UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended June 30, 2008ORo

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


Commission file number 001-31920

K-SEA TRANSPORTATION PARTNERS L.P.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction
of incorporation or organization)

20-0194477(I.R.S. Employer
Identification No.)One Tower Center Boulevard, 17th Floor
East Brunswick, New Jersey 08816(Address of principal executive offices and zip code)(732) 565-3818(Registrant's telephone number, including area code)


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

Title of each class

Name of each exchange on which registeredCommon Units

New York Stock Exchange


Securities
registered pursuant to section 12(g) of the Act:None

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes o    No ý

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. Yes ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

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

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


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

The aggregate market value of the registrant's Common Units held by non-affiliates of the registrant was approximately $338.6 million as of
December 31, 2007 based on $35.89 per Common Unit, the closing price of the Common Units on the New York Stock Exchange on such date.

At
September 15, 2008, 13,633,200 Common Units and 2,082,500 Subordinated Units were outstanding.

Documents
Incorporated by Reference:None



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Table of Contents



K-SEA TRANSPORTATION PARTNERS L.P.    2008 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS



PAGEPART IITEMS 1 and 2.

BUSINESS and PROPERTIES

1ITEM 1A

RISK FACTORS

21ITEM 1B

UNRESOLVED STAFF COMMENTS

39ITEM 3.

LEGAL PROCEEDINGS

39ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

39PART IIITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SECURITYHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES

40ITEM 6.

SELECTED FINANCIAL DATA

42ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

45ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

66ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

67ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

67ITEM 9A.

CONTROLS AND PROCEDURES

67ITEM 9B.

OTHER INFORMATION

68PART IIIITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

69ITEM 11.

EXECUTIVE COMPENSATION

73ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SECURITYHOLDER MATTERS

85ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE

90ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

93PART IVITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

94


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Table of Contents

FORWARD-LOOKING STATEMENTS

Statements included in this report that are not historical facts (including statements concerning plans and objectives of management
for future operations or economic performance, or assumptions related thereto) are forward-looking statements. In addition, we may from time to time make other oral or written statements that are also
forward-looking statements. Forward-looking statements may include words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "should" and other words and terms of
similar meaning.

Forward-looking
statements appear in a number of places in this report and include statements with respect to, among other things:



These
forward-looking statements are made based upon management's current plans, expectations, estimates, assumptions and beliefs concerning future events and, therefore, involve a
number of risks and uncertainties. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking
statements. Please read "Item 1A. Risk Factors" for a list of important factors that could cause our actual results of operations or financial condition to differ from our expectations.

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Table of Contents

PART I

ITEMS 1 and 2.    BUSINESS and PROPERTIES.

Our Partnership

We are a leading provider of marine transportation, distribution and logistics services for refined petroleum products in the United
States. As of September 1, 2008, we operated a fleet of 74 tank barges and 66 tugboats that serves a wide range of customers, including major oil companies, oil traders and refiners. With
approximately 4.4 million barrels of capacity, we believe we operate the largest coastwise tank barge fleet in the United States.

For
the fiscal year ended June 30, 2008, our fleet transported approximately 160 million barrels of refined petroleum products for our customers, including BP, Chevron,
Conoco Philips, ExxonMobil and Tesoro. Our five largest customers in fiscal 2008 have been doing business with us for approximately 18 years on average. We do not assume ownership of any of the
products we transport. During fiscal 2008, we derived approximately 81% of our revenue from longer-term contracts that are generally for periods of one year or more.

We
believe we have a high-quality, well-maintained fleet. As of September 1, 2008, approximately 76% of our barrel-carrying capacity was double-hulled.
Furthermore, we will be permitted to continue to operate our single-hull tank vessels until January 1, 2015 in compliance with the Oil Pollution Act of 1990, or OPA 90, which
mandates the phase-out of all single-hull tank vessels transporting petroleum and petroleum products in U.S. waters. All of our tank vessels except two operate under the U.S.
flag, and all but four are qualified to transport cargo between U.S. ports under the Jones Act, the federal statutes that restrict foreign owners from operating in the U.S. maritime transportation
industry.

Our
strategy to expand our business and increase our distributable cash flow includes the expansion of our fleet through the building of new equipment and strategic acquisitions. On
August 14, 2007, we acquired all of the equity interests in Smith Maritime, Ltd., Go Big Chartering, LLC, and Sirius Maritime, LLC, which we refer to collectively as the
"Smith Maritime Group". The Smith Maritime Group provides marine transportation and logistics services to major oil companies, oil traders and refiners in Hawaii and along the West Coast of the United
States. On a combined basis, the petroleum transportation operations of these companies added 11 petroleum tank barges and 14 tugboats to our fleet, aggregating 777,000 barrels of capacity, of which
669,000 barrels, or 86%, are double-hulled. The aggregate purchase price for the Smith Maritime Group was $203.7 million, comprising $168.9 million in cash, $23.5 million in
assumed debt, and common units representing limited partner interests valued at $11.3 million.

On
October 18, 2005, we acquired all of the membership interests in Sea Coast Transportation LLC, or Sea Coast, from Marine Resources Group, Inc., or MRG. Also on
October 18, 2005, Sea Coast acquired four tugboats from MRG. Sea Coast is a provider of marine transportation and logistics services to major oil companies, oil traders and refiners along the
West Coast of the United States and Alaska. The aggregate purchase price for Sea Coast and the four tugboats was $82.4 million, comprising $78.0 million in cash and common units
representing limited partner interests valued at $4.4 million.

We
also have grown our fleet through acquisitions of individual vessels and through a robust vessel newbuilding program. Since our initial public offering in January 2004, we have
purchased or retrofitted six existing double-hulled tank barges, with aggregate capacity of 634,000 barrels. Also since our initial public offering, under our vessel newbuilding program, we have taken
delivery of twelve newly built double-hulled tank barges with aggregate capacity of 610,000 barrels, and we have entered into agreements with shipyards to construct eight more new double-hulled tank
barges with an aggregate capacity of 645,000 barrels, including a 185,000 barrel articulated tug-barge unit, all scheduled to be delivered by the end of calendar 2010. These vessels are
expected to cost, in the aggregate and after

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Table of Contents

the
addition of certain special equipment, approximately $165.0 million. We expect to finance construction of these new vessels with borrowings and cash from operations.

In
June 2008, we purchased eight tugboats from Roehrig Maritime for $41.5 million in cash. These tugboats will initially reduce our outside towing costs or be chartered out under
existing contracts; however, they will also provide sufficient power for our newbuild barges to be delivered by the end of 2010. To enhance productivity and reduce reliance on chartered-in
towing, we also purchased three additional tugboats during fiscal 2008 at a total cost of approximately $9.8 million.

Our
primary business objective is to increase distributable cash flow to unitholders by executing the following strategies:



We
are a publicly traded Delaware limited partnership. Our business activities are conducted through our subsidiary, K-Sea Operating Partnership L.P., a Delaware
limited partnership which we

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refer
to as the operating partnership, and the subsidiaries of the operating partnership. Our general partner, K-Sea General Partner L.P., is a Delaware limited partnership whose
general partner is K-Sea General Partner GP LLC, a Delaware limited liability company. K-Sea General Partner GP LLC has ultimate responsibility for
managing our business.

Our
principal executive office is located at One Tower Center Boulevard, 17th Floor, East Brunswick, New Jersey 08816, and our telephone number at that address is
(732) 585-3818.

Our Industry

Introduction

Tank vessels, which include tank barges and tankers, are a critical link in the refined petroleum product distribution chain. Tank
vessels transport gasoline, diesel fuel, heating oil, asphalt and other products from refineries and storage facilities to a variety of destinations, including other refineries, distribution
terminals, power plants and ships. According to a June 2006 study by the Association of Oil Pipe Lines, 29.9% of all domestic refined petroleum product transportation was by water in 2004, making
waterborne transportation the most used mode of transportation for refined petroleum products after pipelines.

Among
the laws governing the domestic tank vessel industry is the one commonly referred to as the Jones Act, the federal statute that restricts foreign competition in the U.S. marine
transportation industry. Under the Jones Act, marine transportation of cargo between points in the United States, generally known as U.S. coastwise trade, is limited to U.S.-flag vessels
that were built in the United States and are owned, manned and operated by U.S. citizens. All of our tank vessels except two operate under the U.S. flag, and all but four are qualified to transport
cargo between U.S. ports under the Jones Act.

OPA
90 mandates, among other things, the phase-out of all single-hull tank vessels transporting petroleum and petroleum products in U.S. waters at varying times
by January 1, 2015. The effect of this legislation has been, and is expected to continue to be, the replacement of domestic single-hull tank vessel capacity with double hulled
newbuildings and retrofitting of existing single-hull tank vessels.

The
demand for domestic tank vessels is driven primarily by U.S. demand for refined petroleum products, which can be categorized as either clean oil products or black oil products. Clean
oil products include motor gasoline, diesel fuel, heating oil, jet fuel and kerosene. Black oil products, which are what remain after clean oil products have been separated from crude oil, include
residual fuel oil in the refining process, asphalt, petrochemical feedstocks and bunker fuel. The demand for clean oil products
is impacted by vehicle usage, air travel and prevailing weather conditions, while demand for black oil products varies depending on the type of product transported and other factors, such as oil
refinery requirements and turnarounds, asphalt use, the use of residual fuel oil by electric utilities and bunker fuel consumption.

