Edgar Filing: Ship Finance International LTD

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005

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

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

For the transition period from
Commission file number 0-22704

Ship 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 organisation)
Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, HM
08, Bermuda

(Address of principal executive offices)

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

Title of each class Name of each exchange
Common 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.

Common Shares, $1.00 Par Value
(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.

73,143,737 Common Shares, $1.00 Par Value

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [X] Yes [ ] No

If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934. [ ]Yes [X] No

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No

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

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

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
[ ] Yes [X] No

INDEX TO REPORT ON FORM 20-F

PART I PAGE

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS............1

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE......................... 1

ITEM 3. KEY INFORMATION................................................. 1

ITEM 4. INFORMATION ON THE COMPANY......................................10

ITEM 4A. UNRESOLVED STAFF COMMENTS.......................................26

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS....................26

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES......................44

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS....................................................46

ITEM 8. FINANCIAL INFORMATION...........................................47

ITEM 9. THE OFFER AND LISTING...........................................48

ITEM 10. ADDITIONAL INFORMATION..........................................49

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK...............................................60

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES...............................................60

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.................60

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS.............................................60

ITEM 15. CONTROLS AND PROCEDURES.........................................60

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT................................61

ITEM 16B. CODE OF ETHICS..................................................61

ITEM 16C. PRINCIPAL ACCOUNTANT FEES.......................................61

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR
AUDIT COMMITTEES................................................62

ITEM 16E. PURCHASE OF EQUITY SECURITIES BY ISSUER
AND AFFILIATED PURCHASERS.......................................62

PART III

ITEM 17. FINANCIAL STATEMENTS............................................63

ITEM 18. FINANCIAL STATEMENTS............................................63

ITEM 19. EXHIBITS........................................................64

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable

ITEM 3. KEY INFORMATION

A. SELECTED FINANCIAL DATA

The selected income statement data for the years ended December 31, 2005 and
2004 and the period from October 10, 2003 (date of incorporation) to December
31, 2003 and the selected balance sheet data as of December 31, 2005 and
December 31, 2004 is derived from our audited financial statements included
herein. The selected combined income statement data for the fiscal year ended
December 31, 2003 has been derived from our audited predecessor combined
carve-out financial statements included herein. The selected combined income
statement data for the fiscal years ended December 31, 2002 and 2001 and
selected combined balance sheet data with respect to the fiscal years ended
December 31, 2003, 2002, and 2001 has been derived from our audited predecessor
combined carve-out financial statements not included herein. The following table
should also be read in conjunction with Item 5. "Operating and Financial Review
and Prospects" and our historical financial statements and the notes thereto
included elsewhere herein.

Period
From
Year Year October
Ended Ended 10 to
December December December Predecessor combined carve-out
31, 31, 31, Year Ended December 31,
--- --- --- -----------------------
2005 2004 2003 2003 2002 2001
---- ---- ---- ---- ---- ----
(in thousands of dollars except common shares, per share, fleet and average
daily time charter equivalent earnings data)
Income Statement Data:

Total operating revenues (1) ................. 437,510 492,069 - 695,068 365,174 486,655
Net operating income (loss)................... 300,662 347,157 (14) 348,816 86,091 230,718
Net income (loss)............................. 209,546 262,659 (1,937) 334,812 18,024 212,010
Earnings per share, basic and diluted (2) $2.84 $3.52 - $4.53 $0.24 $2.87
Cash dividends paid 148,863 78,905 - n/a n/a n/a

Balance Sheet Data (at end of period):
Cash and cash equivalents..................... 32,857 29,193 - 26,519 20,634 26,041
Vessels and equipment, net.................... 315,220 236,305 - 1,863,504 1,904,146 1,696,528
Investment in finance leases (including
current portion) ........................... 1,925,354 1,718,642 - - - -
Total assets.................................. 2,393,913 2,152,937 582,192 2,156,348 2,123,607 1,951,353
Long term debt (including current portion) 1,793,657 1,478,894 580,000 991,610 1,106,847 1,000,537
Share capital (2) 73,144 74,901 12 n/a n/a n/a
Stockholders' equity (deficit)................ 561,522 660,982 (1,925) 822,026 485,605 466,742
Common shares outstanding 73,143,737 74,900,837 12,000 n/a n/a n/a
Weighted average common shares outstanding (2) 74,560,108 74,610,946 12,000 n/a n/a n/a

Cash Flow Data:
Cash provided by operating activities......... 280,834 178,528 - 415,523 115,658 307,167
Cash provided by (used in) investing
activities.................................... (269,573) 76,948 (565,500) (51,632) (261,779) (271,850)
Cash provided by (used in) financing
activities.................................. (7,597) (226,283) 565,500 (358,006) 140,714 (24,549)

Fleet Data:
Number of wholly owned vessels (end of period) 52 46 - 43 42 38
Number of vessels owned in joint ventures
(end of period)............................. - - - 6 9 7

Average Daily Time Charter Equivalent
Earnings: (3)
VLCCs......................................... $32,718 $35,482 n/a n/a n/a n/a
Suezmaxes..................................... $24,674 $26,313 n/a n/a n/a n/a
Suezmax OBOs.................................. $23,539 $26,313 n/a n/a n/a n/a
Containerships................................ $26,128 n/a n/a n/a n/a n/a

---------------------------
n/a: Not applicable

(1) Operating revenues from January 1, 2004 include finance lease interest
income, finance lease service revenues, profit sharing revenues from
our profit sharing arrangement with Frontline Ltd., or Frontline, and
charter revenues for the period prior to our vessels commencing
trading under their charters to Frontline. They also include charter
revenues for vessels trading under long term charters to third parties
during the period. All of the vessels that we have acquired from
Frontline are chartered to subsidiaries of Frontline under long term
charters which are generally accounted for as finance leases. We
allocate $6,500 per day from each time charter payment as finance
lease service revenue. The balance of each charter payment is
allocated between finance lease interest income and finance lease
repayment in order to produce a constant periodic return on the
balance of our net investments in finance leases. Our arrangement with
Frontline is that while our vessels are completing performance of
third party charters, we pay Frontline all revenues we earn under
third party charters in exchange for Frontline paying us the Frontline
charter rates. We account for the revenues received from these third
party charters as time charter, bareboat or voyage revenues as
applicable, and the subsequent payment of these amounts to Frontline
as deemed dividends paid. We account for the charter revenues received
from Frontline prior to the charters becoming effective for accounting
purposes as deemed equity contributions received.

The following table analyzes our total operating revenues in 2005 and
2004:

(in thousands of dollars) Year Ended Year Ended
December 31, December 31,
2005 2004

Time charter revenues ...................... 62,605 86,741
Bareboat charter revenues................... 7,325 27,453
Voyage charter revenues .................... 9,745 49,707
Finance lease interest income .............. 177,474 140,691
Finance lease service revenues.............. 92,265 72,551
Profit sharing revenues..................... 88,096 114,926

Total operating revenues ................... 437,510 492,069

The following table analyzes our cash inflows for the year ended
December 31, 2005 from the charters to Frontline and how they are
accounted for in the balance sheet and statement of operations:

Statement
(in thousands of dollars) Balance of
Total Sheet Operations
Frontline charterhire payments
accounted for as:

Finance lease interest income...........177,474 177,474
Finance lease service revenues.......... 92,265 92,265
Finance lease repayments................ 94,777 94,777
Deemed equity contributions received.... 50,560 50,560
Total charterhire paid...................415,076 145,337 269,739

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

(3) Average Daily Time Charter Equivalent Earnings for our tankers
represent time charter equivalent, or TCE, earnings of the basic
charterhire payments and profit sharing payments that our tankers
earned under our time charters with Frontline for the period presented.
Subsequent to January 1, 2004, our tankers operate under time and
bareboat charters to subsidiaries of Frontline. Prior to January 1,
2004 our tankers operated under time charters, bareboat charters,
voyage or spot charters, pool arrangements and contracts of
affreightment to third parties. Average Daily Time Charter Equivalent
Earnings for our containerships represent time charter earnings from
our time charters with third parties.

In order to compare vessels trading under different types of charters,
it is standard industry practice to measure the revenue performance of
a vessel in terms of average daily time charter equivalent earnings, or
TCEs. For voyage charters, which are charters obtained in the spot
market, this is calculated by dividing net voyage revenues by the
number of days on charter. Days spent off hire are excluded from this
calculation. We believe that net voyage revenues, provide more
meaningful information to us than voyage revenues. Net voyage revenues
are also widely used by investors and analysts in the tanker shipping
industry for comparing financial performance between companies and to
industry averages. Under a time charter, the charterer pays
substantially all of the vessel voyage costs and the vessel owner
generally pays the operating costs. Under a bareboat charter the
charterer pays substantially all of the vessel voyage and operating
costs. Under a voyage charter, the vessel owner pays the vessel voyage
and operating costs. Vessel voyage costs are primarily fuel and port
charges. Accordingly, charter income from a voyage charter would be
greater than that from an equally profitable time charter to provide
for the owner's payment of vessel voyage costs. A contract of
affreightment is a form of voyage charter under which the vessel owner
agrees to carry a specific type and quantity of cargo in two or more
shipments over an agreed period of time. For comparability, TCEs for
bareboat charters include an allowance for estimated operating costs
that would be paid by us under an equivalently profitable time charter.
In 2004 and 2005 we included an allowance of $6,500 per day for
estimated operating costs.

B. CAPITALIZATION AND INDEBTEDNESS

Not Applicable

C. REASONS FOR THE OFFER AND USE OF PROCEEDS

Not Applicable

D. RISK FACTORS

We are engaged primarily in transporting crude oil and oil products. The
following summarises some of the risks that may materially affect our business,
financial condition or results of operations. Please note, in this section,
"we", "us" and "our" all refer to the Company and its subsidiaries.

We depend on subsidiaries of Frontline Ltd. for the majority of our operating
cash flow and for our ability to pay dividends to our shareholders.

All of our vessels, except two, are chartered to either Frontline Shipping
Limited, which we refer to as Frontline Shipping, or Frontline Shipping II
Limited, which we refer to as Frontline Shipping II, and together the
Charterers, under long term time charters, and the Charterers' payments to us
are currently our principal source of operating cash flow. The Charterers are
both wholly owned subsidiaries of Frontline Ltd. (NYSE:FRO), or Frontline, which
is one of the largest owners and operators of large crude oil tankers in the
world. Neither of the Charterers has any business or sources of funds other than
those related to the chartering of our fleet to third parties. Frontline
Shipping was initially capitalized by Frontline with $250 million (currently
$218.2 million), and Frontline Shipping II has been capitalized with $56.2
million. This capital serves to support the Charterers' obligations to make
charterhire payments to us. Neither Frontline nor any of its affiliates
guarantees the payment of charterhire or is obligated to contribute additional
capital to either of the Charterers at any time.

Although there are restrictions on the Charterers' rights to use their cash to
pay dividends or make other distributions, at any given time in the future,
their available cash may be diminished or exhausted, and the Charterers may be
unable to make charterhire payments to us. If the 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 shareholders.

Volatility in the tanker charter markets may cause the Charterers to be unable
to pay charterhire to us.

The Charterers subcharter our vessels to end users under long term time
charters, on the spot charter market, or under contracts of affreightment under
which our vessels carry an agreed upon quantity of cargo over a specified route
and time period. As a result, the Charterers are directly exposed to the risk of
volatility in tanker charter rates. Tanker charter rates have historically
fluctuated significantly based upon many factors, including:

o global and regional economic and political conditions;

o changes in production of crude oil, particularly by OPEC and other key
producers;

o developments in international trade;

o changes in seaborne and other transportation patterns, including
changes in the distances that cargoes are transported and construction
of new pipelines;

o environmental concerns and regulations;

o weather; and

o competition from alternative sources of energy.

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

The Charterers' successful operation of our vessels in the tanker charter market
will depend on, among other things, its ability to obtain profitable tanker
charters. We cannot assure you that future tanker charters will be available to
the Charterers at rates sufficient to enable the Charterers to meet their
obligations to pay charterhire to us.

A significant portion of our common shares are owned by Frontline and related
parties and we depend on officers and directors of Frontline for our management,
which may create conflicts of interest.

Frontline currently owns 11.1% of our common shares, and Hemen Holding Ltd. and
Farahead Investment Inc., companies indirectly controlled by John Fredriksen,
Frontline's Chairman and CEO currently own collectively 37.6% of our common
shares. Except for the CEO in our subsidiary Ship Finance Management AS, Lars
Solbakken, we do not have any employees or officers who are not employees or
officers of Frontline. All of our directors and officers, except for one, are
directors or officers of Frontline. These directors owe fiduciary duties to the
shareholders of each company and may have conflicts of interest in matters
involving or affecting us and Frontline, including matters arising under our
agreements with Frontline and its affiliates. In addition, due to their
ownership of Frontline common shares, some of these individuals may have
conflicts of interest when faced with decisions that could have different
implications for Frontline than they do for us. We cannot assure you that any of
these conflicts of interest will be resolved in our favor.

The agreements between us and Frontline and Frontline's affiliates may be less
favorable than agreements that we could obtain from unaffiliated third parties.

The charters, the management agreements, the charter ancillary agreements and
the other contractual agreements we have with Frontline and its affiliates were
made in the context of an affiliated relationship and were not negotiated in
arms 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.

Frontline's other business activities may create conflicts of interest with
Frontline.

While Frontline has agreed to cause the 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
Charterers and Frontline, we are entitled to receive annual profit sharing
payments to the extent that the average TCE rates realized by the 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.

If our charters or management agreements terminate, we could be exposed to
increased volatility in our business and financial results.

If any of our charters terminate, we may not be able to re-charter these vessels
on a long term basis with terms similar to the terms of our charters with the
Charterers. While the terms of our current charters end between 2014 and 2025,
the Charterers have the option to terminate the charters of our non-double hull
vessels on the vessel's anniversary date in 2010. 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 (Bermuda) Limited, or Frontline Management, Frontline
Management is responsible for all of the technical and operational management of
our vessels for a fixed management fee, and will indemnify us against certain
losses of hire and various other liabilities relating to the operation of the
vessels. We may terminate our management agreements with Frontline Management
for any reason at any time on 90 days' notice. In addition, our current
management agreements with Frontline Management may be terminated if the
relevant charter is terminated. If our management agreements with Frontline
Management were to terminate or we were to acquire additional vessels in the
future, we may not be able to obtain similar fixed rate terms from an
independent third party. We may acquire additional vessels in the future and we
cannot assure you that we will be able to enter into similar charters with the
Charterers or a third party charterer, or that we will be able to enter into
similar management agreements with Frontline Management or a third party
manager.

With respect to any vessels we acquire that are not subject to the charter and
management agreements with the Charterers and Frontline Management, we will be
directly exposed to all of the operational and other risks associated with
operating our vessels as described in these risk factors. As a result, our
future 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.

U.S. tax authorities could treat us as a "passive foreign investment company,"
which could have adverse U.S. federal income tax consequences to U.S. holders.

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

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

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

If the IRS were to find that we are or have been a PFIC for any taxable year,
our U.S. shareholders would be 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. See "United States
Taxation--Taxation of U.S. Holders" for a more comprehensive discussion of the
U.S. federal income tax consequences to U.S. shareholders if we are treated as a
PFIC.

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

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

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

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

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 secured loan facilities. We may need to refinance some or all
of our indebtedness on maturity of our senior notes but we cannot assure you we
will be able to do so on terms that are acceptable to us or at all. If we cannot
refinance our indebtedness, we will have to dedicate some or all of our cash
flow, and we may be required to sell some of our assets, to pay the principal
and interest on this 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 may
otherwise be planned. We may also incur additional debt in the future.

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

o limitations on our incurrence of additional indebtedness, including
our issuance of additional guarantees;

o limitations on our incurrence of liens;

o limitations on our ability to pay dividends and make other
distributions under certain circumstances; and

o 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:

o provide additional security under the loan facilities or prepay an
amount of the loan facilities as necessary to maintain the fair market
value of our vessels securing the loan facilities at not less than
125% or 140% of the principal amount outstanding the different loan
facilities;

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

o maintain positive working capital on a consolidated basis; and

o maintain a ratio of shareholders' equity to total assets of not less
than 20%.

Under the terms of our loan facility, we may not make distributions to our
shareholders if we do not satisfy these covenants. We cannot assure you that we
will be able to satisfy these covenants in the future.

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

Our debt service obligations require us to dedicate a substantial portion of our
cash flow 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.

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

Holders of our common shares and other securities will have no direct right to
enforce the obligations of the Charterers, Frontline Management or Frontline
under the charters and related agreements, the Frontline performance guarantee
or the management agreements with Frontline Management. Accordingly, if any of
those counterparties were to breach their obligations to us under any of these
agreements, our shareholders would have to rely on us to pursue our remedies
against those counterparties. Because we depend on officers and directors of
Frontline for our management, if such a breach were to occur, our common
officers and directors would face a direct conflict of interest and we cannot
assure you that our rights would be protected to the same extent that they would
be if we had independent managers.

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

We have outstanding approximately $1,336.6 million in floating rate debt under
our two senior secured credit facilities as of December 31, 2005. Although we
use interest rate swaps to manage our interest rate exposure from 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, 2005 we have entered into interest rate swaps to
fix the interest on $568.3 million of our outstanding indebtedness. 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 is $768.3 million
at December 31, 2005. A one per cent change in interest rates would increase or
decrease interest expense by $7.7 million per year as of December 31, 2005.

Because we are a relatively new company with limited separate operating history,
our historical financial and operating data for periods prior to January 1,
2004, will not be representative of our future results.

We were formed in October 2003 and commenced operations in January 2004. Prior
to commencing operations we did not have any operating history separate from
Frontline's. The predecessor combined carve-out financial statements included as
comparatives in this annual report have been prepared on a carve-out basis and
reflect the historical business activities of Frontline relating to our vessel
owning subsidiaries. These predecessor financial statements do not reflect the
results we would have obtained under our current fixed rate long term charters
and management agreements and therefore are not a meaningful representation of
our future results of operations.

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

Our fleet includes 18 non-double hull tankers. 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 2015. In 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 single hull tankers, including the types of vessels in our fleet,
from 2015 to 2010 unless the relevant flag states extend the date. This change
could result in a number of our vessels being unable to trade in many markets
after 2010. The phase out of single hull tankers may therefore reduce the demand
for single hull tankers, and force the remaining single hull tankers into
employment on less desirable trading routes and increase the number of tankers
trading on those routes. As a result, single hull tankers may be chartered less
frequently and at lower rates. Moreover, 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.

Compliance with safety, environmental and other governmental and other
requirements may adversely affect our business.

The shipping industry is affected by numerous regulations in the form of
international conventions, national, state and local laws and national and
international regulations in force in the jurisdictions in which such tankers
operate, as well as in the country or countries in which such tankers are
registered. These regulations include the U.S. Oil Pollution Act of 1990, or
OPA, the International Convention on Civil Liability for Oil Pollution Damage of
1969, International Convention for the Prevention of Pollution from Ships, the
IMO International Convention for the Safety of Life at Sea of 1974, or SOLAS,
the International Convention on Load Lines of 1966 and the U.S. Marine
Transportation Security Act of 2002. In addition, vessel classification
societies also impose significant safety and other requirements on our vessels.
We believe our tankers are maintained in good condition in compliance with
present regulatory and class requirements relevant to areas in which they
operate, and are operated in compliance with applicable safety/environmental
laws and regulations.

However, regulation of tankers, particularly in the areas of safety and
environmental impact may change in the future and require significant capital
expenditures be incurred on our vessels to keep them in compliance.

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

The market value of our vessels, which are at historically high levels, will
change 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. During the period a vessel is subject to a
charter with the Charterers, 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 conditions in the tanker market, causing a termination of the charters,
it is likely that the fair market value of vessels would be depressed in such
market conditions. 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.

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

Our tankers and their cargoes are at risk of being damaged or lost because of
events such as marine disasters, bad weather, mechanical failures, human error,
war, terrorism, piracy and other circumstances or events. In addition,
transporting crude oil across a wide variety of international jurisdictions
creates a risk of business interruptions due to political circumstances in
foreign countries, hostilities, labor strikes and boycotts, the potential for
changes in tax rates or policies, and the potential for government expropriation
of our vessels. Any of these events may result in loss of revenues, increased
costs and decreased cash flows to the Charterers, 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.
Under the management agreements, Frontline Management is responsible for
procuring insurance for our fleet against those risks that we believe the
shipping industry commonly insures against. These insurances include marine hull
and machinery insurance, protection and indemnity insurance, which include
pollution risks and crew insurances and war risk insurance. Currently, the
amount of coverage for liability for pollution, spillage and leakage available
to us on commercially reasonable terms through protection and indemnity
associations and providers of excess coverage is $1 billion per vessel per
occurrence. We cannot assure you that we will be adequately insured against all
risks. Frontline Management may not be able to obtain adequate insurance
coverage at reasonable rates for our fleet in the future. Additionally, our
insurers may refuse to pay particular claims. Any significant loss or liability
for which we are not insured could have a material adverse effect on our
financial condition.

Maritime claimants could arrest our tankers, which could interrupt the
Charterers' or our cash flow.

Crew members, suppliers of goods and services to a vessel, shippers of cargo and
other parties may be entitled to a maritime lien against 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 Charterers' or our cash flow 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 one vessel
in our fleet for claims relating to another vessel in our fleet.

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

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

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

There may be risks associated with the purchase and operation of secondhand
vessels.

Our current business strategy includes additional growth through the acquisition
of secondhand vessels. Although we will inspect secondhand vessels prior to
purchase, this does not normally provide us with the same knowledge about their
condition that we would have had if such vessels had been built for and operated
exclusively by us. 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.

If Frontline were to become insolvent, a bankruptcy court could pool our or the
Charterers' assets and liabilities with those of Frontline under the equitable
doctrine of substantive consolidation.

Under United States bankruptcy law, the equitable doctrine of substantive
consolidation can permit a bankruptcy court to disregard the separateness of
related entities and to consolidate and pool the entities' assets and
liabilities and treat them as though held and incurred by one entity where the
interrelationship among the entities warrants such consolidation. Substantive
consolidation is an equitable remedy in bankruptcy that results in the pooling
of assets and liabilities of a debtor with one or more of its debtor affiliates
or, in rare circumstances, non-debtor affiliates, for the purposes of
administering claims and assets of creditors as part of the bankruptcy case,
including treatment under a reorganization plan.

Not all jurisdictions that could potentially have jurisdiction over an
insolvency or bankruptcy case involving Frontline, us, and/or any of our
respective affiliates recognize the substantive consolidation doctrine. For
example, we have been advised by our Bermuda counsel that Bermuda does not
recognize this doctrine. However, if Frontline or its creditors were to assert
claims of substantive consolidation or related theories in a Frontline
bankruptcy proceeding in a jurisdiction that recognizes the doctrine of
substantive consolidation, such as the United States, the bankruptcy court could
make our assets or the Charterers' assets available to satisfy Frontline
obligations to its creditors. This could have a material adverse effect on us.

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

We are a holding company, and have no significant assets other than the equity
interests in our subsidiaries. Our subsidiaries own all of our vessels, and
payments under our charter agreements with the Charterers will be 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. If we are unable to obtain funds from our subsidiaries, we will not
be able to pay dividends to our shareholders.

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

We will become subject to Section 404 of the Sarbanes-Oxley Act of 2002, which
will require us to include in our annual report on Form 20-F our management's
report on, and assessment of the effectiveness of, our internal controls over
financial reporting. In addition, our independent registered public accounting
firm will be required to attest to and report on management's assessment of the
effectiveness of our internal controls over financial reporting. These
requirements will first apply to our annual report for the fiscal year ending
December 31, 2006. If we fail to achieve and maintain the adequacy of our
internal controls over financial reporting, we will not be in compliance with
all of the requirements imposed by Section 404. Any failure to comply with
Section 404 could result in an adverse reaction in the financial marketplace due
to a loss of investor confidence in the reliability of our financial statements,
which ultimately could harm our business and could negatively impact the market
price of our common stock. We believe the total cost of our initial compliance
and the future ongoing costs of complying with these requirements may be
substantial.

ITEM 4. INFORMATION ON THE COMPANY

A. HISTORY AND DEVELOPMENT OF THE COMPANY

The Company

We are Ship Finance International Limited, a Bermuda based shipping company that
is engaged primarily in the ownership and operation of oil tankers. 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 are engaged primarily in the ownership and operation of oil tankers,
including oil/bulk/ore, or OBO carriers. We operate tankers of two sizes: very
large crude carriers, or VLCCs, which are between 200,000 and 320,000 deadweight
tons, or dwt, and Suezmaxes, which are vessels between 120,000 and 170,000 dwt.
In addition, we own two containerships. We operate through subsidiaries and
partnerships located in Bermuda, Cyprus, Isle of Man, Liberia, Norway, and
Singapore. We are also involved in the charter, purchase and sale of vessels.

Our tanker fleet is one of the largest tanker fleets in the world, with a
combined deadweight tonnage of 11.7 million dwt, and has an average age of 8.6
years for VLCCs and 13.6 years for Suezmaxes as of June 2, 2006. Eighteen of our
VLCCs and fourteen of our Suezmax tankers are of double hull construction, with
the remainder being modern single hull or double side vessels built since 1989.
Eight of our Suezmax tankers are oil/bulk/ore carriers, or OBO carriers, which
can be configured to carry either oil or dry cargo as market conditions warrant.

We were formed 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. On June 16, 2004, each Frontline
shareholder of record on June 7, 2004, received one of our common shares for
every four Frontline shares held. Our common shares commenced trading on the New
York Stock Exchange under the ticker symbol "SFL" on June 17, 2004. Frontline
made two further dividends of our shares to its shareholders in 2004: On
September 24, 2004 every Frontline shareholder received one of our common shares
for every ten Frontline shares that they held and on December 15, 2004 every
Frontline shareholder received two of our common shares for every 15 Frontline
shares that they held. At December 31, 2004, Frontline's remaining shareholding
in us was approximately 50.8%.

On January 28, 2005 and February 23, 2005 Frontline approved further
distributions of its holdings of our shares. On February 18, 2005, each
shareholder of Frontline received one of our shares for every four shares of
Frontline held and on March 24, 2005 each shareholder of Frontline received one
of our shares for every ten shares of Frontline held. Finally, on February 17,
2006, Frontline approved a further distribution in which each shareholder of
Frontline received one of our shares for every twenty shares of Frontline held.
Following these transactions Frontline's shareholding in us is 11.1% at June 2,
2006.

