            
            
            72,743,737
            
            
            
            72,743,737Share
      capitalAt
      beginning of year
            
            
            72,744
            
            
            
            72,744
            
            
            
            72,744Shares
      issued
            
            
            6,381
            
            
            
            -
            
            
            
            -At
      end of year
            
            
            79,125
            
            
            
            72,744
            
            
            
            72,744Additional
      paid-in capitalAt
      beginning of year
            
            
            2,194
            
            
            
            737
            
            
            
            49Transfer
      to contributed surplus
            
            
            (2,194
            )
            
            
            -
            
            
            
            -Employee
      stock options issued
            
            
            1,392
            
            
            
            1,457
            
            
            
            688Shares
      issued
            
            
            57,915
            
            
            
            -
            
            
            
            -At
      end of year
            
            
            59,307
            
            
            
            2,194
            
            
            
            737Contributed
      surplusAt
      beginning of year
            
            
            496,922
            
            
            
            485,119
            
            
            
            464,429Transfer
      from additional paid-in capital
            
            
            2,194
            
            
            
            -
            
            
            
            -Amortization
      of deferred equity contributions
            
            
            7,443
            
            
            
            11,803
            
            
            
            20,690At
      end of year
            
            
            506,559
            
            
            
            496,922
            
            
            
            485,119Accumulated
      other comprehensive lossAt
      beginning of year
            
            
            (90,064
            )
            
            
            (13,894
            )
            
            
            (71
            )Other
      comprehensive income (loss)
            
            
            41,348
            
            
            
            (76,170
            )
            
            
            (13,823
            )At
      end of year
            
            
            (48,716
            )
            
            
            (90,064
            )
            
            
            (13,894
            )Accumulated
      other comprehensive loss – associated companiesAt
      beginning of year
            
            
            (49,244
            )
            
            
            -
            
            
            
            -Other
      comprehensive income (loss)
            
            
            15,829
            
            
            
            (49,244
            )
            
            
            -At
      end of year
            
            
            (33,415
            )
            
            
            (49,244
            )
            
            
            -Retained
      earningsAt
      beginning of year
            
            
            84,798
            
            
            
            69,771
            
            
            
            63,379Net
      income
            
            
            192,598
            
            
            
            181,611
            
            
            
            167,707Dividends
      declared
            
            
            (90,928
            )
            
            
            (166,584
            )
            
            
            (159,335
            )Deemed
      dividends received
            
            
            -
            
            
            
            -
            
            
            
            4,642Deemed
      dividends paid
            
            
            -
            
            
            
            -
            
            
            
            (6,622
            )At
      end of year
            
            
            186,468
            
            
            
            84,798
            
            
            
            69,771Total
      Stockholders' Equity
            
            
            749,328
            
            
            
            517,350
            
            
            
            614,477Comprehensive
      incomeNet
      income
            
            
            192,598
            
            
            
            181,611
            
            
            
            167,707Fair
      value adjustment to hedging financial instruments
            
            
            41,248
            
            
            
            (76,019
            )
            
            
            (13,948
            )Fair
      value adjustment to hedging financial instruments in associated
      companies
            
            
            15,829
            
            
            
            (49,244
            )
            
            
            -Other
      comprehensive income (loss)
            
            
            100
            
            
            
            (151
            )
            
            
            125Comprehensive
      income
            
            
            249,775
            
            
            
            56,197
            
            
            
            153,884








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.
Since then additional vessels have been acquired from Frontline and chartered
back to Frontline Shipping II Limited ("Frontline Shipping II"), also a
subsidiary of Frontline. 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 2009, the Company owned 25 very large crude oil carriers ("VLCCs"),
seven Suezmax crude oil carriers, eight oil/bulk/ore carriers ("OBOs"), one
Panamax drybulk carrier, eight container vessels, one jack-up drilling rig,
three ultra-deepwater drilling units, six offshore supply vessels and two
chemical tankers. Included in the above are the single-hull VLCCFront Sabangand the Suezmax
tanker Glorycrown,
which are subject to sales-type lease 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 2009, the Company had
contracted to acquire five container vessels (see, however, Note 24 "Subsequent
events") and one Suezmax tanker. The Company has agreed to sell the Suezmax
tanker on sales-type lease terms immediately upon its 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.








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 in ASC Topic 810 "Consolidation" ("ASC 810":
formerly FIN 46(R)) as a legal entity where either (a) equity interest holders
as a group lack the characteristics of a controlling financial interest,
including decision making ability and an interest in the entity's residual risks
and rewards, or (b) the equity holders have not provided sufficient equity
investment to permit the entity to finance its activities without additional
subordinated financial support, or (c) the voting rights of some investors are
not proportional to their obligations to absorb the expected losses of the
entity, their rights to receive the expected residual returns of the entity, or
both, and substantially all of the entity's activities either involve or are
conducted on behalf of an investor that has disproportionately few voting
rights.





F-7





ASC 810
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.





Investments
in associated companies





Investments
in companies over which the Company exercises significant influence but which it
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, direct financing lease interest
income, sales-type 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 receipt relates.




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





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






F-8








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
2009, we capitalized $0.6 million of interest.  No charge for
depreciation is made until a newbuilding is put into operation.





Investment
in Capital Leases





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





For
capital leases that are direct financing leases, the difference between the
gross investment in the lease and the carrying value of the vessel is recorded
as unearned lease interest income. The net investment in the lease consists of
the gross investment less the unearned income. Over the period of the lease each
charter payment received, net of vessel operating costs if applicable, is
allocated between "lease interest income" and "repayment of investment in lease"
in such a way as to produce a constant percentage rate of return on the balance
of the net investment in the direct financing lease. Thus, as the balance of the
net investment in each direct financing lease decreases, less of each lease
payment received is allocated to lease interest income and more is allocated to
lease repayment. For direct financing leases relating to time chartered vessels,
the portion of each time charter payment received that is allocated to vessel
operating costs is classified as "lease service revenue".




For
capital leases that are sales-type leases, 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 lease interest income. The
discount rate used in determining the present values is the interest rate
implicit in the lease. The present value of the minimum lease payments, computed
using the interest rate implicit in the lease, is recorded as the sales price,
from which the carrying value of the vessel at the commencement of the lease is
deducted in order to determine the profit or loss on sale. As is the case for
direct financing leases, the unearned lease interest income is amortized to
income over the period of the lease so as to produce a constant periodic rate of
return on the net investment in the lease.






F-9





Where a
capital lease relates to a charter arrangement containing fixed price purchase
options, the projected carrying value of the net investment in the 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 lease at an option date, the rate
of amortization of unearned 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
lease to the un-guaranteed residual value or the option price at the next option
date, as appropriate.





This
accounting policy for investments in capital 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 lease at the option date, a gain will be reported
in the statement of operations at the date of delivery to the new
owners.








Other
Investments





Other
long term investments are measured at fair value using the best available value
indicators. The Company currently has one such investment in shares which are
not publicly traded. The best estimate available for the valuation of this
investment is the cost basis. When using this basis of valuation, the Company
carries out regular reviews for possible impairment adjustments. Following such
a review, an adjustment was made to the carrying value of this asset in 2009,
which is reported in the consolidated statement of operations as "Long term
investment impairment charge".








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 accounted 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
was applied due to the related party nature of the charter arrangements. The
last pre-existing charter to third parties was completed in the year ended
December 31 2007, following which no deemed dividends have been paid or
received.






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 direct
financing leases in the balance sheet.  This results from the related
party nature of both the transfer of the vessel and the subsequent direct
financing 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.











F-10





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
Company carried out a review of the carrying value of its vessels, drilling rigs
and long-term investments in the second quarter of the year ended December 31,
2009, and concluded that the carrying values of its six single hull vessels,
excluding those sold under sales-type lease agreements, and its investment in
SeaChange Maritime LLC were impaired. Following the impairment charges taken
against these assets, the review of the carrying value of long-lived assets as
at December 31, 2009, indicated that none of the Company's asset values are
further impaired.





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 ASC Topic 815 "Derivatives and
Hedging" ("ASC 815": formerly 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.






F-11





Total
return bond swaps





The
Company may enter 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





The
Company may enter into 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).





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 ASC Topic 718 "Compensation – Stock
Compensation" ("ASC 718": formerly FAS 123(R)).  Under ASC 718 we are
required to expense the fair value of stock options issued to employees over the
period the options vest. The Company uses 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.





F-12





3.
            RECENTLY
      ISSUED ACCOUNTING STANDARDS





In
September 2006, the Financial Accounting Standards Board ("FASB") issued FAS No.
157 "Fair Value
Measurements" ("FAS 157": now ASC Topic 820 "Fair Value Measurement and
Disclosures"), which establishes a framework for measuring fair value in
accordance with Generally Accepted Accounting Principles ("GAAP") and expands
disclosures about fair value measurements. This statement was effective for
financial assets and liabilities as well as for any other assets and liabilities
that are carried at fair value on a recurring basis in financial statements as
of the beginning of the entity's first fiscal year that begins after November
15, 2007.  In February 2008 the FASB issued Staff Position No.157-2
"Effective Date of FASB
Statement No.157" ("FSP 157-2") which defers the effective date of FAS
157 for one year relative to certain non-financial 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 relating to
non-financial assets and liabilities became effective for the Company with
effect from January 1, 2009 and did not have a material impact on its
consolidated results of operations or financial condition.