Transportation of Refined Petroleum Products

Refined petroleum products are transported by pipelines, water carriers, motor carriers and railroads. Tank vessels are used frequently
to continue the transportation of refined petroleum products along the distribution chain after these products have first been transported by another method of transportation, such as a pipeline. For
example, many areas have access to refined petroleum products only by using marine transportation as the last link in their distribution chain. In addition, tank vessel transportation is generally a
more cost-effective and energy-efficient means of transporting bulk commodities such as refined petroleum products than transportation by rail car or truck. The carrying capacity of a
100,000-barrel tank barge is the equivalent of approximately 162 average-size rail tank cars and approximately 439 average-size tractor trailer tank trucks.

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Types of Tank Vessels

The domestic tank vessel fleet consists of tankers, which have internal propulsion systems, and tank barges, which do not have internal
propulsion systems and are instead pushed or towed by a tugboat. Tank barges generally move at slower speeds than comparably sized tankers, but are less expensive to build and operate. Although tank
barge configuration varies, the bow and stern of most tank barges are square or sloped, with the stern of many tank barges having a notch of varying depth to permit pushing by a tugboat. While a
larger tank vessel may be able to carry more cargo, some voyages require a tank vessel to go through a lock, bridge opening or narrow waterway, which limit the size of vessels that may be used. In
addition, some loading and discharge facilities have physical limitations that prevent larger tank vessels from loading or discharging their cargo. Tank barges are often able to navigate the shallower
waters of the inland waterway system and the waters along the coast. Tankers, however, are often confined to the deeper waters offshore due to their size.

Tank
vessels can be categorized by:



Tank
vessels can also be categorized into the following fleets based on the primary waterway system typically navigated by the vessel:



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Tugboats

Tugboats are equipped to push, pull or tow tank barges alongside. The amount of horsepower required to handle a barge depends on a
number of factors, including the size of the barge, the amount of product loaded, weather conditions and the waterways navigated. A typical tugboat is manned by six people: a captain, a mate, an
engineer, an assistant engineer and two deckhands. These individuals perform the duties and tasks required to operate the tugboat, such as standing navigational watches, maintaining and repairing
machinery, rigging and line-handling, and painting and other routine maintenance. A standard work schedule for a tugboat crew is 14 days on, 14 days off. While on duty, the
crew members generally work two six-hour shifts each day.

Integrated Tug-Barge Units

Tugboats can also be integrated into a barge utilizing a notching system that connects the two vessels. An integrated
tug-barge unit, or ITB, has certain advantages over other tug-barge combinations, including higher speed and better maneuverability. In addition, an ITB can operate in certain
sea and weather conditions in which conventional tug-barge combinations cannot.

Our Customers

We provide marine transportation services primarily to major oil companies, oil traders and refiners in the East, West and Gulf Coast
regions of the United States, including Alaska and Hawaii. We monitor the supply and distribution patterns of our actual and prospective customers and focus our efforts on providing services that are
responsive to the current and future needs of these customers.

The
following chart sets forth our major customers and the number of years each of them has been a customer:

K-Sea Transportation Partners L.P.  Major Customers

Major Customers

Years as CustomerBP


35Chevron


19ConocoPhillips


12ExxonMobil


12Tesoro


10


Our
three largest customers in fiscal 2008, based on gross revenue, were ConocoPhillips, ExxonMobil, and Tesoro, each of which accounted for more than 10% of our fiscal 2008 consolidated
revenue. Please read note 10 to our audited consolidated financial statements included elsewhere in this report.

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Table of Contents

Our Vessels

Tank Vessel Fleet

At September 1, 2008, our fleet consisted of the following tank vessels:

K-Sea Transportation Partners L.P. Tank Vessel Fleet

Vessel(1)

Year
Built

Capacity
(barrels)

Gross
Tons

OPA 90
Phase-OutDouble-Hull BargesDBL 155(2)


2004


165,882


12,152


N.A.DBL 151


1981


150,000


8,710


N.A.DBL 140


2000


140,000


10,303


N.A.DBL 134(3)


1994


134,000


9,514


N.A.DBL 105(4)


2004


105,000


11,438


N.A.DBL 101


2002


102,000


6,774


N.A.DBL 102


2004


102,000


6,774


N.A.DBL 103


2006


102,000


6,774


N.A.DBL 104


2007


102,000


6,774


N.A.Casablanca(5)


1987


89,293


5,736


N.A.Lemon Creek(5)


1987


89,293


5,736


N.A.Spring Creek(5)


1987


89,293


5,736


N.A.Nale


2007


86,000


6,508


N.A.McCleary's Spirit(6)


2001


85,000


6,554


N.A.Antares


2004


84,000


5,855


N.A.Deneb


2006


84,000


5,855


N.A.DBL 81


2003


82,000


5,667


N.A.DBL 82


2003


82,000


5,667


N.A.Capella(7)


2002


81,751


5,159


N.A.Leo


2003


81,540


5,954


N.A.Pacific


1993


81,000


5,669


N.A.Rigel


1993


80,861


5,669


N.A.Sasanoa


2001


81,000


5,790


N.A.DBL 78


2000


80,000


5,559


N.A.DBL 77


2008


80,000


5,235


N.A.DBL 70


1972


73,024


5,248


N.A.Kays Point(7)


1999


67,000


4,720


N.A.Noa


2002


67,000


4,826


N.A.Cascades


1993


67,000


4,721


N.A.Columbia


1993


58,000


4,286


N.A.Na-Kao


2005


52,000


4,076


N.A.Ne'ena


2004


52,000


4,076


N.A.DBL 53


1965


53,000


4,543


N.A.DBL 31


1999


30,000


2,146


N.A.DBL 32


1999


30,000


2,146


N.A.DBL 28


2006


28,000


2,146


N.A.DBL 29


2006


28,000


2,146


N.A.DBL 26


2006


28,000


2,146


N.A.DBL 27


2007


28,000


2,146


N.A.DBL 22


2007


28,000


2,146


N.A.DBL 23


2007


28,000


2,146


N.A.


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Table of Contents

Vessel(1)

Year
Built

Capacity
(barrels)

Gross
Tons

OPA 90
Phase-OutDBL 24


2007


28,000


2,146


N.A.DBL 25


2007


28,000


2,146


N.A.Puget Sounder


1992


25,000


1,870


N.A.DBL 2202


1962


22,000


1,830


N.A.DBL 16


1954


20,000


1,420


N.A.DBL 17


1998


18,000


1,499


N.A.DBL 18


1998


18,000


1,499


N.A.DBL 19


1998


18,000


1,499


N.A.Subtotal





3,333,937


239,135




Vessel(1)

Year
Built

Capacity
(barrels)

Gross
Tons

OPA 90
Phase-OutSingle-Hull BargesKTC 80


1981


82,878


4,576


2015KTC 71


1975


81,759


4,719


2015BB 110(7)


1976


78,000


4,754


2015SCT 340


1983


75,000


4,395


2015344(7)


1984


75,000


5,214


2015Noho Hele


1982


67,880


4,185


2015KTC 60


1980


61,638


3,824


2015KTC 55


1972


53,012


3,113


2015KTC 50


1974


54,716


3,367


2015SCT 280


1977


48,000


3,081


2015SCT 282


1978


48,000


3,081


2015Hui Mana(7)


1988


40,000


2,299


2015Essex


1967


35,160


2,307


2015DBL 3201


1968


31,000


2,033


2015KTC 30


1960


30,000


1,807


2015Wallabout Bay


1986


28,330


1,687


2015Newark Bay


1969


27,390


1,595


2015PM 230(7)


1983


25,000


1,610


2015KTC 21


1961


20,000


1,214


2015KTC 20


1980


20,000


1,065


2015Oyster Bay


1951


19,370


1,278


2015SCT 180


1980


16,250


1,053


2015Josiah Bartlett


1955


14,000


1,287


2015SEA 76


1969


13,313


830


2015KTC 14


1941


13,000


820


2015Subtotal





1,058,696


65,194Total Fleet





4,392,633


304,329


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Newbuildings

The following sets forth the size and expected delivery date for vessels in our newbuilding program:

Vessels

Expected DeliveryTwo 80,000-barrel tank barges

1st  2nd Quarter fiscal 2009One 185,000-barrel articulated tug-barge unit

2nd Quarter fiscal 2010One 100,000-barrel tank barge

2nd Quarter fiscal 2010Four 50,000-barrel tank barges

3rd Quarter fiscal 2010  2nd Quarter fiscal 2011


The
total cost of the barges described above, in the aggregate and after the addition of certain special equipment, is approximately $165.0 million, of which approximately
$40.4 million has been spent as of June 30, 2008. Please read "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital
ResourcesOngoing Capital Expenditures" in Item 7 of this report.

Tugboat Fleet

We use tugboats as the primary means of propelling our tank barge fleet. Therefore, we seek to maintain the proper balance between the
number of tugboats and the number of tank barges in our fleet. This balance is influenced by a variety of factors, including the condition of the vessels in our fleet, the mix of our coastwise
business and our local business and the level of longer-term contracts versus shorter-term business. We are also able to maintain a proper balance between tugboats and tank
barges by analyzing the historical trading patterns of our customers and the nature of their cargoes. While a tank barge is unloading, we often dispatch its tugboat to perform other work.