Pursuant to a fleet purchase agreement entered into in December 2003, we
purchased from Frontline a fleet of 47 crude oil tankers, comprising 23 VLCCs,
including an option to acquire a VLCC, each having a capacity of 275,000 to
308,000 dwt, and 24 Suezmax tankers, each having a capacity of 142,000 to
169,000 dwt. We paid an aggregate purchase price of $950.0 million excluding
working capital to acquire this initial fleet. We also assumed senior secured
indebtedness with respect to our fleet in the amount of approximately $1.158
billion, which we subsequently refinanced with the proceeds of our notes, our
$1.058 billion credit facility and a deemed equity contribution of $525 million
from Frontline. All of our vessels, except two are chartered to Frontline
Shipping Limited or to Frontline Shipping II Limited, which we refer
collectively to as the Charterers, under longer term time charters that have
remaining terms that range from five to 23 years. The 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 Charterers have the right to terminate the charter for non double
hull vessels after 2010. The daily charter rate that the Charterers pay to us is
not dependant on the revenue that they receive from chartering our vessels to
third parties. Frontline Shipping was initially capitalized with $250 million in
cash provided by Frontline to support its obligation to make payments to us
under the charters. Frontline Shipping II was capitalised with approximately
$21.0 million in cash. Due to sales and acquisitions, the current capitalisation
in the Charterers is $218.2 million and $56.2 million respectively.

We have entered into charter ancillary agreements with the Charterers, our
vessel owning subsidiaries that own our vessels and Frontline, which remains in
effect until the last long term charter with the relevant Charterer terminates
in accordance with its terms. Frontline has guaranteed the Charterers'
obligations under the charter ancillary agreements. Under the terms of the
charter ancillary agreements, beginning with the final 11-month period in 2004
and for each calendar year after that, the Charterers have agreed to pay us a
profit sharing payment equal to 20% of the charter revenues for the applicable
period, calculated annually on a TCE basis, realized by that Charterer for our
fleet in excess of the daily base charterhire. After 2010, all of our non-double
hull vessels will be excluded from the annual profit sharing payment
calculation. For purposes of calculating bareboat revenues on a TCE basis,
expenses are assumed to equal $6,500 per day.

We have also entered into fixed rate management and administrative services
agreements with Frontline Management, to provide for the operation and
maintenance of our initial fleet of vessels and administrative support services.
These arrangements are intended to provide us with stable cash flow and reduce
our exposure to volatility in the markets for seaborne oil transportation
services.

We refer you to Item 10 C. - Material Contracts for further discussion of the
agreements discussed above.

In 2005, we have bought a further three vessels from Frontline and chartered
them back under long term charters to Frontline Shipping II. In January 2005, we
bought the Front Century and Front Champion, for a total of $196.0 million. The
vessels have been chartered back to Frontline Shipping II for 199 and 204 months
respectively at an initial rate of $31,501 per day declining to $28,625 per day
in 2019 for Front Century and at an initial rate of $31,340 per day declining to
$28,464 per day in 2019 for Front Champion. This arrangement also includes a 20%
profit split element. In March 2005, we bought the VLCC Golden Victory from
Frontline for $98 million. The vessel has been chartered back to Frontline for
204 months at a rate of $33,793 per day.

On January 17, 2005 the Company exercised its option to acquire the VLCC Oscilla
and the vessel was delivered to the Company on April 4, 2005. The purchase price
paid to acquire the vessel was approximately $21.6 million which was equal to
the outstanding mortgage debt under four loan agreements between lenders and the
vessel's owning company. In addition, the Company made a payment of $14.6
million to Frontline to reflect the fact that the original purchase price was
set assuming delivery to Ship Finance on January 1, 2004 whereas delivery did
not occur until April 4, 2005. On the same date the vessel commenced a fixed
rate time charter to Frontline Shipping with an initial rate of $25,575 per day
for a fixed period of 210 months. The Company also entered into a fixed rate
management contract with Frontline Management for $6,500 per day with the same
term as the related time charter.

In January 2005, we sold the Suezmax Front Fighter for $68.3 million and the
vessel was delivered to its new owners in March 2005. The charter of the Front
Fighter to Frontline Shipping has been cancelled as a result of this sale.

We entered into an agreement in May 2005 with parties affiliated with Hemen
Holding Ltd., or Hemen, to acquire two vessel owning companies, each owning one
2005 built containership for a total consideration of $98.6 million. The first
vessel, the Sea Alfa, was delivered in May 2005, and the second, Sea Beta, was
delivered from the shipyard in September 2005. Both vessels are currently
trading on medium term charters to unrelated third parties. Sea Alfa is trading
on a medium term time charter while Sea Beta is trading on a medium term
bareboat charter.

In May 2005, we sold three Suezmaxes, Front Lillo, Front Emperor and Front
Spirit, for a total consideration of $92.0 million. These vessels were delivered
to their new owners in June 2005. In May 2005, we also agreed to buy a further
three vessels from Frontline, namely Front Traveller, Front Transporter, and
Front Target, for an aggregate amount of $92.0 million. The time charter and
management arrangements between Ship Finance and Frontline Shipping have been
cancelled for the three sold vessels and replaced with new agreements on similar
terms for the vessels acquired.

We entered into an agreement in June 2005 with parties affiliated with Hemen to
acquire two vessel owning companies, each owning one 2004 built VLCC, for a
total consideration of $184 million. The ships were bought from the Indonesian
state oil enterprise's shipping division, Pertamina in 2004 by parties
affiliated with Hemen. The vessels were delivered to us and entered on long term
charters to Frontline Shipping II starting in the third quarter of 2005.

In August 2005 the Company sold a Suezmax tanker, Front Hunter, for net proceeds
of $71.0 million. A $3.8 million termination payment was paid as a result of the
termination of the charter.

In November 2005 the bareboat charterer of the VLCC Navix Astral exercised an
option to purchase the vessel for approximately $40.5 million. The vessel was
delivered to its new owner in January of 2006, at the same time we acquired the
VLCC Front Tobago from Frontline for consideration of $40.0 million. Effective
January 2006 this vessel has replaced the Navix Astral and will fulfill the
remainder of the Navix Astral time charter with Frontline until the charter
termination date in January 2014.

In April 2006, we entered into an agreement with Horizon Lines Inc. to acquire
five newbuilding containerships, each with a carrying capacity of 2,824 twenty
foot equivalent units, or TEUs being built at Hyundai Mipo yard in Korea. The
vessels will be delivered over the course of five months commencing in early
2007, and will be chartered back to Horizon Lines under 12 year bareboat
charters with a three year renewal option on the part of Horizon Lines. The
latter will also have the options to buy the vessels after five, eight, 12 and
15 years.

B. BUSINESS OVERVIEW

Strategy

Our core strategy is to create shareholder value by deploying our fleet and
growing our fleet, in each case in a manner designed to increase operating cash
flows and permit attractive dividend yields. To accomplish this objective, we
plan to:

o Enter into contracts with base charterhire and significant upside
potential. We charter our tankers under long term time charters. Under
those time charters, we receive base charterhire plus profit sharing
payments equal to 20% of revenues earned by each of the Charterers
above such base charterhire. Subject to market conditions, we expect
to enter into charters with profit sharing arrangements for other new
vessels that we acquire.

o Grow our fleet. Since we agreed to purchase our original fleet from
Frontline in December 2003, we have exercised an option to purchase
one VLCC, purchased six additional VLCCs, three Suezmaxes and two
containerships. We have also agreed to purchase another five container
vessels. Our growth strategy is supported by our policy of retaining a
portion of our cash flow to support growth while paying attractive
dividends to our shareholders. Our financial flexibility should also
allow us to renew our fleet over time and replace our single hull
vessels with modern double hull vessels as they are retired.

o Diversify our customer base. As our existing charters expire or we
acquire new vessels, which may include types of vessels other than oil
tankers, we intend to enter into charters with other parties in order
to diversify our customer base within the tanker and other shipping
sectors.

o Diversity our asset base. We are aware that most shipping markets
today have historic high new building and second hand prices that
increase the risk in most transactions. We are looking for
transactions which on a stand alone basis can provide a reasonably
high financial leverage to optimize the return on equity. The Offshore
market which is likely to have a better risk/reward situation than
most shipping markets may be an attractive alternative. Particularly
since this market also provides good opportunities for charterers to
cover the risk by chartering out for long term periods to major oil
companies.

Competitive Strengths

We believe that our fleet, together with our contractual arrangements with
Frontline and its affiliates, give us a number of competitive strengths,
including:

o one of the largest VLCC and Suezmax fleets in the world;

o fixed rate, long term charters intended to reduce our exposure to
volatility in tanker rates;

o profit sharing potential when the Charterers' earnings from deploying
our vessels exceed certain levels;

o substantially fixed operating costs under our management agreements;

o a charter counterparty with Frontline Shipping and Frontline Shipping
II, currently capitalized with $218.2 million and $56.2 million,
respectively to support their obligation to make charter payments to
us; and

o vessels managed by Frontline Management, one of the industry's most
experienced operators of tankers.

Charter Arrangements with the Frontline Group

The Charterers

Each of the Charterers is a Bermuda company and a wholly owned subsidiary of
Frontline. Frontline Shipping was incorporated to charter our initial fleet of
47 tankers we agreed to acquire from Frontline in December 2003 including the
vessel under the option that was exercised in January 2005. Frontline Shipping
II charters the nine other tankers that we acquired since December 2003. Under
its constituent documents, Frontline Shipping is not permitted to engage in
other businesses or activities and is required to have at least one independent
director on its board of directors whose consent is required to approve
bankruptcy actions and other extraordinary transactions, including dividend
payouts. Each Charterer's obligations to us under the applicable charters are
secured by a lien over all the assets of that Charterer and a pledge of the
equity interests of that Charterer. In addition, Frontline Shipping is
capitalized by Frontline with $218.2 million in cash, and Frontline Shipping II
is capitalized with $56.2 million in cash. These amounts serve to support the
Charterers' obligations to make charterhire payments to us, and are subject to
adjustment based on the number of charters with us that each Charterer is a
party to. The Charterers are entitled to use these funds only (1) to make
charterhire payments (including profit sharing payments) to us and (2) for
reasonable working capital purposes to meet short term voyage expenses.

Time Charters

We have chartered the tankers we acquired from Frontline to the Charterers under
long term time charters, which will extend for various periods depending on the
age of the vessels, ranging from approximately seven to 23 years. We refer you
to "Our Fleet" below for the relevant charter termination dates for each of our
vessels. Five of the vessels that we acquired are on current long term time
charters and one vessel was on current long term bareboat charter at December
31, 2005. The latter vessel, Navix Astral, has since been sold. We have agreed
with the Charterers that it will treat all of these vessels as being under time
charters with us, on the same terms and effective on the same dates as with the
other 44 vessels for all economic purposes. If the current underlying charterer
defaults, the relevant Charterer will continue to perform the economic terms of
the charters with us. On redelivery of a vessel from its underlying charter,
that vessel will be deemed delivered under the Charterer's charter with us for
the rest of its term. 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 Charterers have the right to terminate a charter for a non double hull
vessel on each vessel's anniversary date 2010. The Charterer is 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. However, under the vessel
management agreements, 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.

With the exceptions described below, the daily base charterhire for vessels
chartered to Frontline Shipping, 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
---- ---- -------

2003 to 2006..............................................$25,575 $21,100
2007 to 2010..............................................$25,175 $20,700
2011 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.

In addition, the base charter rate for our non-double hull vessels will decline
to $7,500 per day on each vessel's anniversary date in 2010, at which time the
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 Charterer has 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 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.

The daily base charterhire for our vessels that are chartered to Frontline
Shipping II, which is also payable to us monthly in advance for a maximum of 360
days per year (361 days per leap year), is as follows:

Vessel 2005 to 2006 2007 to 2010 2011 to 2018 2019 and beyond
------ ------------ ------------ ------------ ---------------

Front Champion........ $31,340 $31,140 $30,640 $28,464
Front Century......... $31,501 $31,301 $30,801 $28,625
Golden Victory........ $33,793 $33,793 $33,793 $33,793
Front Energy.......... $30,014 $30,014 $30,014 $30,014
Front Force........... $29,853 $29,853 $29,853 $29,853

For the VLCC Front Tobago, and the three Suezmaxes, Front Target, Front
Traveller, and Front Transporter, the terms are similar to those listed above
under Frontline Shipping as these vessels represent replacement leases for
vessels included in the original fleet purchase which have since been sold.

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 Charterer may make them, at its expense, without our consent, but those
changes or improvements will become our property. The Charterer is not obligated
to pay us charter hire 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 Charterer with an option to
terminate the charter before the end of its term, other than with respect to our
non-double hull vessels on each vessel's anniversary date 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 the Charterer's
consent.

Frontline Performance Guarantee

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

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

o the performance of the obligations of the Charterers under the charter
ancillary agreement,

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

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

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

Frontline Ltd., Frontline Shipping Limited and Frontline Shipping II Limited -
Charter Ancillary Agreements.

We and our vessel owning subsidiaries have entered into charter ancillary
agreements with Frontline, Frontline Shipping, and Frontline Shipping II which
provides, among other things, for:

o the maintenance of the charter service reserve by the Charterers,

o profit sharing payments by the Charterers to us when charter revenues
for our fleet exceed the daily base charterhire,

o the deferral of certain charter payments to us by the Charterers
during any period when cash and cash equivalents held by the
Charterers fall below a predetermined amount. The charter ancillary
agreement also imposes certain restrictive covenants on the
Charterers, including, among others, a covenant not to pay dividends
or make other distributions to its shareholders, incur additional
indebtedness, loan, repay or make any other payment in respect of its
indebtedness, undertake some corporate transactions, or amend its
charter, unless, in each case, certain conditions are met.

The Charterers' obligations to us under the charters and the charter ancillary
agreements are secured by a lien over its assets and a pledge of the equity
interests in the Charterers. In addition, Frontline has guaranteed the
Charterers' obligations under the charter ancillary agreement pursuant to the
performance guarantee. Subject to a 30-day cure period, and in addition to any
other available rights or remedies we may have, upon the occurrence of any event
of default under the charter ancillary agreement we may terminate any or all of
the charters and foreclose on any or all of our security interests provided by
the agreement.

Frontline Management-Vessel Management Agreements.

Each of our vessel owning subsidiaries has entered into fixed rate vessel
management agreements with Frontline Management, pursuant to which Frontline
Management is responsible for the technical management of their respective
vessels. We expect that Frontline Management will outsource many of these
services to third party providers. The management agreements also require
Frontline Management to maintain insurance for each of the vessels. Under the
management agreements, each vessel owning subsidiary pays Frontline Management a
fixed fee of $6,500 per day per vessel for as long as the relevant charter is in
place.

Frontline Management-Administrative Services Agreement.

We and each of our vessel owning subsidiaries have entered into an
administrative services agreement with Frontline Management. Under the terms of
the agreement, Frontline Management provides us and our vessel owning
subsidiaries with all of our non-vessel related administrative support services
and with office space in Bermuda. We and our vessel owning subsidiaries each pay
Frontline Management a fixed fee of $20,000 per year for its services under the
agreement, and will reimburse Frontline Management for reasonable additional
third party costs that it incurs on our behalf.

Frontline Ltd.-Performance Guarantee.

Frontline has issued a performance guarantee with respect to the charters, the
management agreements, the administrative services agreement, and the charter
ancillary agreement. Under the terms of this guarantee, Frontline has
guaranteed:

o the Charterers' performance of its obligations under the charters
other than the payment of charter hire,

o the Charterers' performance of its obligations under the charter
ancillary agreement,

o Frontline Management's performance of its obligations under the
management agreements (however, Frontline's indemnification obligation
for environmental matters will not exceed the coverage of the
applicable protection and indemnity insurance), and

o Frontline Management's obligations under the administrative services
agreement.

The performance guarantee will remain in effect until all of the obligations of
the Charterers and Frontline Management that are guaranteed under the
performance guarantee have been performed.

Charter Arrangements for Containerships

During 2005, we took delivery of two newbuilding containerships, each with a
carrying capacity of 1,700 TEUs. The Sea Alfa is on a timecharter until May 2009
to Heung-A, a Korean container line at $28,350 per day on a timecharter basis.
The Sea Beta is bareboat chartered out until March 2009 to Pan Logistics, an
Australian container line at $15,000 per day.

In April 2006, we entered into an agreement with Horizon Lines Inc. to acquire
five newbuilding containerships each with a carrying capacity of 2,824 TEUs. The
vessels will be delivered over a course of five months commencing in early 2007,
and will be chartered back to Horizon Lines under 12 year bareboat charters with
a three year renewal option on the part of Horizon Lines. The latter will also
have options to buy the vessels after five, eight, 12 and 15 years.

Our Fleet

We operate a substantially modern fleet of vessels and the following table sets
forth the fleet that we operate as of June 2, 2006:

Approximate Charter Termination
----------- -------------------
Vessel Built Dwt. Construction Flag Date
------ ----- ---- ------------ ---- ----

VLCCs
-----
Front Sabang 1990 286,000 Single-hull SG 2014 (1)
Front Vanadis 1990 286,000 Single-hull SG 2014 (1)
Front Highness 1991 284,000 Single-hull SG 2015 (1)
Front Lady 1991 284,000 Single-hull SG 2015 (1)
Front Lord 1991 284,000 Single-hull SG 2015 (1)
Front Duke 1992 284,000 Single-hull SG 2014 (1)
Front Duchess 1993 284,000 Single-hull SG 2014 (1)
Front Tobago 1993 261,000 Single-hull LIB 2014 (1)
Front Edinburgh 1993 302,000 Double-side LIB 2013 (1)
Front Ace 1993 276,000 Single-hull LIB 2014 (1)
Front Century 1998 311,000 Double-hull MI 2021
Front Champion 1998 311,000 Double-hull BA 2022
Front Vanguard 1998 300,000 Double-hull MI 2021
Front Vista 1998 300,000 Double-hull MI 2021
Front Circassia 1999 306,000 Double-hull MI 2021
Front Opalia 1999 302,000 Double-hull MI 2022
Front Comanche 1999 300,000 Double-hull FRA 2022
Golden Victory 1999 300,000 Double-hull MI 2022
Ocana (ex Front Commerce) 1999 300,000 Double-hull IoM 2022
Front Scilla (ex Oscilla) 2000 303,000 Double-hull MI 2023
Ariake (tbn Oliva) 2001 299,000 Double-hull BA 2023
Front Serenade 2002 299,000 Double-hull LIB 2024
Otina (ex Hakata) 2002 298,465 Double-hull IoM 2025
Front Stratus (tbn Ondina) 2002 299,000 Double-hull LIB 2025
Front Falcon 2002 309,000 Double-hull BA 2025
Front Page 2002 299,000 Double-hull LIB 2025
Front Energy 2004 305,000 Double-hull CYP 2027
Front Force 2004 305,000 Double-hull CYP 2027

Suezmax OBO Carriers
--------------------
Front Breaker 1991 169,000 Double-hull MI 2015
Front Climber 1991 169,000 Double-hull SG 2015
Front Driver 1991 169,000 Double-hull MI 2015
Front Guider 1991 169,000 Double-hull SG 2015
Front Leader 1991 169,000 Double-hull SG 2015
Front Rider 1992 170,000 Double-hull SG 2015
Front Striver 1992 169,000 Double-hull SG 2015
Front Viewer 1992 169,000 Double-hull SG 2015

Suezmaxes
---------
Front Transporter 1989 150,000 Single-hull MI 2014 (1)
Front Target 1990 150,000 Single-hull MI 2014 (1)
Front Traveller 1990 150,000 Single-hull MI 2014 (1)
Front Birch 1991 150,000 Double-side MI 2014 (1)
Front Maple 1991 150,000 Double-side MI 2014 (1)
Front Granite 1991 150,000 Single-hull MI 2014 (1)
Front Sunda 1992 150,000 Single-hull MI 2014 (1)
Front Comor 1993 150,000 Single-hull MI 2014 (1)
Front Pride 1993 150,000 Double-hull NIS 2017
Front Glory 1995 150,000 Double-hull NIS 2018
Front Splendour 1995 150,000 Double-hull NIS 2018
Front Ardenne 1997 153,000 Double-hull NIS 2019
Front Brabant 1998 153,000 Double-hull NIS 2021
Mindanao 1998 159,000 Double-hull SG 2021

Containerships
--------------
Sea Alfa 2005 1,700 Teu n/a CYP 2007
Sea Beta 2005 1,700 Teu n/a CYP 2007

Key to Flags:
BA - Bahamas, IoM - Isle of Man, LIB - Liberia, NIS - Norwegian International
Ship Register, SG - Singapore, FRA - France, MI - Marshall Islands, CYP -
Cyprus.

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

Other than our interests in the vessels described above, we do not own any
material physical properties.

Importance of Fleet Size

We believe that fleet size in the industrial shipping sector is important in
negotiating terms with major clients and charterers. We believe that a large,
high-quality VLCC and Suezmax fleet will enhance our ability to obtain
competitive terms from suppliers and shipbuilders and to produce cost savings in
chartering and operations.

Seasonality

Historically, oil trade and therefore charter rates increased in the winter
months and eased in the summer months as demand for oil in the Northern
Hemisphere rose in colder weather and fell in warmer weather. The tanker
industry in general is less dependent on the seasonal transport of heating oil
than a decade ago as new uses for oil and oil products have developed, spreading
consumption more evenly over the year. Most apparent is a higher seasonal demand
during the summer months due to energy requirements for air conditioning and
motor vehicles.

Customers

Frontline, through its subsidiaries, is our principal customer and more than 80%
of our operating revenues are derived from them.

Competition

The market for international seaborne crude oil transportation services is
highly fragmented and competitive. Seaborne crude oil transportation services
generally are provided by two main types of operators: major oil company 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 oil
trading companies also operate their own vessels and use such vessels not only
to transport their own crude oil but also to transport crude oil for third party
charterers in direct competition with independent owners and operators in the
tanker charter market. Competition for charters is intense and is based upon
price, location, size, age, condition and acceptability of the vessel and its
manager. Competition is also affected by the availability of other size vessels
to compete in the trades in which we engage.

Risk of Loss and Insurance

Our business is affected by a number of risks, including mechanical failure of
the vessels, collisions, property loss to the vessels, cargo loss or damage and
business interruption due to political circumstances in foreign countries,
hostilities and labour 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.

Frontline Management is 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 $1 billion per vessel 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.

Inspection by a Classification Society

Every commercial vessel's hull and machinery is "classed" by a classification
society authorised by its country of registry. The classification society
certifies that the vessel has been built and maintained in accordance with the
rules of such classification society and complies with applicable rules and
regulations of the country of registry of the vessel and the international
conventions to which that country is a member. Our vessels have all been
certified as "in class."

Each vessel is inspected by a surveyor of the classification society every year,
every two and a half years and every four to five years. Should any defects be
found, the classification surveyor will issue a "recommendation" for appropriate
repairs which have to be made by the shipowner within the time limit prescribed.

Environmental and Other Regulations

Government regulation significantly affects the ownership and operations of our
vessels. The various types of governmental regulation that affects our vessels
include international conventions and national, state and local laws and
regulations of the jurisdictions where our tankers operate or are registered
significantly affect the ownership and operation of our tankers. We believe we
are currently in substantial compliance with applicable environmental and
regulatory laws regarding the ownership and operation of our tankers. However,
because existing laws may change or new laws may be implemented, we cannot
predict the ultimate cost of complying with all applicable requirements or the
impact they will have on the resale value or useful lives of our tankers.
Future, non-compliance could require us to incur substantial costs or to
temporarily suspend operation of our tankers.

We believe that the heightened environmental and quality concerns of insurance
underwriters, regulators and charterers are leading to greater inspection and
safety requirements on all vessels and creating an increasing demand for modern
vessels that are able to conform to the stricter environmental standards. We
maintain high operating standards for our vessels that emphasize operational
safety, quality maintenance, continuous training of our crews and officers and
compliance with United States and international and other national regulations.

Our vessels are subject to both scheduled and unscheduled inspections by a
variety of governmental and private entities, each of which may have unique
requirements. These entities include the local port authorities such as the U.S.
Coast Guard, harbour master or equivalent, classification societies, flag state
administration or country of registry, and charterers, particularly terminal
operators and major oil companies which conduct frequent vessel inspections.
Each of these entities may have unique requirements that we must comply with.

International Maritime Organisation

The International Maritime Organisation, or the IMO (the United Nations agency
for maritime safety and the prevention of marine 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 relates to 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. In March 1992,
the IMO adopted regulations that set forth pollution prevention requirements
applicable to tankers which became effective in July 1993. These regulations,
which have been adopted by more than 150 nations, including many of the
jurisdictions in which our tankers operate, provide, in part, that:

o tankers between 25 and 30 years old 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
cargo into a tanker in such a way that in the event of a breach
of the hull, water flows into the tanker, displacing oil upwards
instead of into the sea);

o tankers 30 years old or older must be of double-hull construction or
mid-deck design with double-sided construction; and

o all tankers are subject to enhanced inspections.

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

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

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

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

These regulations were amended in 2001 and provided a timetable for the phase
out of single hull tankers. This timetable was amended again in December 2003 in
response to European Union ("EU") proposals, further accelerating the final
phase-out dates for single hull tankers.

The baseline phase-out dates apply to tankers according to their certified
arrangement (protectively located segregated ballast tanks or PL/SBT) and the
type of oil carried as cargo. These regulations identify 3 categories of single
hull tankers, including double side and double bottom tankers:

a) Category 1 (Pre- PL/SBT) oil tankers - any tanker of 20,000 dwt or above
carrying crude oil, fuel oil, heavy diesel oil or lubricating oil as cargo
or of 30,000 dwt or above carrying other types of oil.
b) Category 2 (PL/SBT) oil tankers - any tanker of 20,000 dwt or above
carrying crude oil, fuel oil, heavy diesel oil or lubricating oil as cargo
or of 30,000 dwt or above carrying other types of oil.
c) Category 3 oil tankers - any tanker of between 5,000 dwt and 20,000 dwt
carrying crude oil, fuel oil, heavy diesel oil or lubricating oil as cargo
or of less than 30,000 dwt carrying other types of oil.

All of the single-hull tankers we operate are Category 2 oil tankers. The table
below provides the specific phase out dates according to each category of oil
tanker. Oil tankers that meet MARPOL Regulation 13F or have double bottoms and
double sides with dimensions in compliance with MARPOL Regulation 13G1(c)
continue to be exempt from the accelerated phase out.

Baseline Phase-Out Scheme

Phase Out Date Year of Delivery

Category 1 Category 2 Category 3

April 5, 2005 before April 5, 1982 before April 5, 1977
+ 2005 after April 5, 1982 After April 5, 1977 but
before January 1, 1978
+ 2006 1978* and 1979*
+ 2007 1980* and 1981*
+ 2008 1982*
+ 2009 1983*
+ 2010 1984* or later
+ by Anniversary of Delivery Date In Year
* subject to CAS

For Category 2 and 3 tankers, a successful completion of the Condition
Assessment Scheme (CAS) is required by 15 years of age or by the first
intermediate or renewal survey due after April 5, 2005, which ever occurs later.

The new phase-out regime became effective on April 5, 2005. For Category 1
tankers (pre-MARPOL tankers without segregated ballast tanks, generally built
before 1982), the final phase-out date has been brought forward to 2005 from
2007. For Category 2 tankers (MARPOL tankers, generally built after 1982) the
final phase out date has brought forward to 2010 from 2015.