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": now ASC Topic 815 "Derivatives and Hedging").
FAS 161 applies to all derivative instruments and related hedged items accounted
for under ASC 815 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 ASC 815 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 did not have a material impact on the Company's consolidated
financial position, results of operations, and cash flows.





In
May 2009, the FASB issued guidance on accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. The guidance, which is outlined in ASC
Topic 855 "Subsequent
Events" and updated in Accounting Standards Update 2010-09 "Subsequent
Events (Topic 855)",  establishes the period after the balance sheet
date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements, and the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. The adoption of these
changes did not have an impact on our consolidated financial statements because
the Company already followed a similar approach prior to the adoption of this
guidance.





In June
2009, the FASB issued ASC Topic 105 "The Codification and the Hierarchy
of Generally Accepted Accounting Principles" ("ASC 105").  The
guidance stipulates the Codification as the single source of authoritative
nongovernmental U.S. GAAP.  The statement is effective for interim and
annual periods ending after September 15, 2009.  The Company has
updated its references to GAAP in its consolidated financial statements for the
year ended December 31, 2009.  As the Codification was not intended to
change or alter existing GAAP, it did not have any impact on the Company's
consolidated financial statements.





In June
2009, the FASB issued FAS No. 167 "Amendments to FASB Interpretation
No. 46(R)" ("FAS 167": now ASC Topic 810 "Consolidation"). FAS 167
amends the evaluation criteria to identify the primary beneficiary of a variable
interest entity provided by FASB Interpretation No.
46(R).  Additionally, FAS 167 requires ongoing reassessments of
whether an enterprise is the primary beneficiary of the variable interest entity
and additional disclosures. The Company will adopt FAS 167 in fiscal year 2010
and does not expect it to have any material impact on its consolidated financial
position, results of operations, and cash flows.





F-13








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.






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.






F-14





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





Year
      ended December 31(in
      thousands of $)
                
                2009
                
                
                2008
                
                
                2007Net
      income available to stockholders
                
                
                192,598
                
                
                
                181,611
                
                
                
                167,707
   The
components of the denominator for the calculation of basic and diluted EPS are
as follows:




Year
      ended December 31(in
      thousands of $)
              
              2009
              
              
              2008
              
              
              2007Basic
      earnings per share:Weighted
      average number of common shares outstanding
              
              
              74,399
              
              
              
              72,744
              
              
              
              72,744Diluted
      earnings per share:Weighted
      average number of common shares outstanding
              
              
              74,399
              
              
              
              72,744
              
              
              
              72,744Effect
      of dilutive share options
              
              
              5
              
              
              
              28
              
              
              
              1574,404
              
              
              
              72,772
              
              
              
              72,759
  F-15


7.
            OPERATING
      LEASES





Rental
income





The
      minimum future revenues to be received under the Company's non-cancelable
      operating leases as of December 31, 2009 are as
  follows:





(in
      thousands of $)
              Year
      ending December 312010
            
            
            65,9982011
            
            
            65,2662012
            
            
            64,9032013
            
            
            63,7432014
            
            
            62,992Thereafter
            
            
            267,940Total
      minimum lease revenues
            
            
            590,842








The
      cost and accumulated depreciation of vessels leased to third parties on
      operating leases at December 31, 2009 and 2008 were as
      follows:





(in
      thousands of $)
            
            2009
            
            
            2008Cost
            
            
            638,665
            
            
            
            638,665Accumulated
      depreciation
            
            
            82,058
            
            
            
            51,849







8.
            GAIN
      ON SALE OF ASSETS





During
the year ended December 31, 2009 the Company realized the following gains on
sales of vessels:





(in thousands of
      $)
              Vessel
            
            Imputed
      sales price
            
            
            Book
      value
            
            
            GainFront
      Duchess
            
            
            16,372
            
            
            
            16,353
            
            
            
            19Glorycrown
            
            
            95,100
            
            
            
            70,398
            
            
            
            24,702111,472
            
            
            
            86,751
            
            
            
            24,721




The
VLCC Front Duchess was
a direct financing lease asset and the sales price on disposal is shown net of
charter termination payments.
  The Glorycrown
is a newbuilding Suezmax tanker which on delivery from the yard was sold under a
sales-type lease agreement, terminating in November 2014. Total agreed cash
payments of $113 million will be received over the five year term and the
imputed sale price above has been calculated in accordance with ASC Topic 840
"Leases".
The vessel will be included in net investment in sales-type leases until the
termination of the lease in 2014.





In
addition to the above sales, the jack-up drilling rig West Ceres and the VLCC Front Vanadis were also
disposed of in the year ended December 31, 2009. These were both direct
financing lease assets on which the lessees exercised fixed price purchase
options. There was no gain or loss recorded on these disposals, as a result of
the accounting policy relating to investment in capital leases. The policy
provides that if any option price is less than the projected net investment in
the capital lease at an option date, the rate of amortization of unearned lease
interest income is adjusted so as to reduce the net investment in the lease to
the option price at the option date.





F-16





9.
            OTHER
      FINANCIAL ITEMS





Other
financial items comprise the following items:





Year
      ended December 31(in
      thousands of $)
            
            2009
            
            
            2008
            
            
            2007Net
      increase/(decrease)  in mark-to-market valuation of financial
      instruments
            
            
            12,675
            
            
            
            (54,527
            )
            
            
            (12,558
            )Other
      items
            
            
            (1,625
            )
            
            
            (349
            )
            
            
            (1,919
            )Total
      other financial items
            
            
            11,050
            
            
            
            (54,876
            )
            
            
            (14,477
            )





The net
increase/(decrease) in mark-to-market valuations relates to 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 $)
            
            2009
            
            
            2008Restricted
      cash
            
            
            4,101
            
            
            
            60,103





Restricted
cash consists mainly of deposits held as collateral by the relevant banks in
connection with loans, interest rate swaps, bond swaps 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 at both December
31, 2009 and 2008.





Other
receivables





Other
receivables are presented net of allowances for doubtful accounts. As at
December 31, 2009 and 2008 there was no allowance.








12.
            VESSELS
      AND EQUIPMENT, NET








(in thousands of
      $)
            
            2009
            
            
            2008Cost
            
            
            638,665
            
            
            
            638,665Accumulated
      depreciation and amortization
            
            
            82,058
            
            
            
            51,849Vessels
      and equipment, net
            
            
            556,607
            
            
            
            586,816





Depreciation
and amortization expense was $30.2 million, $28.0 million and $20.6 million for
the years ended December 31 2009, 2008 and 2007, respectively.





F-17





13.
            INVESTMENTS
      IN DIRECT FINANCING AND SALES-TYPE
LEASES





Most of
the Company's VLCCs, Suezmaxes and OBOs are chartered on long term, fixed rate
time 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
three to 17 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 jack-up drilling rig is chartered on a long term bareboat charter to
SeaDrill Invest II Limited ("SeaDrill II"), a wholly owned subsidiary of
Seadrill Limited ("Seadrill"), a related party.  The terms of the
charter provide the charterer with various call options to acquire the rig at
certain dates throughout the charter, which expires in 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
charterer with various call options to acquire the vessels at certain dates
throughout the charters, which expire in 2020.





As of
December 31, 2009, 41 of the Company's assets were accounted for as direct
financing leases, all of which are leased to related parties. In addition, two
of the Company's assets were accounted for as sales-type leases, these being
Front SabangandGlorycrown which are leased
to non-related parties.





The
following lists the components of the investments in direct financing and
sales-type leases as at December 31, 2009, of which Front SabangandGlorycrown accounted for
$75.4 million.