At
September 1, 2008, we operated the following tugboats:

K-Sea Transportation Partners L.P. Tugboat Fleet

Name(1)

Year Built

Horsepower

DimensionsLincoln Sea


2000


8000


119' × 40' × 22'Rebel


1975


7200


150' × 46' × 22'Yankee


1976


7200


150' × 46' × 22'Jimmy Smith


1976


7200


150' × 40' × 22'Barents Sea


1976


6200


136' × 40' × 16'McKinley Sea


1981


6000


136' × 37' × 20'Aegean Sea


1978


6000


136' × 37' × 20'Irish Sea


1969


5750


135' × 35' × 18'Sirius


1974


5750


135' × 38' × 19'Nakolo


1974


5750


125' × 38' × 14'El Lobo Grande


1978


5750


128' × 36' × 19'


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Table of Contents

Name(1)

Year Built

Horsepower

DimensionsNakoa


1976


5500


118' × 34' × 17'Volunteer


1982


4860


120' × 37' × 18'Adriatic Sea(2)


2004


4800


126' × 34' × 15'Java Sea(3)


2005


4800


119' × 34' × 15'Namahoe


1997


4400


105' × 34' × 16'Pacific Freedom(4)


1998


4500


120' × 31' × 15'Viking


1972


4300


133' × 34' × 18'Beaufort Sea


1971


4300


113' × 32' × 16'North Sea


1982


4200


126' × 34' × 16'Greenland Sea


1990


4200


117' × 34' × 17'Pacific Wolf


1975


4100


111' × 24' × 13'William J. Moore


1970


4000


135' × 35' × 20'Niolo


1982


4000


117' × 34' × 17'Nokea


1975


4000


105' × 30' × 14'Nunui


1978


4000


185' × 40' × 12'Tasman Sea


1976


3900


124' × 34' × 16'Norwegian Sea(5)


2006


3900


133' × 34' × 17'Sea Hawk(6)


2006


3900


112' × 32' × 15'John Brix(7)


1999


3900


141' × 35' ×   8'Pacific Avenger


1977


3900


140' × 34' × 17'Altair


1981


3800


106' × 33' × 17'Kara Sea


1974


3520


111' × 32' × 14'Ross Sea


2003


3400


95' × 32' × 14'Bismarck Sea


1978


3300


95' × 28' × 13'Solomon Sea


1965


3300


105' × 32' × 14'Coral Sea


1973


3280


111' × 32' × 14'Nathan E. Stewart


2001


3200


95' × 32' × 14'Maryland


1962


3010


110' × 28' × 14'Baltic Sea


1973


3000


101' × 30' × 13'Pacific Challenger


1976


3000


118' × 34' × 16'Paragon


1978


3000


99' × 32' × 15'Pacific Raven


1970


3000


112' × 31' × 14'Na Hoku


1981


3000


105' × 34' × 17'Nalani


1981


3000


105' × 34' × 17'Nohea


1983


3000


98' × 30' × 14'Pacific Pride(8)


1989


2500


84' × 28' × 13'Sargasso Sea


1972


2460


105' × 30' × 15'Labrador Sea


2002


2400


82' × 26' × 12'Siberian Sea


1980


2400


85' × 24' × 10'Caribbean Sea


1961


2400


85' × 24' × 10'Bering Sea


1975


2250


105' × 29' × 13'Caspian Sea


1981


2000


65' × 24' ×   9'Inland Sea


2000


2000


76' × 26' × 10'Pacific Patriot


1981


2000


77' × 27' × 12'Davis Sea


1982


2000


77.4' × 26' × 9'Pacific Eagle(9)


2001


2000


98' × 27' × 13'Tiger


1966


2000


88' × 27' × 12'


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Table of Contents

Name(1)

Year Built

Horsepower

DimensionsChukchi Sea


1979


2000


92' × 26' ×   9'Houma


1970


1950


90' × 29' × 11'Timor Sea


1960


1920


80' × 24' × 10'Odin


1982


1860


72' × 28' × 12'Taurus


1979


1860


79' × 25' × 12'Falcon


1978


1800


80' × 25' × 12'Naupaka


1983


1800


75' × 26' × 10'Fidalgo


1973


1400


98' × 25' ×   8'






Integrated Tug-Barge Units

As of September 1, 2008, we operated 22 ITBs, which represented approximately 40% of the barrel-carrying capacity of our tank
barge fleet.

Bunkering

For over 30 years, we have specialized in the shipside delivery of fuel, known as bunkering, for the major and independent
bunker suppliers in New York Harbor. We also provide bunkering services in the port of Norfolk. Demand for bunkering services is driven primarily by the number of ship arrivals. A ship's time in port
generally is limited, and the cost of delaying sailing due to bunkering or other activities can be significant. Therefore, we continually strive to improve the level of service and on-time
deliveries to our customers.

The
majority of our bunker delivery tank vessels are equipped with advanced, whole-load sampling devices to provide the supplier and receiver a representative sample. Our
bunker delivery tank barges are also equipped with extended booms for hose handling ease alongside ships, remote pump engine shut-offs, spill rails, spill containment equipment and
supplies, VHF and UHF radio communication and fendering.

Preventative Maintenance

We have a computerized preventative maintenance program that tracks U.S. Coast Guard and American Bureau of Shipping inspection
schedules and establishes a system for the reporting and handling of routine maintenance and repair.

Vessel
captains submit monthly inspection reports, which are used to note conditions that may require maintenance or repair. Vessel superintendents are responsible for reviewing these
reports, inspecting identified discrepancies, assigning a priority classification and generating work orders. Work orders establish job type, assign personnel responsible for the task and record
target start and completion dates. Vessel superintendents inspect repairs completed by the crew, supervise outside contractors as needed and conduct quarterly inspections following the same criteria
as the captains.

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Drills
and training exercises are conducted in conjunction with these inspections, which are typically more comprehensive in scope. In addition, an operations duty officer is available on a
24-hour basis to handle any operational issues. The operations duty officer is prepared to respond on scene whenever required and is trained in technical repair issues, spill control and
emergency response.

The
American Bureau of Shipping and the U.S. Coast Guard establish drydocking schedules. Typically, we drydock our vessels twice every five years. Prior to sending a vessel to a
shipyard, we develop comprehensive work lists to ensure all required maintenance is completed. Repair facilities bid on these work lists, and jobs are awarded based on quality, price and time to
complete. Vessels then report to a cleaning facility to prepare for shipyard. Once the vessel is gas-free, a certified marine chemist issues paperwork certifying that no dangerous vapors
are present. The vessel proceeds to the shipyard where the vessel superintendent and certain crewmembers assist in performing the maintenance and repair work. The planned maintenance period is
considered complete when all work has been tested to the satisfaction of American Bureau of Shipping or U.S. Coast Guard inspectors or both.

Safety

General

We are committed to operating our vessels in a manner that protects the safety and health of our employees, the general public and the
environment. Our primary goal is to minimize the number of safety- and health-related accidents on our vessels and our property. Our primary concerns are to avoid personal injuries and to reduce
occupational health hazards. We want to prevent accidents that may cause damage to our personnel, equipment or the environment, such as fire, collisions, petroleum spills and groundings of our
vessels. In addition, we are committed to reducing overall emissions and waste generation from each of our facilities and vessels and to the safe management of associated cargo residues and cleaning
wastes.

Our
policy is to follow all laws and regulations as required, and we are actively participating with government, trade organizations and the public in creating responsible laws,
regulations and standards to safeguard the workplace, the community and the environment. Our Operations Department is responsible for coordinating all facets of our health and safety program and
identifies areas that may require special emphasis, including new initiatives that evolve within the industry. Our Human Resources Department is responsible for all training, whether conducted
in-house or at a training facility. Supervisors are responsible for carrying out and monitoring compliance for all of the safety and health policies on their vessels.

Tank Barge Characteristics

To protect the environment, today's tank barge hulls are required not only to be leak-proof into the body of water in which
they float but also to be vapor-tight to prevent the release of any fumes or vapors into the atmosphere. Our tank barges that carry light products such as gasoline or naphtha have alarms that indicate
when the tank is full (95% of capacity) and when it is overfull (98% of capacity). Each tank barge also has a vapor recovery system that connects the cargo tanks to the shore terminal via pipe and
hose to return to the plant the vapors generated while loading.

The
majority of our bunker delivery tank barges are equipped with advanced, whole-load sampling devices to provide the supplier and receiver a representative sample. Our
bunker delivery tank barges are also equipped with extended booms for hose handling ease alongside ships, remote pump engine shut-offs, spill rails, spill containment equipment and
supplies, VHF and UHF radio, satellite and internet communication.

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Safety Management Systems

We belong and adhere to the recommendations of the American Waterways Operators ("AWO") Responsible Carrier Program. The program is
designed as a framework for continuously improving the industry's and member companies' safety performance. The program complements and builds upon existing government regulations, requiring company
safety and training standards that in many instances exceed those required by federal law or regulation.

Developed
by the AWO, the Responsible Carrier Program incorporates best industry practices in three primary areas:



The
Responsible Carriers Program has been recognized by many groups, including the U.S. Coast Guard and shipper organizations. We are periodically audited by an AWO-certified
auditor to verify compliance. We were last audited in early 2007, and our Responsible Carrier Program certificate remains in effect until March 2010.