To soften the significant impact that would occur if the approximately 700
tankers (approximately 67 million tons dwt) were to be phased out globally in
2010 as per above, two exceptions to the baseline phase out dates were adopted
which allow Category 2 and 3 oil tankers that have passed the CAS to operate
beyond the 2010 cut-off date as summarized below:

Exception One - a flag state may permit oil tankers to operate to 25 years of
age provided that, not later than July 1, 2001, the entire cargo tank length is
protected with one of the following arrangements which cannot be used for the
carriage of oil:

|X| Double bottoms having a height at centerline which does not meet that
required by the MARPOL Regulation 13E; or

|X| Wing tanks having a width which does not meet that required by
International Bulk Chemical Code for type 2 cargo tank location.

Exception Two - a flag state may permit oil tankers, that do not have double
bottoms nor double sides, to operate to 25 years of age or the anniversary date
of the tanker's delivery in 2015, whichever occurs earlier.

Although flag states are permitted to grant extensions in both of the above
cases provided CAS is satisfactorily completed and IMO has been so informed of
the extension, coast States have the right to deny oil tankers that have been
granted such extensions into their ports and offshore terminals.

Oil tankers granted life extension under Exception One may be denied entry after
2015 for vessels which are 25 years of age and older. Oil tankers with neither
double bottoms nor double sides which have been granted an extension under
Exception Two may be denied entry after the relevant phase out date.

Based on the present oil consumption, expected future oil consumption, the
present tanker fleet, the order book for tankers forward and the yard capacities
we believe that in order to meet the world demand for transport of oil, the
industry will need to use single hulls after 2010 and hence we believe
exemptions will be granted for trading well maintained single hull tankers after
2010.

The following table summarizes the impact of such regulations on the Company's
single hull and double sided tankers:

OPA 90
Vessel Year IMO phase out Flag state
Vessel Name Vessel type Category(s) Built No exemption exemption

Front Birch Suezmax DS 1991 2010 2015
Front Comor Suezmax SH 1993 2010 2015
Front Granite Suezmax SH 1991 2010 2015
Front Maple Suezmax DS 1991 2010 2015
Front Sunda Suezmax SH 1992 2010 2015
Front Target Suezmax SH 1990 2010 2015
Front Transporter Suezmax SH 1989 2010 2014
Front Traveller Suezmax SH 1990 2010 2015
Edinburgh VLCC DS 1993 2010 2015
Front Ace VLCC SH 1993 2010 2015
Front Duchess VLCC SH 1993 2010 2015
Front Duke VLCC SH 1992 2010 2015
Front Highness VLCC SH 1991 2010 2015
Front Lady VLCC SH 1991 2010 2015
Front Lord VLCC SH 1991 2010 2015
Front Sabang VLCC SH 1990 2010 2015
Front Vanadis VLCC SH 1990 2010 2015
Front Tobago VLCC SH 1993 2010 2015

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

Under MARPOL Regulation 13H, HGO means any of the following:

1. crude oils having a density at 15(0)C higher than 900 kg/m3;

2. fuel oils having either a density at 15(0)C higher than 900 kg/ m3 or
a kinematic viscosity at 50(0)C higher than 180 mm2/s;

3. bitumen, tar and their emulsions.

Under MARPOL 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 15(0)C
higher than 900 kg/m3 but lower than 945 kg/m3, that conform to certain
technical specifications and, in the opinion of the such 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 such 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 IMO has also negotiated international conventions that impose liability for
oil pollution in international waters and a signatory's territorial waters. In
September 1997, the IMO adopted Annex VI to the International Convention for the
Prevention of Pollution from Ships to address air pollution from ships. Annex VI
was ratified in May 2004, and became effective in May 2005. Annex VI sets limits
on sulfur oxide and nitrogen oxide emissions from ship exhausts and prohibit
deliberate emissions of ozone depleting substances, such as halons,
chlorofluorocarbons, emissions of volatile compounds from cargo tanks and
prohibition of shipboard incineration of specific substances. Annex VI also
includes a global cap on the sulfur content of fuel oil and allows for special
areas to be established with more stringent controls on sulfur emissions. We
believe that we are in substantial compliance with the Annex VI regulations.
Compliance with these regulations could require the installation of expensive
emission control systems and could have a financial impact on the operation of
our vessels. Additional or new conventions, laws and regulations may be adopted
that could adversely affect our ability to manage our vessels.

The operation of our vessels is also affected by the requirements set forth in
the IMO's Management Code for the Safe Operation of Ships and Pollution
Prevention, or the ISM Code. The ISM Code requires ship owners and bareboat
charterers to maintain an extensive "Safety Management System" that includes the
adoption of a safety and environmental protection policy setting forth
instructions and procedures for safe operation and describing procedures for
emergencies. The failure of a ship owner or a bareboat charterer to comply with
the ISM Code may subject such party to increased liability, may decrease
available insurance coverage for the affected vessels and may result in a denial
of access to, or detention in certain ports. We rely on the safety management
system that we and our third party technical managers have developed.

The ISM Code requires that vessel operators obtain a safety management
certificate for each vessel they operate. This certificate evidences compliance
by a vessel's management with the ISM Code requirements for a safety management
system. No vessel can obtain a certificate unless its manager has been awarded a
Document of Compliance, issued by each flag state, under the ISM Code. All of
our vessels and their operators have received ISM certification. The Manager is
required to renew these documents of compliance and safety management
certificates annually.

Non-compliance with the ISM Code and other IMO regulations may subject the
vessel owner or a bareboat charterer to increased liability, may lead to
decreases in available insurance coverage for affected vessels and may result in
a tanker's denial of access to, or detention in, some ports. Both the United
States Coast Guard and EU authorities have indicated that vessels not in
compliance with the ISM Code will be prohibited from trading in U.S. and EU
ports, as the case may be.

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

United States Oil Pollution Act of 1990 and Comprehensive Environmental
Response, Compensation and Liability Act of 1980

The United States regulates the tanker industry with an extensive regulatory and
liability regime for environmental protection and cleanup of oil spills,
consisting primarily of the United States Oil Pollution Act of 1990, or OPA, and
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, or CERCLA. OPA affects all owners and operators whose vessels trade with
the United States or its territories or possessions, or whose vessels operate in
the waters of the United States, which include the United States territorial sea
and the 200 nautical mile exclusive economic zone around the United States.
CERCLA applies to the discharge of hazardous substances (other than oil) whether
on land or at sea. Both OPA and CERCLA impact our operations.

Under OPA, vessel owners, operators and bareboat charterers are "responsible
parties" 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:

o natural resources damages and related assessment costs;

o real and personal property damages;

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

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

o loss of subsistence use of natural resources.

OPA limits the liability of responsible parties to the greater of $1,200 per
gross ton or $10.0 million per tanker that is over 3,000 gross tons (subject to
possible adjustment for inflation). Under a recently proposed legislation, OPA
liability limits will be increased, when such legislation is enacted, to the
greater of $1,900 per gross ton or $16.0 million per tanker that is over 3,000
gross tons per discharge (subject to possible adjustment for inflation). The act
specifically permits individual states to impose their own liability regimes
with regard to oil pollution incidents occurring within their boundaries, and
some states have enacted legislation providing for unlimited liability for
discharge of pollutants within their waters. In some cases, states that have
enacted this type of legislation have not yet issued implementing regulations
defining tanker owners' responsibilities under these laws.

CERCLA, which applies to owners and operators of tankers, contains a similar
liability regime and provides for cleanup and removal of hazardous substances
and for natural resource damages. Liability under CERCLA is limited to the
greater of $300 per gross ton or $5 million. These limits of liability do not
apply, however, where the incident is caused by violation of applicable United
States federal safety, construction or operating regulations, or by the
responsible party's gross negligence or wilful misconduct. These limits do not
apply if the responsible party fails or refuses to report the incident or to
co-operate and assist in connection with the substance removal activities. OPA
and CERCLA each preserve the right to recover damages under existing law,
including maritime tort law.

OPA also requires owners and operators of vessels to establish and maintain with
the United States Coast Guard evidence of financial responsibility sufficient to
meet the limit of their potential strict liability under the act. The United
States Coast Guard has enacted regulations requiring evidence of financial
responsibility in the amount of $1,500 per gross ton for tankers, coupling the
OPA limitation on liability of $1,200 per gross ton with the CERCLA liability
limit of $300 per gross ton. We expect that if the recently proposed legislation
increasing liability limitations under OPA is enacted, the United States Coast
Guard will accordingly increase the amounts of the financial responsibility.
Under these regulations, an owner or operator of more than one tanker is
required to obtain a certificate of financial responsibility for the entire
fleet in an amount equal only to the financial responsibility requirement of the
tanker having the greatest maximum strict liability under OPA and CERCLA. We
have provided requisite guarantees and received certificates of financial
responsibility from the United States Coast Guard for each of our tankers that
calls in United States waters.

Frontline Management insures each of our tankers with pollution liability
insurance in the maximum commercially available amount of $1.0 billion per
incident per vessel. A catastrophic spill could exceed the insurance coverage
available, in which event there could be a material adverse effect on our
business.

Under OPA, oil tankers without double hulls will not be permitted to come to
United States ports or trade in the United States waters by 2015. Based on the
current phase-out requirement, our 18 single hull tankers will not be eligible
to carry oil as cargo within the 200-mile United States exclusive economic zone
starting in 2010, except that these tankers and our three double sided tankers
may trade in United States waters until 2015 if their operations are limited to
discharging their cargoes at the Louisiana Offshore Oil Port ("LOOP") or
unloading with the aid of another vessel, a process referred to as "lightering,"
within authorized lightering zones more than 60 miles off-shore.

OPA also amended the Federal Water Pollution Control Act to require owners or
operators of tankers operating in the waters of the United States to file vessel
response plans with the United States Coast Guard, and their tankers are
required to operate in compliance with their United States Coast Guard approved
plans. These response plans must, among other things:

o 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";

o describe crew training and drills; and

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

Vessel response plans for our tankers operating in the waters of the United
States have been approved by the United States Coast Guard. In addition, the
United States Coast Guard has announced it intends to propose similar
regulations requiring certain vessels to prepare response plans for the release
of hazardous substances. We are responsible for ensuring our vessels comply with
any additional regulations.

OPA does not prevent individual states from imposing their own liability regimes
with respect to oil pollution incidents occurring within their boundaries. In
fact, 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 United States federal
law.

Other U.S. Environmental Requirements

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 U.S. Environmental Protection Agency, or
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 are equipped with vapor control
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 control systems that satisfy these requirements. Although a
risk exists that new regulations could require significant capital expenditures
and otherwise increase our costs, we believe, based on the regulations that have
been proposed to date, that no material capital expenditures beyond those
currently contemplated and no material increase in costs are likely to be
required.

The Clean Water Act, or the CWA, prohibits the discharge of oil or hazardous
substances into navigable waters and imposes strict liability in the form of
penalties for any unauthorized discharges. The CWA also imposes substantial
liability for the costs of removal, remediation and damages. State laws for the
control of water pollution also provide varying civil, criminal and
administrative penalties in the case of a discharge of petroleum or hazardous
materials into state waters. The CWA complements the remedies available under
the more recent OPA and CERCLA, discussed above. Under current regulations of
the EPA, vessels are not required to obtain CWA permits for the discharge of
ballast water in U.S. ports. However, as a result of a recent U.S. federal court
decision, vessel owners and operators may be required to obtain CWA permits for
the discharge of ballast water, or they will face penalties for failing to do
so. Although the EPA is likely to appeal this decision, we do not know how this
matter is likely to be resolved and we cannot assure you that any costs
associated with compliance with the CWA's permitting requirements will not be
material to our results of operations.

The National Invasive Species Act, or NISA, was enacted in 1996 in response to
growing reports of harmful organisms being released into U.S. ports through
ballast water taken on by ships in foreign ports. NISA established a ballast
water management program for ships entering U.S. waters. Under NISA, mid-ocean
ballast water exchange is voluntary, except for ships heading to the Great
Lakes, Hudson Bay, or vessels engaged in the foreign export of Alaskan North
Slope crude oil. However, NISA's exporting and record-keeping requirements are
mandatory for vessels bound for any port in the United States. Although ballast
water exchange is the primary means of compliance with the act's guidelines,
compliance can also be achieved through the retention of ballast water onboard
the ship, or the use of environmentally sound alternative ballast water
management methods approved by the U.S. Coast Guard. If the mid-ocean ballast
exchange is made mandatory throughout the United States, or if water treatment
requirements or options are instituted, the costs of compliance could increase
for ocean carriers.

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

Several of our vessels currently 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 Tanker Restrictions

In July 2003, the EU adopted legislation, which was amended in October 2003,
that prohibits all single hull tankers from entering into its ports or offshore
terminals by 2010 or earlier, depending on their age. The EU has also already
banned all single hull tankers carrying heavy grades of oil from entering or
leaving its ports or offshore terminals or anchoring in areas under its
jurisdiction. Commencing in 2005, certain single hull tankers above 15 years of
age are also restricted from entering or leaving EU ports or offshore terminals
and anchoring in areas under EU jurisdiction. The EU is also considering
legislation that would: (1) ban manifestly sub-standard vessels (defined as
those more than 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. The sinking of the m.t. Prestige
and resulting oil spill in November 2002 has led to the adoption of other
environmental regulations by certain EU nations, which could adversely affect
the remaining useful lives of all of our tankers and our ability to generate
income from them. It is impossible to predict what legislation or additional
regulations, if any, may be promulgated by the European Union or any other
country or authority.

International Conventions on Civil Liability for Oil Pollution Damage

Although the United States is not a party to these Conventions, many countries
ratified and followed the liability system adopted by the IMO and originally set
out in the International Convention on Civil Liability for Oil Pollution Damage
of 1969 and the Convention for the Establishment of an International Fund for
Oil Pollution of 1971. This international oil pollution regime was modified in
1992 by two Protocols. The amended Conventions are known as the 1992 Civil
Liability Convention and the 1992 Fund Convention. The 1992 Conventions entered
into force on May 30, 1996. Due to a number of denunciations of the 1971
Convention this Convention ceased to be in force on May 24, 2004. A large number
of States have also denounced the 1969 Civil Liability Convention and as more
States do so its importance is increasingly diminishing. Under the 1992 Civil
Liability Convention, a vessel's registered owner is strictly liable for oil
pollution damage caused in the territory, territorial seas or exclusive economic
zone of a contracting state by discharge of persistent oil from a tanker,
subject to certain complete defences. The 1992 Fund established by the 1992 Fund
Convention pays compensation to those suffering oil pollution damage in a State
party to the 1992 Fund Convention who did not obtain full compensation under the
1992 Civil Liability Convention. This would normally apply where the shipowner
has a defence under the 1992 Civil Liability Convention or the damage exceeds
the shipowner's liability under that Convention. Under an amendment that became
effective on November 1, 2003, liability limits under the 1992 Civil Liability
Convention were increased by over 50%. 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 SDR 4,510,000 (approximately $6.7 million) plus SDR
631 (approximately $932) for each additional gross ton over 5,000. For vessels
of over 140,000 gross tons, liability will be limited to SDR 89,770,000
(approximately $132.7 million). Also with effect from the same date the maximum
amount payable by the 1992 Fund increased from SDR 135 million (approximately
$199.5 million) to SDR 203million (approximately $300.0 million). The right to
limit liability is forfeited under the 1992 Civil Liability Convention if it is
proved that the pollution damage resulted from the shipowner's personal act or
omission, committed with the intent to cause such damage, or recklessly and with
knowledge that such damage would probably result. Vessels trading to States that
are parties to the 1992 Civil Liability Convention must provide evidence of
insurance covering the liability of the owner. On March 2005 a third tier of
compensation was established by means of a Supplementary Fund. This Fund
provides additional compensation to that available under the 1992 Fund
Convention for pollution damage in States that are members of the Supplementary
Fund. The amount available is SDR 750 million (approximately $1.1 billion)
including the costs payable under the 1992 Civil Liability Convention and the
1992 Fund Convention, SDR 203 million (approximately $300.0 million). In
jurisdictions where the 1992 Civil Liability Convention has not been adopted,
various legislative schemes govern or common law applies, and liability is
imposed either on the basis of fault or in a manner similar to the 1992
Convention. We believe that our P&I insurance covers liabilities either under
the international oil pollution schemes or under local regimes like for example
the US Oil Pollution Act 1990.

The unit of account in the 1992 Conventions is the Special Drawing Right (SDR)
as defined by the International Monetary Fund. In this document the SDR has been
converted into US dollars at the rate of exchange applicable on May 2, 2006 of
SDR 1 = USD 1.477760.

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
Maritime Transportation Security Act of 2002 ("MTSA") came into effect. To
implement certain portions of the MTSA, in July 2003, the United States Coast
Guard issued regulations requiring the implementation of certain security
requirements aboard vessels operating in waters subject to the jurisdiction of
the United States. Similarly, in December 2002, amendments to the International
Convention for the Safety of Life at Sea ("SOLAS") created a new chapter of the
convention dealing specifically with maritime security. The new chapter came
into effect in July 2004 and imposes various detailed security obligations on
vessels and port authorities, most of which are contained in the newly created
International Ship and Port Facilities Security Code ("ISPS"). Among the various
requirements are:

o on-board installation of automatic information systems, or AIS, to
enhance vessel-to-vessel and vessel-to-shore communications;

o on-board installation of ship security alert systems;

o the development of vessel security plans; and

o compliance with flag state security certification requirements.

The United States Coast Guard regulations, intended to align with international
maritime security standards, exempt non-U.S. vessels from MTSA vessel security
measures provided such vessels have on board a valid International Ship Security
Certificate that attests to the vessel's compliance with SOLAS security
requirements and the ISPS Code. All of our vessels comply with the various
security measures addressed by the MTSA, SOLAS and the ISPS Code.

C. ORGANIZATIONAL STRUCTURE

See Exhibit 8.1 for a list of our significant subsidiaries.

D. PROPERTY, PLANT AND EQUIPMENT

Other than its interests in the vessels described above, we do not own any
material physical properties.

ITEM 4A. UNRESOLVED STAFF COMMENTS

Not Applicable.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion should be read in conjunction with our audited
consolidated financial statements and notes thereto and predecessor combined
carve-out financial statements included herein. This discussion includes
forward-looking statements based on assumptions about our future business. Our
actual results could differ materially from those contained in the
forward-looking statements.

Overview

We were incorporated in Bermuda on October 10, 2003, for the purpose of
acquiring certain of the shipping assets of Frontline. Frontline is a publicly
listed Bermuda based shipping company engaged primarily in the ownership and
operation of oil tankers, including OBO carriers.

On December 11, 2003, we entered into a purchase agreement with Frontline to
purchase certain of Frontline's wholly owned VLCC and Suezmax owning
subsidiaries, plus a purchase option to acquire a further VLCC, which we refer
to collectively as the Vessel Interests. On December 18, 2003 we issued $580
million aggregate principal amount of 8.5% senior notes due 2013 in a private
offering to qualified institutional buyers. The proceeds from the offering of
our senior notes, together with a deemed equity contribution of approximately
$525 million from Frontline, were used to complete the acquisition of the Vessel
Interests. We also assumed senior secured indebtedness with respect to our fleet
in the amount of approximately $1,158.0 million, which we subsequently
refinanced with the proceeds of our notes and our $1,058.0 million credit
facility. On January 1, 2004 we completed the purchase of the Vessel Interests
we agreed to purchase from Frontline on December 11, 2003. As a result of these
transactions we acquired a fleet of 24 Suezmax tankers, 22 VLCCs, and an option
to acquire an additional VLCC with a combined carrying capacity of approximately
10.5 million dwt and a combined book value at January 1, 2004 of approximately
$2,048.4 million.

On January 1, 2004, we entered into time charter agreements with Frontline
Shipping to charter the 46 vessels for substantially the remainder of their
useful lives at fixed rates. Frontline Shipping was initially capitalized by
Frontline with $250 million to support its obligation to make charterhire
payments to us. In addition, on January 1, 2004, we entered into management
agreements with Frontline Management to manage the 46 vessels for substantially
the remainder of their useful lives at fixed rates.

On January 17, 2005 we exercised our option to acquire the VLCC Oscilla. The
vessel was delivered to us on April 4, 2005, renamed Front Scilla and chartered
to Frontline Shipping under substantially the same terms as our other VLCCs.
Between January and March 2005 we purchased three further double hulled VLCCs
from Frontline, which were chartered to Frontline Shipping II under
substantially the same terms as our other VLCCs, except with respect to the base
charter rates. In March 2005, we sold the Suezmax tanker Front Fighter and the
time charter of Front Fighter to Frontline Shipping and management agreement for
the vessel were both concurrently cancelled.

In 2005 we acquired a total of 11 vessels, of which two were containerships, and
sold five vessels as discussed in detail in Item 4. Following these purchases
and disposals we have a fleet of 52 vessels as of June 2, 2006.

As a result of the purchase of our fleet and our time charter and management
agreements with Frontline, our consolidated financial statements significantly
differ as of and for the year ended December 31, 2004 compared with our
predecessor combined carve-out financial statements as of and for the year ended
December 31, 2003. These differences primarily relate to the way we account for
vessels and revenues as a result of the time charter arrangements, but also
include the way we account for operating expenses and administrative expenses.
The following discussion identifies the principal factors that affect our
predecessor combined carve-out financial statements and our 2004 and future
results.

Overview - Predecessor

For the year ended December 31, 2003, the predecessor combined carve-out
financial statements presented herein have been carved out of the consolidated
financial statements of Frontline. Our financial position, results of operations
and cash flows reflected in our combined financial statements are not indicative
of those that would have been achieved had we operated autonomously for all
periods presented.

Our predecessor combined carve-out financial statements assume that our business
was operated as a separate corporate entity prior to its inception. Prior to the
date of our incorporation, our business was operated as part of the shipping
business of Frontline. Our predecessor combined carve-out financial statements
have been prepared to reflect the combination of the Vessel Interests.

As at December 31, 2003, the Vessel Interests were comprised of 19 wholly owned
VLCCs, 24 wholly owned Suezmax tankers, one option to acquire a VLCC and
interests in six associated companies that each owned a VLCC.

Where Frontline's assets, liabilities, revenues and expenses relate to specific
Vessel Interests, these have been identified and carved out for inclusion in our
predecessor combined carve-out financial statements. Frontline's shipping
interests and other assets, liabilities, revenues and expenses that do not
relate to the Vessel Interests have been identified and not included in our
combined financial statements. The preparation of our combined financial
statements requires allocation of certain assets and liabilities and expenses
where these items are not identifiable as related to one specific activity.
Administrative overheads of Frontline that cannot be related to a specific
vessel have been allocated pro rata based on the number of vessels in the
Company compared with the number in Frontline's total fleet. We have deemed that
the related allocations are reasonable to present our financial position,
results of operations, and cash flows. We also believe the various allocated
amounts would not materially differ from those that would have been achieved had
we operated on a stand-alone basis for all periods presented. However, our
financial position, results of operations and cash flows are not indicative of
those that would have been achieved had we operated autonomously for all periods
presented in our predecessor combined carve-out financial statements as we may
have made different operational and investment decisions as an independent
Company. Furthermore, the predecessor combined carve-out financial statements do
not reflect the results we would have achieved under our current fixed rate long
term charters and management agreements and therefore are not indicative of our
current or future results of operations.

The majority of our assets, liabilities, revenues and expenses are vessel
specific and are included in the vessel owning subsidiaries' financial
statements. However, in addition, the following significant allocations have
been made:

Long term debt: An allocation of corporate debt of Frontline has been made. This
debt has been allocated as it relates specifically to a vessel over which the
Company had a purchase option (which was subsequently exercised). The associated
interest expense has also been allocated to our predecessor combined carve-out
financial statements.

Interest rate swaps: For the purposes of our combined financial statements,
interest rate swaps specific to carved out debt have been included. In addition,
non-debt specific interest rate swaps have been included on the basis that such
swaps were intended to cover the floating rate debt that has been included in
our predecessor carve-out combined statements. The associated mark to market
adjustments arising on the swaps has also been allocated to our predecessor
combined carve-out financial statements and is included in other financial
items, net.

Administrative expenses: Frontline's overheads relate primarily to management
organizations in Bermuda and Oslo that manage the business. These overhead costs
include salaries and other employee related costs, office rents, legal and
professional fees and other general administrative expenses. Other employee
related costs includes costs recognized in relation to Frontline's employee
share option plan. We have allocated overhead pro rata based on the number of
vessels in the Company compared with the number in Frontline's total fleet.

No allocation of interest income has been made and interest income reported in
our combined financial statements represents interest income earned by the
vessel owning subsidiaries and interest earned on loans to joint ventures.

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:

o the earnings of our vessels under time charters to the Charterers;

o the amount we receive under the profit sharing arrangements with the
Charterers;

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

o vessel management fees;

o administrative expenses; and

o interest expense.

Vessel Earnings
Our revenues since January 1, 2004 derive primarily from our long term, fixed
rate time charters with the Charterers. All of the vessels that we have acquired
from Frontline, including the vessels we have acquired since December 2003, are
chartered to the Charterers under long term charters that are generally
accounted for as finance leases. We allocate $6,500 per day from each time
charter payment as finance lease service revenue. The balance of each charter
payment is allocated between finance lease interest income and finance lease
repayment in order to produce a constant periodic return on the balance of our
net investments in finance leases. As the balance of our net investments in
finance leases decreases, we will allocate less of each charter payment as
finance lease interest income and more as finance lease repayments. Certain of
our vessels were on charter to third parties as at January 1, 2004 when our
charter arrangements with Frontline became economically effective. Our
arrangement with Frontline is that while our vessels are completing performance
of third party charters, we pay Frontline all revenues we earn under third party
charters in exchange for Frontline paying us the agreed upon Frontline
charterhire. We account for the revenues received from these third party
charters as time charter, bareboat or voyage revenues, as applicable, and the
subsequent payment of these amounts to Frontline as deemed dividends paid. We
account for the charter revenues received from Frontline Shipping and Frontline
Shipping II prior to the charters becoming effective for accounting purposes, as
deemed equity contributions received.

In addition, for the final 11-month period in 2004 and for each calendar year
thereafter, the Charterers will pay us a profit sharing payment if our vessels'
earnings exceed certain amounts. Operating revenues from January 1, 2004,
therefore include finance lease interest income, finance lease service revenues,
profit sharing revenues and include charter revenues for the period prior to our
vessels commencing trading under their charters to Frontline.

We recognize profit sharing revenue for a particular vessel when its earnings on
a TCE basis exceed the maximum amount of base charterhire that the vessel is
scheduled to earn for the entire year. In 2004, this occurred in the second
quarter of the year. We therefore generally do not expect to recognize any
profit sharing revenue in the first quarter of any year. In addition, we expect
stronger demand for vessels and increased oil trading activity in the winter
months in the Northern hemisphere to affect the amount and timing of our profit
sharing revenue.

Expenses
Our expenses consist primarily of vessel management fees, administrative
expenses and interest expense. With respect to vessel management fees, our
vessel owning subsidiaries have entered into fixed rate management agreements
with Frontline Management under which Frontline Management is responsible for
all technical management of the vessels. Each of these subsidiaries pays
Frontline Management a fixed fee of $6,500 per day per vessel for all of the
above services. We reported voyage expenses in 2004, derived from voyages that
were in progress on January 1, 2004. As of January 1, 2005, all of our vessels
were employed under time or bareboat charters. We do not expect to report
further significant voyage expenses.