(in
      thousands of $)
            
            2009
            
            
            2008Total
      minimum lease payments to be received
            
            
            3,339,545
            
            
            
            3,903,011Less: amounts
      representing estimated executory costs including profit thereon, included
      in total minimum lease payments
            
            
            (831,275
            )
            
            
            (926,987
            )Net
      minimum lease payments receivable
            
            
            2,508,270
            
            
            
            2,976,024Estimated
      residual values of leased property (un-guaranteed)
            
            
            522,873
            
            
            
            625,857Less: unearned
      income
            
            
            (1,013,139
            )
            
            
            (1,278,840
            )2,018,004
            
            
            
            2,323,041Less: deferred deemed
      equity contribution
            
            
            (206,474
            )
            
            
            (213,917
            )Less: unamortized
      gains
            
            
            (17,815
            )
            
            
            (18,632
            )Total
      investment in direct financing and
      sales-type  leases
            
            
            1,793,715
            
            
            
            2,090,492Current
      portion
            
            
            139,889
            
            
            
            173,982Long-term
      portion
            
            
            1,653,826
            
            
            
            1,916,5101,793,715
            
            
            
            2,090,492





The
minimum future gross revenues to be received under the Company's non-cancellable
direct financing and sales-type leases as of December 31, 2009 are as
follows:





(in
      thousands of $)
              Year
      ending December 312010
            
            
            349,9212011
            
            
            317,5412012
            
            
            297,7312013
            
            
            292,4482014
            
            
            289,165Thereafter
            
            
            1,792,739Total
      minimum lease revenues
            
            
            3,339,545








F-18





14.
            INVESTMENT
      IN ASSOCIATED COMPANIES





At
      December 31, 2009 and 2008 the Company has the following participation in
      investments that are recorded using the equity
  method:





2009
            
            
            2008Front
      Shadow Inc. ("Front Shadow")
            
            
            100.00
            %
            
            
            100.00
            %SFL
      West Polaris Limited ("SFL West Polaris")
            
            
            100.00
            %
            
            
            100.00
            %SFL
      Deepwater Ltd ("SFL Deepwater")
            
            
            100.00
            %
            
            
            100.00
            %







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





As
      of December 31 2009(in
      thousands of $)
            
            TOTAL
            
            
            Front
      Shadow
            
            
            SFL
      West Polaris
            
            
            SFL
      DeepwaterCurrent
      assets
            
            
            316,822
            
            
            
            1,882
            
            
            
            112,002
            
            
            
            202,938Non
      current assets
            
            
            2,125,707
            
            
            
            21,626
            
            
            
            692,690
            
            
            
            1,411,391Current
      liabilities
            
            
            247,575
            
            
            
            6,055
            
            
            
            77,403
            
            
            
            164,117Non
      current liabilities
            
            
            1,693,751
            
            
            
            14,460
            
            
            
            578,088
            
            
            
            1,101,203








As
      of December 31 2008(in
      thousands of $)
            
            TOTAL
            
            
            Front
      Shadow
            
            
            SFL
      West Polaris
            
            
            SFL
      DeepwaterCurrent
      assets
            
            
            230,139
            
            
            
            1,666
            
            
            
            84,780
            
            
            
            143,693Non
      current assets
            
            
            2,358,735
            
            
            
            23,518
            
            
            
            767,742
            
            
            
            1,567,475Current
      liabilities
            
            
            488,851
            
            
            
            6,535
            
            
            
            75,459
            
            
            
            406,857Non
      current liabilities
            
            
            1,690,276
            
            
            
            16,520
            
            
            
            662,033
            
            
            
            1,011,723





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





Year
      ended December 31 2009(in
      thousands of $)
            
            TOTAL
            
            
            Front
      Shadow
            
            
            SFL
      West Polaris
            
            
            SFL
      DeepwaterOperating
      revenues
            
            
            150,473
            
            
            
            1,109
            
            
            
            57,547
            
            
            
            91,817Net
      operating income
            
            
            150,230
            
            
            
            1,096
            
            
            
            57,442
            
            
            
            91,692Net
      income
            
            
            75,629
            
            
            
            864
            
            
            
            22,476
            
            
            
            52,289





Year
      ended December 31 2008(in
      thousands of $)
            
            TOTAL
            
            
            Front
      Shadow
            
            
            SFL
      West Polaris
            
            
            SFL
      DeepwaterOperating
      revenues
            
            
            44,823
            
            
            
            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
            
            
            
            -
            
            
            
            -





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 2009 the balance outstanding under this facility was
$16.5 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. In addition, Front Shadow has a put option to sell the vessel to Golden
Ocean at a fixed price at the end of the charter, which expires in
2016.






F-19





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 2009 the balance outstanding under
this facility was $618.7 million. The Company guaranteed $90.0 million of this
debt at December 31, 2009. 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") and Seadrill Offshore AS ("Seadrill Offshore"), fully guaranteed by
Seadrill. In September 2008 SFL Deepwater entered into a $1,400.0 million term
loan facility and at December 31 2009 the balance outstanding under this
facility was $1,255.3 million. The Company guarantees $200.0 million of this
debt. The rigs are chartered on a bareboat basis and the terms of the charter
provide each of the charterers with various call options to acquire the rigs at
certain dates throughout the charter. In addition, there is an obligation for
each of the charterers to purchase the respective 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 ASC
810.








15.
            ACCRUED
      EXPENSES





(I
      (in thousands of $)
            
            2009
            
            
            2008Ship
      operating expenses
            
            
            84
            
            
            
            619Administrative
      expenses
            
            
            1,333
            
            
            
            1,176Interest
      expense
            
            
            7,681
            
            
            
            16,1429,098
            
            
            
            17,937





16.
            DIVIDEND
      PAYABLE





On
November 27, 2009 the Board declared a dividend of $0.30 per share totaling
$23.4 million, to be paid on or about January 27, 2010 in cash or, at the
election of the shareholder, in newly issued common shares at a price of $13.16
per share.  As a result of the shareholders' elections, this dividend
was in settled in January 2010 by the issue of 930,483 new shares and cash
payments of $11.2 million. These newly issued shares have been included in
reported share capital as at December 31, 2009, and dividend payable corresponds
to the net amount payable in cash. At December 31, 2008, dividend payable
represents the gross amount payable, as there was no option for shareholders to
receive payment of this dividend in the form of shares.




17.SHORT-TERM
      AND LONG-TERM
      DEBT





(in
      thousands of $)
            
            2009
            
            
            2008Long-term
      debt:8.5%
      Senior Notes due 2013
            
            
            301,074
            
            
            
            449,080U.S.
      dollar fixed rate loan due 2011 to a related party
            
            
            90,000
            
            
            
            115,000U.S.
      dollar denominated floating rate debt (LIBOR plus margin)
      due      through 2019
            
            
            1,718,376
            
            
            
            2,031,4362,109,450
            
            
            
            2,595,516Short-term
      debt:U.S.
      dollar floating rate loan due 2010 to a related party
            
            
            26,500
            
            
            
            -Total
      short-term and long-term debt
            
            
            2,135,950
            
            
            
            2,595,516Less: short-term debt
      and current portion of long-term debt
            
            
            (292,541
            )
            
            
            (385,577
            )1,843,409
            
            
            
            2,209,939









F-20






The
outstanding debt as of December 31, 2009 is repayable as follows:





(in
      thousands of $)
              Year
      ending December 312010
            
            
            292,5412011
            
            
            826,8872012
            
            
            240,7062013
            
            
            431,2112014
            
            
            151,371Thereafter
            
            
            193,234Total
      debt
            
            
            2,135,950





The
weighted average interest rate for floating rate debt denominated in U.S.
dollars as at December 31, 2009 was 3.59% per annum (2008: 3.85% per annum).
These rates take into consideration the effect of related interest rate swaps.
At December 31, 2009 the three month dollar LIBOR rate was 0.25%.





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.





In 2004,
2005 and 2006 the Company bought back and cancelled notes with an aggregate
principal amount of $130.9 million. No notes were bought in 2007 and
2008.  In 2009 the Company purchased notes with a principal amount
totalling $148.0 million, which are being held as treasury notes and against
which certain borrowings are secured (see below). A gain of $20.6 million was
recorded on the purchase. The net amount outstanding at December 31, 2009 was
$301.1 million (2008: $449.1 million).





$115
million loan due to a related party





In
November 2008 the Company entered into a $115 million loan agreement at a fixed
interest rate with a related party. The $90.0 million outstanding at December
31, 2009, is repayable in January 2011.




$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, 2009 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.







F-21





$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 which were used to partly fund the
acquisition of the jack-up drilling rig West Ceres. In July 2009 the
West Ceres was sold
pursuant to the exercise of a pre-agreed purchase option, and the facility fully
repaid.





$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 the remaining four
vessels.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 container vessel SFL Europa. The facility
bears interest at LIBOR plus a margin and is repayable over a term of seven
years.  At December 31, 2009 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.




$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.  Two of the VLCCs were sold in 2009 and the
facility now relates to a single VLCC. The facility bears interest at LIBOR plus
a margin and is repayable over a term of two years.  At December 31,
2009 the available amount under the facility was fully drawn.









F-22







$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, 2009 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,
2009 the available amount under the facility was fully drawn.





$60
million secured term loan facility





In June
2009 the Company entered into a $60 million secured term loan facility with a
bank.  The proceeds of the facility were used to partly fund the
purchase of 8.5% Senior Notes issued by the Company, which are being held as
treasury notes and against which the facility is secured. The facility bears
interest at LIBOR plus a margin and is repayable over a term of two
years.





$30
million secured term loan facility





In June
2009 the Company entered into a $30 million secured term loan facility with a
bank.  The proceeds of the facility were used to partly fund the
purchase of 8.5% Senior Notes issued by the Company, which are being held as
treasury notes and against which the facility is secured. The facility bears
interest at LIBOR plus a margin and is repayable over a term of three
years.