We
are also certified to the standards of the International Safety Management, or ISM, system. The ISM standards were promulgated by the International Maritime Organization, or IMO, and
have been
adopted through treaty by many IMO member countries, including the United States. Although ISM is not required for coastal tug and barge operations, we have determined that an integrated safety
management system including the ISM and Responsible Carriers Program standards promotes safer operations and provides us with necessary operational flexibility as we continue to grow.

Ship Management, Crewing and Employees

We maintain an experienced and highly qualified work force of shore-based and seagoing personnel. As of August 15, 2008, we
employed 1,044 persons, comprising 176 shore staff and 868 fleet personnel. Our tug and tanker captains are non-union management supervisors. Effective July 1, 2008, we agreed on a
new two-year collective bargaining agreement with our maritime union covering certain of our seagoing personnel comprising 47% of our workforce. The collective bargaining agreement
provides for wage increases, and requires us to make contributions to certain pension and other welfare programs. No unfunded pension liability exists under any of these programs. Our vessel employees
are paid on a daily or hourly basis and typically work 14 days on and 14 days off. Our shore-based personnel are generally salaried and most are located at our headquarters in East
Brunswick, New Jersey or our facilities in Staten Island, New York, Seattle, Washington, Honolulu, Hawaii, Norfolk, Virginia and Philadelphia, Pennsylvania. We believe that our relations with our
employees are satisfactory.

Our
shore staff provides worldwide support for all aspects of our fleet and business operations, including sales and scheduling, crewing and human resources functions, engineering,
compliance and technical management, financial and insurance services, and information technology. A staff of dispatchers and schedulers maintain a 24-hour duty rotation to monitor
communications and to coordinate fleet operations with our customers and terminals. Communication with our vessels is accomplished by various methods, including wireless data links, cellular
telephone, VHF, UHF and HF radio.

Our
crews regularly inspect each vessel, both at sea and in port, and perform most of the ordinary course maintenance. Our procedures call for a member of our shore-based staff to
inspect each vessel at least once each fiscal quarter, making specific notations and recommendations regarding the overall condition of the vessel, maintenance, safety and crew welfare. In addition,
selected vessels are inspected each year by independent consultants. All of the vessels that are on bareboat charters to third parties are managed and operated by the customer.

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Classification, Inspection and Certification

Most of our coastwise vessels have been certified as being "in class" by the American Bureau of Shipping and, in the case of one
vessel, by Lloyds of London. Other vessels, primarily in our West Coast operations, have the required "loadline" certification. The American Bureau of Shipping is one of several internationally
recognized classification societies that inspect vessels at regularly scheduled intervals to ensure compliance with American Bureau of Shipping classification rules and some applicable federal safety
regulations. Most insurance underwriters require at least a "loadline" certification by a classification society before they will extend coverage to a coastwise vessel. The classification society
certifies that the pertinent vessel has been built and maintained in accordance with the rules of the society and complies with applicable rules and regulations of the vessel's country of registry and
the international conventions of which that country is a member. Inspections are conducted on the pertinent vessel by a surveyor of the classification society in three surveys of varying frequency and
thoroughness: annual surveys each year, an intermediate survey every two to three years and a special survey every four to five years. As part of the intermediate survey, a vessel may be required to
be drydocked every 24 to 30 months for inspection of its underwater parts and for any necessary repair work related to such inspection.

Our
vessels are also inspected at periodic intervals by the U.S. Coast Guard to ensure compliance with Federal safety regulations. All of our tank vessels carry Certificates of
Inspection issued by the U.S. Coast Guard.

Our
vessels and shoreside operations are also inspected and audited periodically by our customers, in some cases as a precondition to chartering our vessels. We maintain all necessary
approvals required for our vessels to operate in their normal trades. We believe that the high quality of our vessels, our crews and our shoreside staff are advantages when competing against other
vessel operators for long-term business.

Insurance Program

We maintain insurance coverage consistent with industry practice that we believe is adequate to protect against the accident-related
risks involved in the conduct of our business and risks of liability for environmental damage and pollution. Nevertheless, we cannot provide 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.

Our
hull and machinery insurance covers risks of actual or constructive loss from collision, towers liabilities, fire, grounding and engine breakdown up to an agreed value per vessel.
Our
war-risks insurance covers risks of confiscation, seizure, capture, vandalism, sabotage and other war-related risks. While some tanker owners and operators obtain
loss-of-hire insurance covering the loss of revenue during extended tanker off-hire periods, we do not have this type of coverage. We believe that, given our
diversified marine transportation operations and high utilization rate, this type of coverage is not economical and is of limited value to us. However, we evaluate the need for such coverage on an
ongoing basis taking into account insurance market conditions and the employment of our vessels.

Our
protection and indemnity insurance covers third-party liabilities and other related expenses from, among other things, injury or death of crew, passengers and other third parties,
claims arising from collisions, damage to cargo, damage to third-party property, asbestos exposure and pollution arising from oil or other substances. Our current protection and indemnity insurance
coverage for pollution is $1 billion per incident and is provided by West of England Ship Owners Insurance Services Ltd. ("West of England"), a mutual insurance association. West of
England is a member of the International Group of protection and indemnity mutual assurance associations. The protection and indemnity associations that comprise the International Group insure
approximately 90% of the world's commercial tonnage and have entered into a pooling agreement to reinsure each association's liabilities. Each protection and indemnity association has capped its
exposure to this pooling agreement at

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approximately
$4.3 billion per non-pollution incident. As a member of West of England, we are subject to calls payable to the association based on our claim records, as well as the
claim records of all other members of the individual associations and members of West of England.

We
are not currently the subject of any claims alleging exposure to asbestos or second-hand smoke, although such claims have been brought against our predecessors in the past
and may be brought against us in the future. Our predecessor company, EW Transportation LLC, has contractually agreed to retain any such liabilities that occurred prior to our initial public
offering in January 2004, will indemnify us for up to $10 million of such liabilities until January 2014, and will make available to us the benefit of certain indemnities it received in
connection with the purchase of certain vessels. If, notwithstanding the foregoing, we are ultimately obligated to pay any asbestos-related or similar claims for any reason, we believe that we or EW
Transportation LLC would have adequate insurance coverage for periods after March 1986 to pay such claims. However, EW Transportation LLC and its predecessors may not have insurance
coverage prior to March 1986. If we were subject to claims related to that period, including claims from current or former employees, EW Transportation LLC may not have insurance to pay the
liabilities, if any, that could be imposed on us. If we had to pay claims solely out of our own funds, it could have a material adverse effect on our financial condition. Furthermore, any claims
covered by insurance would be subject to deductibles, and because it is possible that a large number of claims could be brought, the aggregate amount of these deductibles could be material. Please
read "Legal Proceedings" in Item 3 of this report.

We
may not be able to obtain insurance coverage in the future to cover all risks inherent in our business, and insurance, if available, may be at rates that we do not consider
commercially reasonable. In addition, as more single-hull vessels are retired from active service, insurers may be less willing to insure, and customers less willing to hire,
single-hull vessels.

Competition

The domestic tank vessel industry is highly competitive. The Jones Act restricts U.S. point-to-point maritime
shipping to vessels built in the United States, owned and operated by U.S. citizens and manned by U.S. crews. In our market areas, our primary direct competitors are the operators of
U.S.-flag ocean-going tank barges and U.S.-flag refined petroleum product tankers, including the captive fleets of major oil companies.

In
the voyage and short-term charter market, our vessels compete with all other vessels of a size and type required by a charterer that can be available at the date
specified. In the voyage market, competition is based primarily on price and availability, although charterers have become more selective with respect to the quality of vessels they hire, with
particular emphasis on factors such as age, double hulls and the reliability and quality of operations. Increasingly, major charterers are demonstrating a preference for modern vessels based on
concerns about the environmental risks associated with older vessels. Consequently, we believe that owners of large modern fleets have been able to gain a competitive advantage over owners of older
fleets.

U.S.-flag
tank vessels also compete with petroleum product pipelines and are affected by the level of imports on foreign flag products carriers. The Colonial Pipeline system,
which originates in Texas and terminates at New York Harbor, the Plantation Pipe Line system, which originates in Louisiana and terminates in Washington D.C., and smaller regional pipelines between
Philadelphia and New York, carry refined petroleum products to the major storage and distribution facilities that we currently serve. We believe that high capital costs, tariff regulation and
environmental considerations make it unlikely that a new refined product pipeline system will be built in our market areas in the near future. It is possible, however, that new pipeline segments,
including pipeline segments that connect with existing pipeline systems, could be built or that existing pipelines could be converted to carry refined petroleum products. Either of these occurrences
could have an adverse effect on our ability to compete in particular locations.

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Regulation

Our operations are subject to significant federal, state and local regulation, including those described below.

Environmental

General.Government regulation significantly affects the ownership and operation of our tank vessels. Our tank vessels are subject to international conventions,
federal, state and local laws and regulations relating to safety and health and environmental protection, including the generation, storage, handling, emission, transportation, and discharge of
hazardous and non-hazardous materials. Although we believe that we are in substantial compliance with applicable environmental laws and regulations, we cannot predict the ultimate cost of
complying with these requirements, or the impact of these requirements on the resale value or useful lives of our tank vessels. The recent trend in environmental legislation is toward stricter
requirements, and this trend will likely continue. In addition, a future serious marine incident occurring in U.S. waters, or internationally, that results in significant oil pollution or causes
significant environmental impact could result in additional legislation or regulation that could affect our profitability.