We have entered into an administrative services agreement with Frontline
Management under which Frontline Management provides us with administrative
support services. We and each of our vessel owning subsidiaries pay Frontline
Management a fixed fee of $20,000 per year for its services under the agreement,
and agree to reimburse Frontline Management for reasonable third party costs, if
any, advanced on our behalf by Frontline.

Other than the interest expense associated with our 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. At December 31, 2004 we had a $1,058.0 million secured six-year credit
facility with a syndicate of financial institutions. This credit facility
provided us with a portion of the capital required to complete the acquisition
of the Vessel Interests and to refinance related secured indebtedness. This
credit facility bore interest at LIBOR plus 1.25%. We were also party to
interest rate swaps which fixed the interest on $581.4 million of our floating
rate borrowings at an average rate of 3.8% (exclusive of margin). In February
2005, we refinanced our existing secured credit facility with a new $1,131.0
million secured credit facility. The new facility bears interest at LIBOR plus a
margin of 0.7% and is repayable over a term of six years. The related interest
rate swaps remain unchanged.

Factors Affecting Our Predecessor Results

The principal factors that have affected our predecessor historical results of
operations and financial position include:

o the earnings of our vessels in the charter market;

o vessel expenses;

o administrative expenses;

o depreciation;

o interest expense; and

o foreign exchange.

Vessel Earnings
Prior to January 1, 2004, we derived our earnings from bareboat charters, time
charters, voyage charters and contracts of affreightment. A bareboat charter is
a contract for the use of a vessel for a specified period of time where the
charterer pays substantially all of the vessel voyage costs and operating costs.
A time charter is a contract for the use of a vessel for a specific period of
time during which the charterer pays substantially all of the vessel voyage
costs but the vessel owner pays the operating costs. A voyage charter is a
contract for the use of a vessel for a specific voyage in which the vessel owner
pays substantially all of the vessel voyage costs and operating costs. A
contract of affreightment is a form of voyage charter in which the owner agrees
to carry a specific type and quantity of cargo in two or more shipments over an
agreed period of time. Accordingly, for equivalent profitability, charter income
under a voyage charter would be greater than that under a time charter to take
account of the owner's payment of the vessel voyage costs. In order to compare
vessels trading under different types of charters, it is standard industry
practice to measure the revenue performance of a vessel in terms of average
daily TCEs. For voyage charters, this is calculated by dividing net voyage
revenues by the number of days on charter. Days spent off hire are excluded from
this calculation. Off hire days are days a vessel is unable to perform its
service for which it is immediately required under a time charter. Off hire days
include days spent on repairs, dry docking and surveys, whether scheduled or
unscheduled.

As at December 31, 2003, 29 of our vessels operated in the voyage charter
market. The tanker industry has historically been highly cyclical, experiencing
volatility in profitability, vessel values and freight rates. In particular,
freight and charter rates are strongly influenced by the supply of tanker
vessels and the demand for oil transportation services. The following table sets
forth the average daily TCEs earned by our tanker fleet in 2003 :

--------------------------------
2003
--------------------------------
(dollars per day)
VLCC.......................... 40,400
Suezmax....................... 33,500
Suezmax OBO................... 32,000

Expenses
Operating costs are the direct costs associated with running a vessel and
include crew costs, vessel supplies, repairs and maintenance, drydockings,
lubricating oils and insurance.

Administrative expenses are composed of general corporate overhead expenses,
including personnel costs, property costs, legal and professional fees and other
general administrative expenses. Personnel costs include, among other things,
salaries, pension costs, fringe benefits, travel costs and health insurance.

Depreciation, or the periodic cost charged to our income for the reduction in
usefulness and long term value of our vessels, is also related to the number of
vessels we own. We depreciate the cost of our vessels, less their estimated
residual value, over their estimated useful life on a straight-line basis. No
charge is made for depreciation of vessels under construction until they are
delivered.

Interest expense in our combined financial statements relates to vessel specific
debt facilities of our subsidiaries and to corporate debt that has been
allocated to us. Interest expense depends on the same factors set forth above as
to our interest expense. At December 31, 2003, all of our debt was floating rate
debt.

Foreign Exchange
As at December 31, 2003, certain of our subsidiaries had Yen denominated debt
and charters denominated in Yen, which exposed us to exchange rate risk. As at
December 31, 2003, we had Yen denominated debt in subsidiaries of (Y)9.6 billion
($89.8 million).

Critical Accounting Policies and Estimates

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

In preparing our consolidated financial statements, we follow critical
accounting policies that are different in some respect from those followed in
the preparation of our predecessor financial statements. Each set of critical
accounting policies is discussed separately below.

We use the following critical accounting policies in preparing our consolidated
financial statements.

Revenue Recognition

Revenues are generated from time charter and bareboat charterhires and are
recorded over the term of the charter as service is provided. Voyage charter
revenues have been included for the period prior to our vessels commencing
trading under their charters to Frontline. Under a voyage charter, the revenues
and associated voyage costs are recognized ratably over the estimated duration
of the voyage.

Profit sharing revenues are recorded when earned and realizable. We consider
profit sharing revenues to be earned and realizable to the extent that a
vessel's underlying earnings on a time charter equivalent basis exceed the
maximum amount of base charterhire the vessel could earn during the period. This
threshold is calculated as the number of days in the profit sharing period
multiplied by the daily profit sharing threshold rates. These threshold rates
represent the base charterhire rates specified in the individual time charter
agreements.

Vessels and Depreciation

The cost of vessels less estimated residual value is depreciated on a straight
line basis over the vessels' estimated remaining economic useful lives. The
estimated economic useful life of our double-hull vessels is 25 years and for
single hull vessels is either 25 years or the vessels' anniversary date in 2015,
whichever comes first. This is a common life expectancy applied in the shipping
industry.

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

Leases

Leases of our vessels where we are the lessor are classified as either finance
leases or operating leases based on an assessment of the terms of the lease. For
the leases which have been classified as finance leases, the minimum lease
payments (net of amounts representing estimated executory costs including profit
thereon) plus the unguaranteed residual value are recorded as the gross
investment in the 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 income which is amortized to income over the
lease term as finance lease interest income to produce a constant periodic rate
of return on the net investment in the lease.

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.

Deemed Dividends

Our charter arrangements with Frontline became effective on January 1, 2004.
Certain of our vessels were on fixed term charters to third parties as at
January 1, 2004 and the remainder were on spot voyages. As each of our vessels
completes its original charter in place on January 1, 2004, the finance leases
with Frontline become effective for accounting purposes. We account for the
revenues received from these third party charters as time charter, bareboat or
voyage revenues as applicable and the subsequent payment of these amounts to
Frontline as deemed dividends paid. We account for the charter revenues received
from Frontline Shipping Limited prior to the charters becoming effective for
accounting purposes, as deemed equity contributions received. This treatment has
been applied due to the related party nature of the charter arrangements.

The Company has accounted for the acquisition of assets from entities under
common control at the historical carrying value of the seller. The difference
between the purchase price and historical carrying value has been recorded as a
deemed dividend paid.

Deemed Equity Contributions

We have accounted for the difference between the historical cost of the vessels,
originally transferred to us by Frontline at Frontline's historical carrying
value, and the net investment in the lease as a deferred deemed equity
contribution. This deferred deemed equity contribution is presented as a
reduction in the net investment in finance leases in the balance sheet. This
results from the related party nature of both the original transfer of the
vessel and the subsequent finance lease. The deferred deemed equity contribution
is amortized as a credit to contributed surplus over the life of the new lease
arrangement as lease payments are applied to the principal balance of the lease
receivable.

Impairment of Long-lived Assets

Our vessels are reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable. In
assessing the recoverability of the vessels' carrying amounts, we must make
assumptions regarding estimated future cash flows. These assumptions include
assumptions about the spot market rates for vessels, the revenues the vessel
could earn under time charter, voyage charter or bareboat charter, the operating
costs of our vessels, the estimated economic useful life of our vessels and
their scrap value. In making these assumptions, we refer to historical trends
and performance as well as any known future factors. Factors we consider
important that 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
significant negative industry or economic trends. If our review indicates
impairment, an impairment charge is recognized based on the difference between
carrying value and fair value. Fair value is typically established using an
average of three independent valuations. Although management believes that the
assumptions and estimates used to evaluate impairment are reasonable and
appropriate, such assumptions and estimates are highly subjective.

Variable Interest Entities

A variable interest entity is a legal entity that lacks either (a) equity
interest holders as a group that lack the characteristics of a controlling
financial interest, including: decision making ability and an interest in the
entity's residual risks and rewards or (b) the equity holders have not provided
sufficient equity investment to permit the entity to finance its activities
without additional subordinated financial support. FASB Interpretation 46 (R)
requires a variable interest entity to be consolidated if any of its interest
holders are entitled to a majority of the entity's residual return or are
exposed to a majority of its expected losses. In applying the provisions of
Interpretation 46 (R), we must make assumptions in respect of, but not limited
to, the sufficiency of the equity investment in the underlying entity. These
assumptions include assumptions about the future revenues, operating costs and
estimated economic useful lives of assets of the underlying entity.

We initially applied the provisions of Interpretation 46(R) to all special
purpose entities and other entities created after January 31, 2003 on December
31, 2003. In accordance with the requirements of Interpretation 46(R), we
initially applied its provisions to entities that are not considered to be
special purpose entities that were created before January 31, 2003 as of March
31, 2004.

The effect of implementation of FIN 46(R) was to require consolidation of one
entity in which we held an interest but which had not previously been
consolidated. We had an option to purchase the VLCC Oscilla on expiry of a
five-year time charter, which commenced in March 2000. Oscilla was owned and
operated by an unrelated special purpose entity. Prior to the adoption of FIN
46(R) we did not consolidate this special purpose entity. We have determined
that the entity that owns Oscilla is a variable interest entity and that we are
the primary beneficiary. At December 31, 2004 through to January 2005, when we
exercised our option to acquire the vessel, after exhaustive efforts, we were
unable to obtain the accounting information necessary to be able to consolidate
the entity that owned Oscilla. If we had exercised the option at December 31,
2004, the cost of the Oscilla would have been approximately $28.5 million and
our maximum exposure to loss was $8.4 million. The application of FIN 46(R) has
not had a material impact on our results of operations or financial position. We
have taken delivery of the vessel in April 2005.

The following critical accounting policies were used in the preparation of the
predecessor combined carve-out financial statements.

Carve out of the Financial Statements of Frontline

For the year ended December 31, 2003, our predecessor combined carve-out
financial statements presented herein have been carved out of the financial
statements of Frontline.

Where Frontline's assets, liabilities, revenues and expenses relate to the
specific Vessel Interests, these have been identified and carved out for
inclusion in our combined financial statements. Frontline's shipping interests
and other assets, liabilities, revenues and expenses that do not relate to the
Vessel Interests have been identified and not included in our combined financial
statements. The preparation of our combined financial statements requires the
allocation of certain assets and liabilities and expenses where these items are
not identifiable as related to one specific activity. Administrative overheads
of Frontline that cannot be related to a specific vessel have been allocated
based on the number of vessels in the Company compared with the number in
Frontline's total fleet. Management has deemed the related allocations are
reasonable to present our financial position, results of operations, and cash
flows. Management believes the various allocated amounts would not materially
differ from those that would have been achieved had we operated on a stand-alone
basis for all periods presented in our predecessor combined carve-out financial
statements. Our financial position, results of operations and cash flows are not
indicative of those that would have been achieved had we operated autonomously
for all years presented as we may have made different operational and investment
decisions as a company independent of Frontline.

Revenue Recognition

Revenues are generated from voyage charters, contracts of affreightment, time
charter and bareboat charterhires. Time charter and bareboat charter revenues
are recorded over the term of the charter as service is provided. Under a voyage
charter the revenues and associated voyage costs are recognized ratably over the
estimated duration of the voyage. The operating results of voyages in progress
at a reporting date are estimated and recognized pro-rata on a per day basis.
Probable losses on voyages are provided for in full at the time such losses can
be estimated.

Amounts receivable or payable arising from profit sharing arrangements are
accrued based on the estimated results of the voyage recorded as at the
reporting date.

The operating revenues and voyage expenses of the vessels operating in the
Tankers pool, and certain other pool arrangements, are pooled and net operating
revenues, calculated on a TCE basis, are allocated to the pool participants
according to an agreed formula. The same revenue and expenses principles stated
above are applied in determining the pool's net operating revenues.

Vessels and Depreciation

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

Impairment of Long-lived Assets

Our vessels are reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable. In
assessing the recoverability of the vessels' carrying amounts, we must make
assumptions regarding estimated future cash flows. These assumptions include
assumptions about the spot market rates for vessels, the revenues the vessel
could earn under time charter, voyage charter or bareboat charter, the operating
costs of our vessels, the estimated economic useful life of our vessels and
their scrap value. In making these assumptions, we refer to historical trends
and performance as well as any known future factors. Factors we consider
important that could effect 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
significant negative industry or economic trends. If our review indicates
impairment, an impairment charge is recognized based on the difference between
carrying value and fair value. Fair value is typically established using an
average of three independent valuations. Although management believes that the
assumptions and estimates used to evaluate impairment are reasonable and
appropriate, such assumptions and estimates are highly subjective.

Leases

Leases of vessels where we are the lessee are classified as either capital
leases or operating leases based on an assessment of the terms of the lease.
Classification of leases involves the use of estimates or assumptions about fair
values of leased vessels, expected future values of vessels and, if lessor's
rates of return are not known, lessee's cost of capital. 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. Lessee's cost of capital is estimated using an average
that includes estimated return on equity and estimated incremental borrowing
cost. The classification of leases in our accounts as either capital leases or
operating leases is sensitive to changes in these underlying estimates and
assumptions.

Variable Interest Entities

The application of this accounting policy is discussed in the above critical
accounting policies for our consolidated financial statements.

Accounting Changes

The accounting changes as set forth below relate to the predecessor combined
carve-out financial statements included herein. The changes are not applicable
to our consolidated financial statements for the years ended December 31, 2004
and 2005 of the Company.

In December 2003 we implemented the provisions of FIN 46R. The effect of
implementation of FIN 46R was to require consolidation of one entity in which we
held an interest but which had not previously been consolidated. We had an
option to purchase the VLCC Oscilla on expiry of a five-year time charter, which
commenced in March 2000. Oscilla was owned and operated by an unrelated special
purpose entity. Prior to the adoption of FIN 46 we did not consolidate this
special purpose entity. We have determined that the entity that owned Oscilla
was a variable interest entity and that we were the primary beneficiary. At
December 31, 2004 through to January 2005, when we exercised our option to
acquire the vessel, after exhaustive efforts, we were unable to obtain the
accounting information necessary to be able to consolidate the entity that owned
Oscilla. If we had exercised the option at December 31, 2004, the cost of the
Oscilla would have been approximately $28.5 million. Our maximum exposure to
loss, measured by the purchase price we paid for the option, was $8.4 million.

With effect from December 2003, the IMO implemented new regulations that result
in the accelerated phase-out of single hull vessels. As a result of this, we
have re-evaluated the estimated useful life of our single hull vessels and
determined this to be either 25 years or the vessel's anniversary date in 2015
whichever comes first. As a result, the estimated useful lives of 13 of our
wholly owned vessels were reduced in the fourth quarter of 2003. A change in
accounting estimate was recognized to reflect this decision, resulting in an
increase in depreciation expense and consequently decreasing net income by $1.1
million and basic and diluted earnings per share by $0.01, for 2003.

Market Overview

For the third year in a row the tanker market was very profitable, even if 2005
could not compete with 2004. The extreme volatility witnessed in rates over 2004
was to a smaller extent the case for 2005, though still were testing at times.
The TCE for a modern VLCC differed between lows of $24,000 per day and highs of
$130,000 per day in 2005 according to industry sources.

The International Energy Agency (IEA) reported in their May issue, world oil
demand in 2005 of 83.59 million barrels per day (mbd), an increase of 1.05 mbd
from 2004. The Middle East, China and North America contributed with 55% of this
increase which indicate their strong economic growth.

Lack of spare oil production capacity drove crude oil prices to about $70 per
barrel towards the end of the year and dampened the extremely strong growth in
oil consumption of close to 4.0% in 2004 to 1.3% in 2005 according to the IEA.
China continued its rapid economic growth with full force in 2005 with GDP
increasing 9.9% however their growth in oil demand was down from 15.4% in 2004
to 2.4% in 2005. The hurricanes Katrina and Rita which hit the US Gulf Coast in
August and September were each among the top five most powerful storms of all
time and lead to damages to production platforms which caused additional ton
miles for the last quarter of 2005. It is estimated that hurricanes cut down
approximately 0.4 mbd in US production as an average over the year. Geopolitical
tension in Nigeria, Venezuela, Iraq, Iran and other parts of the Middle East,
which was given a lot of press attention, seems to have had limited effect on
their production as the OPEC members in total increased production by 3.2% in
2005 compared to total world supply which increased 1.3%.

The world VLCC fleet increased 4.7% in 2005 from 444 vessels to 465 vessels.
Only one VLCC was scrapped during the year while eight were converted. A total
of 30 were delivered during the year. The total order book for VLCCs was at 92
vessels at the end of 2005, of which 35 were ordered during the year. The size
of the world Suezmax fleet increased seven per cent in 2005 from 315 vessels to
337. Two Suezmaxes were scrapped while 24 were delivered. The total orderbook
for Suezmaxes was at 63 at the end of the year, of which seven were ordered
during the year. The total orderbooks for VLCCs and Suezmaxes equate to 19.8%
and 18.7%, respectively, of the existing fleet.

Even though spot market rates have declined during the first four months of
2006, the Company believes the outlook for the remainder of 2006 is positive.
The continued growth in oil consumption combined with relatively few deliveries,
combined with an increasing amount of conversions for other purposes, should
lead to a positive demand environment for tankers.

Seasonality

We operate our tankers in markets that have historically exhibited seasonal
variations in demand and, therefore, charter rates. Tanker markets are typically
stronger in the winter months in the northern hemisphere due to increased oil
consumption. In addition, unpredictable weather patterns in the winter months
tend to disrupt vessel scheduling. The oil price volatility resulting from these
factors has historically led to increased oil trading activities and demand for
vessels. The change in demand for vessels may affect the charter rates that the
Charterer receives for our vessels. Seasonality may also affect the amount and
timing of our profit sharing revenues.

Inflation

Although inflation has had a moderate impact on our corporate overheads, 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, 2005 compared with the year ended December 31, 2004

Operating revenues

(in thousands of $) 2005 2004
Time charter revenues .......................... 62,605 86,741
Bareboat charter revenues....................... 7,325 27,453
Voyage charter revenues ........................ 9,745 49,707
Finance lease interest income .................. 177,474 140,691
Finance lease service revenues.................. 92,265 72,551
Profit sharing revenues......................... 88,096 114,926
--------------------------
Total operating revenues ....................... 437,510 492,069
--------------------------

Total operating revenues decreased 11% in the year ended December 31, 2005
compared with 2004. The decrease in operating revenues in 2005 primarily
reflects the change in employment of our vessels in addition to reduced profit
share income received from Frontline. In the first six months of 2004, the
majority of our vessels were completing third party charters prior to commencing
employment with Frontline, whereas in 2005, all but six of our tankers have
commenced full employment with Frontline and are now operating under the fixed
rate charter arrangements and are accounted for as finance leases. During the
period of third party employment, we recorded time charter, bareboat charter,
and voyage charter revenue for the vessels. Subsequent to the completion of
third party charters, vessels under finance leases provide earnings in the form
of lease interest income, lease service revenue, and profit share.

As of December 31, 2005 18 of our 22 Suezmax tankers and 26 of our 28 VLCC
tankers have commenced employment with Frontline under long term charters that
are accounted for as finance leases. Finance lease interest income and finance
lease services revenues increased by 26% and 27% respectively in the year ended
December 31, 2005. This increase is explained by the increase in the number of
vessels accounted for as finance leases, 44 in 2005 compared with 40 at December
31, 2004.

At December 31, 2005 all but six of our tankers had completed their charters to
third parties. We expect the remaining vessels on charter to third parties to
complete these arrangements between January 1, 2006 and December 31, 2007. After
these charters are completed we expect that all revenues from our current fleet
of tankers will be derived from finance leases and our profit sharing
arrangement with Frontline.

In addition to operating revenues from our tankers we have also recorded time
charter revenues in connection with our two containerships which are on time
charter to unrelated third parties.

The following table analyzes our cash flows from the charters to Frontline
during 2005 and 2004 and how they are accounted for:

(in thousands of $)
2005 2004
Frontline charterhire payments accounted for as:

Finance lease interest income .............. 177,474 140,691
Finance lease service revenues............... 92,265 72,551
Finance lease repayments..................... 94,777 61,990
Deemed equity contributions received......... 50,560 97,118
--------------------------

Total charterhire paid............................ 415,076 372,350
-------------------------

We allocate $6,500 per day from each time charter payment as finance lease
service revenue. The balance of each charter payment is allocated between
finance lease interest income and finance lease repayment in order to produce a
constant periodic return on the balance of our net investments in finance
leases. Accordingly as the balance of our net investments in finance leases
decreases, we will allocate less of each charter payment as finance lease
interest income and more as finance lease repayments. At December 31, 2005 the
average implicit interest rate for our finance leases was 8.3% (December 31,
2004: 8.9%).

Certain of our vessels acquired in 2005 were on charter to third parties at the
delivery date to the Company and certain of our vessels acquired as part of the
original purchase of the Vessel Interests were on charter to third parties as at
January 1, 2004 when our charter arrangements with Frontline Shipping Limited
became economically effective. Our charter arrangements with the Charterers
become economically effective on the date of delivery of the vessel to such
Charterers. Our arrangement with the Charterers is that while our vessels are
completing performance of third party charters, we pay the Charterers all
revenues we earn under third party charters in exchange for the Charterers
paying us the agreed upon charterhire rates. We account for the revenues
received from these third party charters as time charter, bareboat or voyage
revenues as applicable and the subsequent payment of these amounts to Frontline
as deemed dividends paid. We account for the charter revenues received from the
Charterers prior to the charters becoming effective for accounting purposes, as
deemed dividends received. For the year ended December 31, 2005 we paid deemed
dividends in the amount of $16.5 million (2004: $59.0) to Frontline. The
significant decrease in deemed dividends paid is due to the fact that the
majority of our fleet of tankers completed their respective third party charters
in 2004.

Each of the Charterers has agreed to pay us a profit sharing payment equal to
20% of the charter revenues for the applicable period, calculated annually on a
TCE basis, realized by that Charterer for our fleet in excess of the weighted
average rate of the base charterhire. For the year ended December 31, 2005 we
earned total profit share revenues from the Charterers in the amount of $88.1
million (2004: $114.9 million). The decrease in profit sharing revenue is
directly related to decrease in average TCE earned by the fleet while employed
by Frontline in 2005.

Voyage expenses

Voyage expenses of $3.6 million in 2005 are derived from vessels which were on
charter to third parties on the delivery date to the Company. Voyage expenses
have decreased 64% from $10.0 million for the year ended December 31, 2004, as
fewer vessels were on charter to third parties during the period. We do not
expect to report further significant voyage expenses.

Ship operating expenses

Ship operating expenses have increased 14% from $96.5 million for the year ended
December 31, 2004 to $110.2 million for the year ended December 31, 2005
primarily due to the increase in our fleet of tankers and the addition of two
containerships. Ship operating expenses in 2005 are primarily comprised of our
payments to Frontline of $6,500 per day under the management contracts for our
tankers. They also include ship operating expenses for our two containerships
that are managed by unrelated third parties. The management fees are payable on
each of our vessels except those that Frontline has elected to bareboat charter
from us. At December 31, 2005, five of our vessels were bareboat chartered.

Administrative expenses

Administrative expenses in 2005 comprise a fee of $20,000 per vessel owning
subsidiary plus $20,000 paid by us to Frontline under the terms of our
administrative service agreement. Fees payable under this agreement amounted to
$1.0 million in the year ended December 31, 2005 (December 31, 2004: $0.9
million). Frontline provides administrative services under this agreement, which
include accounting, corporate secretarial and investor support. Additionally, we
pay expenses that are not covered by this agreement which include audit and
legal fees, listing fees and other professional charges.

Depreciation expense

Depreciation expenses for the year ended December 31, 2005 was $19.9 million
compared to $34.6 million for the year ended December 31, 2004. Depreciation
expenses relate to the vessels on charters to third parties that are accounted
for as operating leases. The reduction in 2005 is due to the fact that in 2004
we recorded depreciation on vessels during the period before they commenced
employment with Frontline under long term charters. In 2005 we recorded the
majority of depreciation on the six vessels trading on third party timecharters.
With the exception of our containerships, we expect that our total depreciation
charge will continue to decrease as vessels complete their charters to third
parties.

Interest income

Interest income has increased by $0.8 million for the year ended December 31,
2005. The increase is a result of the increase in funds on deposit during the
year.

Interest expense
2005 2004 Change

Interest on floating rate loans 50,951 26,723 91%
Interest on 8.5% Senior Notes 41,614 47,180 (12%)
Swap interest 2,846 12,545 (77%)
Amortization of deferred charges 16,524 9,485 74%
-------- ------------ ----------
111,935 95,933 17%
-------- ------------ ----------

At December 31, 2005, we had total debt outstanding of $1,793.7 million
comprised of $457.1 million aggregate principal amount of 8.5% Senior Notes and
$1,336.6 million under floating rate secured credit facilities. At December 31,
2004 we had total debt outstanding of $1,478.9 million, $530.3 million related
to the 8.5% Senior Notes and $948.6 million of which was floating rate debt.
Interest costs related to floating rate debt increased in 2005 due to the rising
LIBOR and also due to an increase in debt outstanding as the Company financed
the purchase of five VLCC's during the period. The increase in floating rate
interest costs was offset by the decrease in Senior Notes interest, as the
Company bought back and cancelled $73.2 million of the notes during 2005.

At December 31, 2005, we were party to interest rate swap contracts which
effectively fix our interest rate on $568.3 million of floating rate debt at an
average rate of 3.7%. At December 31, 2004 we were party to interest rate swap
contracts with a notional principal amount of $581.4 million. Swap interest has
decreased due to the increase in the three month LIBOR throughout 2005.

Amortization of deferred charges increased by $7.0 million in 2005 compared with
2004 due to the write off of deferred charges associated with the refinancing of
the $1,058.0 million credit facility. In addition, deferred charges related to
the repurchase of $73.2 million in Senior Notes were written off during the
year.

Other financial items

In 2005 and 2004, other financial items primarily consisted of mark to market
valuation changes on our interest rate swap contracts of $14.7 million and $9.3
million, respectively.