$27
million short-term loan due to related party





In March
2009 the Charter Ancillary Agreement with Frontline Shipping III was amended,
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 is available on a revolving basis, bears interest at LIBOR
plus a margin, and is due for repayment in 2010.





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,
2009, 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".






F-23







19.
            SHARE
      CAPITAL AND CONTRIBUTED SURPLUS





Authorized
      share capital is as follows:





(in
      thousands of $, except share data)
            
            2009
            
            
            2008125,000,000
      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)
            
            2009
            
            
            200879,125,000
      common shares of $1.00 par value each (2008: 72,743,737
      shares)
            
            
            79,125
            
            
            
            72,744





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





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, 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. In the year ended December
31, 2009, the Company issued and sold 1,372,100 shares under this arrangement,
with total proceeds of $16.5 million net of costs, giving a premium on issue of
$15.1 million.





During
the year ended December 31, 2009, the Company declared four dividends and in
each case shareholders were given the option to elect to receive their dividend
in cash or in the form of newly issued common shares at a 5% discount to the
volume-weighted-average-price of the shares for the three trading days prior to
the ex-dividend date. Details of the dividends declared during the year and the
associated issue of new shares are as follows:





Date
      of dividend declaration
            February
      26, 2009
            May
      14, 2009
            August
      20, 2009
            November
      27, 2009Dividend
      per share
            $0.30
            $0.30
            $0.30
            $0.30Ex-dividend
      date
            March
      5, 2009
            May
      22, 2009
            August
      27, 2009
            December
      4, 2009Date
      of dividend payment
            April
      17, 2009
            July
      6, 2009
            October
      16, 2009
            January
      27, 2010Price
      at which new shares issued
            $5.68
            $11.31
            $12.86
            $13.16Last
      date for election to receive dividend in the form of
shares
            April
      13, 2009
            June
      26, 2009
            October
      7, 2009
            January
      19, 2010Approximate
      proportion
              of
      shareholders electing to receive shares
            55%
            47%
            51%
            52%Number
      of new shares issued
            2,112,422
            1,038,777
            916,921
            930,483
      (see Note)Total
      share premium on issue
            $9.9
      million
            $10.7
      million
            $10.9
      million
            $11.3
      million


Note: The
issue of new shares on January 27, 2010, has been reflected in the Consolidated
Balance Sheet as at December 31, 2009, since at the date of this report the
outcome of the shareholders' elections was fully known.





In June
2009 10,560 new common shares, at a premium of approximately $0.05million, were
issued to an employee in lieu of the dividend portion of his share-based bonus
payment.  The value of the payment was $0.06 million, which was equal
to the accrued dividend bonus as at December 31, 2008.





Following
the above issues of new shares, the Company had issued share capital of
79,125,000 common shares as at December 31, 2009, including 930,483 shares
issued on or about January 27, 2010, to shareholders who elected to receive in
the form of shares the dividend which they became entitled to on December 4,
2009.





The total
premium on issue of new shares in the year ended December 31, 2009, amounted to
$57.9 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 the corresponding
amount is credited to additional paid in capital (see also Note
20).





F-24





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 net investment in direct financing
leases in the balance sheet.  This results from the related party
nature of both the transfer of the vessels and the subsequent
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, 2009, the Company has credited contributed surplus with $7.4 million of such
deemed equity contributions (2008: $11.8 million).







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.





Previously
granted options for 355,000 shares were cancelled in July 2009 and concurrently
replaced with five awards for a total of 495,000 options. As prescribed by ASC
718, this has been accounted for as a modification of previous awards of equity
instruments. In addition, one new grant of options for 10,000 shares was awarded
in July 2009 and six new grants of options for a total of 65,000 shares were
awarded in October 2009. The fair value of each option modification and each new
option granted is estimated on the date of the modification or new grant using
the Black-Scholes option valuation model, with the following
assumptions:  risk-free interest rate of 1.41% (weighted average
across options), volatility of 64% (weighted average across options), a dividend
yield of 0% and a weighted average expected option term of 3.5
years.  The risk-free interest rates were estimated using the interest
rate on three year US treasury zero coupon issues.  The volatility was
estimated using historical share price data.  The dividend yield has
been estimated at 0% as the exercise price is reduced by all dividends declared
by the Company from the date of grant to the exercise date.  It is
assumed that all options granted under the plan will vest.





The
following summarizes share option transactions related to the Option Scheme in
2009, 2008 and 2007:





2009
            
            
            2008
            
            
            2007Options
            
            
            Weighted
      average exercise price
              $
            
            
            Options
            
            
            Weighted
      average exercise price
              $
            
            
            Options
            
            
            Weighted
      average exercise price
              $Options
      outstanding at beginning of year
            
            
            555,000
            
            
            
            24.18
            
            
            
            360,000
            
            
            
            24.44
            
            
            
            150,000
            
            
            
            22.32Cancelled
            
            
            (355,000
            )
            
            
            21.91
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Granted
            
            
            570,000
            
            
            
            10.91
            
            
            
            195,000
            
            
            
            27.52
            
            
            
            210,000
            
            
            
            28.15Exercised
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Options
      outstanding at end of year
            
            
            770,000
            
            
            
            14.84
            
            
            
            555,000
            
            
            
            24.18
            
            
            
            360,000
            
            
            
            24.44Exercisable
      at end of year
            
            
            133,333
            
            
            
            27.64
            
            
            
            170,000
            
            
            
            21.55
            
            
            
            50,000
            
            
            
            20.13





The
weighted average grant-date fair value of new options granted during 2009 is
$5.63 per share (2008: $6.42 per share, 2007: $6.06 per share). The weighted
average modification-date fair value of option modifications in 2009 is $2.56
per share (2008: $nil, 2007: $nil). 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 exercise 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. The exercise price shown for options cancelled
is the average of the reduced prices at the time of cancellation.





As of
December 31, 2009 there was $1.6 million in unrecognized compensation costs
related to non-vested options granted under the Option Scheme (2008: $1.3
million). This cost will be recognized over the vesting periods, which average
2.1 years.








F-25





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 other 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





-
            Golar
      LNG Limited ("Golar")





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




(in
      thousands of $)
            
            2009
            
            
            2008Amounts
      due from:Frontline
      Charterers
            
            
            33,585
            
            
            
            42,643Frontline
      Ltd
            
            
            276
            
            
            
            2,799Total
      amount due from related parties
            
            
            33,861
            
            
            
            45,442Amounts
      due to:Frontline
      Management
            
            
            234
            
            
            
            6,293Other
      related parties
            
            
            188
            
            
            
            179Total
      amount due to related parties
            
            
            422
            
            
            
            6,472Short-term
      debt: due to a related party
            
            
            26,500
            
            
            
            -Current
      portion of long-term debt: due to a related party
            
            
            -
            
            
            
            115,000Long-term
      debt due to a related party
            
            
            90,000
            
            
            
            -








Related
party leasing and service contracts




As at
December 31, 2009, 38 of the Company's vessels were leased to the Frontline
Charterers, one jack-up drilling rig was leased to a subsidiary of Seadrill and
two offshore supply vessels were leased to subsidiaries of Deep Sea: these
leases have been recorded as capital leases. In addition, four offshore supply
vessels were leased to Deep Sea under operating leases.




At
December 31, 2009 the combined balance of net investments in direct financing
leases with the Frontline Charterers and subsidiaries of Seadrill and Deep Sea
was $1,942.6 million (2008: $2,275.7 million) of which $128.0 million (2008:
$157.5 million) represents short-term maturities.





At
December 31, 2009 the net book value of assets leased under operating leases to
Deep Sea was $147.1 million (2008: $156.6 million).






F-26





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




Payments
      (in millions of $)
            
            2009
            
            
            2008
            
            
            2007Operating
      lease income
            
            
            20.4
            
            
            
            21.2
            
            
            
            7.4Direct
      financing lease interest income
            
            
            147.5
            
            
            
            174.9
            
            
            
            185.0Finance
      lease service revenue
            
            
            89.0
            
            
            
            93.6
            
            
            
            102.1Direct
      financing lease repayments
            
            
            153.8
            
            
            
            175.7
            
            
            
            156.7Deemed
      dividends received
            
            
            -
            
            
            
            -
            
            
            
            4.6Deemed
      dividends paid
            
            
            -
            
            
            
            -
            
            
            
            (6.6
            )





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, 2009, the Company earned and recognized revenue of $33.0
million (2008: $111.00 million, 2007: $52.5 million) under this
arrangement.





In the
event that vessels on charter to the Frontline Charterers are agreed to be sold,
the Company may pay compensation for the termination of the lease. In September
2009 Front Duchess was
sold and the lease on this vessel was cancelled, with an agreed termination fee
of $2.4 million.





As at
December 31, 2009 the Company was owed a total of $33.6 million (2008: $42.6
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 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. An exception to this arrangement is for any vessel leased to the
Frontline Charterers which is sub-chartered on a bareboat basis, for which there
is no management fee payable for the duration of the bareboat sub-charter. In
the year ended December 31, 2009 management fees payable to Frontline Management
amounted to $89.0 million (2008: $93.6 million, 2007: $103.4 million). The
management fees are classified as ship operating expenses in the consolidated
statements of operations.