Various
governmental and quasi-governmental agencies require us to obtain permits, licenses and certificates for the operation of our tank vessels. While we believe that we are in
substantial compliance with applicable environmental laws and regulations and have all permits, licenses and certificates necessary for the conduct of our operations, frequently changing and
increasingly stricter requirements, future non-compliance or failure to maintain necessary permits or approvals could require us to incur substantial costs or temporarily suspend operation
of one or more of our tank vessels.

We
maintain operating standards for all our tank vessels that emphasize operational safety, quality maintenance, continuous training of our crews and officers, care for the environment
and compliance with U.S. regulations. Our tank 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 (U.S. Coast Guard, harbor master or equivalent), classification societies, flag state administration and charterers, particularly
terminal operators and oil companies.

Finally,
we manage our exposure to losses from potential discharges of pollutants through the use of well maintained and well managed facilities, well maintained and well equipped
vessels and safety and environmental programs, including a maritime compliance program and our insurance program. Moreover, we believe we will be able to accommodate reasonably foreseeable
environmental regulatory changes. However, the risks of substantial costs, liabilities, and penalties are inherent in marine operations. As a result, there can be no assurance that any new regulations
or requirements or any discharge of pollutants by us will not have a material adverse effect on us.

The Oil Pollution Act of 1990.The Oil Pollution Act of 1990, or OPA 90, affects all vessels trading in U.S. waters, including the exclusive economic zone
extending 200 miles seaward. OPA 90 sets forth various technical and operating requirements for tank vessels operating in U.S. waters. Existing single-hull, double-sided and
double-bottomed tank vessels are to be phased out of service at varying times based on their tonnage and age, with all such vessels being phased out by January 2015. As of September 1, 2008, 25
of our tank vessels, which are single-hulled, will be precluded from transporting petroleum products as of January 1, 2015.

Under
OPA 90, owners or operators of tank vessels and certain non-tank vessels operating in U.S. waters must file vessel spill response plans with the U.S. Coast Guard and
operate in compliance with the plans. These vessel response plans must, among other things:



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Our vessel response plans have been approved by the U.S. Coast Guard, and all of our tankermen have been trained to comply with OPA 90 requirements. In addition,
we conduct regular oil-spill response drills in accordance with the guidelines set out in OPA 90. We believe that all of our vessels are in substantial compliance with OPA 90.

Environmental Spill and Release Liability.OPA 90 and various state laws substantially increased over historic levels the statutory liability of owners and
operators of vessels for the discharge or substantial threat of a discharge of oil and the resulting damages, both regarding the limits of liability and the scope of damages. OPA 90 imposes joint and
several strict liability on responsible parties, including owners, operators and bareboat charterers, for all oil spill and containment and clean-up costs and other damages arising from
spills attributable to their vessels. A complete defense is available only when the responsible party establishes that it exercised due care and took precautions against foreseeable acts or omissions
of third parties and when the spill is caused solely by an act of God, act of war (including civil war and insurrection) or a third party other than an employee or agent or party in a contractual
relationship with the responsible party. These limited defenses may be lost if the responsible party fails to report the incident or reasonably cooperate with the appropriate authorities or refuses to
comply with an order concerning clean-up activities. Even if the spill is caused solely by a third party, the owner or operator must pay removal costs and damage claims and then seek
reimbursement from the third party or the trust fund established under OPA 90. Finally, in certain circumstances involving oil spills, OPA 90 and other environmental laws may impose criminal liability
on personnel and/or the corporate entity.

OPA
90 limits the liability of each responsible party for oil pollution from vessels, and these limits were increased substantially in 2006. The limits for a tank vessel without a
qualifying double hull are the greater of (1) $3,000 per gross ton or (2) $22 million for a tank vessel of greater than 3,000 tons or $6 million for a tank vessel of 3,000
gross tons or less. The limits for a tank vessel with a qualifying double hull are the greater of (1) $1,900 per gross ton or (2) $16 million for a tank vessel of greater than
3,000 gross tons or $4 million for a tank vessel of 3,000 gross tons or less. The limits for any vessel other than a tank vessel are the greater of $950 per gross ton or $0.8 million.
The limits of liability are subject to periodic increases to account for inflation. These limits do not apply where, among other things, the spill is caused by gross negligence or willful misconduct
of, or a violation of an applicable federal safety, construction or operating regulation by, a responsible party or its agent or employee or any person acting in a contractual relationship with a
responsible party. In addition to removal costs, OPA 90 provides for recovery of damages, including:



OPA 90 requires owners and operators of vessels operating in U.S. waters to establish and maintain with the U.S. Coast Guard evidence of their financial responsibility
sufficient to meet their potential liabilities imposed by OPA 90. Under the regulations, we may provide evidence of insurance, a surety bond, a guarantee, letter of credit, qualification as a
self-insurer or other evidence of financial responsibility. We have qualified as a self-insurer under the regulations and have received Certificates of Financial Responsibility
from the U.S. Coast Guard for all of our vessels subject to this requirement.

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OPA
90 expressly provides that individual states are entitled to enforce their own oil pollution liability laws, even if such laws are inconsistent with or imposing greater liability
than OPA 90. There is no uniform liability scheme among the states. Some states have schemes similar to OPA 90 that limit liability to various amounts, some rely on common law fault-based remedies and
others impose strict and/or unlimited liability on an owner or operator. Virtually all coastal states have enacted their own pollution prevention, liability and response laws, whether statutory or
through court decisions, with many providing for some form of unlimited liability. We believe that the liability provisions of OPA 90 and similar state laws have greatly expanded potential liability
in the event of an oil spill, even in instances where we did not cause the spill. Some states have also established their own requirements for financial responsibility. However, at least two states
have repealed regulations concerning the operation, manning, construction or design of tank vessels as a result of the U. S. Supreme Court's 2000 ruling in United States v. Locke. In Locke, the Court
held that the regulation of maritime commerce is generally a federal responsibility because of the need for national and international uniformity.

Parties
affected by oil pollution that do not fully recover from a responsible party may pursue relief from the Oil Spill Liability Trust Fund. Responsible parties may seek reimbursement
from the fund for costs incurred that exceed the liability limits of OPA 90. In order to obtain reimbursement of excess costs, the responsible party must establish that it is entitled to a statutory
limitation of liability as discussed above. If we are deemed a responsible party for an oil pollution incident and are ineligible for reimbursement of excess costs, the costs of responding to an oil
pollution incident could have a material adverse effect on our results of operations, financial condition and cash flows. We presently maintain oil pollution liability insurance in an amount in excess
of that required by OPA 90. Through West of England, our current coverage for oil pollution is $1 billion per incident. It is possible, however, that our liability for an oil pollution incident
may be in excess of the insurance coverage we maintain.

We
are also subject to potential liability arising under the U.S. Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, which applies to the discharge of
hazardous substances, whether on land or at sea. Specifically, CERCLA provides for liability of owners and
operators of vessels for cleanup and removal of hazardous substances. Liability under CERCLA for releases of hazardous substances from vessels is limited to the greater of $300 per gross ton or
$5 million per incident unless attributable to willful misconduct or neglect, a violation of applicable standards or rules, or upon failure to provide reasonable cooperation and assistance.
CERCLA liability for releases from facilities other than vessels is generally unlimited.

We
are required to show proof of insurance, surety bond, self insurance or other evidence of financial responsibility to pay damages under OPA 90 and CERCLA in the amount of $1,500 per
gross ton for vessels, consisting of the sum of the OPA 90 liability limit of $1,200 per gross ton or $10 million per discharge and the CERCLA liability limit of $300 per gross ton or
$5 million per discharge. We have satisfied these requirements and obtained a U.S. Coast Guard Certificate of Financial Responsibility for each of our tank vessels. OPA 90 and CERCLA each
preserve the right to recover damages under other existing laws, including maritime tort law.

Water.The federal Clean Water Act (CWA) imposes restrictions and strict controls on the discharge of pollutants into navigable waters, and such discharges
generally require permits. The CWA provides for civil, criminal and administrative penalties for any unauthorized discharges and 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 and liabilities in the case of a discharge of petroleum, its derivatives,
hazardous substances, wastes and pollutants into state waters. In addition, the Coastal Zone Management Act authorizes state implementation and development of programs of management measures for
non-point source pollution to restore and protect coastal waters.

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On
July 23, 2008, the U.S. Ninth Circuit Court of Appeals affirmed the district court decision inNorthwest Environmental Advocates v.
EPAthat vacated an Environmental Protection Agency's (EPA) regulation that exempted certain discharges of effluent from vessels, including discharges of ballast water, from
permitting requirements under the National Pollutant Discharge Elimination System (NPDES) program. The district court ruling requires that the regulation be vacated on September 30, 2008. In
connection with the district court decision, EPA published for comment the Draft NPDES General Permits for Discharges Incidental to the Normal Operation of a Vessel on June 17, 2008. The
proposed general permits would impose effluent limitations on discharges from vessels and would require the implementation of best management practices to control such discharges. Because the general
permit is only in draft form at this time, we cannot estimate its potential financial impact. However, we believe that any financial impacts resulting from the repeal of the permitting exemption for
ballast water discharge and the resulting general permit for such discharges will not be material.