Year ended December 31, 2004 compared with predecessor combined carve-out for
year ended December 31, 2003

Operating revenues

(in thousands of $) 2004 2003
Time charter revenues .......................... 86,741 40,759
Bareboat charter revenues....................... 27,453 25,986
Voyage charter revenues ........................ 49,707 628,323
Finance lease interest income .................. 140,691 -
Finance lease service revenues.................. 72,551 -
Profit sharing revenues......................... 114,926 -
----------- ----------
Total operating revenues ....................... 492,069 695,068
----------- ----------

Total operating revenues decreased 29% in the year ended December 31, 2004 as
compared to 2003. Operating revenues in 2004 include finance lease interest
income, finance lease service revenues, profit sharing revenues from our profit
sharing arrangement with Frontline and charter revenues for the period prior to
our vessels commencing trading under their charters to Frontline after January
1, 2004. They also include charter revenues for vessels trading under long term
charters to third parties during the period. The decrease in operating revenues
in 2004 primarily reflects the change in employment of our vessels. During 2004,
20 of our 24 Suezmax tankers and 20 of our 22 VLCC tankers had commenced
employment with Frontline under long term charters that were accounted for as
finance leases in 2004. At December 31, 2004 all but six of our vessels had
completed their charters to third parties. We expect the remaining vessels on
charter to third parties to complete these arrangements between January 1, 2006
and December 31, 2007. After these charters are completed we expect that all of
our revenues from our current fleet will be derived from finance leases and our
profit sharing arrangement with Frontline. In 2003, the combined predecessor
carve-out financial statements reflect that the majority of vessels were trading
in the spot market.

At December 31, 2004 the average implicit interest rate for our finance leases
was 8.9%.

For the year ended December 31, 2004 we paid deemed dividends in the amount of
$59.0 million to Frontline Shipping Limited in connection with vessels on
charter to third parties as described above.

For the final 11-month period in 2004 and for each calendar year after that,
each of the Charterers has agreed to pay us a profit sharing payment equal to
20% of the charter revenues for the applicable period, calculated annually on a
TCE basis, realized by that Charterer for our fleet in excess of the weighted
average rate of the base charterhire, which for the year ended December 31, 2004
were $25,575 per day for each VLCC and $21,100 per day for each Suezmax tanker.
For the year ended December 31, 2004 we earned total profit share revenues from
Frontline Shipping Limited in the amount of $114.9 million.

Voyage expenses

Voyage expenses of $10.0 million in 2004 are derived from voyages which were in
progress at January 1, 2004. Voyage expenses have decreased 93% from $148.5
million for the year ended December 31, 2003, as all of our vessels are now
employed under time or bareboat charters. We do not expect to report further
significant voyage expenses.

Ship operating expenses

Ship operating expenses have increased 18% from $82.0 million for the year ended
December 31, 2003 to $96.5 million for the year ended December 31, 2004
primarily due to the change in vessel management contracts. Ship operating
expenses in 2004 are primarily comprised of our payments to Frontline of $6,500
per day under the management contracts for our vessels. They also include ship
operating expenses for those vessels that were on voyages at January 1, 2004.
The management fees are payable on each of our vessels except those that
Frontline has elected to bareboat charter from us. At December 31, 2004, five of
our vessels were bareboat chartered. For the year ended December 31, 2003
operating expenses were based on actual costs incurred.

Administrative expenses

Administrative expenses in 2004 comprise a fee of $20,000 per vessel owning
subsidiary plus $20,000 paid by us to Frontline under the terms of our
administrative service agreement. Fees payable under this agreement amounted to
$960,000 in the year ended December 31, 2004. Administrative expenses reported
in our predecessor combined carve-out financial statements consist of an
allocation of total administrative expenses reported by Frontline.

Depreciation expense

Depreciation expenses for the year ended December 31, 2004 was $34.6 million
compared to $106.0 million for the year ended December 31, 2003. Depreciation
expenses relate to the vessels on charters to third parties that are accounted
for as operating leases. The reduction in 2004 is due to the fact that most of
our fleet is now employed under long term charters to Frontline that are
accounted for as capital leases. In 2003 we recorded depreciation on our entire
wholly-owned fleet of 42 vessels whereas in 2004 we recorded depreciation on
only six vessels throughout the period. Additionally we recorded depreciation on
vessels during the period before they commenced employment with Frontline under
long term charter. We expect that our total depreciation charge will continue to
decrease as vessels complete their charters to third parties.

Interest income

Interest income has decreased by $3.2 million for the year ended December 31,
2004. The decrease is a result of the decrease in interest income from loans to
associated companies. Our investment in these associated companies was
terminated in the first quarter of 2004.

Interest expense

2004 2003 Change

Interest on floating rate loans 26,723 30,258 (12%)
Interest on 8.5% Senior Notes 47,180 - -
Swap interest 12,545 3,831 227%
Amortization of deferred charges 9,485 1,088 772%
-------- -------- ---------
95,933 35,177 173%
------- -------- ---------

At December 31, 2004, we had total debt outstanding of $1,478.9 million
comprised of $530.3 million aggregate principal amount of 8.5% Senior Notes and
$948.6 million under a floating rate secured credit facility. At December 31,
2003 we had total debt outstanding of $991.6 million, all of which was floating
rate. Interest costs increased in 2004 principally due to the issuance of the
senior notes. At December 31, 2004, we were party to interest rate swap
contracts which effectively fix our interest rate on $581.4 million of floating
rate debt at an average rate of 3.8%. At December 31, 2003 we were party to
interest rate swap contracts with a notional principal amount of $152.7 million.
Swap interest has increased due to the increase in contracts and notional
principal amounts outstanding at December 31, 2004.

Amortization of deferred charges increased by $8.3 million in 2004 compared with
2003 due to additions that were incurred in relation to the issuance of the
senior notes, the draw down of the $1,058.0 million credit facility and the
write-off of $4.3 million of deferred charges related to refinanced facilities.

Other financial items and foreign exchange gains and losses

In 2004 and 2003, other financial items primarily consisted of mark to market
valuation changes on our interest rate swap contracts of $9.3 million and $5.6
million, respectively.

Foreign exchange losses have decreased from 2003 due to the repayment of our Yen
denominated debt. At December 31, 2004 we have no Yen denominated debt as
compared to Yen denominated debt of (Y)9.6 billion ($89.8 million) at December
31, 2003.

Liquidity and Capital Resources

We operate in a capital intensive industry and have historically financed our
purchase of tankers through a combination of debt issuances, an equity
contribution from Frontline 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. Management
fees are also payable monthly in advance.

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

Our short-term liquidity requirements relate to servicing our debt and funding
working capital requirements (including required payments under our management
agreements and administrative services agreements). Sources of short-term
liquidity include cash balances, restricted cash balances, short-term
investments 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 or replacement vessels, and repayment of long term debt
balances including those relating to our 8.5% Senior Notes due 2013, our
$1,131.4 million secured credit facility due 2011 and our $350.0 million secured
credit facility due 2012. To the extent we decide to acquire additional vessels,
we may consider additional borrowings and equity and debt issuances.

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

As of December 31, 2005 and December 31, 2004, we had cash and cash equivalents
(including restricted cash) of $34.4 million and $34.6 million, respectively. In
the year ended December 31, 2005, we generated cash from operations of $280.8
million, used $269.6 million in investing activities and used $7.6 million in
financing activities.

On January 1, 2004, our charter agreements with Frontline Shipping and the
management agreements and administrative services agreements with Frontline
Management took economic effect. Under these agreements, we are contracted to
make payments and receive amounts that will impact our future liquidity
requirements.

During the year ended December 31, 2005 we paid cash dividends of $2.00 per
common share (December 31, 2004: $1.05), or a total of $148.9 million. In the
first quarter of 2006 we paid cash dividends of $0.50 per share for a total of
$36.4 million.

Acquisitions and Disposals

We purchased our initial 46 vessel owning subsidiaries from Frontline on January
1, 2004 for a total purchase price of $1,061.8 million. The purchase price was
calculated as the book value of vessels owned by the subsidiaries of $2,048.4
million less related debt balances and other liabilities of $986.6 million which
we assumed. The purchase was partly funded by an equity contribution of $525.0
million from Frontline. Additionally we purchased Frontline's option to acquire
an additional VLCC for $8.4 million. This price represents the book value of the
option as recorded previously in Frontline's accounts.

In the year ended December 31, 2005 we acquired vessels and vessel owning
entities for a total cost of $598.0 million and sold vessels for total proceeds
of $229.8 million as discussed below:

On January 17, 2005 the Company exercised its option to acquire the VLCC Oscilla
and the vessel was delivered to the Company on April 4, 2005. The purchase price
paid to acquire the vessel was equal to the outstanding mortgage debt under the
four loan agreements between lenders and the vessel's owning company. In
addition, the Company made a payment of $14.6 million to Frontline to reflect
the fact that the original purchase price was set assuming delivery to Ship
Finance on January 1, 2004 whereas delivery did not occur until April 4, 2005.
On the delivery date the vessel, which has been renamed Front Scilla, commenced
a fixed rate time charter to Frontline following the structure in place for
other vessels chartered to Frontline. The Company also entered into a fixed rate
management contract with Frontline Management for $6,500 per day with the same
term as the related time charter.

In March 2005, we sold a Suezmax tanker, the Front Fighter to an unrelated third
party for $68.3 million.

Between January and March 2005, we purchased three additional double hull VLCCs
from Frontline for an aggregate purchase price of $294 million. The acquisitions
of these vessels have been funded partly by the proceeds from the sale of the
Front Fighter in March 2005, partly from profit sharing payments that we
received from Frontline in respect of the 11-month period ended December 31,
2004, and partly from use of proceeds from our new secured credit facility.

We entered into an agreement in May 2005 with parties affiliated with Hemen to
acquire two vessel owning companies, each owning one 2005 built containership
for a total consideration of $98.6 million.

In May 2005, we sold the three Suzemaxes, Front Lillo, Front Emperor and Front
Spirit, for a total consideration of $92.0 million. These vessels were delivered
to their new owners in June 2005. In May 2005, we also agreed to buy a further
three vessels from Frontline, namely Front Traveller, Front Transporter, and
Front Target, for an aggregate amount of $92.0 million.

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

In August 2005, we sold a Suezmax tanker, the Front Hunter to an unrelated third
party for net proceeds of $71.0 million.

In November of 2005 the bareboat charterer of the VLCC Navix Astral exercised an
option to purchase the vessel for approximately $40.5 million.

In January 2006 the Company acquired the VLCC Front Tobago from Frontline for
consideration of $40.0 million. Effective January 2006 this vessel has replaced
the Navix Astral and will fulfil the remainder of the Navix Astral time charter
with Frontline Shipping.

In April 2006, we entered into an agreement with Horizon Lines Inc. in which we
will acquire five 2,824 TEU container vessels being built at Hyundai Mipo yard
in Korea for consideration of approximately $280.0 million. The vessels will be
delivered over the course of five months commencing in early 2007, and will be
chartered back to Horizon Lines under 12 years bareboat charters with a three
year renewal option on the part of Horizon Lines. The latter will also have
options to buy the vessels after five, eight, 12 and 15 years.

Borrowings

As of December 31, 2005 and December 31, 2004, we had total long term debt
outstanding of $1,793.7 million and $1,478.9 million, respectively. As at
December 31, 2005, this amount consisted of the outstanding amount of $457.1
million from our issue of $580.0 million 8.5% senior notes due 2013. In February
2004, we refinanced the existing debt on the vessels we acquired from Frontline
and entered into a new $1,058.0 million syndicated senior secured credit
facility. This facility bore interest at LIBOR plus 1.25% and was repayable
between 2004 and 2010 with a final bullet of $499.7 million payable on maturity.
In February 2005, we refinanced our existing $1,058.0 million secured credit
facility with a new $1,131.4 million secured credit facility. The new facility
bears interest at LIBOR plus a margin of 0.7%, is repayable over a term of six
years and has similar security terms to the repaid facility. At December 31,
2005, the outstanding amount on this facility was $997.9 million. This facility
contains a minimum value covenant, which requires that the aggregate value of
our vessels exceed 140% of the outstanding amount of the facility. The new
facility also contains covenants that require us to maintain certain minimum
levels of free cash, working capital and equity ratios.

In June 2005, we entered into a combined $350.0 million senior and junior
secured term loan facility with a syndicate of banks. At December 31, 2005, the
outstanding amount on this facility was $338.7 million. The proceeds of the
facility were used to fund the acquisition of five new VLCCs. The facility bears
interest at LIBOR plus a margin of 0.65% for the senior loan and LIBOR plus a
margin of 1.00% for the junior loan, is repayable over a term of seven years
and has similar security terms as the $1,131.4 million facility. This new
facility contains a minimum value covenant, which requires that the aggregate
value of our vessels exceed 140% of the outstanding amount of the senior loan
and, for as long as any amount is outstanding under the junior loan, 125% of the
outstanding loan. The facility also contains covenants that require us to
maintain certain minimum levels of free cash, working capital and equity ratios.

We were in compliance with all loan covenants at December 31, 2005. At December
31, 2005, LIBOR was 4.54%.

In April 2006 we entered into a non recourse $210 million secured term loan
facility with a syndicate of banks. The proceeds of the facility will be used to
partly fund the acquisition of five new container vessels to be delivered over a
five-month period commencing in January 2007. The vessels will be chartered back
to Horizon Lines under a 12-year bareboat charter with a 3-year renewal option
on the part of Horizon Lines. The latter will also have options to buy the
vessels after five, eight, 12 and 15 years. The facility bears interest at LIBOR
plus a margin of 1.4%, is repayable over a term of 12 years and is secured by
the vessel owning subsidiaries' assets. This new facility contains a minimum
value covenant, which requires that the aggregate value of our vessels exceed
120% of the outstanding loan. The vessel owning subsidiaries have entered into
12 year interest rate swaps with a combined notional principal amount of $210
million at rates of approximately 5.65%.

In connection with the $1,058.0 million syndicated senior secured credit
facility, in the first quarter of 2004 we entered into new five year interest
rate swaps with a combined notional principal amount of $500.0 million at rates
between 3.3% and 3.5%. We also have existing interest rate swap contracts with a
combined notional principal amount of $68.3 million at rates between 6.0% and
6.5%. The overall effect of these swaps is to fix the interest rate on $568.3
million of floating rate debt at 4.4% (exclusive of margin). Our net exposure to
interest rate fluctuations was $768.3 million at December 31, 2005, compared
with $367.2 million at December 31, 2004. The refinancing of our credit facility
in February 2005 had no effect on these swap arrangements. Our net exposure is
based on our total floating rate debt less the notional principal of our
floating to fixed interest rate swaps.

We use financial instruments to reduce the risk associated with fluctuations in
interest rates. We do not hold or issue instruments for speculative or trading
purposes.

In 2005 we bought back and cancelled 8.5% senior notes with a total principal
amount of $73.2 million. In April 2006 we entered into a Bond Swap Line with a
bank in which the bank buys our senior notes, and we compensate the bank for
their funding cost plus a margin, we keep the upside and guarantee for the
downside in the transaction. During April and May 2006 the bank acquired senior
notes with a total principal amount of $51.5 million.

Equity

We were initially capitalized with 12,000 shares of $1.00 each and an equity
contribution of $525.0 million by Frontline. On May 18, 2004 we issued an
additional 73,913,837 shares of $1.00 each to Frontline. This transaction was
recorded as an increase in share capital and a corresponding reduction in
contributed surplus at par value of the shares issued.

In July 2004, we issued 1,600,000 common shares to an institutional investor at
a price of $15.75 per share for total proceeds of $25.2 million.

In November and December 2004, we repurchased and cancelled 625,000 common
shares at an average price of $23.54 per share for a total amount of $14.8
million.

During 2005 we repurchased and cancelled a further 1,757,100 common shares. The
shares were repurchased at an average price of $18.83 for a total amount of
$33.1 million.

As each of our vessels completes the third party charters that were in place on
January 1, 2004, the finance leases with Frontline, entered into on January 1,
2004, become effective for accounting purposes. We have accounted for the
difference between the historical cost of the vessel, originally transferred to
us by Frontline on January 1, 2004 at Frontline's historical carrying value, and
the net investment in the lease as a deferred deemed equity contribution. The
difference is presented as a reduction in the net investment in finance leases
in the balance sheet. This results from the related party nature of both the
original transfer of the vessel and the subsequent sales type 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,
2005 we accounted for $9.2 million as amortization of such deemed equity
contributions.

Following these transactions, as of December 31, 2005, our issued and fully paid
share capital balance was $73.1 million and our contributed surplus balance was
$441.1 million.

During the first five months of 2006, a further 400,000 common shares have been
repurchased and cancelled. The shares were repurchased at an average price of
$18.03 for a total amount of $7.2 million.

Contractual Commitments

At December 31, 2005, we had the following contractual obligations and
commitments:

Payment due by period
Less than 1 year 1 - 3 years 3 - 5 years After 5 years Total
-------------------- --------------- --------------- ---------------- -------------
(in thousands of $)

$580 million 8.5% notes - - - 457,080 457,080
$1,131.4 million and $350
million credit facilities 122,519 245,038 245,038 723,982 1,336,577
-------------------- --------------- --------------- ---------------- -------------
Total contractual cash
obligations 122,519 245,038 245,038 1,181,062 1,793,657
-------------------- --------------- --------------- ---------------- -------------

Trend information

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

We pay daily management fees, which are payable by us monthly in advance for
365 days per year (366 days in a leap year) for each of our vessels in the
amount of $6,500.

Since December 31, 2005 we have acquired one VLCC and agreed to acquire five
containerships to be delivered over a five month period commencing January 2007.
We have also sold one VLCC tanker. We expect the net increase in our fleet will
increase our total revenues.

To partly finance the increase in our fleet size in 2007 we plan to increase our
level of indebtedness through a new non recourse credit facility in the amount
of approximately $210.0 million; this increased indebtedness will increase our
interest expense. Our new non recourse secured credit facility which will be
drawn in 2007 bears a higher interest margin (1.4%) than our existing facilities
(0.65%-1.00%) and we have entered into interest rate swaps for the full amount
at an effective fixed rate of approximately 5.65%. Accordingly, we expect our
new facility will increase our average interest rate on our debt.

Since December 31, 2005 market rates for spot chartering tankers have decreased.
All of our tanker vessels are subject to long term charters that provide for
both a fixed base charterhire and a profit sharing payment that applies once the
applicable Charterer earns daily rates from our vessels that exceed certain
levels. If market rates for spot market chartered vessels decrease our profit
sharing revenues will decrease.

Off balance sheet arrangements

At December 31, 2005 we were not party to any arrangements which are considered
to be off balance sheet arrangements.

Liquidity and Capital Resources - Predecessor

As of December 31, 2003 and 2002, we had cash and cash equivalents of $26.5
million, and $20.6 million, respectively. We generated cash from operations of
$415.5 million in 2003. Net cash used in investing activities in 2003 was $51.6
million and related primarily to $70 million in funding payments to the various
investments in associated companies, in addition to $17 million received as
proceeds from the sale of investments in associated companies.

Cash used in financing activities was $358.0 million in 2003. In 2003 there were
$178.2 million in principal repayments on long term debt and a net reduction of
$178.8 million in the amount due to Frontline.

In July 2003 we disposed of our interests in Golden Lagoon Corporation and
Ichiban Transport Corporation for proceeds of $17 million.

In June 2003, we acquired the remaining 50% of the shares in Golden Tide
Corporation for $9.5 million.

We had total long term debt outstanding of $991.6 million at December 31, 2003..
As of December 31, 2003, all of our debt was floating rate debt. As of December
31, 2003, our interest rate swap arrangements effectively fixed our interest
rate exposure on $152.6 million of floating rate debt.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. DIRECTORS AND SENIOR MANAGEMENT

The following table sets forth information regarding our executive officers and
directors and certain key officers of Frontline Management AS, which is a wholly
owned subsidiary of Frontline, who are responsible for overseeing the management
of our vessels. With the exception of Paul Leand , all of our current executive
officers and directors are officers and/or directors of Frontline, Frontline
Management and the Charterers.

Name Age Position
---- --- --------

Tor Olav Tr0im.................... 43 Chairman of the Board
Paul Leand........................ 39 Director of the Company
Kate Blankenship.................. 41 Director of the Company and Chairperson
of the Audit Committee
Lars Solbakken.................... 49 Chief Executive Officer of Ship Finance
Management AS
Inger M. Klemp.................... 43 Chief Financial Officer of Frontline
Management AS
Oscar Spieler..................... 45 Chief Executive Officer of Frontline
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.

Tor Olav Tr0im has been the Chairman of the Board since October 2003. He has
been Vice-President and a director of Frontline since November 3, 1997. He
previously served as Deputy Chairman of Frontline from July 4, 1997. Since May
2000, Mr. Tr0im has been a director and Vice-Chairman of Knightsbridge Tankers
Ltd, a Bermuda company listed on the NASDAQ National Market. He is a director of
Aktiv Inkasso ASA, a Norwegian Oslo Stock Exchange listed company and Golden
Ocean Group Limited, a Bermuda company listed on the Oslo Stock Exchange. Prior
to his service with Frontline, from January 1992, Mr. Tr0im served as Managing
Director and a member of the Board of Directors of DNO AS, a Norwegian oil
company. Since May 2001, Mr. Tr0im has served as a director of Golar LNG
Limited, a Bermuda company listed on the Oslo Stock Exchange and the NASDAQ
National Market. Mr. Tr0im has served as a director of SeaDrill Limited, a
Bermuda company listed on the Oslo Stock Exchange, since May 2005.

Paul Leand Jr., who is not affiliated with Frontline, serves as a Director of
the Company. Mr. Leand is the Chief Executive Officer and Director of AMA
Capital Partners LLC, or AMA, an investment bank specializing in the maritime
industry. From 1989 to 1998 Mr. Leand served at the First National Bank of
Maryland where he managed the Bank's Railroad Division and its International
Maritime Division. He has worked extensively in the U.S. capital markets in
connection with AMA's restructuring and mergers and acquisitions practices. Mr.
Leand serves as a member of American Marine Credit LLC's Credit Committee and
served as a member of the Investment Committee of AMA Shipping Fund I, a private
equity fund formed and managed by AMA.

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

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

Inger M. Klemp has served as Chief Financial Officer of Frontline Management AS
since June 1, 2006. Mrs. Klemp has served as Vice President Finance from August
2001 until she was promoted. From 1992 to 2001 Mrs. Klemp served in various
positions in Color Group ASA, a Norwegian cruise ferry operator. From 1989 to
1992 Mrs. Klemp served as Assistant Vice President in Nordea Bank Norge ASA
(previously Christiania Bank).

Oscar Spieler has served as Chief Executive Officer of Frontline Management AS
since October 2003, and prior to that time as Technical Director of Frontline
Management AS since November 1999. From 1995 until 1999, Mr. Spieler served as
Fleet Manager for Bergesen, a major Norwegian gas tanker and VLCC owner. From
1986 to 1995, Mr. Spieler worked with the Norwegian classification society DNV,
working both with shipping and offshore assets.

B. COMPENSATION

During the year ended December 31, 2005, we paid to our directors and executive
officers (three persons) aggregate cash compensation of $52,500 and an aggregate
amount of $nil for pension and retirement benefits. We reimburse directors for
reasonable out of pocket expenses incurred by them in connection with their
service to us.

C. BOARD PRACTICES

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

We currently have an audit committee, which is responsible for overseeing the
quality and integrity of the Company's financial statements and its accounting,
auditing and financial reporting practices, the Company's compliance with legal
and regulatory requirements, the independent auditor's qualifications,
independence and performance and the Company's internal audit function.

In lieu of a compensation committee comprised of independent directors, our
Board of Directors is responsible for establishing the executive officers'
compensation and benefits. In lieu of a nomination committee comprised of
independent directors, our Board of Directors is responsible for identifying and
recommending potential candidates to become board members and recommending
directors for appointment to board committees.

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

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

D. EMPLOYEES

We currently employ one person, Mr Lars Solbakken. This is because Frontline
Management has assumed full managerial responsibility for our fleet and our
administrative services.

E. SHARE OWNERSHIP

The beneficial interests of our Directors and officers in our common shares as
of June 2, 2006, were as follows:

Percentage of
Common Shares Common Shares
Director or Officer of $1.00 each Outstanding
------------------- ------------- -----------

Tor Olav Tr0im 204,700 *
Paul Leand - -
Kate Blankenship 3,766 *
Lars Solbakken - -
Inger M. Klemp 14,133 *
Oscar Spieler 14,083 *

* Less than one per cent

We do not have a share option plan and none of our Directors and officers hold
any options to acquire our common shares.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. MAJOR SHAREHOLDERS

The following table presents certain information regarding the current ownership
of our Common Shares with respect to (i) each person who we know to own more
than five percent of our outstanding Common Shares; and (ii) all directors and
officers as a group as of June 2, 2006.

Common Shares
Owner Amount Percent

Farahead Investment. Inc. 14,000,000 19.24%
Hemen Holding Ltd. 13,333,994 18.33%
Frontline Ltd. 8,084,686 11.11%
Fidelity Management & Research Company 3,977,763 5.33%
All Directors and Officers as a group (six persons) 236,682 0.32%*

* Less than one per cent

Hemen is a Cyprus holding company, and Farahead is a Liberian company, both
indirectly controlled by Mr John Fredriksen, who is Frontline's Chairman and
Chief Executive Officer.

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

As at June 2, 2006, 62,909,002 of our Common Shares were held by 231 holders of
record in the United States.

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

We have acquired the majority of our assets, which at May 11, 2006 consist
primarily of our fleet of 52 vessels, from Frontline. The majority of our
operations are conducted through contractual relationships between us and other
affiliates of Frontline. In addition, the majority of our directors are also
directors of Frontline. We refer you to Item 10.C "Material Contracts" for
discussion of the material contractual arrangements that we have with Frontline
and its affiliates.

We acquired our initial fleet of 46 vessel owning subsidiaries and one
subsidiary with an option to acquire an additional vessel from Frontline
pursuant to a fleet purchase agreement between us and Frontline that we entered
into in December 2003. We paid a total of $1,061.8 million to Frontline being
the book value of assets transferred by Frontline less amounts of debt assumed.
As part of this spin-off transaction we also received an equity contribution of
$525.0 million from Frontline. We assumed senior secured indebtedness with
respect to our fleet in the amount of approximately $1,158 million.

We charter 50 of our vessels to Frontline under long-term leases, most of which
were given economic effect from January 1, 2004. In connection with these
charters, we have recognized the inception of net investments in finance leases
of $1,876.5 million, additions during 2005 of $647.8 million and disposals
during 2005 of $160.8 million. At December 31, 2005 the balance of net
investments in finance leases with Frontline was $1,925.4 million (2004:
$1,718.6 million) of which $107.0 million (2004: $77.0 million) represents
short-term maturities.

We pay Frontline a management fee of $6,500 per day per vessel for all of its
vessels, with the exception of five which are bareboat chartered, resulting in
expenses of $105.2 million for the year ended December 31, 2005 (2004: 96.4
million). The management fees have been classified as ship operating expenses.

We pay Frontline an administrative management fee of $20,000 per year plus
$20,000 per vessel per year. Based on the current fleet we paid Frontline $1.0
million in 2005 (2004: $960,000) under this arrangement. These fees have been
classified as administrative expenses.

Frontline pay us profit sharing payments of 20% earnings above average base
charter rates as presented in Item 5 "Trend Information" for the 11 month period
beginning February 1, 2004 and each year thereafter. During the year ended
December 31, 2005, we earned and recognized revenue of $88.1 million (2004:
$114.9 million) under this arrangement.