We pay a
commission of 1% to Frontline Management in respect of all payments received in
respect of the five year sales-type leases on the newly delivered Suezmax
vessels Glorycrown and
Everbright. In 2009 we
paid $0.4 million to Frontline Management pursuant to this
arrangement.





The
Company also paid $0.4 million in 2009 (2008: $1.0 million, 2007: $1.2 million)
to Frontline Management for the provision of management and administrative
services. As at December 31, 2009 the Company owes Frontline Management $0.2
million (2008: $6.3 million).





The
Company paid $208,000 in 2009 (2008: $37,000, 2007: $nil) to Golar Management UK
Limited, a subsidiary of Golar, for the provision of office facilities. At
December 31, 2009, the Company owed Golar Management UK Limited $115,000, which
is included in amounts due to other related parties.





Related
party loans





At
December 31, 2009 the Company had two loans from related parties, which are
discussed in Note 17: Short-term and long-term debt.





F-27





Related
party purchases and sales of vessels - 2009





In July
2009 a subsidiary of Seadrill, to which the jack-up drilling rig West Ceres was chartered,
exercised its option to purchase the rig from the Company at the fixed option
price of $135.2 million.





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 HerculesandWest Taurus,for $1,690.0
million from subsidiaries of Seadrill. The rigs were each chartered back to
subsidiaries of Seadrill for periods of 15 years, fully guaranteed by
Seadrill.  The subsidiaries have 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 subsidiaries of Seadrill have purchase obligations 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.





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.





F-28





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, 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, 2009, the Company and its consolidated
subsidiaries 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, which are all designated as hedges against
specific loans.





Notional Principal(in thousands of
      $)
            Inception
      date
            Maturity
      date
            
            Fixed
      interest rate$486,836
      (reducing to $415,422)
            February
      2008
            February
      2011
            
            
            2.87%
      - 4.03
            %$190,573
      (reducing to $98,269)
            April
      2006
            May
      2019
            
            
            5.65
            %$107,738
      (reducing to $86,612)
            September
      2007
            September
      2012
            
            
            4.85
            %$64,718
      (reducing to $51,902)
            January
      2008
            December
      2011
            
            
            3.69
            %$46,064
      (reducing to $24,794)
            March
      2008
            August
      2018
            
            
            4.05%
      - 4.15
            %$190,264
      (reducing to $169,683)
            March
      2008
            June
      2012
            
            
            1.88%
      - 3.43
            %







As
at December 31 2009 the total notional principal amounts subject to such swap
agreements was $1,086.2 million (2008: $1,205.6 million).
  Total
Return Bond Swap transactions





In prior
years the Company entered into short-term total return bond swap transactions
with banks (see Note 2: Derivatives) and at December
31, 2008, was holding bond swaps with a principal amount totaling $148.0 million
under these arrangements. In the year ended December 31, 2009, these bond swap
transactions were settled and the Company acquired 8.5% Senior Notes with a
principal amount totaling $148.0 million, which are being held as treasury notes
(see Note 17:8.5% Senior
Notes due 2013). No bond swaps were held by the Company at December 31,
2009.








Total
Return Equity Swap transactions





In prior years the Company
entered into total return equity swap transactions indexed to the Company's own
shares (see Note 2:Derivatives) and at December
31, 2008, the counterparty to the transactions had acquired approximately
692,000 shares in the Company at an adjusted average price of $9.79. These
equity swap transactions were settled in the year ended December 31, 2009. In
addition to 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.





At
December 31, 2009, there were no equity swap transactions to which the Company
was party.








Foreign
      currency risk





The
majority of the Company's transactions, assets and liabilities are denominated
in U.S. dollars, the functional currency of the Company.  There is a
risk that currency fluctuations will have a negative effect on the value of the
Company's cash flows.  The Company has not entered into forward
contracts for either transaction or translation risk, which may have an adverse
effect on the Company's financial condition and results of
operations.








F-29







Fair Values




The
carrying value and estimated fair value of the Company's financial assets and
liabilities at December 31, 2009 and 2008 are as follows:





(in
      thousands of $)
            
            2009
              Carrying
      value
            
            
            2009
              Fair value
            
            
            2008
              Carrying
      value
            
            
            2008
              Fair valueNon-derivatives:Cash
      and cash equivalents
            
            
            84,186
            
            
            
            84,186
            
            
            
            46,075
            
            
            
            46,075Restricted
      cash
            
            
            4,101
            
            
            
            4,101
            
            
            
            60,103
            
            
            
            60,103Floating
      rate short-term debt
            
            
            26,500
            
            
            
            26,500
            
            
            
            -
            
            
            
            -Fixed
      rate long term debt
            
            
            90,000
            
            
            
            90,000
            
            
            
            115,000
            
            
            
            115,000Floating
      rate long term debt
            
            
            1,718,376
            
            
            
            1,718,376
            
            
            
            2,031,436
            
            
            
            2,031,4368.5%
      Senior Notes due 2013
            
            
            301,074
            
            
            
            289,784
            
            
            
            449,080
            
            
            
            334,565Derivatives:TRS
      equity swap contracts – short term receivables
            
            
            -
            
            
            
            -
            
            
            
            466
            
            
            
            466Total
      short term amounts receivable
            
            
            -
            
            
            
            -
            
            
            
            466
            
            
            
            466TRS
      bond swap contracts –  short term payables
            
            
            -
            
            
            
            -
            
            
            
            34,221
            
            
            
            34,221Interest
      rate swap contracts – short term payables
            
            
            -
            
            
            
            -
            
            
            
            79
            
            
            
            79Total
      short term amounts payable
            
            
            -
            
            
            
            -
            
            
            
            34,300
            
            
            
            34,300Interest
      rate swap contracts – long term payables
            
            
            58,346
            
            
            
            58,346
            
            
            
            94,415
            
            
            
            94,415Total
      amounts payable
            
            
            58,346
            
            
            
            58,346
            
            
            
            128,715
            
            
            
            128,715





In
accordance with the accounting policy relating to interest rate swaps (see Note
2 "Derivatives – Interest rate
swaps"), where the Company has designated the swap as a hedge, and to the
extent that the hedge is effective, changes in the fair values of interest rate
swaps are recognized in other comprehensive income. Changes in the fair value of
other swaps and the ineffective portion of swaps designated as hedges are
recognized in the consolidated statement of operations (see also Note 24 "Subsequent
events").




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,
      2009
            
            
            (Level
1)
            
            
            (Level
2)
            
            
            (Level
3)Assets:Cash
      and cash equivalents
            
            
            84,186
            
            
            
            84,186Restricted
      cash
            
            
            4,101
            
            
            
            4,101Total
      assets
            
            
            88,287
            
            
            
            88,287
            
            
            
            -
            
            
            
            -Liabilities:Floating
      rate short-term debt
            
            
            26,500
            
            
            
            26,500Fixed
      rate long term debt
            
            
            90,000
            
            
            
            90,000Floating
      rate long term debt
            
            
            1,718,376
            
            
            
            1,718,3768.5%
      Senior Notes due 2013
            
            
            289,784
            
            
            
            289,784Interest
      rate swap contracts –  long term payables
            
            
            58,346
            
            
            
            -
            
            
            
            58,346Total
      liabilities
            
            
            2,183,006
            
            
            
            2,124,660
            
            
            
            58,346
            
            
            
            -





ASC Topic
820 "Fair Value Measurement
and Disclosures" ("ASC 820") 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, ASC 820 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).






F-30






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 short-term and 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
long-term debt is estimated to be equal to the carrying value since it is
repayable within thirteen months.





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, 2009.




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, 2009
Frontline accounted for 72% of our operating revenues (2008: 75%, 2007: 78%).
There is thus a concentration of revenue risk with Frontline.








23.
            COMMITMENTS
      AND CONTINGENT LIABILITIES





Assets
      Pledged





2009Book
      value of assets pledged under ship mortgages
            $2,350
      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 may result in additional calls on the
members.





At
December 31, 2009 the Company had contractual commitments under newbuilding
contractstotaling
$189.1 million (2008: $675.7 million). There was also at that date a commitment
to subscribe up to $0.6 million in additional share capital to SeaChange
Maritime LLC, a long term investment in which the Company has a 7%
shareholding.








F-31





24.
            SUBSEQUENT
      EVENTS





In
January 2010 the Company agreed to grant purchase options for the VLCC Edinburgh to an unrelated
third party, exercisable in March 2012 and March 2014 at a fixed price of
approximately $20.5 million, which is significantly above the vessel's projected
carrying value.  Concurrently Frontline has agreed to increase the
charterhire by $1,000 per day until March 2012 and Frontline will be entitled to
earn a commission if one of the purchase options is exercised.