Solid Waste.Our operations occasionally generate and require the transportation, treatment and disposal of both hazardous and non-hazardous solid
wastes that are subject to the requirements of the federal Resource Conservation and Recovery Act, or RCRA, and comparable state and local requirements. In addition, in the course of our tank vessel
operations, we engage contractors to remove and dispose of waste material, including tank residue. In the event that such waste is found to be "hazardous" under either RCRA or the CWA, and is disposed
of in violation of applicable law, we could be found jointly and severally liable for the cleanup costs and any resulting damages. Finally, the EPA does not currently classify "used oil" as "hazardous
waste," provided certain recycling standards are met. However, some states in which we operate have classified "used oil" as "hazardous" under state laws patterned after RCRA. The cost of managing
wastes generated by tank vessel operations has increased in recent years under stricter state and federal standards. Additionally, 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 could be liable for clean up costs under CERCLA or the equivalent state laws. We
use only certified haulers for this work.

Air Emissions.The federal Clean Air Act (CAA) requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air
contaminants. Our vessels are subject to vapor control and recovery requirements for certain cargoes when loading, unloading, ballasting, cleaning and conducting other operations in regulated port
areas. Our tank barges are equipped with vapor control systems that satisfy these requirements. In addition, the EPA issued final rules regarding emissions standards for various classes of marine
diesel engines. While these rules are currently limited to new engines beginning with the 2004 model year, the EPA has noted that it may revisit the application of emissions standards to rebuilt or
remanufactured engines if the industry does not take steps to introduce new pollution control technologies. Adoption of such standards could require modifications to some existing marine diesel
engines and may require substantial expenditures.

The
CAA also requires states to draft State Implementation Plans (SIPs) designed to attain national health-based air quality standards in primarily major metropolitan and/or industrial
areas. Where states fail to present approvable SIPs or SIP revisions by certain statutory deadlines, the federal government is required to draft a Federal Implementation Plan. Several SIPs regulate
emissions resulting from barge loading and degassing operations by requiring the installation of vapor control equipment. As stated above, our tank barges 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 upon 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.

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Coastwise Laws

A substantial portion of our operations are conducted in the U.S. domestic trade, which is governed by the coastwise laws of the United
States. The U.S. coastwise laws reserve marine transportation between points in the United States, including harbor tug services, to vessels built in and documented under the laws of the United States
(U.S.-flag) and owned and manned by U.S. citizens. Generally, an entity is deemed a U.S. citizen for these purposes so long as:



Because
we could lose the privilege of operating our vessels in the U.S. coastwise trade if non-U.S. citizens were to own or control in excess of 25% of our outstanding
interests, our limited partnership agreement restricts foreign ownership and control of our common and subordinated units to not more than 15% of our outstanding interests.

There
have been repeated efforts aimed at repeal or significant change of the Jones Act. Although we believe it is unlikely that the Jones Act will be substantially modified or repealed,
there can be no assurance that Congress will not substantially modify or repeal such laws. Such changes could have a material adverse effect on our operations and financial condition.

Other

Our vessels are subject to the jurisdiction of the U.S. Coast Guard, the National Transportation Safety Board, the U.S. Customs and
Border Protection (CBP) and the U.S. Maritime Administration, as well as subject to rules of private industry organizations such as the American Bureau of Shipping. These agencies and organizations
establish safety standards and are authorized to investigate vessels and accidents and to recommend improved maritime safety standards. Moreover, to ensure compliance with applicable safety
regulations, the U.S. Coast Guard is authorized to inspect vessels at will.

Occupational Health Regulations

Our shoreside facilities are subject to occupational safety and health regulations issued by the U.S. Occupational Safety and Health
Administration, or OSHA, and comparable state programs. These regulations currently require us to maintain a workplace free of recognized hazards, observe safety and health regulations, maintain
records, and keep employees informed of safety and health practices and duties. Our vessel operations are also subject to occupational safety and health regulations issued by the U.S. Coast Guard and,
to an extent, OSHA. These regulations currently require us to perform monitoring, medical testing and recordkeeping with respect to mariners engaged in the handling of the various cargoes that are
transported by our chemical and petroleum product carriers.

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Vessel Condition

Our vessels are subject to periodic inspection and survey by, and drydocking and maintenance requirements of, the U.S. Coast Guard
and/or the American Bureau of Shipping. We believe we are currently in compliance in all material respects with the environmental and other laws and regulations, including health and safety
requirements, to which our operations are subject. We are unaware of any pending or threatened litigation or other judicial, administrative or arbitration proceedings against us occasioned by any
alleged non-compliance with such laws or regulations. The risks of substantial costs, liabilities and penalties are, however, inherent in marine operations, and there can be no assurance
that significant costs, liabilities or penalties will not be incurred by or imposed on us in the future.

Seasonality

We operate our tank vessels in markets that exhibit seasonal variations in demand and, as a result, in charter rates. For example,
movements of clean oil products, such as motor fuels, generally increase during the summer driving season. In certain regions, movements of black oil products and distillates, such as heating oil,
generally increase during the winter months, while movements of asphalt products generally increase in the spring through fall months. Unseasonably cold winters result in significantly higher demand
for heating oil in the northeastern United States. Meanwhile, our operations along the West Coast and in Alaska historically have been subject to seasonal variations in demand that vary from those
exhibited in the East Coast and Gulf Coast regions. The summer driving season can increase demand for automobile fuel in all of our markets and, accordingly, the demand for our services. A decline in
demand for, and level of consumption of, refined petroleum products could cause demand for tank vessel capacity and charter rates to decline, which would decrease our revenues and cash flows. Our West
Coast operations provide seasonal diversification primarily as a result of services to our Alaskan markets, which experience the greatest demand for petroleum products in the summer months, due to
weather conditions. Considering the above, we believe seasonal demand for our services is lowest during our third fiscal quarter. We do not see any significant seasonality in the Hawaiian market.

Properties

We lease pier facilities and approximately 7,000 square feet of office space in Staten Island, New York. The lease expires in April
2009; however, we have the option to renew it for two additional ten-year periods.

We
lease pier facilities, a water treatment facility and approximately 10,500 square feet of office space in Norfolk, Virginia. This lease expires in January 2010 and we have an option
to purchase the facility.

We
lease approximately 15,542 square feet of office space for our principal executive office in East Brunswick, New Jersey, for which the lease expires in December 2013.

We
lease pier facilities and approximately 16,000 square feet of office space in Seattle, Washington. This lease expires in October 2008 with a renewal option for one additional
five-year term.

We
lease wharf facilities of approximately 1,025 linear feet and approximately 12,000 square feet of office and warehouse space in Philadelphia, Pennsylvania, which terminates in July
2018.

We
also lease a parcel of land, pier facilities and approximately 2,800 square feet of office and warehouse space, on a month to month basis, in Honolulu, Hawaii.

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SEC Reporting

We file annual, quarterly and current reports, along with any related amendments and supplements thereto, with the SEC. From time to
time, we may also file registration statements pertaining to equity or debt offerings. You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F
Street, NE, Washington, DC 20549. You may obtain information regarding the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains a website atwww.sec.govthat contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC.

We
also provide electronic access to our periodic and current reports on our website,www.k-sea.com, free of charge. These
reports are available on our website as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC.
Information on our website or any other website is not incorporated by reference into this report and does not constitute a part of this report.

ITEM 1A.    RISK FACTORS.

Risks Inherent in Our Business

Marine transportation is an inherently risky business.

Our vessels and their cargoes are at risk of being damaged or lost because of events such
as:



All
of these hazards can result in death or injury to persons, loss of property, environmental damages, delays or rerouting. If one of our vessels were involved in an accident, with the
potential risk of environmental contamination, the resulting media coverage could have a material adverse effect on our business, financial condition and results of operations.

On
November 11, 2005, one of our double-hulled tank barges, the DBL 152, struck submerged debris in the U.S. Gulf of Mexico, causing significant damage. The submerged debris was
determined to be a service platform which collapsed during Hurricane Rita in September 2005. At the time of the incident, the barge was carrying approximately 120,000 barrels of No. 6 fuel oil,
a heavy oil product. We believe much of the oil escaped into the ocean. Our insurers responded to the pollution-related costs and environmental damages resulting from the incident, paying
approximately $65 million less $60,000 in total deductibles.

Our
affiliate, EW Transportation LLC, and its predecessors have been named, together with a large number of other companies, as co-defendants in 39 civil actions by
various parties alleging unspecified damages from past exposure to asbestos and second-hand smoke aboard some of the vessels that it contributed to us in connection with the initial public
offering of our common units. EW Transportation LLC and its predecessors have been dismissed from 38 of these lawsuits for an aggregate sum of approximately $47,000 and are pursuing settlement
of the other case. We may be subject to litigation in the future involving these plaintiffs and others alleging exposure to asbestos due to alleged failure to properly encapsulate friable asbestos or
remove friable asbestos on our vessels, as well as for exposure to second-hand smoke and other matters.

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A decline in demand for, and level of consumption of, refined petroleum products could cause demand for tank vessel capacity and charter rates to decline, which would
decrease our revenues and profitability.