In 2005, we bought a further six vessels from Frontline, all of which have been
chartered back to Frontline Shipping II under long term charters. In January
2005, we bought the Front Century and Front Champion, for a total of $196
million. In March 2005, we bought the VLCC Golden Victory from Frontline for $98
million. In June 2005 we bought the Front Traveller, Front Transporter and Front
Target for an aggregate of $92 million. Also in June 2005, we purchased the Sea
Energy, Sea Force, Sea Alfa and Sea Beta from parties affiliated with Hemen for
total consideration of $282.6 million. The Sea Energy and Sea Force are
chartered back to Frontline Shipping II, while the Sea Alfa and Sea Beta have
been chartered to unrelated third parties, both until 2009.

In January 2006 we acquired the VLCC Front Tobago from Frontline for
consideration of $40.0 million. Effective January 2006 this vessel has replaced
the Navix Astral and will fulfil the remainder of the Navix Astral time charter
with Frontline from the delivery of the vessel to its new owner until the
charter termination date in January 2014.

C. INTERESTS OF EXPERTS AND COUNSEL

Not Applicable

ITEM 8. FINANCIAL INFORMATION

A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

See Item 18.

Legal Proceedings

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

Dividend Policy

The Board initially adopted a policy in May, 2004, following our public listing,
whereby we would seek to have a normal dividend target of $0.25 per share per
quarter. In August, 2004, the targeted normal dividend was increased to $0.35
per share and in November 2004, the targeted normal dividend was increased to
$0.45 per share. We have paid the following cash dividends since our public
listing in June 2004.

Payment Date Amount per Share

2004
July 9, 2004 $0.25
September 13, 2004 $0.35
December 7, 2004 $0.45

2005
March 18, 2005 $0.50
June 24, 2005 $0.50
September 20, 2005 $0.50
December 13, 2005 $0.50

2006
March 20, 2006 $0.50

The timing and amount of dividends, if any, is at the discretion of our Board of
Directors and will depend upon our results of operations, financial condition,
cash requirements, restrictions in financing arrangements and other relevant
factors.

B. SIGNIFICANT CHANGES

We were incorporated in Bermuda in October 2003 as a wholly owned subsidiary of
Frontline for the purpose of acquiring certain of our shipping assets. During
2004, Frontline distributed approximately 48.3% of its shares in us to its
shareholders and at December 31, 2004 held 50.8% in the Company. See Item 4.
Information on the Company. In 2005, Frontline spun off a further 35% of its
shares in the Company to its shareholders. In February 2006, 5% was spun off and
Frontline holds approximately 11.1% of our shares as at June 2 2006.

ITEM 9. THE OFFER AND LISTING

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

The Company's Common Shares were listed on the New York Stock Exchange ("NYSE")
on June 17, 2004 and commenced trading on that date under the symbol "SFL".

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

High Low
Fiscal year ended December 31

2005 $24.00 $16.70
2004 $26.16 $11.55

The following table sets forth, for each full financial quarter the high and low
prices of the Common Shares on the NYSE since the date of listing.

High Low

Fiscal year ended December 31, 2005
First quarter $24.00 $18.41
Second quarter $20.79 $18.05
Third quarter $20.83 $17.67
Fourth quarter $20.25 $16.70

Fiscal year ended December 31, 2004
Second quarter $16.00 $11.55
Third quarter $22.75 $14.30
Fourth quarter $26.16 $18.64

The following table sets forth, for the most recent six months, the high and low
prices for the Common Shares on the NYSE.

High Low
May 2006 $19.78 $18.21
April 2006 $17.72 $16.52
March 2006 $18.46 $16.57
February 2006 $18.70 $17.92
January 2006 $19.15 $16.30
December 2005 $18.70 $16.70

ITEM 10. ADDITIONAL INFORMATION

A. SHARE CAPITAL

Not Applicable

B. MEMORANDUM AND ARTICLES OF ASSOCIATION

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

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 a provision
eliminating personal liability of a director or officer 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 and officers of the company 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 and officer of the company or was serving in a similar capacity
for another entity at the company's request.

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

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

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

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 and 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 of deficiency of any security in or upon which any of
our monies shall be invested, or for any loss or damage arising from the
bankruptcy, insolvency, or tortuous act of any person with whom any monies,
securities, or effects shall be deposited, or for any loss occasioned by any
error of judgment, omission, default, or oversight on his part, or for any other
loss, damage or misfortune whatever which shall happen in relation to the
execution of his duties, or supposed duties, to us or otherwise in relation
thereto. Each indemnitee will be indemnified and held harmless out of our funds
to the fullest extent permitted by Bermuda law against all liabilities, loss,
damage or expense (including but not limited to liabilities under contract, tort
and statute or any applicable foreign law or regulation and all reasonable legal
and other costs and expenses properly payable) incurred or suffered by him as
such director, alternate director, officer, person or committee member or
resident representative (or in his reasonable belief that he is acting as any of
the above). In addition, each indemnitee shall be indemnified against all
liabilities incurred in defending any proceedings, whether civil or criminal, in
which judgment is given in such indemnitee's favor, or in which he is acquitted.
We are authorized to purchase insurance to cover any liability it may incur
under the indemnification provisions of its Bye-laws.

C. MATERIAL CONTRACTS

Fleet Purchase Agreement
On December 11, 2003 we entered into a fleet purchase agreement with Frontline
pursuant to which we acquired our initial fleet of 46 vessel owning subsidiaries
and one subsidiary with an option to acquire an additional vessel. We paid an
aggregate purchase price of $950.0 million, excluding working capital and other
intercompany balances retained by us. We also assumed senior secured
indebtedness with respect to its fleet in the amount of approximately $1.158
billion. The purchase price and the refinancing of the existing senior secured
indebtedness on those vessels, which was completed in January of 2004, were
financed through a combination of the net proceeds from our issuance of $580
million of 8 1/2% Senior Notes, due 2013, funds from a $1.058 billion senior
secured credit facility and a deemed equity contribution of $525.0 million from
Frontline.

Time Charters
We have chartered the vessels we acquired from Frontline to the Charterers under
long term time charters, which will extend for various periods depending on the
age of the vessels, ranging from approximately eight to twenty two years.

With the exceptions described below, the daily base charter rates for our
charters with Frontline Shipping, 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
---- ---- -------

Vessel 2005 to 2006 2007 to 2010 2011 to 2018 2019 and beyond
------ ------------ ------------ ------------ ---------------

Front Champion........$31,340 $31,140 $30,640 $28,464
Front Century.........$31,501 $31,301 $30,801 $28,625
Golden Victory........$33,793 $33,793 $33,793 $33,793
Front Energy..........$30,014 $30,014 $30,014 $30,014
Front Force...........$29,853 $29,853 $29,853 $29,853

For the VLCC Front Tobago and the three Suezmaxes, Front Target, Front
Transporter and Front Traveller the terms are similar to the listed above under
Frontline Shipping as these vessels represent replacement leases for vessels
included in the original fleet purchase which have been sold.

In addition, the base charter rate for our non-double hull vessels will decline
to $7,500 per day after the vessels anniversary dates in 2010, at which time
Frontline Shipping 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 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 Charterers will
continue to pay us the daily base charter rate for the vessel, less $6,500 per
day. The related management agreement provides that our obligation to pay the
$6,500 fixed fee to Frontline Management will be suspended for so long as the
vessel is bareboat chartered.

Under the charters we are required to keep the vessels seaworthy, and to crew
and maintain them. Frontline Management performs those duties for us under the
management agreements described below. If a structural change or new equipment
is required due to changes in classification society or regulatory requirements,
the Charterers may make them, at its expense, without our consent, but those
changes or improvements will become our property. The 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 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 Charterers
consent.

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

Charter Service Reserve. Frontline Shipping was initially capitalized with $250
million in cash provided by Frontline to support its obligation to make payments
to us under the charters. Frontline Shipping II has been capitalised with
approximately $21.0 million in cash. Due to sales and acquisitions, the current
capitalisation in the Charterers are $218.2 million and $56.2 million
respectively. These funds are being held as a charter service reserve to support
each Charterer's obligation to make charter payments to us under the charters.
The Charterer's are entitled to use the charter service reserve only (1) to make
charter payments to us and (2) for reasonable working capital to meet short term
voyage expenses. The Charterers are required to provide us with monthly
certifications of the balances of and activity in the charter service reserve.

Material Covenants. Pursuant to the terms of the charter ancillary agreement,
each 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 or any of its affiliates (other than us or our wholly owned
subsidiaries), unless (1) the relevant 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 Charterer remains in compliance with
such obligations, (B) the balance of the charter service reserve equals at least
$218.2 million, in the case of Frontline Shipping, or $56.2 million in the case
of Frontline Shipping II (which threshold will be reduced by $5.3 million and
$7.0 million alternatively $5.3 million in the case of Frontline Shipping and
Frontline Shipping II, respectively, in each event that a charter to which the
Charterer is a party is terminated other than by reason of a default by the
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 it's reasonably
expected payment obligations during such 30-day period, (3) any charterhire
payments deferred pursuant to the deferral provisions described below have been
fully paid to us and (4) any profit sharing payments deferred pursuant to the
profit sharing payment provisions described below have been fully paid to us. In
addition, each Charterer has agreed to certain other restrictive covenants,
including restrictions on its ability to, without our consent:

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

o violate its organizational documents;

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

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

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

o enter into transactions with affiliates, other than on an arm's-length
basis;

o permit the incurrence of any liens on any of its assets, other than
liens incurred in the ordinary course of business;

o issue any capital stock to any person or entity other than Frontline;
and

o 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 Charterers at all
times to remain its wholly owned subsidiary.

Deferral of Charter Payments. For any period during which the cash and cash
equivalents held by Frontline Shipping are less than $75 million Frontline
Shipping is entitled to defer from the payments payable to us under each
charter up to $4,600 per day for each of our vessels that is a VLCC and up
to $3,400 per day for each of our vessels that is a Suezmax, in each case
without interest. However, no such deferral with respect to a particular
charter may be outstanding for more than one year at any given time.
Frontline Shipping will be required to immediately use all revenues that
Frontline Shipping receives that are in excess of the daily charter rates
payable to us to pay any deferred amounts at such time as the cash and cash
equivalents held by Frontline Shipping are greater than $75 million, unless
Frontline Shipping reasonably believes that the cash and cash equivalents
held by Frontline Shipping will not exceed $75 million for at least 30 days
after the date of the payment. In addition, Frontline Shipping will not be
required to make any payment of deferred charter amounts until the payment
would be at least $2 million. For Frontline Shipping II, with respect to
the vessels that represent replacement leases for vessels included in the
original fleet purchase which have been sold, the terms are similar to the
ones listed under Frontline Shipping above.

Profit Sharing Payments. Under the terms of the charter ancillary
agreements, beginning with the final 11-month period in 2004 and for each
calendar year after that, the Charterers have agreed to pay us a profit
sharing payment equal to 20% of the charter revenues for the applicable
period, calculated annually on a TCE basis, realized by that Charter for
our fleet in excess of the daily base charterhire. After 2010, all of our
non-double hull vessels will be excluded from the annual profit sharing
payment calculation. For purposes of calculating bareboat revenues on a TCE
basis, expenses are assumed to equal $6,500 per day. Each of the 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.

Frontline Shipping and Frontline Shipping II 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. Frontline Shipping and Frontline Shipping II are required
to immediately use all revenues that Frontline Shipping and Frontline
Shipping II 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 Frontline
Shipping 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, Frontline Shipping and Frontline Shipping II will not
be required to make any payment of deferred profit sharing amounts until
the payment would be at least $2 million.

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

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

o the relevant 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;

o the relevant Charterer or Frontline materially breaches any of its
obligations under the applicable charter ancillary agreement or the
Frontline performance guarantee;

o Frontline Management materially breaches any of its obligations under
any of the management agreements; or

o Frontline Shipping and Frontline Shipping II fails at any time to hold
at least $55 million or $12.4 million in cash and cash equivalents,
respectively.

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

o terminate any or all of the relevant charters with the relevant
Charterer;

o foreclose on any or all of our security interests described above with
respect to the relevant Charterer; and/or pursue any other available
rights or remedies.

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

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

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

Administrative Services Agreement
We have entered into an administrative services agreement with Frontline
Management and our vessel owning subsidiaries effective January 1, 2004 and
subsequent administrative services agreements for the vessel owning subsidiaries
purchased at a later time. Under these administrative services agreements
Frontline Management provides us and our vessel owning subsidiaries with
administrative support services such as the maintenance of our corporate books
and records, payroll services, the preparation of tax returns and financial
statements, assistance with corporate and regulatory compliance matters not
related to our vessels, legal and accounting services, assistance in complying
with United States and other relevant securities laws, obtaining non-vessel
related insurance, if any, cash management and bookkeeping services, development
and monitoring of internal audit controls, disclosure controls and information
technology, furnishing any reports or financial information that might be
requested by us and other non-vessel related administrative services. Under this
agreement Frontline Management also provides us and our vessel owning
subsidiaries with office space in Bermuda. We and our vessel owning subsidiaries
pay Frontline Management a fixed fee of $20,000 each per year for its services
under the agreement, and reimburse Frontline Management for reasonable third
party costs, including directors fees and expenses, shareholder communications
and public relations, registrars, audit, legal fees and listing costs, if
Frontline Management advances them on our behalf.

Frontline guarantees to us Frontline Management's performance under this
administrative services agreement.

D. EXCHANGE CONTROLS

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

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

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

E. TAXATION

United States Taxation

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

Taxation of the Company's Shipping Income: In General

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

Shipping income that is attributable to transportation that begins or ends, but
that does not both begin and end, in the United States will be considered to be
50% derived from sources within the United States. Shipping income attributable
to transportation that both begins and ends in the United States will be
considered to be 100% derived from sources within the United States. The Company
does not engage in transportation that gives rise to 100% U.S. source income.

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

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

Application of Code Section 883

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

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

(ii) It can satisfy any one of the following two (2) stock ownership
requirements for more than half the days during the taxable year:

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

o 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 and Cyprus, the countries of
incorporation of certain of the Company's subsidiaries, as qualified foreign
countries. Accordingly, the Company and its vessel owning subsidiaries satisfy
the country of organization requirement.

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

For the 2005 tax year, the Company satisfied the Publicly-Traded Test since, on
more than half the days of the taxable year, the Company's stock was primarily
and regularly traded on the New York Stock Exchange.

Final regulations interpreting Section 883 became effective for calendar year
taxpayers such as the Company and its subsidiaries beginning with the calendar
year 2005.

Taxation in Absence of Internal Revenue Code Section 883 Exemption

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

Gain on Sale of Vessels.

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

Taxation of U.S. Holders

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

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

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

Distributions

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

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

There is no assurance that any dividends paid on our common stock will be
eligible for these preferential rates in the hands of a U.S. Individual Holder.
Any dividends paid by the Company which are not eligible for these preferential
rates will be taxed as ordinary income to a U.S. Individual Holder.

Sale, Exchange or other Disposition of Common Stock

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

Passive Foreign Investment Company Status and Significant Tax Consequences

Special United States federal income tax rules apply to a U.S. Holder that holds
stock in a foreign corporation classified as a passive foreign investment
company, or a PFIC, for United States federal income tax purposes. In general,
we will be treated as a PFIC with respect to a U.S. Holder if, for any taxable
year in which such holder held our common stock, either at least 75% of our
gross income for such taxable year consists of passive income (e.g., dividends,
interest, capital gains and rents derived other than in the active conduct of a
rental business), or at least 50% of the average value of the assets held by the
corporation during such taxable year produce, or are held for the production of,
passive income.

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

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

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

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

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

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

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

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

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

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

o 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

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

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

Backup Withholding and Information Reporting

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

o fail to provide an accurate taxpayer identification number;

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

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

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

Bermuda Taxation

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

Liberian Taxation

F. DIVIDENDS AND PAYING AGENTS

Not Applicable

G. STATEMENT BY EXPERTS

Not Applicable

H. DOCUMENTS ON DISPLAY

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

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.

Our exposure to interest rate risk relates primarily to our debt and related
interest rate swaps. The majority of this exposure derives from our floating
rate debt, which totalled $1,336.6 million at December 31, 2005 (2004: $948.6
million). We have entered into interest rate swap agreements to manage this
exposure to interest rate changes by swapping floating interest rates with fixed
interest rates. At December 31, 2005, we had fourteen swaps with a total
notional principal of $568.3 million (2004: $581.4 million) The swap agreements
mature between March 2006 and February 2009, and we estimate that we would
receive $18.4 million to terminate these agreements as of December 31, 2005
(2004: $3.6 million). Our net exposure to interest rate fluctuations is $768.3
million at December 31, 2005 (2004: $367.2 million). Our net exposure is based
on our total floating rate debt less the notional principal of our floating to
fixed interest rate swaps. A one per cent change in interest rates would
increase or decrease interest expense by $7.7 million per year as of December
31, 2005 (2004: $3.6 million).

The fair market value of our fixed rate debt was $427.3 million as of December
31, 2005 (2004: $546.2 million). If interest rates were to increase or decrease
by one per cent with all other variables remaining constant, we estimate that
the market value of our fixed rate debt would decrease or increase by
approximately $22.7 million and $24.5 million respectively (2004: decrease by
$31.2 and increase by $33.8 million).

The majority of our transactions, assets and liabilities are denominated in U.S.
dollars, our functional currency. One of our subsidiaries had charter contracts
denominated in Yen. At December 31, 2005 we had (Y)35.7 million (2004: (Y)929
million) receivable in relation to long term Yen denominated charter contracts;
a movement of one Yen in the exchange rate would not have a significant effect
on net income. The charterer also had an option to buy the vessel for (Y)4,666
million in January 2006, this option was exercised. The option was settled on
January 17, 2006. Since this date, we do not have any direct Yen exposure in the
Company.

ITEM 12. DESCRIPTION OF SECURITIES

Not Applicable

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
instalment or any other material default that was not cured within 30 days. In
addition, the payment of our dividends are not, and have not been in arrears or
have note 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 of Controls and Procedures

As of December 31, 2005, we carried out an evaluation of the effectiveness of
the design and operation of the our disclosure controls and procedures pursuant
to Exchange Act Rule 13a-14. Based upon that evaluation, the principal executive
officer and principal financial officer concluded that the our disclosure
controls and procedures are effective in alerting them timely to material
information relating to the Company required to be included in our periodic SEC
filings.

(b) Management's Annual Report on Internal Control over Financial Reporting

Not Applicable

(d) Changes in Internal Controls over Financial Reporting

There have been no changes in internal controls over financial reporting
(identified in connection with management's evaluation of such internal controls
over financial reporting) that occurred during the year covered by this annual
report that has materially affected, or is reasonably likely to materially
affect, our internal controls 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 the 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.

We have posted a copy of our Code of Ethics on its website at www.shipfinance.bm
We will provide any person, free of charge, a copy of its Code of Ethics upon
written request to our registered office.

ITEM 16 C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Our principal accountant for 2005 and 2004 was Moore Stephens, P.C. The
following table sets forth the fees related to audit and other services provided
by Moore Stephens, P.C.

(in thousands of $)
2005 2004

Audit Fees (a) 330 250
Audit-Related Fees (b) 9 -
Tax Fees (c) - -
All Other Fees (d) - -
Total 339 250

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

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

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

(d) All Other Fees
All other fees include services other than audit fees, audit-related fees and
tax fees set forth above.

Our Board of Directors has adopted pre-approval policies and procedures in
compliance with paragraph (c) (7)(i) of Rule 2-01 of Regulation S-X that require
the Board to approve the appointment of our independent auditor before such
auditor is engaged and approve each of the audit and non-audit related services
to be provided by such auditor under such engagement by the Company. All
services provided by the principal auditor in 2005 were approved by the Board
pursuant to the pre-approval policy.

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

Not applicable

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

Total Number Maximum Number
of Shares (or Approximate
(or Units) Dollar Value)
Purchased as of Shares
Total Part of (or Units)
Number Average Publicly that May Yet
of Shares Price Paid Announced Be Purchased
(or Units) per Share Plans or Under the Plans
Period Purchased (or Units) Programs or Programs
------ --------- ---------- -------- -----------

05.06.01 to 05.06.30 300,000 (1) $19.58 - -
05.10.01 to 05.10.31 336,400 (1) $19.43 - -
05.11.01 to 05.11.30 520,700 (1) $18.95 - -
05.12.01 to 05.12.31 600,000 (1) $18.01 - -
Total 1,757,100 (1) $18.81 - -

(1) The shares repurchased in the period were not part of a publicly announced
plan or program. The repurchases were made in open-market transactions.

PART III

ITEM 17. FINANCIAL STATEMENTS

Not Applicable

ITEM 18. FINANCIAL STATEMENTS

The following financial statements listed below and set forth on pages F-1
through F-30 are filed as part of this annual report:

Financial Statements for Ship Finance International Limited.

Report of Independent Registered Public Accounting Firm F-2

Report of Independent Registered Public Accounting Firm F-3

Report of Independent Registered Public Accounting Firm F-4

Consolidated Statements of Operations for the years ended
December 31, 2005 and 2004 and the period from October 10,
2003 (inception) to December 31, 2003 and Predecessor Combined
Carve-out Statement of Operations for the year ended December 31,
2003 F-5

Consolidated Balance Sheets as of December 31, 2005 and 2004 F-6

Consolidated Statements of Cash Flows for the years ended
December 31, 2005 and 2004 and the period from October 10,
2003 (inception) to December 31, 2003 and Predecessor Combined
Carve-out Statement of Cash Flows for the year ended December 31,
2003 F-7

Consolidated Statement of Changes in Stockholders' Equity for the
years ended December 31, 2005 and 2004 and the period from
October 10, 2003 (inception) to December 31, 2003 and Predecessor
Combined Carve-out Statement of Changes in Stockholders' Equity
for the year ended December 31 2003 F-9

Notes to Consolidated and Predecessor Combined Carve-out
Financial Statements F-10

ITEM 19. EXHIBITS

Number Description of Exhibit

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

1.4* Amended and Restated Bye-laws of the Company incorporated by
reference to Exhibit 3.2 of the Company's Original Registration
Statement.

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

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

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

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

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

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

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

4.7* Form of Charter Ancillary Agreement incorporated by reference to
Exhibit 10.6 of the Company's Original Registration Statement.

4.8* Form of Administrative Services Agreement incorporated by reference
to Exhibit 10.7 of the Company's Original Registration Statement.

8.1 Subsidiaries of the Company

11.1* Code of Ethics

12.1 Certification of the Principal Executive Officer

12.2 Certification of the Principal Executive Officer

12.3 Certification of the Principal Financial Officer

13.1 Certifications under Section 906 of the Sarbanes-Oxley act of 2002 of
the Principal Executive Officer

13.2 Certifications under Section 906 of the Sarbanes-Oxley act of 2002 of
the Principal Executive Officer

13.3 Certifications under Section 906 of the Sarbanes-Oxley act of 2002 of
the Principal Financial Officer

* Incorporated herein by reference.

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 authorised.

Ship Finance International Limited.
(Registrant)

Date June 27, 2006 By: /s/ Inger M. Klemp
--------------------------------
Inger M. Klemp
Principal Financial Officer

Ship Finance International Limited
Index to Consolidated and Predecessor Combined Carve-out Financial Statements

Report of Independent Registered Public Accounting Firm F-2

Report of Independent Registered Public Accounting Firm F-3

Report of Independent Registered Public Accounting Firm F-4

Consolidated Statements of Operations for the years ended F-5
December 31, 2005 and 2004 and the period from October 10, 2003
(inception) to December 31, 2003 and Predecessor Combined
Carve-out Statement of Operations for the year ended
December 31, 2003

Consolidated Balance Sheets as of December 31, 2005 and 2004 F-6

Consolidated Statements of Cash Flows for the years ended F-7
December 31, 2005 and 2004 and the period from October 10, 2003
(inception) to December 31, 2003 and Predecessor Combined
Carve-out Statement of Cash Flows for the year ended
December 31, 2003

Consolidated Statement of Changes in Stockholders' Equity for F-9
the years ended December 31, 2005 and 2004 and the period from
October 10, 2003 (inception) to December 31, 2003 and
Predecessor Combined Carve-out Statement of Changes in
Stockholders' Equity for the year ended December 31 2003

Notes to Consolidated and Predecessor Combined Carve-out F-10
Financial Statements

Ship Finance International Limited
Report of Independent Registered Public Accounting Firm

To the Board of Directors of 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, 2005
and 2004, and the related consolidated statements of operations, cash flows and
changes in stockholders' equity for the years ended December 31, 2005 and 2004
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. We were not
engaged to perform an audit of the Company's internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2005 and 2004, and the consolidated results of their
operations, and their cash flows for the years ended December 31, 2005 and 2004,
in conformity with U.S. generally accepted accounting principles.

MOORE STEPHENS, P. C.
Certified Public Accountants.

New York, New York
February 15, 2006

Ship Finance International Limited
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Ship Finance International
Limited.

In our opinion, the accompanying statements of operations, cash flows and
changes in stockholders' equity present fairly, in all material respects, the
results of operations of Ship Finance International Limited (the Company) and
its cash flows for the period from October 10, 2003 (Inception) to December 31,
2003, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

PricewaterhouseCoopers DA
Oslo, Norway
February 6, 2004

Ship Finance International Limited
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Ship Finance International
Limited.

In our opinion, the accompanying predecessor combined statement of operations,
cash flows and changes in stockholders' equity present fairly, in all material
respects, the results of operations of the predecessor to Ship Finance
International Limited and its subsidiaries (the Company) at December 31, 2003
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

PricewaterhouseCoopers DA
Oslo, Norway
March 22, 2004

Ship Finance International Limited

Consolidated Statements of Operations for the years ended December 31, 2005,
December 31, 2004 and the period from October 10, 2003 (inception) to
December 31, 2003 and Predecessor Combined Carve-out Statement of Operations
for the year ended December 31, 2003

(in thousands of $, except per share data)
Predecessor
Period from Predecessor
October 10, Combined
2003 Carve-out
Year ended Year ended (inception) to Year ended
December 31, December 31, December 31, December 31,
2005 2004 2003 2003

Operating revenues
Time charter revenues 62,605 86,741 - 40,759
Bareboat charter revenues 7,325 27,453 - 25,986
Voyage charter revenues 9,745 49,707 - 628,323
Finance lease interest income 177,474 140,691 - -
Finance lease service revenues 92,265 72,551 - -
Profit sharing revenues 88,096 114,926 - -
----------------------------------------------------------------- --------------- -------------- ---------------
Total operating revenues 437,510 492,069 - 695,068
Loss on sale of assets (654) - - -
Operating expenses
Voyage expenses and commission 3,600 9,978 - 148,533
Ship operating expenses 110,240 96,505 - 81,989
Administrative expenses 2,447 3,812 14 9,715
Depreciation 19,907 34,617 - 106,015
----------------------------------------------------------------- --------------- -------------- ---------------
Total operating expenses 136,194 144,912 14 346,252
Net operating income/(loss) 300,662 347,157 (14) 348,816
Other income/(expenses)
Interest income 3,343 2,567 199 5,866
Interest expense (111,935) (95,933) (2,122) (35,117)
Share of results of associated companies - - - 22,098
Foreign currency exchange gain (loss) (52) 88 - (10,442)
Other financial items, net 17,528 8,780 - 3,591
----------------------------------------------------------------- --------------- -------------- ---------------
Net other expenses (91,116) (84,498) (1,923) (14,004)
----------------------------------------------------------------- --------------- -------------- ---------------
Net income/(loss) 209,546 262,659 (1,937) 334,812
================================================================= =============== ============== ===============
Per share information:
Basic and diluted earnings per share $2.84 $3.52 - $4.53
Cash dividends paid and declared $2.00 $1.05 - -

The accompanying notes are an integral part of these consolidated and combined
carve-out financial statements.