In
February 2010 the Company announced the sale of the VLCC Front Vista to a
subsidiary of Frontline for $58.5 million. Compensation of $0.4 million was
received from Frontline for the cancellation of the related charter. A gain on
sale of approximately $1.8 million was recorded and the Company received net
proceeds of approximately $22.1 million, after repayment of associated
borrowings. A short-term seller's credit of $41.5 million was extended to
Frontline, which bears interest at LIBOR plus a margin.





On
February 26, 2010, the Board of Ship Finance declared a dividend of $0.30 per
share to be paid in cash on or about March 30, 2010.





In
February 2010 the Company agreed to terminate agreements made in 2007 relating
to the acquisition of four newbuilding container vessels with an aggregate cost
of approximately $155 million. Concurrently, the Company agreed to acquire seven
newbuilding Handysize drybulk carriers with delivery expected in 2010 and 2011,
for an aggregate construction cost of approximately $188 million.





In
February 2010 the Company announced that it has agreed certain amendments to the
charter agreements with Frontline Shipping and Frontline Shipping II, whereby
restricted cash deposits held by them as security against their charter
commitments will be reduced from an aggregate amount of $174 million to $62
million, in exchange for a guarantee from Frontline for the payment of charter
hire. Frontline Shipping and Frontline Shipping II will be prohibited from
making withdrawals from the restricted cash deposits.





In March
2010 the Company announced that it has concluded arrangements for a $725 million
secured term loan facility due 2015, for the financing of 26 vessels chartered
to Frontline. The new facility replaced the $1,131 million secured term loan
facility due 2011.





In March
2010 the Company terminated the interest rate swap contracts relating to the
$1,131 million secured term loan facility due 2011. The termination of the swap
contracts will result in the reclassification of $14.8 million of mark to
market adjustments, currently reported in other comprehensive income, to the
income statement in 2010.





In March
2010 the Company took delivery of the newbuilding Suezmax tanker Everbright from the shipyard.
The vessel immediately commenced a five year sales-type lease terminating in
March 2015.





In March
2010 the Company announced that it has concluded arrangements for a $42.6
million term loan facility due 2014, secured against the newbuilding Suezmax
tanker Glorycrown.





In March
2010 the Company announced that it has concluded arrangements for a $42.6
million term loan facility due 2015, secured against the newbuilding Suezmax
tanker Everbright.





In March
2010 the Company announced that it has agreed the sale of the single-hull VLCC
Golden River to an
unrelated third party for a gross sales price of approximately $12.6 million.
The vessel is expected to be delivered to its new owner in April 2010 and a
termination fee of approximately $3 million will be paid to Frontline for the
early termination of the related charter.





In March
2010 the Company awarded a total of 72,000 options to employees under the Share
Option Scheme, at an initial exercise price of $18.38 per share.








F-32





SFL
Deepwater Ltd.


Index
to Financial Statements














Report
      of Independent Registered Public Accounting Firm
            A-2Statements
      of Operations for the year ended December 31, 2009 and the period from
      July 11, 2008 (date of incorporation) to December 31,
2008.
            A-3Balance
      Sheets as of December 31, 2009 and 2008
            A-4Statements
      of Cash Flows for the year ended December 31, 2009 and the period from
      July 11, 2008 (date of incorporation) to December 31,
2008.
            A-5Statement
      of Changes in Stockholders' Equity and Comprehensive Income for the year
      ended December 31, 2009 and the period from July 11, 2008 (date of
      incorporation) to December 31, 2008.
            A-6Notes
      to the Consolidated Financial Statements
            A-7























A-1


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the
Board of Directors and Stockholders


SFL
Deepwater Ltd.





We have
audited the accompanying balance sheets of SFL Deepwater Ltd. (the "Company") as
of December 31, 2009 and 2008, and the related statements of operations, changes
in stockholders' equity and comprehensive income, and cash flows for the year
ended December 31, 2009, and the period July 11, 2008 (date of incorporation) to
December 31, 2008.  The Company's management is responsible for these
financial statements.  Our responsibility is to express an opinion on
these financial statements based on our audits.





We
conducted our audits in accordance with auditing standards generally accepted in
the United States of America.  Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  Our audits of
the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.  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.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of SFL Deepwater Ltd. as of December
31, 2009 and 2008, and the results of its operations and its cash flows for the
year ended December 31, 2009, and the period July 11, 2008 (date of
incorporation) to December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America.











/S/
MSPC


Certified
Public Accountants and Advisors


A
Professional Corporation


New York,
New York


March 31,
2010








A-2


SFL
Deepwater Ltd.





STATEMENTS
OF OPERATIONS


for
the year ended December 31, 2009 and


the
period from July 11, 2008 (date of incorporation) to December 31,
2008


(in thousands of
$








Year
      ended
                December
      31, 2009
              
              
              Period
      from
                July
      11, 2008
                (date
      of incorporation)
                to
      December 31, 2008Operating
      revenuesDirect
      financing lease interest income from related parties
              
              
              91,817
              
              
              
              15,035Total
      operating revenues
              
              
              91,817
              
              
              
              15,035Operating
      expensesAdministration
      expenses
              
              
              125
              
              
              
              129Total
      operating expenses
              
              
              125
              
              
              
              129Net
      operating income
              
              
              91,692
              
              
              
              14,906Non-operating
      income / (expense)Interest
      income
              
              
              4
              
              
              
              1Interest
      expense
              
              
              (39,237
              )
              
              
              (6,301
              )Other
      financial items, net
              
              
              (170
              )
              
              
              (100
              )Net
      income
              
              
              52,289
              
              
              
              8,506
  The
accompanying notes are an integral part of these consolidated financial
statements.





A-3


SFL
Deepwater Ltd.





BALANCE
SHEETS


as
of December 31, 2009 and 2008


(in
thousands of $)




2009
              
              
              2008ASSETSCurrent
      assetsCash
      and cash equivalents
              
              
              2
              
              
              
              11,547Due
      from parent
              
              
              31,072
              
              
              
              -Due
      from other related parties
              
              
              19,808
              
              
              
              338Investment
      in direct financing leases, current portion
              
              
              152,056
              
              
              
              131,808Total
      current assets
              
              
              202,938
              
              
              
              143,693Long-term
      assetsInvestment
      in direct financing leases, long-term portion
              
              
              1,396,214
              
              
              
              1,548,270Deferred
      charges
              
              
              15,177
              
              
              
              19,067Financial
      instruments (long term): mark to market valuation
              
              
              -
              
              
              
              138Total
      assets
              
              
              1,614,329
              
              
              
              1,711,168LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesCurrent
      portion of long-term debt
              
              
              155,833
              
              
              
              137,125Deferred
      revenue
              
              
              6,436
              
              
              
              3,836Due
      to parent
              
              
              -
              
              
              
              13,624Due
      to other related parties
              
              
              -
              
              
              
              250,000Accrued
      expenses
              
              
              1,848
              
              
              
              2,272Total
      current liabilities
              
              
              164,117
              
              
              
              406,857Long-term
      liabilitiesLong-term
      debt
              
              
              1,099,417
              
              
              
              1,005,667Financial
      instruments (long term): mark to market valuation
              
              
              1,786
              
              
              
              6,056Total
      liabilities
              
              
              1,265,320
              
              
              
              1,418,580Commitments
      and contingent liabilities
              
              
              -
              
              
              
              -Stockholders'
      equityShare
      capital
              
              
              -
              
              
              
              -Additional
      paid-in capital
              
              
              290,000
              
              
              
              290,000Accumulated
      other comprehensive loss
              
              
              (1,786
              )
              
              
              (5,918
              )Retained
      earnings
              
              
              60,795
              
              
              
              8,506Total
      stockholders' equity
              
              
              349,009
              
              
              
              292,588Total
      liabilities and stockholders' equity
              
              
              1,614,329
              
              
              
              1,711,168





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






A-4





SFL
Deepwater Ltd.





STATEMENTS
OF CASH FLOWS


for
the year ended December 31, 2009 and


the
period from July 11,  2008 (date of incorporation) to December 31,
2008


(in
thousands of $)






Year
      ended
                December
      31, 2009
              
              
              Period
      from
                July
      11, 2008
                (date
      of incorporation)
                to
      December 31, 2008Operating
      activitiesNet
      income
              
              52,289
              
              
              
              8,506Adjustments
      to reconcile net income to net cash provided
                by
      operating activities:Amortization
      of deferred charges
              
              3,942
              
              
              
              603Changes
      in operating assets and liabilities:Amounts
      due from/to parent
              
              (44,696
              )
              
              
              13,624Amounts
      due from/to other related parties
              
              (269,470
              )
              
              
              249,662Deferred
      revenue
              
              2,600
              
              
              
              3,836Accrued
      expenses
              
              (424
              )
              
              
              2,272Net
      cash provided by (used in) operating activities
              
              (255,759
              )
              
              
              278,503Investing
      activitiesInvestment
      in direct financing lease assets
              
              -
              
              
              
              (1,690,000
              )Repayments
      from investments in direct financing leases
              
              131,808
              
              
              
              9,922Net
      cash provided by (used in) investing activities
              
              131,808
              
              
              
              (1,680,078
              )Financing
      activitiesPaid-in
      capital received from parent company
              
              -
              
              
              
              290,000Proceeds
      from issuance of long-term debt
              
              250,000
              
              
              
              1,150,000Repayments
      of long-term debt
              
              (137,542
              )
              
              
              (7,208
              )Debt
      fees paid
              
              (52
              )
              
              
              (19,670
              )Net
      cash provided by financing activities
              
              112,406
              
              
              
              1,413,122Net
      change in cash and cash equivalents
              
              (11,545
              )
              
              
              11,547Cash
      and cash equivalents at start of the year
              
              11,547
              
              
              
              -Cash
      and cash equivalents at end of the year
              
              2
              
              
              
              11,547


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








A-5





SFL
Deepwater Ltd.





STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME


for
the year ended December 31, 2009 and


the
period from July 11, 2008 (date of incorporation) to December 31,
2008


(in
thousands of $, except number of shares)




Year
      ended
                December
      31, 2009
              
              
              Period
      from
                July
      11, 2008
                (date
      of incorporation)
                to
      December 31, 2008Number
      of shares outstandingAt
      beginning of period
              
              
              100
              
              
              
              -Shares
      issued in period
              
              
              -
              
              
              
              100At
      end of period
              
              
              100
              
              
              
              100Share
      capitalAt
      beginning of period
              
              
              -
              
              
              
              -Shares
      issued in period
              
              
              -
              
              
              
              -At
      end of period
              
              
              -
              
              
              
              -Additional
      paid-in capitalAt
      beginning of period
              
              
              290,000
              
              
              
              -Shares
      issued in period
              
              
              -
              
              
              
              290,000At
      end of period
              
              
              290,000
              
              
              
              290,000Accumulated
      other comprehensive lossAt
      beginning of period
              
              
              (5,918
              )
              
              
              -Other
      comprehensive loss in period
              
              
              4,132
              
              
              
              (5,918
              )At
      end of period
              
              
              (1,786
              )
              
              
              (5,918
              )Retained
      earningsAt
      beginning of period
              
              
              8,506
              
              
              
              -Net
      income in period
              
              
              52,289
              
              
              
              8,506At
      end of period
              
              
              60,795
              
              
              
              8,506Total
      Stockholders' Equity
              
              
              349,009
              
              
              
              292,588Comprehensive
      incomeNet
      income
              
              
              52,289
              
              
              
              8,506Fair
      value adjustment to hedging financial instruments
              
              
              4,132
              
              
              
              (5,918
              )Comprehensive
      income
              
              
              56,421
              
              
              
              2,588








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


A-6


SFL
Deepwater Ltd.


Notes
to the Financial Statements




1.
            GENERAL




SFL
Deepwater Ltd. (the "Company") was incorporated in Bermuda on July 11, 2008, as
a wholly-owned subsidiary of Ship Finance International Limited ("Ship Finance")
for the purpose of acquiring and leasing certain assets. In November 2008 the
Company acquired two ultra-deepwater semi-submersible drilling rigs from
subsidiaries of Seadrill Limited ("Seadrill"), a related company listed on the
Oslo Stock Exchange. The rigs are chartered to Seadrill Deepwater Charterer Ltd.
("Seadrill Deepwater") and Seadrill Offshore AS ("Seadrill Offshore"), both
subsidiaries of Seadrill and together referred to as the Seadrill
Charterers.





The
Company is accounted for using the equity method in the Consolidated Financial
Statements of Ship Finance, as it has been determined that Ship Finance is not
the primary beneficiary of the Company.







2.
            ACCOUNTING
      POLICIES




Basis
of Accounting




The
financial statements are prepared in accordance with accounting principles
generally accepted in the United States ("US GAAP").





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 all 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. 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
charter hire and direct financing lease interest income.





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





Rental
payments from capital leases are allocated between direct financing lease
interest income and repayment of net investment in direct financing
leases.






A-7





Any
contingent elements of rental income, such as 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 drilling rigs is 30 years, which is a
common life expectancy applied in the offshore drilling industry.





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 residual 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".





Investment
in Direct Financing Leases




Current
leases (charters) of our assets where we are the lessor are classified as direct
financing leases. For these leases, the minimum lease payments plus the
estimated residual value of the asset are recorded as the gross investment in
the direct financing 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 direct financing lease interest income. Over
the period of the lease, each charter payment received is allocated between
"direct financing lease interest income" and "repayment of investment in direct
financing leases" in such a way as to produce a constant percentage rate of
return on the balance of the net investment in the lease. Thus, as the balance
of the net investment in each lease decreases, less of each charter payment
received is allocated to direct financing lease interest income and more is
allocated to direct financing lease repayment.





Where a
direct financing lease relates to a charter arrangement containing fixed price
purchase options, the projected carrying value of the net investment in the
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 lease at an option date,
the rate of amortization of unearned 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
lease to the un-guaranteed residual value or the option price at the next option
date, as appropriate.





This
accounting policy for investments in direct financing 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 lease at the option date, a gain will be
reported in the statement of operations at the date of delivery to the new
owners.






A-8





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.  The review of the carrying value of long-lived assets at
December 31, 2009, indicated that none of the Company's asset values are
impaired.





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 the 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 the 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 ASC Topic 815 "Derivatives and Hedging" (ASC 815: formerly
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.








3.
            RECENTLY
      ISSUED ACCOUNTING STANDARDS




In
September 2006, the Financial Accounting Standards Board ("FASB") issued FAS No.
157 "Fair Value
Measurements" ("FAS 157": now ASC Topic 820 "Fair Value Measurement and
Disclosures"), which establishes a framework for measuring fair value in
accordance with Generally Accepted Accounting Principles ("GAAP") and expands
disclosures about fair value measurements. This statement was effective for
financial assets and liabilities as well as for any other assets and liabilities
that are carried at fair value on a recurring basis in financial statements as
of the beginning of the entity's first fiscal year that begins after November
15, 2007.  In February 2008 the FASB issued Staff Position
No.157-2 "Effective Date of
FASB Statement No.157" ("FSP
157-2") which defers the
effective date of FAS 157 for one year relative to certain non-financial 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
results of operations or financial condition. The remaining aspects of FAS 157
relating to non-financial assets became effective for the Company with effect
from January 1, 2009 and did not have a material impact on its results of
operations or financial condition.






A-9





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": now ASC Topic 815 "Derivatives and Hedging").
FAS 161 applies to all derivative instruments and related hedged items accounted
for under ASC 815 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 ASC 815
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 did not have a material impact on the
Company's financial position, results of operations, and cash
flows.





In
May 2009, the FASB issued guidance on accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. The guidance, which is outlined in ASC
Topic 855 "Subsequent
Events" and updated in accounting Standards Update 2010-09 "Subsequent
Events (Topic 855)",  establishes the period after the balance sheet date
during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements, and the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. The adoption of these
changes did not have an impact on our financial statements.





In June
2009, the FASB issued ASC Topic 105 "The Codification and the Hierarchy
of Generally Accepted Accounting Principles".  The guidance
stipulates the Codification as the single source of authoritative
nongovernmental U.S. GAAP.  The statement is effective for interim and
annual periods ending after September 15, 2009.  As the Codification
was not intended to change or alter existing GAAP, it did not have any impact on
the Company's financial statements.





In June
2009, the FASB issued FAS No. 167 "Amendments to FASB Interpretation
No. 46(R)" ("FAS 167": now ASC Topic 810 "Consolidation"). FAS 167
amends the evaluation criteria to identify the primary beneficiary of a variable
interest entity provided by FASB Interpretation No.
46(R).  Additionally, FAS 167 requires ongoing reassessments of
whether an enterprise is the primary beneficiary of the variable interest entity
and additional disclosures. As the Company does not hold investments in other
entities, the adoption of FAS 167 in fiscal year 2010 will not have an impact on
its financial position, results of operations, and cash flows.






4.
            SEGMENT
      INFORMATION




The
Company has only one reportable segment.




A-10




5.
            TAXATION




Bermuda




Under
      current Bermuda law, the Company is not required to pay taxes in Bermuda
      on either income or capital gains.





United
      States




The
      Company does not accrue U.S. income taxes as 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.







6.
            DIRECT
      FINANCING LEASE INTEREST INCOME




The
charters relating to the Company's two drilling rigs contain interest
adjustments clauses, whereby the charter rates are adjusted to reflect the
difference between the actual interest rate and a pre-agreed base interest rate
calculated on a deemed outstanding loan for the relevant asset on charter. The
Company's accounting policy is to adjust lease income to reflect such interest
rate adjustments.





Interest
rate adjustments reduced direct financing lease interest income by $39.1 million
in the year ended December 31, 2009, and by $4.4 million in the period from July
11, 2008 to December 31, 2008.