The demand for tank vessel capacity is influenced by the demand for refined petroleum products and other factors
including:



Any
of these factors could adversely affect the demand for tank vessel capacity and charter rates. Any decrease in demand for tank vessel capacity or decrease in charter rates could
adversely affect our business, financial condition and results of operations.

In
addition, we operate our tank vessels in markets that have historically exhibited seasonal variations in demand and, as a result, in charter rates. For example, movements of certain
clean oil products, such
as motor fuels, generally increase during the summer driving season. In those same regions, movements of black oil products and certain clean oil products, such as heating oil, generally increase
during the winter months, while movements of asphalt products generally increase in the spring through fall months. Unseasonably mild winters can result in significantly lower demand for heating oil
in the northeastern United States. Meanwhile, our operations along the West Coast and in Alaska historically have been subject to seasonal variations in demand that vary from those exhibited in the
East Coast and Gulf Coast regions. In addition, unpredictable weather patterns and variations in oil reserves disrupt vessel scheduling. Seasonality could materially affect our business, financial
condition and results of operations in the future.

Our business would be adversely affected if we failed to comply with the Jones Act provisions on coastwise trade, or if those provisions were modified, repealed or waived.

We are subject to the Jones Act and other federal laws that restrict maritime transportation between points in the United States to
vessels built and registered in the United States and owned and manned by U.S. citizens. We are responsible for monitoring the ownership of our common units and other partnership interests. If we do
not comply with these restrictions, we would be prohibited from operating our vessels in U.S. coastwise trade, and under certain circumstances we would be deemed to have undertaken an unapproved
foreign transfer, resulting in severe penalties, including permanent loss of U.S. coastwise trading rights for our vessels, fines or forfeiture of the vessels. For information about the Jones Act and
other maritime laws, please read "RegulationCoastwise Laws" in Item 1 of this report.

In
the past, interest groups have lobbied Congress to repeal the Jones Act to facilitate foreign flag competition for trades and cargoes currently reserved for U.S.-flag
vessels under the Jones Act and cargo preference laws. We believe that interest groups may continue efforts to modify or repeal the Jones Act and cargo preference laws currently benefiting
U.S.-flag vessels. If these efforts are successful, it could result in increased competition, which could reduce our revenues and cash available for distribution.

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The Secretary of the Department of Homeland Security is vested with the authority and discretion to waive the coastwise laws to such extent and upon such terms as
he may prescribe whenever he deems that such action is necessary in the interest of national defense. In response to the effects of Hurricanes Katrina and Rita, the Secretary of the Department of
Homeland Security waived the coastwise laws generally for the transportation of petroleum products from September 1 to September 19, 2005 and from September 26, 2005 to
October 24, 2005. In the past, the Secretary of the Department of Homeland Security has waived the coastwise laws generally for the transportation of petroleum released from the Strategic
Petroleum Reserve undertaken in response to circumstances arising from major natural disasters. Any waiver of the coastwise laws, whether in response to natural disasters or otherwise, could result in
increased competition from foreign tank vessel operators, which could reduce our revenues and cash available for distribution.

We may not be able to grow or effectively manage our growth.

A principal focus of our strategy is to continue to grow by expanding our business in all coastal markets in the U.S. and also into
other geographic markets. Our future growth will depend upon a number of factors, some of which we can control and some of which we cannot. These factors include our ability
to:



A
deficiency in any of these factors would adversely affect our ability to achieve anticipated levels of cash flows or realize other anticipated benefits. In addition, competition from
other buyers could reduce our acquisition opportunities or cause us to pay a higher price than we might otherwise pay.

We may be unable to make or realize expected benefits from acquisitions, and implementing our growth strategy through acquisitions may harm our business, financial condition
and operating results.

Our growth strategy is based upon the expansion of our fleet through newbuildings and strategic acquisitions. Our ability to grow our
fleet depends upon a number of factors, many of which we cannot control. These factors include our ability to:



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Any
acquisition of a vessel or business may not be profitable and may not generate returns sufficient to justify our investment. In addition, our acquisition growth strategy exposes us
to risks that may harm our business, financial condition and operating results, including the risks that we may:



Increased competition in the domestic tank vessel industry could result in reduced profitability and loss of market share for us.

Contracts for our vessels are generally awarded on a competitive basis, and competition in the markets we serve is intense. The process
for obtaining such contracts generally requires a lengthy and time consuming screening and bidding process that may extend for months. The
most important factors determining whether a contract will be awarded include:



Some
of our competitors may have greater financial resources and larger operating staffs than we do. As a result, they may be able to make vessels available more quickly and efficiently,
transition to double-hull barges from single-hull barges more rapidly, and withstand the effects of declines in charter rates for a longer period of time. They may also be
better able to weather a downturn in the oil and gas industry. As a result, we could lose customers and market share to these competitors.

Increased competition from pipelines could result in reduced profitability.

We also face competition from refined petroleum product pipelines. Long-haul transportation of refined petroleum products
is generally less costly by pipeline than by tank vessel. The construction of new pipeline segments to carry petroleum products into our markets, including pipeline segments that connect with existing
pipeline systems, and the conversion of existing non-refined petroleum product pipelines, could adversely affect our ability to compete in particular locations.

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We rely on a limited number of customers for a significant portion of our revenues. The loss of any of these customers could adversely affect our business and operating
results.

Our customers consist primarily of major oil companies, oil traders and refineries. The portion of our revenues attributable to any
single customer changes over time, depending on the level of relevant activity by the customer, our ability to meet the customer's needs and other factors, many of which are beyond our control. Three
customers accounted for 16%, 12% and 11%, respectively, of our consolidated total revenues for fiscal 2008. If we were to lose any of these customers or if any of them significantly reduced its use of
our services, our business and operating results could be adversely affected.

Voyage charters may not be available at rates that will allow us to operate our vessels profitably.

During fiscal 2008, we derived approximately 19% of our revenue from single voyage charters. Voyage charter rates fluctuate
significantly based on tank vessel availability, the demand for refined petroleum products and other factors. Increased dependence on the voyage charter market by us could result in a lower
utilization of our vessels and decreased profitability. Future voyage charters may not be available at rates that will allow us to operate our vessels profitably.

We may not be able to renew time charters, consecutive voyage charters, contracts of affreightment and bareboat charters when they expire.

We received approximately 81% of our revenue from time charters, consecutive voyage charters, contracts of affreightment and bareboat
charters during fiscal 2008. These arrangements, which are generally for periods of one year or more, may not be renewed, or if renewed, may not be renewed at similar rates. If we are unable to obtain
new charters at rates equivalent to those received under the old charters, our profitability may be adversely affected.

We must make substantial expenditures to maintain the operating capacity of our fleet, which will reduce our cash available for distribution.

Tank vessels are subject to the requirements of the Oil Pollution Act of 1990, or OPA 90. OPA 90 mandates that all
single-hull tank vessels operating in U.S. waters be removed from petroleum and petroleum product transportation services at various times through January 1, 2015, and provides a
schedule for the phase-out of the single-hull vessels based on their age and size. As of September 1, 2008, approximately 76% of the barrel-carrying capacity of our tank
vessel fleet was double-hulled in compliance with OPA 90. The remaining 24% will be in compliance with OPA 90 until January 2015. The capacity of certain of our single-hull vessels has
already been effectively replaced by double-hull vessels placed into service in the past several years. We estimate that the current cost to replace our remaining single hull capacity with
newbuildings or by retrofitting certain of our existing vessels totals $50.0 million. This capacity can also be replaced by acquiring existing double-hull tank vessels as
opportunities arise. At the time we make these expenditures, the actual cost could be higher due to inflation and other factors.

Marine
transportation of refined petroleum products is a capital intensive business, requiring significant investment to maintain an efficient fleet and to stay in regulatory compliance.
We estimate that, over the next five years, we will spend an average of approximately $23.0 million per year to drydock and maintain our fleet. In addition, we will deduct an additional
$1.25 million per year from the cash that we would otherwise distribute to our unitholders to contribute to the cost of replacing the operating capacity of our single hull vessels when they
phase-out under OPA 90 in January 2015. Periodically, we will also make expenditures to acquire or construct additional tank vessel capacity and to upgrade our overall fleet efficiency.

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Please
read "Risks Related to Our Common UnitsIn calculating our available cash from operating surplus each quarter, we are required to deduct estimated
maintenance capital expenditures, which may result in less cash available for distribution to unitholders than if actual maintenance capital expenditures were deducted" for information about our
requirement to deduct estimated maintenance capital expenditures in calculating our available cash from operating surplus.

Capital expenditures and other costs necessary to operate and maintain a vessel vary depending on the age of the vessel and changes in governmental regulations, safety or
other equipment standards.

Capital expenditures and other costs necessary to operate and maintain a vessel increase with the age of the vessel. In addition,
changes in governmental regulations, safety or other equipment standards, as well as compliance with standards imposed by maritime self-regulatory organizations and customer requirements
or competition, may require us to make additional expenditures. For example, we may be required to make significant expenditures for alterations or the addition of new equipment to satisfy
requirements of the U.S. Coast Guard and the American Bureau of Shipping. In addition, we may be required to take our vessels out of service for extended periods of time, with corresponding losses of
revenues, in order to make such alterations or to add such equipment. In the future, market conditions may not justify these expenditures or enable us to operate our older vessels profitably during
the remainder of their economic lives.