Ship Finance International Limited

Consolidated Balance Sheets as of December 31, 2005 and 2004

(in thousands of $)

December 31, December 31,
2005 2004

ASSETS
Current assets
Cash and cash equivalents 32,857 29,193
Restricted cash 1,575 5,379
Trade accounts receivable 382 256
Amount due from parent company 79,416 119,790
Other receivables 1,409 241
Inventories 185 -
Prepaid expenses and accrued income 106 -
Investment in finance leases, current portion 107,010 76,998
---------------------------------------------------------- ---------------------------- ----------------
Total current assets 222,940 231,857
Vessel purchase option - 8,370
Vessels and equipment, net 315,220 236,305
Investment in finance leases 1,818,344 1,641,644
Mark to market valuation of derivatives 19,563 7,737
Deferred charges 17,846 27,024
---------------------------------------------------------- ---------------------------- ----------------
Total assets 2,393,913 2,152,937
========================================================== ============================ ================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt and current portion of long-term debt 122,519 91,308
Trade accounts payable 978 180
Accrued expenses 9,908 8,396
Other current liabilities 1,315 382
---------------------------------------------------------- ---------------------------- ----------------
Total current liabilities 134,720 100,266
Long-term liabilities
Long-term debt 1,671,138 1,387,586
Mark to market valuation of derivatives 1,196 4,103
Other long-term liabilities 25,337 -
---------------------------------------------------------- ---------------------------- ----------------
Total liabilities 1,832,391 1,491,955
Commitments and contingent liabilities
Stockholders' equity
Share capital 73,144 74,901
Contributed surplus 441,105 463,261
Retained earnings 47,273 122,820
---------------------------------------------------------- ---------------------------- ----------------
Total stockholders' equity 561,522 660,982
---------------------------------------------------------- ---------------------------- ----------------
Total liabilities and stockholders' equity 2,393,913 2,152,937
========================================================== ============================ ================

The accompanying notes are an integral part of these consolidated and combined
carve-out financial statements.

Ship Finance International Limited

Consolidated Statements of Cash Flows for the years ended December 31, 2005 and
2004 and the period from October 10, 2003 (inception) to December 31,
2003 and Predecessor Combined Carve-out Statement of Cash Flows for the
year ended December 31, 2003

(in thousands of $)

Period from Predecessor
October 10, Combined
2003 Carve-out
Year ended Year ended (inception) to Year ended
December 31, December 31, December 31, December 31,
2005 2004 2003 2003

Operating activities
Net income (loss) 209,546 262,659 (1,937) 334,812
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 19,907 34,617 - 106,015
Amortisation of deferred charges 16,524 9,485 69 1,019
Share of results of associated companies - - - (22,098)
Interest income, capitalised - - - (4,489)
Unrealised foreign exchange (gain) loss - (164) - 10,716
Loss on sale of assets 654 - - -
Adjustment of derivatives to market value (14,732) (9,289) - (6,850)
Other (4,708) (1,146) - -
Release of accumulated other comprehensive income to - - - 1,609
net income
Changes in operating assets and liabilities, net of
effect of acquisitions
Trade accounts receivable 6,241 (256) - (343)
Other receivables 940 - (199) (129)
Inventories 3,191 - - 4,540
Other current assets 5,266
Voyages in progress - - - (3,061)
Prepaid expenses and accrued income 129 199 - (285)
Trade accounts payable (1,291) 180 - (539)
Accrued expenses (2,139) 1,750 2,063 (9,092)
Amount due from parent company 40,374 (119,892) 4 -
Other current liabilities 932 385 - 3,698
---------------------------------------------------------- ---------------- --------------- ---------------- ---------------
Net cash provided by operating activities 280,834 178,528 - 415,523

Investing activities
Acquisition of subsidiaries (518,182) (536,793) - -
Additions to new buildings and vessel purchase options - (8,370) - -
Purchase of vessels (79,772)
Proceeds from sales of vessels 229,800
Repayments from investments in finance leases 94,777 61,990 - -
Investments in associated companies - - - (70,045)
Proceeds from sales of investments in associated - - - 17,245
companies
Net maturity (placement) of restricted cash 3,804 560,121 (565,500) -
Short-term loan advances to parent company - (55,254) - -
Short-term loan repayments from parent company - 55,254 - -
Net maturity of other loans receivable - - - 1,168
---------------------------------------------------------- ---------------- --------------- ---------------- ---------------
Net cash provided by (used in) investing activities (269,573) 76,948 (565,500) (51,632)

Financing activities
Proceeds from issuance of shares - 24,696 - -
Repurchases of shares (33,083) (14,713) - -
Proceeds from issuance of long-term debt 1,571,429 1,017,100 580,000 -
Repayments of long-term debt (1,253,503) (1,099,707) - (178,236)
Debt fees paid (7,347) (15,760) (14,500) (985)
Net repayments to parent company - - - (178,785)
Cash dividends paid (148,863) (78,905) - -
Deemed dividends paid (136,230) (58,994) - -
---------------------------------------------------------- ---------------- --------------- ---------------- ---------------
Net cash provided by (used in) financing activities (7,597) (226,283) 565,500 (358,006)
---------------------------------------------------------- ---------------- --------------- ---------------- ---------------
Net change in cash and cash equivalents 3,664 29,193 - 5,885
Cash and cash equivalents at start of the period 29,193 - - 20,634
---------------------------------------------------------- ---------------- --------------- ---------------- ---------------
Cash and cash equivalents at end of the period 32,857 29,193 - 26,519
========================================================== ================ =============== ================ ===============

Supplemental disclosure of cash flow information:
Interest paid, net of capitalised interest 92,315 81,992 - 31,543
========================================================== ================ =============== ================ ===============

The accompanying notes are an integral part of these consolidated and combined
carve-out financial statements.

Ship Finance International Limited

Consolidated Statement of Changes in Stockholders' Equity for the years ended
December 31, 2005 and 2004 and the period from October 10, 2003 (inception)
to December 31, 2003 and Predecessor Combined Carve-out Statement of Changes
in Stockholders' Equity for the
year ended December 31 2003

(in thousands of $, except number of shares)

Period from Predecessor
October 10, Combined
2003 Carve-out
Year ended Year ended (inception) to Year ended
December 31, December 31, December 31, December 31,
2005 2004 2003 2003

Number of shares outstanding
At beginning of period 74,900,837 12,000 - -
Shares issued from contributed surplus - 73,913,837 12,000 -
Shares issued for cash - 1,600,000 - -
Share repurchased and cancelled (1,757,100) (625,000) - -
---------------------------------------------------------- ---------------- --------------- ---------------- ---------------
At end of period 73,143,737 74,900,837 12,000 -
---------------------------------------------------------- ---------------- --------------- ---------------- ---------------

Share capital
At beginning of period 74,901 12 - -
Shares issued from contributed surplus - 73,914 12 -
Shares issued for cash - 1,600 - -
Share repurchased and cancelled (1,757) (625) - -
---------------------------------------------------------- ---------------- --------------- ---------------- ---------------
At end of period 73,144 74,901 12 -
---------------------------------------------------------- ---------------- --------------- ---------------- ---------------

Contributed surplus
At beginning of period 463,261 - - -
Equity contribution from parent company - 525,000 - -
Shares issued from contributed surplus - (73,914) - -
Shares issued for cash - 23,096 - -
Share repurchased and cancelled (31,327) (14,088) - -
Amortisation of deferred equity contributions 9,171 3,167 - -
---------------------------------------------------------- ---------------- --------------- ---------------- ---------------
At end of period 441,105 463,261 - -
---------------------------------------------------------- ---------------- --------------- ---------------- ---------------

Retained earnings (deficit)
At beginning of period 122,820 (1,937) - -
Net income (loss) 209,546 262,659 (1,937) -
Cash dividends paid (148,863) (78,905) - -
Deemed dividends paid (136,230) (58,997) - -
---------------------------------------------------------- ---------------- --------------- ---------------- ---------------
At end of period 47,273 122,820 (1,937) -
---------------------------------------------------------- ---------------- --------------- ---------------- ---------------
Total Stockholders' Equity 561,522 660,982 (1,925)
---------------------------------------------------------- ---------------- --------------- ---------------- ---------------

Invested equity
At beginning of period - - - 485,605
Net income - - - 334,812
Release of accumulated other comprehensive income to net - - - 1,609
income
---------------------------------------------------------- ---------------- --------------- ---------------- ---------------
At end of period - - - 822,026
---------------------------------------------------------- ---------------- --------------- ---------------- ---------------

Comprehensive income
Net income (loss) 209,546 262,659 (1,937) 334,812
Release of accumulated other comprehensive income to net - - - 1,609
income
---------------------------------------------------------- ---------------- --------------- ---------------- ---------------
Other comprehensive income - - - 1,609
---------------------------------------------------------- ---------------- --------------- ---------------- ---------------
Comprehensive income 209,546 262,659 (1,937) 336,421
---------------------------------------------------------- ---------------- --------------- ---------------- ---------------

The accompanying notes are an integral part of these consolidated and combined
carve-out financial statements.

SHIP FINANCE INTERNATIONAL LIMITED
Notes to the Consolidated and Predecessor Combined Carve-out
Financial Statements

1. GENERAL INFORMATION

Ship Finance International Limited ("Ship Finance" or the "Company"), a
publicly listed company, 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. In the first quarter of 2004,
Ship Finance used the proceeds of the notes issue, together with a
refinancing of existing debt, to fund the acquisition of a fleet of 47
crude oil tankers (including one purchase option for a VLCC) from Frontline
and has chartered each of the ships back to Frontline for most of their
estimated remaining lives. The Company operates tankers of two sizes: very
large crude carriers ("VLCCs") which are between 200,000 and 320,000
deadweight tons ("dwt"), and Suezmaxes, which are vessels between 120,000
and 170,000 dwt. In addition, the Company operates two containerships with
a carrying capacity of approximately 1,800 twenty-foot equivalent units
("teu"). Ship Finance 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 agreements were each
given economic effect as of January 1, 2004 (See Note 17).

The Company was incorporated as a wholly owned subsidiary of Frontline. On
June 16, 2004, Frontline distributed 25% of Ship Finance's common shares to
Frontline's ordinary shareholders with each Frontline shareholder receiving
one share in Ship Finance for every four Frontline shares held. On June 17,
2004, Ship Finance common shares commenced trading on the New York Stock
Exchange under the ticker symbol "SFL". In 2004 and 2005 Frontline made
four further distributions of its shares in Ship Finance and at December
31, 2005 held 15.8% of the Company.

2. ACCOUNTING POLICIES

Basis of Accounting
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. The
consolidated financial statements include the assets and liabilities of the
Company and its subsidiaries. All intercompany balances and transactions
have been eliminated on consolidation. As at December 31, 2003 the company
did not have any subsidiaries.

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

The Company accounts for certain of the long-term charters to Frontline as
sales type leases while the remaining charters are currently being
accounted for as operating leases. For those vessels on existing long-term
charters to third parties, the difference between amounts earned under
those charters and the amounts due to the Company by Frontline is remitted
to Frontline and accounted for as a deemed dividend which reduces
stockholders' equity.

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.

Certain comparative figures have been reclassified to conform with the
presentation adopted in the current period. Effective December 31, 2004 we
have reclassified accrued income relating to profit share due from
Frontline to amounts due from parent company.

Predecessor combined carve-out financial information
The predecessor combined carve-out financial statements are prepared in
accordance with accounting principles generally accepted in the United
States. For the year ended December 31, 2003, the predecessor combined
carve-out financial statements have been carved out of the consolidated
financial statements of Frontline and assume that the Company was operated
as a separate corporate entity prior to its inception. The predecessor
combined carve-out financial statements were prepared in contemplation of
the fleet purchase transaction that occurred effective January 1, 2004 and
reflect the Company's acquisition from Frontline of certain wholly owned
VLCC and Suezmax owning subsidiaries, including certain subsidiaries
acquired through a reorganization of Frontline's interests in certain joint
ventures plus a purchase option to acquire a further VLCC (together the
"Vessel Interests").

Frontline is a shipping company with activities that include the ownership
and operation of oil tankers and dry bulk carriers as well as leasing of
vessels and participation in tanker owning joint venture arrangements.
Frontline is also involved in the purchase and sale of vessels. Where
Frontline's assets, liabilities, revenues and expenses relate to the
specific Vessel Interests, these have been identified and carved out for
inclusion in these financial statements. Frontline's shipping interests and
other assets, liabilities, revenues and expenses that do not relate to the
Vessel Interests have been identified and not included in these financial
statements. The preparation of the carved out financial statements requires
allocation of certain assets and liabilities and expenses where these items
are not identifiable as related to one specific activity. Administrative
overheads of Frontline that cannot be related to a specific vessel type of
operations have been allocated pro-rata based on the number of vessels in
the Company compared with the number in Frontline's total fleet. Management
has deemed that the related allocations are reasonable to present the
financial position, results of operations, and cash flows of the Company.
Management believes the various allocated amounts would not materially
differ from those that would have been achieved had Ship Finance operated
on a stand-alone basis for all periods presented. However, the financial
position, results of operations and cash flows of the Company are not
necessarily indicative of those that would have been achieved had the
Company operated autonomously for all periods presented as the Company may
have made different operational and investment decisions as a Company
independent of Frontline.

The majority of the Company's assets, liabilities, revenues and expenses
are vessel specific and are included in the vessel owning subsidiaries
financial statements. However, in addition, the following significant
allocations have been made:

Long term debt: An allocation of corporate debt of Frontline has been made
which totals $8,608,000 as of December 31, 2003. This debt has been
allocated as it relates specifically to an entity of which the Company has
a purchase option. The associated interest expense has also been allocated
to these predecessor combined carve-out financial statements.

Interest rate swaps: For the purposes of the predecessor combined carve-out
financial statements, interest rate swaps specific to carved out debt have
been included. In addition, non-debt specific interest rate swaps with
notional principal amounts of $50,000,000 have been included on the basis
that such swaps were intended to cover the floating rate debt that has been
included in these predecessor combined carve-out statements. The associated
mark to market adjustments arising on the swaps has also been allocated to
these predecessor combined carve-out financial statements and is included
in other financial items, net.

Administrative expenses: Frontline's overheads relate primarily to
management organizations in Bermuda and Oslo that manage the business.
These overhead costs include salaries and other employee related costs,
office rents, legal and professional fees and other general administrative
expenses. Other employee related costs include costs recognized in relation
to Frontline's employee share option plan. We have allocated overhead pro
rata based on the number of vessels in the Company compared with the number
in Frontline's total fleet. The amount of such costs, presented as part of
administrative expenses, which was allocated from these organizations was
$8,995,000 for the year ended December 31, 2003.

No allocation of interest income has been made and interest income reported
in the predecessor combined carve-out financial statements represents
interest income earned by the vessel owning subsidiaries and interest
earned on loans to joint ventures.

Accounting policies used in preparing the consolidated financial statements

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
U.S. dollars. All 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 freight billings, time charter, bareboat charter hires,
finance lease interest income, finance lease service revenues and profit
sharing revenues. The operating results of voyages in progress are
estimated and recorded pro-rata on a per day basis in the consolidated
statements of operations. Probable losses on voyages are provided for in
full at the time such losses can be estimated. Time charter and bareboat
charter revenues are recorded over the term of the charter as service is
provided.

Finance lease service revenues represent services provided to the lessee to
operate vessels and are recognized on a daily accrual basis.

Profit sharing revenues are recorded when earned and realizable. The
Company considers profit sharing revenues to be earned and realizable to
the extent that a vessel's underlying earnings on a time charter equivalent
basis exceed the profit sharing threshold for the profit sharing period.
This threshold is calculated as the number of days in the profit sharing
period multiplied by the daily profit sharing threshold rates. Our profit
sharing revenues are 20% of a vessel's underlying earnings in excess of the
threshold.

Revenues and voyage expenses of the vessels operating in pool arrangements
are pooled and the resulting net pool revenues, calculated on a time
charter equivalent basis, are allocated to the pool participants according
to an agreed formula. Formulae used to allocate net pool revenues vary
among different pools but generally allocate revenues to pool participants
on the basis of the number of days a vessel operates in the pool with
weighting adjustments made to reflect vessels' differing capacities and
performance capabilities. The same revenue and expenses principles stated
above are applied in determining the pool's net pool revenues. Certain
pools are responsible for paying voyage expenses and distribute net pool
revenues to the participants. Certain pools require the participants to pay
and account for voyage expenses, and distribute gross pool revenues to the
participants such that the participants' resulting net pool revenues are
equal to net pool revenues calculated according to the agreed formula. The
Company accounts for gross pool revenues allocated by these pools as "pool
revenues" which are included in voyage revenues in its statements of
operations. Refer to Note 5 for further analysis of pool revenues.

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.

Vessels and equipment
The cost of the vessels less estimated residual value is depreciated on a
straight-line basis over the vessels' estimated remaining economic useful
lives. The estimated economic useful life of the Company's double hull
vessels is 25 years and for single hull vessels is either 25 years or the
vessel's anniversary date in 2015, whichever comes first.

In December 2003, the International Maritime Organization adopted new
regulations that will result in a more accelerated phase-out of single hull
vessels. As a result of this, the Company re-evaluated the estimated useful
life of its single hull vessels and determined this to be either 25 years
or the vessel's anniversary date in 2015 whichever came first. As a result,
the estimated useful life of thirteen of the Company's vessels was reduced
in the fourth quarter of 2003. A change in accounting estimate was
recognized in the predecessor combined carve-out financial statements to
reflect this decision, resulting in an increase in depreciation expense and
consequently decreasing net income by $1.1 million in 2003.

Vessel purchase options
Vessel purchase options are capitalized at the time option contracts are
acquired or entered into. The Company reviews expected future cash flows,
which would result from the exercise of each option contract on a contract
by contract basis to determine whether the carrying value of the option is
recoverable. If the expected future cash flows are less than the carrying
value of the option plus further costs to delivery, provision is made to
write down the carrying value of the option to the recoverable amount. The
carrying value of each option payment is written off as and when the
Company adopts a formal plan not to exercise the option. Purchase price
payments are capitalized and the total of the option payment, if any, and
purchase price payment is transferred to cost of vessels, upon exercise of
the option and delivery of the vessel to the Company.

Leases
Leases of our vessels where we are the lessor are classified as either
finance leases or operating leases based on an assessment of the terms of
the lease. For the long term charters classified as finance type leases the
minimum lease payments (net of amounts representing estimate executory
costs including profit thereon) plus the unguaranteed residual value are
recorded as the gross investment in the 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 income which is
amortised to income over the lease term as finance lease interest income to
produce a constant periodic rate of return on the net investment in the
lease.

Deemed Dividends
Certain of the Company's vessels acquired in 2005 were on charter to third
parties at the delivery date to the Company and certain of its vessels
acquired as part of the original purchase of the Vessel Interests were on
charter to third parties as at January 1, 2004 when the charter
arrangements with Frontline became economically effective. The Company's
arrangement with Frontline is that while the vessels are completing
performance of third party charters, the Company pays Frontline all
revenues earned under third party charters in exchange for Frontline paying
the Company the Frontline charter rates. The revenues received from these
third party charters are accounted for as time charter, bareboat or voyage
revenues as applicable and the subsequent payment of these amounts to
Frontline as deemed dividends paid. The Company accounts for the charter
revenues received from Frontline Shipping prior to the charters becoming
effective for accounting purposes, as deemed equity contributions received.
This treatment has been applied due to the related party nature of the
charter arrangements.

The Company has accounted for the acquisition of assets from entities under
common control at the historical carrying value of the seller. The
difference between the purchase price and historical carrying value has
been recorded as a deemed dividend paid.

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

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

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.

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.

The Company has no independent assets or operations from those if its
subsidiaries who have provided guarantees to its indebtedness. These
guarantees are full and unconditional and joint and several. All of the
Company's subsidiaries are guarantors.

Derivatives
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.

SFAS 133, as amended by SFAS 137 "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement No.133"
and SFAS 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities an amendment of FASB Statement No. 133", requires an
entity to recognize all derivatives as either assets or liabilities on the
balance sheet and measure these instruments at fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated
as part of a hedge transaction and, if it is, the type of hedge
transaction. In order to qualify for hedge accounting under SFAS 133,
certain criteria and detailed documentation requirements must be met.

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

Accounting policies used in preparing the predecessor combined-carve out
financial statements

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
U.S. dollars. 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 freight billings, contracts of affreightment, time charter,
and bareboat charter hires. The operating results of voyages in progress
are estimated and recorded pro-rata on a per day basis. Probable losses on
voyages are provided for in full at the time such losses can be estimated.
Time charter and bareboat charter revenues are recorded over the term of
the charter as service is provided. Amounts receivable or payable arising
from profit sharing arrangements are accrued based on the estimated results
of the voyage recorded as at the reporting date.

Revenues and voyage expenses of the vessels operating in pool arrangements
are pooled and the resulting net pool revenues, calculated on a time
charter equivalent basis, are allocated to the pool participants according
to an agreed formula. Formulae used to allocate net pool revenues vary
among different pools but generally allocate revenues to pool participants
on the basis of the number of days a vessel operates in the pool with
weighting adjustments made to reflect vessels' differing capacities and
performance capabilities. The same revenue and expenses principles stated
above are applied in determining the pool's net pool revenues. Certain
pools are responsible for paying voyage expenses and distribute net pool
revenues to the participants. The Company accounts for the net pool
revenues allocated by these pools as "pool revenues" which are included in
voyage revenues in its statements of operations. Certain pools require the
participants to pay and account for voyage expenses, and distribute gross
pool revenues to the participants such that the participants' resulting net
pool revenues are equal to net pool revenues calculated according to the
agreed formula. The Company accounts for gross pool revenues allocated by
these pools as "pool revenues" which are included in voyage revenues in its
statements of operations. Refer to Note 5 for further analysis of pool
revenues.

Inventories
Inventories, which is comprised of principally fuel and lubricating oils,
are stated at the lower of cost and market value. Cost is determined on a
first-in, first-out basis.

Vessel purchase options
Vessel purchase options are capitalized at the time option contracts are
acquired or entered into. The Company reviews expected future cash flows,
which would result from exercise of each option contract on a contract by
contract basis to determine whether the carrying value of the option is
recoverable. If the expected future cash flows are less than the carrying
value of the option plus further costs to delivery, provision is made to
write down the carrying value of the option to the recoverable amount. The
carrying value of each option payment is written off as and when the
Company adopts a formal plan not to exercise the option. Purchase price
payments are capitalized and the total of the option payment, if any, and
purchase price payment is transferred to cost of vessels, upon exercise of
the option and delivery of the vessel to the Company.

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 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.

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.

Derivatives
The Company enters into interest rate swap transactions 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. Hedge accounting
may be used to account for these swaps provided certain hedging criteria
are met. On January 1, 2002, the Company discontinued hedge accounting for
two interest rate swaps previously accounted for as cash flow hedges. This
resulted in a balance of $4.9 million being frozen in accumulated other
comprehensive income as at that date and this amount was reclassified into
the consolidated statement of operations over the remaining lives of the
underlying debt instruments. The underlying loans were repaid in 2004 and
the then remaining balance in accumulated other comprehensive income of
$2.5 million was reclassified into earnings.

3. RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2003, the FASB issued Interpretation 46, Consolidation of
Variable Interest Entities. In December 2003, the FASB issued
Interpretation 46 Revised, Consolidation of Variable Interest Entities. In
general, a variable interest entity is a corporation, partnership, trust,
or any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity
to support its activities. Interpretation 46 requires a variable interest
entity to be combined by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both.
The consolidation requirements of Interpretation 46 apply in the first
fiscal year or interim period ending after December 15, 2003 to variable
interest entities created after January 31, 2003. The consolidation
requirements apply in the first fiscal year or interim period ending after
December 15, 2003 for "Special Purpose Entities" created before January 31,
2003. The consolidation requirements apply in the first fiscal year or
interim period ending after March 15, 2004 for other entities created
before January 31, 2003. Certain of the disclosure requirements apply in
all financial statements issued after January 31, 2003, regardless of when
the variable interest entity was established. The adoption of
Interpretation 46 did not result in the consolidation of any entities.

The Company had an option to purchase the VLCC Oscilla on or before the
expiry of a five-year time charter, which commenced in March 2000. Oscilla
was owned and operated by an unrelated entity, Seacrest Shipping Ltd.
("Seacrest"). If the Company had exercised its option at December 31, 2003,
the cost to the Company of the Oscilla would have been approximately $42.3
million and the maximum exposure to loss is $17.4 million, representing
amounts outstanding from Seacrest of $9.0 million and the carrying value of
the option of $8.4 million. At December 31, 2003, Seacrest had total
indebtedness of $36.0 million (including $9.0 million due to the Company)
and JPY674.6 million (equivalent to $6.3 million) and the fair value of the
vessel Oscilla was $78.5 million. Prior to the adoption of FIN 46R, this
special purpose entity was not consolidated in the predecessor combined
carve out financial statements. We have determined that the entity that
owns Oscilla is a variable interest entity and that we are the primary
beneficiary. At December 31, 2004 through to January 2005 when we exercised
our option to acquire the vessel, after exhaustive efforts, we were unable
to obtain the accounting information necessary to be able to consolidate
the entity that owned Oscilla. If we had exercised the option at December
31, 2004, the cost of the Oscilla would have been approximately $28.5
million and our maximum exposure to loss was $8.4 million. We have taken
delivery of the vessel in April 2005.

In December 2004, the FASB issued Statement of Financial Accounting
Standards 153 Exchanges of Nonmonetary Assets, an amendment of APB Opinion
No. 29 ("SFAS 153"). APB Opinion No. 29 Accounting for Nonmonetary
Transactions ("APB 29") provides that accounting for nonmonetary
transactions should be measured based on the fair value of the assets
exchanged but allows certain exceptions to this principle. SFAS 153 amends
APB 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that don't have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. SFAS 153
is effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005 and shall be applied prospectively. Adoption
of SFAS 153 has not affected the Company's results to date.