7.
            INVESTMENTS
      IN DIRECT FINANCING LEASES




The
Company's assets consist of two drilling rigs which are chartered on long term,
fixed rate charters to the Seadrill Charterers, both subsidiaries of Seadrill, a
related party. The charters extend for approximately 14 years remaining period
and provide the charterers with various call options to acquire the rigs at
certain dates throughout the charters. In addition, at the end of each charter
the respective charterer has a non-cancellable obligation to purchase the
relevant rig from the Company at a specified fixed price.





The
following lists the components of the investments in direct financing leases as
of December 31, 2009:




(in
      thousands of $)
              
              2009
              
              
              2008Total
      minimum lease payments to be received
              
              
              2,448,333
              
              
              
              2,711,094Less: unearned
      income
              
              
              900,063
              
              
              
              1,031,016Total
      investment in direct financing  leases
              
              
              1,548,270
              
              
              
              1,680,078Current
      portion
              
              
              152,056
              
              
              
              131,808Long-term
      portion
              
              
              1,396,214
              
              
              
              1,548,2701,548,270
              
              
              
              1,680,078
  A-11


The
minimum future gross revenues to be received under the Company's non-cancellable
direct financing leases as of December 31, 2009 are as follows:





(in
      thousands of $)
              Year
      ending December 312010
            
            
            271,5602011
            
            
            248,9082012
            
            
            206,7572013
            
            
            215,1682014
            
            
            215,167Thereafter
            
            
            1,290,773Total
      minimum lease revenues
            
            
            2,448,333







8.
            SHORT-TERM
      AND LONG-TERM
      DEBT








In
      thousands of $)
            
            2009
            
            
            2008Long-term
      debt:U.S.
      dollar denominated floating rate debt (LIBOR plus margin)
      due  2013
            
            
            1,255,250
            
            
            
            1,142,792Less: current portion
      of long-term debt
            
            
            (155,833
            )
            
            
            (137,125
            )1,099,417
            
            
            
            1,005,667





The
outstanding debt as of December 31, 2009 is repayable as follows:





(in
      thousands of $)
              Year
      ending December 312010
            
            
            155,8332011
            
            
            160,5002012
            
            
            117,0422013
            
            
            821,875Thereafter
            
            
            -Total
      debt
            
            
            1,255,250





The
weighted average interest rate for the above floating rate debt denominated in
U.S. dollars was 2.65% as at December 31, 2009 (2008: 3.12%). These rates take
into consideration the effect of interest rate swaps. At December 31, 2009 the
three month dollar LIBOR rate was 0.251% (2008: 1.425%).





$1.4
billion secured term loan facility




In
September 2008 the Company entered into a $1.4 billion secured term loan
facility with a syndicate of banks to partly finance the acquisition of its two
drilling rigs. The facility bears interest at LIBOR plus a margin and is
repayable over a term of five years. The facility is secured by the Company's
assets and a guarantee from Ship Finance to a limit of $200 million. The
facility contains a minimum value covenant and covenants which require Ship
Finance to maintain certain minimum levels of free cash, working capital and
adjusted book equity ratios.





As of
December 31, 2009, the Company and Ship Finance are in compliance with all of
the covenants relating to the facility.








A-12







9.
            SHARE
      CAPITAL AND ADDITIONAL PAID-IN
CAPITAL




Authorized share capital is
      as follows:


2009
            2008100
      common shares of $1.00 par value each
            $100
            $100





Issued
      and fully paid share capital is as
follows:


2009
            2008100
      common shares of $1.00 par value each
            $100
            $100





The
Company was incorporated on July 11, 2008, and is a wholly-owned subsidiary of
Ship Finance International Limited, a company incorporated in Bermuda and
publicly listed on the New York Stock Exchange (ticker SFL).





In the
year ended December 31, 2008, the Company issued 100 common shares of par value
$1.00 each for total consideration of $290.0 million.







10.
            RELATED
      PARTY TRANSACTIONS




Hemen
Holding Ltd., a Cyprus holding company, and Farahead Investment Inc., a Liberian
company, together hold approximately 43% of the issued share capital of Ship
Finance, the Company's parent.  Hemen Holding Ltd. and Farahead
Investment Inc. (hereafter jointly referred to as "Hemen") are both indirectly
controlled by trusts established by Mr. John Fredriksen for the benefit of his
immediate family. The Company's two drilling rigs, West Hercules and West Taurus, are leased to
subsidiaries of Seadrill, in which Hemen also has a significant
interest.





In
November 2008 the Company acquired two drilling rigsfor $1,690.0 million
from subsidiaries of Seadrill. The rigs were chartered back to the Seadrill
Charterers, which are subsidiaries of Seadrill, for periods of 15 years, fully
guaranteed by Seadrill.  Seadrill Offshore has been granted fixed
price purchase options after three, six, eight, 10, and 12 years in the case of
West Hercules. Seadrill
Deepwater has been granted fixed price purchase options after six, eight, 10 and
12 years in the case of West
Taurus.  In addition, the Seadrill Charterers have
non-cancellable obligations to purchase the rigs from the Company after 15
years, at the expiry of the relevant charters.





The
Balance Sheets include the following amounts due from and to related
parties:





(in
      thousands of $)
            
            2009
            
            
            2008Amounts
      due from related parties:Lease
      payments due from the Seadrill Charterers
            
            
            19,808
            
            
            
            338Amounts
      due to related parties:Outstanding
      purchase installment due to subsidiary of Seadrill
            
            
            -
            
            
            
            250,000




At
December 31, 2009, the balance of net investments in direct financing leases
with the Seadrill Charterers was $1,548.3 million (2008: $1,680.1 million) of
which $152.1 million (2008: $131.8 million) represents short-term
maturities.






A-13





In the
year ended December 31, 2009, direct financing lease interest income of $91.8
million was received from the Seadrill Charterers. In the period from July 11,
2008, (date of incorporation) to December 31, 2008, direct financing lease
interest income of $15.0 million was received from the Seadrill
Charterers.




11.
            FINANCIAL
      INSTRUMENTS




Interest
      rate risk management




The
Company has entered into a $1.4 billion floating interest rate secured term loan
facility. The Company's charter agreements with the Seadrill Charterers include
interest adjustment clauses, whereby the daily charter rate is adjusted to
reflect the difference between the actual interest rate and a pre-agreed base
interest rate calculated on a deemed outstanding loan for the relevant asset on
charter.





On the
instruction of the Seadrill Charterers, the Company has entered into interest
rate swaps which swap floating rate interest to fixed rate. The counterparties
to these contracts are HSH Nordbank AG, Fortis Bank (Nederland) N.V., DnB NOR
Bank ASA, Skandinaviska Enskilda Banken AB (publ) Oslo and ING Bank N.V. 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 participate in the loan facility to which the interest rate swaps
are related.





The
Company's swap transactions as at December 31, 2009, are designated as hedges
against a portion of its long term debt and are summarized as
follows:




Notional Principal(in thousands of
      $)
            Inception
      date
            Maturity
      date
            Fixed
      interest rate$649,375
      (reducing to $401,417)
            December
      2008
            August
      2013
            1.91%
      - 2.24%







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, 2009 and 2008 are as follows:









(in
      thousands of $)
            
            2009
              Carrying
      value
            
            
            2009
              Fair value
            
            
            2008
              Carrying
      value
            
            
            2008
              Fair valueNon-derivatives:Cash
      and cash equivalents
            
            
            2
            
            
            
            2
            
            
            
            11,547
            
            
            
            11,547Floating
      rate long-term debt
            
            
            1,255,250
            
            
            
            1,255,250
            
            
            
            1,142,792
            
            
            
            1,142,792Derivatives:Interest
      rate swap contracts – long-term receivables
            
            
            -
            
            
            
            -
            
            
            
            138
            
            
            
            138Interest
      rate swap contracts – long term payables
            
            
            1,786
            
            
            
            1,786
            
            
            
            6,056
            
            
            
            6,056










A-14







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, 2009
              
              
              (Level 1)
              
              
              (Level 2)
              
              
              (Level 3)Assets:Cash
      and cash equivalents
              
              
              2
              
              
              
              2Total
      assets
              
              
              2
              
              
              
              2
              
              
              
              -
              
              
              
              -Liabilities:Floating
      rate long term debt
              
              
              1,255,250
              
              
              
              1,255,250Interest
      rate swap contracts –  long term payables
              
              
              1,786
              
              
              
              
              
              
              
              1,786Total
      liabilities
              
              
              1,257,036
              
              
              
              1,255,250
              
              
              
              1,786
              
              
              
              -


ASC Topic
820 "Fair Value Measurement and Disclosures" ("ASC 820") 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, ASC 820 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.






A-15





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, 2009.




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 Nordea Bank. However, the
Company believes this risk is remote.





The
Company's operating revenue consists entirely of lease income derived from the
charters of its two drilling rigs to the Seadrill Charterers, both subsidiaries
of Seadrill. There is thus a concentration of revenue risk with
Seadrill.








12.
            COMMITMENTS
      AND CONTINGENT LIABILITIES




Assets
      Pledged


2009Book
      value of assets pledged under ship mortgages
            $1,548
      million







13.
            SUBSEQUENT
      EVENTS




None.







A-16