In May 2005, the FAS issued Statement of Financial Accounting Standards 154
Accounting Changes and Error Corrections, a replacement of APB Opinion No.
20 and FAS 3 ("SFAS 154"). SFAS 154 replaces APB Opinion No. 20 Accounting
Changes and FAS 3 Reporting Accounting Changes in Interim Financial
Statements. Previously, most changes in accounting principle were
recognised by including the cumulative effect of changing to the new
accounting principle in net income for the period of the change. SFAS 154
requires retrospective application of a change in accounting principle to
prior periods unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change to any
period. When it is impracticable to determine the period-specific effects
of an accounting change, SFAS 154 requires that the new accounting
principle be applied to the balances of assets and liabilities as of the
beginning of the earliest period for which retrospective application is
practicable and that a corresponding adjustment be made to the opening
balance of retained earnings ( or other appropriate components of equity or
net assets) for that period rather than being reported in an income
statement. SFAS 154 is applicable for all accounting changes and
corrections of errors occurring in fiscal years beginning after December
15, 2005. The Company does not expect adoption of SFAS 154 on January 1,
2006 to have a significant impact on its financial statements.

4. SEGMENTAL INFORMATION

The Company has one reportable segment, leasing. Segment results are
evaluated based on income from vessel operations before general and
administrative expenses. The accounting policies used in the reportable
segment are the same as those followed in the preparation of the Company's
consolidated financial statements.

The Company's management does not evaluate performance by geographical
region as this information is not meaningful.

Information about the Company's reportable segment as of and for the each
of the years ended December 31, 2005 and December 31, 2004 are as follows:

(in thousands of $) Leasing 2005 Leasing 2004

Total operating revenues 437,510 492,069
Voyage expenses 3,600 9,978
Ship operating expenses 110,240 96,505
Depreciation and amortisation 19,907 34,617
Interest income 173 663
Interest expense 111,935 95,933
Net income 205,984 264,317
Vessels and equipment, net 315,220 236,305
Investment in finance leases 1,925,354 1,718,642
Total assets 2,366,288 2,111,257
Expenditure for vessels 79,772 -

Reconciliations of reportable segments information to the Company's
consolidated totals follows:

(in thousands of $) 2005 2004

Total operating revenues
Total operating revenues for
reportable segments 437,510 492,069
Other operating revenues - -
Total consolidated operating revenues 437,510 492,069
Interest income
Total interest income for
reportable segments 173 663
Interest income attributable to corporate 3,170 1,904
holding and management companies
-------------------------------------------------------------------------
Total consolidated interest income 3,343 2,567
-------------------------------------------------------------------------
Interest expense
Total interest expense for
reportable segments 111,935 95,933
Interest expense attributable to corporate - -
holding and management companies
-------------------------------------------------------------------------
Total consolidated interest expense 111,935 95,933
-------------------------------------------------------------------------
Depreciation
Total depreciation for reportable segments 19,907 34,617
Depreciation not attributed to segments - -
-------------------------------------------------------------------------
Total consolidated depreciation 19,907 34,617
-------------------------------------------------------------------------
Net income
Net income for reportable segments 205,984 264,317
Net income attributable to corporate 3,562 (1,658)
holding and management companies
-------------------------------------------------------------------------
Total net income 209,546 262,659
-------------------------------------------------------------------------
Vessels and equipment, net
Vessels and equipment, net for
reportable segments 315,220 236,305
Vessels and equipment not attributed
to segments - -
-------------------------------------------------------------------------
Total consolidated vessels and equipment, net 315,220 236,305
Investment in finance leases
Investment in finance leases for
reportable segments 1,925,354 1,718,642
Investment in finance leases not
attributed to segments - -
-------------------------------------------------------------------------
Total consolidated investment in finance leases 1,925,354 1,718,642
-------------------------------------------------------------------------
Assets
Total assets for reportable segments 2,366,288 2,111,257
Cash and cash equivalents attributable to
holding company 26,751 28,447
Other assets attributable to corporate 874 13,233
holding and management companies
-------------------------------------------------------------------------
Total consolidated assets 2,393,913 2,152,937
-------------------------------------------------------------------------

During the year ended December 31, 2005, the Company reported total income
from one customer of $358 million. These revenues are reported under the
leasing segment. During the years ended December 31, 2005 and 2004 one
customer accounted for 10% or more of consolidated operating revenues.

5. POOL REVENUES

Voyage charter revenues included in these financial statements include pool
revenues. Certain pools are responsible for paying voyage expenses and
distribute net pool revenues to the participants while other pools require
the participants to pay and account for voyage expenses, and distribute
gross pool revenues to the participants such that the participants'
resulting net pool revenues are equal to net pool revenues calculated
according to the agreed formula. An analysis of the Company's pool revenues
included within voyage revenues is as follows:

------------------------------------------------------ -------------- -------------- ---------------
(in thousands of $) Year ended Year ended Period from Predecessor
December 31, December 31, October 10, Combined
2005 2004 2003 Carve-Out
(inception) Year ended
to December December 31,
31, 2003 2003
------------------------------------------------------ -------------- -------------- ---------------

Pool earnings allocated on gross basis - 4,040 - 45,749
Pool earnings allocated on net basis (4) 4,464 - 37,775
Total pool earnings (4) 8,504 - 83,524
------------------------------------------------------ -------------- -------------- ---------------

6. 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 the
U.S. Federal statutory income tax rate and the reported income tax expense
has not been presented herein as it would not provide additional useful
information to users of the financial statements as the Company's net
income is subject to neither Bermuda nor U.S. tax.

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

7. EARNINGS PER SHARE

Basic earnings per share ("EPS") for all periods prior to June 16, 2004 has
been computed based on the net income (loss) available to common
stockholders and the number of common shares outstanding on June 16, 2004,
the date on which the Company was partially spun off from Frontline. Basic
EPS for all periods subsequent to June 16, 2004 is computed based on the
net income (loss) available to common stockholders and the number of common
shares outstanding. For all periods presented there are no potentially
dilutive securities.

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

(in thousands of $) Year ended Year ended Period from Predecessor
December 31, December 31, October 10, Combined
2005 2004 2003 Carve-Out
(inception) Year ended
to December December 31,
31, 2003 2003

---------------------------------------------- -------------- -------------- -------------- --------------

Net income (loss) available to stockholders 209,546 262,659 (1,937) 334,812
---------------------------------------------- -------------- -------------- -------------- --------------

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

(in thousands ) Year ended Year ended Period from Predecessor
December 31, December 31, October 10, Combined
2005 2004 2003 Carve-Out
(inception) Year ended
to December December 31,
31, 2003 2003
----------------------------------------- -------------- -------------- -------------- --------------

Weighted average number of common shares
outstanding 74,560 74,611 73,925 73,925
----------------------------------------- -------------- -------------- -------------- --------------

8. OPERATING LEASES

Rental income
The minimum future revenues to be received under the Company's
non-cancellable operating leases as of December 31, 2005 are as follows:

Year ending December 31, Yen revenues Revenues Total
(in thousands) (in (Y)) (in $ (in $) (in $)
equivalent)
2006 35,700 303 45,610 45,913
2007 17,363 17,363
2008 15,823 15,823
2009 4,422 4,422
Thereafter - - - -
---------------------------------------------------------------------------
Total minimum lease revenues 35,700 303 83,218 83,521
---------------------------------------------------------------------------

The cost and accumulated depreciation of vessels leased to third parties
on operating leases at December 31, 2005 and 2004 were as follows:

(in thousands of $)

December 31, 2005 December 31, 2004

Cost 481,732 384,198
Accumulated depreciation 166,512 147,893

9. TRADE ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES

Trade accounts receivable
Trade accounts receivable are presented net of allowances for doubtful
accounts amounting to $nil as of each of December 31, 2005 and 2004.

Other receivables
Other receivables are presented net of allowances for doubtful accounts
amounting to $nil as of each of December 31, 2005 and 2004.

10. VESSEL PURCHASE OPTION

The Company had an option from a third party to purchase the VLCC Oscilla
on expiry of a five-year time charter, which commenced in March 2000. The
Company acquired the option from Frontline in 2004 for $8.4 million as part
of the Vessel Interests. In January 2005, the Company exercised its option
to acquire the vessel with the purchase price paid being equal to the
outstanding mortgage debt under four loan agreements between lenders and
the vessel's owning company. In addition, the Company made a payment of
$14.6 million to Frontline to reflect the fact that the original purchase
price was set assuming delivery to Ship Finance on January 1, 2004 whereas
delivery did not occur until April 4, 2005. On the delivery date, the
vessel, which has been renamed Front Scilla, commenced a fixed rate time
charter to Frontline following the structure in place for other vessels
chartered to Frontline. The additional payment to Frontline has been
accounted for as a deemed dividend paid.

11. VESSELS AND EQUIPMENT, NET

(in thousands of $)
December 31, 2005 December 31, 2004
--------------------------------------------------------------------------
Cost 481,732 385,436
Accumulated depreciation 166,512 149,131
--------------------------------------------------------------------------

--------------------------------------------------------------------------
Net book value 315,220 236,305
--------------------------------------------------------------------------

Depreciation expense was $19.9, $34.6, $nil, and $106.1 million for the
years ended December 31, 2005, 2004, the period from October 10, 2003 to
December 31, 2003 and for the predecessor combined carve out for the year
ended December 31, 2003.

In November 2005, the bareboat charterer of the vessel "Navix Astral"
declared their intent to exercise their purchase option and the vessel was
delivered to her new owner in January 2006. As a consequence, an impairment
loss of $1.9 million has been included in the statement of operations for
the year ended December 31, 2005.

12. INVESTMENTS IN FINANCE LEASES

The Company's tankers are chartered on long term, fixed rate charters to
Frontline which extend for various periods depending on the age of the
vessels, ranging from approximately seven to 23 years. The terms of the
charters do not provide Frontline 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.

Of these charters, 44 are accounted for as sales type leases. The following
lists the components of the investments in finance leases as of December
31, 2005:

(in thousands of $)

Total minimum lease payments to be received 4,060,056
Less: amounts representing estimated executory costs including (1,019,259)
profit thereon, included in total minimum lease payments
---------------------------------------------------------------------------------------
Net minimum lease payments receivable 3,040,797
Estimated residual values of leased property (unguaranteed) 596,697
Less: unearned income (1,429,445)
---------------------------------------------------------------------------------------
2,208,049
Less: deferred deemed equity contribution (249,601)
Add: accumulated amortization of deferred deemed equity contribution 9,171
---------------------------------------------------------------------------------------
Less: unamortised gains (42,265)
---------------------------------------------------------------------------------------
1,925,354

Current portion 107,010
Long-term portion 1,818,344
---------------------------------------------------------------------------------------
1,925,354
---------------------------------------------------------------------------------------

13. INVESTMENT IN ASSOCIATED COMPANIES

At December 31, 2003, Frontline had the following participation in
investments that were recorded in the Company's predecessor combined
carve-out financial statements using the equity method:

Vessel/ Country of Ownership
Name Activity Incorporation Percentage
---- -------- ------------- ----------
Ariake Transport Corporation.... Ariake Liberia 50.1%
Dundee Navigation SA............ Dundee Liberia 50.1%
Edinburgh Navigation SA......... Edinburgh Liberia 50.1%
Hitachi Hull #4983 Corporation.. Hakata Liberia 50.1%
Sakura Transport Corporation.... Sakura I Liberia 50.1%
Tokyo Transport Corporation..... Tanabe Liberia 50.1%

Summarized statement of operations information of these equity method
investees is as follows:

(in thousands of $) 2003
------------------- ------
Net operating revenues. 93,872
Net operating income... 79,434
Net income............. 45,039

In December 2003, Frontline agreed with its partner, Overseas Shipholding,
Group, Inc ("OSG"), to swap interests in six joint venture companies, each
of which owns a VLCC. These agreements resulted in Frontline exchanging its
interest in three vessels in exchange for OSG's interest in three other
vessels, thereby increasing its interest in those vessels to 100% each. The
exchanges of interests were completed on February 24, 2004. These
transactions have been accounted for as a non-monetary exchange of
productive assets. The Company received a net cash settlement of $2.3
million in the exchange transaction to reflect the difference in values of
the assets exchanged and recognized a gain of $0.2 million.

14. ACCRUED EXPENSES

(in thousands of $)
December 31, 2005 December 31, 2004
Ship operating expenses 102 70
Voyage expenses 252 -
Administrative expenses 769 1,143
Interest expense 8,785 7,183
------------------------------- -------------------- ----------------
9,908 8,396
------------------------------- -------------------- ----------------

15. LONG-TERM DEBT

(in thousands of $) December 31, December 31,
2005 2004
--------------------------------------------------------------------------
8.5% Senior Notes due 2013 457,080 530,270
US dollar denominated floating rate debt 1,336,577 948,624
(LIBOR plus 0.65% - 1.00%) due through 2011
--------------------------------------------------------------------------
1,793,657 1,478,894
Less: short-term portion (122,519) (91,308)
--------------------------------------------------------------------------
1,671,138 1,387,586
--------------------------------------------------------------------------

The outstanding debt as of December 31, 2005 is repayable as follows:

Year ending December 31,
(in thousands of $)
2006 122,519
2007 122,519
2008 122,519
2009 122,519
2010 122,519
2011 and later 1,181,062
--------------------------------------------------------------------
Total debt 1,793,657
--------------------------------------------------------------------

The weighted average interest rate for floating rate debt denominated in US
dollars was 4.41% and 3.97% as of December 31, 2005 and December 31, 2004,
respectively. These rates take into consideration the effect of related
interest rate swaps.

8.5% Senior Notes due 2013
On December 15, 2003 the Company issued $580 million of senior notes. The
notes are governed by an Indenture dated December 15, 2003 among the
Company and Wilmington Trust Company, as trustee. The Indenture contains
covenants that restrict the ability of the Company, among other things, to
incur additional indebtedness, to pay dividends or make distributions of
capital, to enter into certain sale and leaseback transactions, to sell
assets or capital stock of its subsidiaries or to enter into transactions
with affiliates.

The notes are general unsecured, senior obligations of the Company and rank
equally in right of payment to any future senior indebtedness of the
Company but are effectively subordinated to all future secured indebtedness
of the Company, to the extent of the value of the collateral securing such
indebtedness. The notes are unconditionally guaranteed on a senior
unsecured basis by each subsidiary of the Company, but the guarantees are
effectively subordinated to all present and future secured indebtedness of
the subsidiaries, to the extent of the value of the collateral securing
such Indebtedness. Interest on the notes is payable in cash semi-annually
in arrears on June 15 and December 15, commencing on June 15, 2004 and is
computed on the basis of a 360-day year comprised of twelve 30-day months.

The notes are not redeemable prior to December 15, 2008 except in certain
circumstances. After that date the Company may redeem notes at redemption
prices which reduce from 104.25% in 2008 to 100% in 2011 and thereafter.
Prior to December 15, 2006 the Company may redeem up to 35% of the original
principal amount using the cash proceeds of an initial public equity
offering at a redemption price of 108.5%.

In 2005, the Company bought back and cancelled notes with a principal
amount of $73.2 million.

$1,058.0 million syndicated senior secured credit facility
In February 2005, the Company refinanced its existing $1,058.0 million
syndicated senior secured credit facility with a new $1,131.4 million
secured credit facility, with similar security terms.

$1,131.4 million term loan facility
In February 2005, the Company entered into a $1,131.4 million term loan
facility with a syndicate of banks. The proceeds from the facility were
used to repay the $1,058.0 million syndicated senior secured credit
facility and for general corporate purposes. Obligations under the facility
are secured by the Company's assets and equity interests of vessel owning
subsidiaries. In addition, each of the new vessel owning subsidiaries has
guaranteed its performance under the facility. The facility bears interest
at LIBOR plus a margin of 0.7% and the facility is repayable over a term of
six years.

The loan facility subjects the Company to a number of restrictions on its
business and financial maintenance covenants, including restrictions on
creating liens on the vessels, limitations on the Company's ability to
amend its charters, management, and administrative agreements, minimum
liquidity and working capital requirements, and collateral maintenance
limitations.

Further, the loan facility restricts the Company's ability to make
distributions unless the (i) charter service reserve and Free Cash as
defined exceed $100 million and (ii) the Company satisfies financial
covenants contained in the loan facility at the distribution date.

$350.0 million syndicated combined senior and junior secured credit
facility

In June 2005, the Company entered into a combined $350 million senior and
junior secured term loan facility with a syndicate of banks. The proceeds
from the facility were used to fund the acquisition of five new VLCCs.
Obligations under the facility are secured by the Company's assets and
equity interests of the five new vessel owning subsidiaries. In addition,
each of the new vessel owning subsidiaries has guaranteed its performance
under the facility. The facility bears interest at LIBOR plus a margin of
0.65% for the senior loan and LIBOR plus a margin of 1.00% for the junior
loan and may be prepaid on a pro-rata basis without penalty. The facility
is repayable over a term of seven years.

The loan facility subjects the Company to a number of restrictions on its
business and financial maintenance covenants, including restrictions on
creating liens on the vessels, limitations on its ability to amend its
charters, management, and administrative agreements, minimum liquidity and
working capital requirements, and collateral maintenance limitations.

Further, the loan facility restricts the Company's ability to make
distributions unless the (i) charter service reserve and its Free Cash as
defined exceed $35 million and (ii) the Company satisfies financial
covenants contained in the loan facility on the distribution date.

16. SHARE CAPITAL AND CONTRIBUTED SURPLUS

Authorised share capital is as follows:

(in thousands of $)
125,000,000 common shares of $1.00 par value each 125,000
---------------------------------------------------------------------------

Issued and fully paid share capital is as follows:

(in thousands of $, except per share data)
73,143,737 common shares of $1.00 par value each 73,144
---------------------------------------------------------------------------

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

The Company was formed in October 2003 with an authorized share capital of
$12,000, divided into 12,000 common shares of $1.00 par value each. In
connection with the partial spin-off from Frontline in May 2004, the
authorized share capital was increased to 125,000,000 common shares, of
which 73,925,837 were issued and outstanding immediately after the partial
spin-off. In July 2004, the Company issued 1,600,000 common shares in a
private placement for the price of $15.75 per share. In 2004 the Company
repurchased and cancelled 625,000 shares at an average cost of $23.54 per
share. In 2005 the Company repurchased and cancelled a further 1,757,100
shares at and average cost of $18.81 per share.

In connection with the purchase of the Company's fleet from Frontline in
January 2004, Ship Finance received an equity contribution of $525.0
million.

As at December 31, 2005, none of the unissued share capital of the Company
is under option or is conditionally or unconditionally to be put under
option.

As each of the Company's vessels completes its original charter put in
place prior to the acquisition date from Frontline, the sales type leases
with Frontline become effective for accounting purposes. The Company has
accounted for the difference between the historical cost of the vessel
transferred to the Company by Frontline at Frontline's historical carrying
value, and the net investment in the lease as a deferred deemed equity
contribution. The difference is presented as a reduction in the net
investment in finance leases in the balance sheet. This results from the
related party nature of both the transfer of the vessel and the subsequent
sales type lease. The deferred deemed equity contribution is amortized as a
credit to equity 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, 2005 the Company has accounted for $9.2 million
of such deemed equity contributions (December 31, 2004: $3.2 million).

17. RELATED PARTY TRANSACTIONS

The Company acquired its initial fleet of 47 vessels from its parent
company, Frontline, in a spin-off transaction. The Company paid a total of
$1,061.8 million to Frontline being the book value of assets transferred by
Frontline less amounts of debt assumed. As part of this spin-off
transaction the Company also received an equity contribution of $525.0
million from Frontline. [See Note 1]

In February 2001, Frontline acquired newbuilding contracts for the
construction and purchase of three VLCCs at the Hitachi shipyard in Japan
for delivery in 2002 from Seatankers Management Co. Ltd., a company
affiliated with Hemen Holding Ltd ("Hemen"). Hemen is indirectly controlled
by Mr. John Fredriksen, a director of Frontline. These contracts were
acquired for the original contract price of $72 million each plus $0.5
million per contract. These three newbuildings were delivered in 2002 and
are included in the predecessor combined carve-out financial statements.

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

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

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

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

The Company charters 51 of its vessels to Frontline under long-term leases,
47 of which were given economic effect from January 1, 2004, and the
remainder with effect in the first half of 2005. In connection with these
charters, the Company has recognized the inception of net investments in
finance leases of $1,876.5 million, additions during 2005 of $647.8 million
and disposals during 2005 of $160.8 million. At December 31, 2005 the
balance of net investments in finance leases with Frontline was $1,925.4
million (2004: $1,718.6 million) of which $107.0 million (2004: $77.0
million) represents short-term maturities.

A summary of earned amounts from Frontline is as follows:

Frontline payments (in millions of $) 2005 2004
------------------------------------- ---- ----
Finance lease interest income 177.5 140.7
Finance lease service revenue 92.3 72.6
Finance lease repayments 94.8 62.0
Deemed dividends (net) (16.5) (59.0)

The Company pays Frontline a management fee of $6,500 per day per vessel
for all of its vessels, with the exception of five which are bareboat
chartered, resulting in expenses of $105.2 million for the year ended
December 31, 2005 (2004: $96.4 million). The management fees have been
classified as ship operating expenses in the consolidated statements of
operations.

The Company pays Frontline an administrative management fee of $20,000 per
year plus $20,000 per vessel per year. Based on the current fleet the
Company paid Frontline $1,011,830 in 2005 (2004: $960,000) under this
arrangement. These fees have been classified as administrative expenses in
the consolidated statements of operations.

Frontline pays the Company profit sharing of 20% of their earnings from
their use of the Company's fleet above the average daily charter rates each
fiscal year. During the year ended December 31, 2005, the Company earned
and recognized revenue of $88.1 million (2004: $114.9 million) under this
arrangement.

18. 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
Company does not hold or issue instruments for speculative or trading
purposes. The counterparties to such contracts are J.P. Morgan Chase,
Nordea Bank Norge, Credit Agricole Indosuez, Deutsche Schiffsbank, HSH
Nordbank, Fortis Bank, Citibank, Scotiabank, Den Norske Bank and
Skandinaviska Enskilda Banken. Credit risk exists to the extent that the
counterparties are unable to perform under the contracts, but this risk is
considered remote.

The Company manages its debt portfolio with interest rate swap agreements
in U.S. dollars to achieve an overall desired position of fixed and
floating interest rates. For the purposes of the financial statements,
interest rate swaps specific to debt have been included. In addition, non
debt specific interest rate swaps with notional principal amounts of
$50,000,000 have been included. The Company has entered into the following
interest rate swap transactions involving the payment of fixed rates in
exchange for LIBOR:

(in thousands of $) Inception Maturity Fixed
date date interest rate
---------- -------- -------------
$50,000 Feb 2004 Feb 2009 3.49%
$100,000 Feb 2004 Feb 2009 3.49%
$50,000 Feb 2004 Feb 2009 3.35%
$50,000 Feb 2004 Feb 2009 3.49%
$50,000 Feb 2004 Feb 2009 3.35%
$50,000 Feb 2004 Feb 2009 3.35%
$50,000 Feb 2004 Feb 2009 3.37%
$25,000 Feb 2004 Feb 2009 3.32%
$25,000 Feb 2004 Feb 2009 3.32%
$25,000 Feb 2004 Feb 2009 3.33%
$25,000 Feb 2004 Feb 2009 3.32%
$30,958 (reducing monthly to $29,793) Mar 1998 Mar 2006 6.04%
$19,146 (reducing monthly to $10,294) Sept 1998 Aug 2008 6.49%
$18,153 (reducint monthly to $8,763) Feb 2004 Aug 2008 6.49%

As at December 31, 2005, the notional principal amounts subject to such
swap agreements was $568.3 million (2004 - $581.4 million).

Forward freight contracts
The Company may enter into forward freight contracts and futures contracts
in order to manage its exposure to the risk of movements in the spot market
for certain trade routes and for speculative or trading purposes. Market
risk exists to the extent that spot market fluctuations have a negative
effect on the Company's cash flows and consolidated statements of
operations.

At December 31, 2005, the Company was not party to any forward freight
contracts or futures contracts.

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. One of
the Company's subsidiaries has a charter contract denominated in Yen with
contracted payments as set forth in Note 8. 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
instruments at December 31, 2005 and 2004 are as follows:

(in thousands of $) 2005 2005 2004 2004
Carrying value Fair value Carrying value Fair value

Non-derivatives:
Cash and cash equivalents 32,857 32,857 29,193 29,193
Restricted cash 1,575 1,575 5,379 5,379
Floating rate debt 1,336,577 1,336,577 948,624 948,624
8.5% Senior Notes due 2013 457,080 427,370 530,270 546,178
Derivatives:
Interest rate swap contracts - 19,563 19,563 7,737 7,737
amounts receivable
Interest rate swap contracts - 1,196 1,196 4,103 4,103
amounts payable

The carrying value of cash and cash equivalents, which are highly liquid,
is a reasonable estimate of fair value.

The estimated fair value for floating rate long-term debt is considered 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 interest rate swaps is estimated by taking into account
the cost of entering into interest rate swaps to offset the Company's
outstanding swaps.

Concentrations of risk
There is a concentration of credit risk with respect to cash and cash
equivalents to the extent that substantially all of the amounts are carried
with Skandinaviska Enskilda Banken, BNP Paribas, Den norske Bank, Fortis
Bank and Nordea Bank Norge. However, the Company believes this risk is
remote as these banks are high credit quality financial institutions.

During the year ended December 31, 2005, and 2004 one customer, Frontline,
accounted for more than 80% of our consolidated operating revenues.

19. CONTINGENT LIABILITIES

Assets Pledged
(in thousands of $)
----------------------------------------------------------------------
Ship mortgages 1,264

Other Contractual Commitments
The Company insures 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. As a member of these mutual associations, the
Company is subject to calls payable to the associations based on the
Company's claims record in addition to the claims records of all other
members of the associations. A contingent liability exists to the extent
that the claims records of the members of the associations in the aggregate
show significant deterioration, which result in additional calls on the
members.

20. SUBSEQUENT EVENTS

In January 2006 the Company acquired the VLCC Front Tobago from Frontline
for consideration of $40.0 million. Effective January 2006 this vessel has
replaced the Navix Astral and will fulfil the remainder of the Navix Astral
time charter with Frontline from the delivery of the vessel to its new
owner until the charter termination date in January 2014.

On February 17, 2006, the Board of Ship Finance declared an ordinary
dividend of $0.45 per share and an extraordinary dividend of $0.05 per
share which was paid on March 20, 2006.

In February 2006, the Company entered into a total return bond swap line
with Fortis Bank for a term of twelve months. This swap will facilitate the
buyback of Ship Finance's 8.5% senior notes in the amount of $50 million.

In April 2006, the Company entered into an agreement with Horizon Lines
Inc. to acquire five 2,800 TEUS (twenty-foot equivalent units) newbuilding
containerships. The vessels will be delivered over the course of six months
commencing in early 2007 and will be immediately placed on long term
bareboat charters with Horizon Lines Inc.

On May 26, 2006, the Board of Ship Finance declared an ordinary dividend of
$0.45 per share and an extraordinary dividend of $0.05 per share which will
be paid on June 26, 2006.

In June 2006, Frontline's option to sell and leaseback a VLCC newbuilding
to the Company expired. The option agreement was linked to the sale of the
Suezmax Front Hunter and the Company has, in a subsequent arrangement,
agreed to provide Frontline with an additional payment of $16.0 million.

SK 23153 0001 681182