In
order to fund these capital expenditures, we will either incur borrowings or raise capital through the sale of debt or equity securities. Our ability to access the capital markets for
future offerings may be limited by our financial condition at the time as well as by adverse market conditions resulting from, among other things, general economic conditions and contingencies and
uncertainties that are beyond our control. Our failure to obtain the funds for necessary future capital expenditures would limit our ability to continue to operate some of our vessels and could have a
material adverse effect on our business and on our ability to make distributions to unitholders.

Our purchase of existing vessels carries risks associated with the quality of those vessels.

Our fleet renewal and expansion strategy includes the acquisition of existing vessels as well as the ordering of newbuildings. Unlike
newbuildings, existing vessels typically do not carry warranties with respect to their condition. While we generally inspect any existing vessel prior to purchase, such an inspection would normally
not provide us with as much knowledge of its condition as we would possess if the vessel had been built for us and operated by us during its life. Repairs and maintenance costs for existing vessels
are difficult to predict and may be more substantial
than for vessels we have operated since they were built. These costs could decrease our profits and reduce our liquidity.

Decreased utilization of our vessels due to bad weather could have a material adverse effect on our operating results and financial condition.

Unpredictable weather patterns tend to disrupt vessel scheduling and supplies of refined petroleum products and our vessels and cargoes
are at risk of being damaged or lost because of bad weather. In addition, adverse weather conditions can cause delays in the delivery of newbuilds and in transporting cargoes. As a result, bad weather
conditions could have a material adverse effect on our operating results and financial condition.

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

Increasingly stringent federal, state and local laws and regulations governing worker health and safety and the manning, construction
and operation of vessels significantly affect our operations. Many aspects of the marine industry are subject to extensive governmental regulation by the U.S. Coast

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Guard,
the Department of Transportation, the Department of Homeland Security, the National Transportation Safety Board and the U.S. Customs and Border Protection (CBP), and to regulation by private
industry organizations such as the American Bureau of Shipping. The U.S. Coast Guard and the National Transportation Safety Board set safety standards and are authorized to investigate vessel
accidents and recommend improved safety standards. The U.S. Coast Guard is authorized to inspect vessels at will.

Our
operations are also subject to federal, state, local and international laws and regulations that control the discharge of pollutants into the environment or otherwise relate to
environmental protection. Compliance with such laws, regulations and standards may require installation of costly equipment or operational changes. Failure to comply with applicable laws and
regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of our operations. Some environmental laws often impose strict liability for
remediation of spills and releases of oil and hazardous substances, which could subject us to liability without regard to whether we were negligent or at fault. Under OPA 90, owners, operators and
bareboat charterers are jointly and severally strictly liable for the discharge of oil within the internal and territorial waters of, and the
200-mile exclusive economic zone around, the United States. Additionally, an oil spill could result in significant liability, including fines, penalties, criminal liability and costs for
natural resource damages. The potential for these releases could increase as we increase our fleet capacity. Most states bordering on a navigable waterway have enacted legislation providing for
potentially unlimited liability for the discharge of pollutants within their waters.

Our insurance may not be adequate to cover our losses.

We may not be adequately insured to cover losses from our operational risks, which could have a material adverse effect on our
operations. For example, a catastrophic oil spill or other disaster could exceed our insurance coverage. In addition, our affiliate, EW Transportation LLC, and its predecessors may not have
insurance coverage prior to March 1986. If we were subject to claims related to that period, including claims from current or former employees, EW Transportation LLC may not have insurance to
pay the liabilities, if any, that could be imposed on us. If we had to pay claims solely out of our own funds, it could have a material adverse effect on our financial condition. Furthermore, any
claims covered by insurance would be subject to deductibles, and since it is possible that a large number of claims could be brought, the aggregate amount of these deductibles could be material.

We
may not be able to procure adequate insurance coverage at commercially reasonable rates in the future, and some claims may not be paid. In the past, stricter environmental regulations
have led to higher costs for insurance covering environmental damage or pollution, and new regulations could lead to similar increases or even make this type of insurance unavailable. In addition, our
insurance may be voidable by the insurers as a result of certain actions of ours.

Because
we obtain some of our insurance through protection and indemnity associations, we also may be subject to calls, or premiums, in amounts based not only on our own claim records,
but also the claim records of all other members of the protection and indemnity associations through which we receive insurance coverage for tort liability, including pollution-related liability. Our
payment of these calls could result in significant expenses to us, which could reduce our profits or cause losses. Moreover, the protection and indemnity clubs and other insurance providers reserve
the right to make changes in insurance coverage with little or no advance notice.

Terrorist attacks have resulted in increased costs and have disrupted our business. Continued hostilities in the Middle East or other sustained military campaigns may
adversely impact our results of operations.

After the terrorist attacks of September 11, 2001, New York Harbor was shut down temporarily, resulting in the suspension of our
local operations in the New York City area for four days and the loss

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of
revenue related to these operations. The long-term impact that terrorist attacks and the threat of terrorist attacks may have on the petroleum industry in general, and on us in
particular, is not known at this time. Uncertainty surrounding continued hostilities in the Middle East or other sustained military campaigns may affect our operations in unpredictable ways, including
disruptions of petroleum supplies and markets, and the possibility that infrastructure facilities could be direct targets of, or indirect casualties of, an act of terror.

Changes
in the insurance markets attributable to terrorist attacks may make certain types of insurance more difficult for us to obtain. Moreover, the insurance that may be available to
us may be significantly more expensive than our existing insurance coverage. Instability in the financial markets as a result of terrorism or war could also affect our ability to raise capital.

We depend upon unionized labor for the provision of our services in certain geographic areas. Any work stoppages or labor disturbances could disrupt our business in those
areas.

Approximately 47% of our seagoing personnel are employed under a contract with a division of the International Longshoreman's
Association that expires on June 30, 2010. Any work stoppages or other labor disturbances could have a material adverse effect on our business, financial condition and results of operations.

Our employees are covered by federal laws that may subject us to job-related claims in addition to those provided by state laws.

Some of our employees are covered by provisions of federal statutory and general maritime law. These laws typically operate to make
liability limits established by state workers' compensation laws inapplicable to these employees and to permit these employees and their representatives to pursue actions against employers for
job-related injuries in federal courts. Because we are not generally protected by the limits imposed by state workers' compensation statutes, we may have greater exposure for claims made
by these employees.

We depend on key personnel for the success of our business.

We depend on the services of our senior management team and other key personnel. In particular, our success depends on the continued
efforts of Mr. Timothy J. Casey, the President and Chief Executive Officer of K-Sea General Partner GP LLC, and other key employees. The loss of the services of any
key employee could have a material adverse effect on our business, financial condition and results of operations. We may not be able to locate or employ on acceptable terms qualified replacements for
senior management or key employees if their services were no longer available.

Due to our lack of asset diversification, adverse developments in our marine transportation business would reduce our ability to make distributions to our unitholders.

We rely exclusively on the revenues generated from our marine transportation business. Due to our lack of asset diversification, an
adverse development in this business would have a significantly greater impact on our business, financial condition and results of operations than if we maintained more diverse assets.

Changes in international trade agreements could affect our ability to provide marine transportation services at competitive rates.

Currently, vessel trade or marine transportation between two points within the same country, generally known as cabotage or coastwise
trade, is not included in the General Agreement on Trade in Services or the North American Free Trade Agreement. In addition, the Jones Act restricts maritime cargo transportation between U.S. ports
to U.S.-flag vessels qualified to engage in U.S. coastwise trade.

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If
maritime services were deemed to include cabotage and included in the General Agreement on Trade in Services, the North American Free Trade Agreement or other multi-national trade agreements,
transportation of maritime cargo between U.S. ports could be opened to foreign-flag vessels. Foreign vessels would have lower construction costs and would generally operate at
significantly lower costs than we do in U.S. markets, which would likely have a material adverse effect on our ability to compete.

Delays or cost overruns in the construction of new vessels or the modification of existing vessels could adversely affect our business. Cash flows from new or retrofitted
vessels may not be immediate or as high as expected.

We are currently building eight new vessels and completing other smaller projects at an estimated total cost of $165.0 million.
These projects are subject to the risk of delay or cost overruns caused by the following:



Significant
delays could also have a material adverse effect on expected contract commitments for these vessels and our future revenues and cash flows. We will not receive any material
increase in revenue or cash flow from new or modified vessels until they are placed in service and customers enter into binding arrangements for the use of the vessels. Furthermore, customer demand
for new or modified vessels may not be as high as we currently anticipate, and, as a result, our future cash flows may be adversely affected.

Risks Related to Our Common Units

We may not have sufficient cash from operations to enable us to pay the minimum quarterly distribution following establishment of cash reserves and payment of fees and
expenses, including payments to our general partner.

We may not have sufficient available cash each quarter to pay the minimum quarterly distribution. The amount of cash we can distribute
on our common units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other
things:



Additionally,
the actual amount of cash we have available for distribution depends on other factors such as:



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The
amount of cash we have available for distribution depends primarily on our cash flow, including cash flow from operations and working capital borrowings, and not solely on
profitability, which will be affected by non-cash items. As a result, we may make cash distributions during periods when we record losses and may not make cash distributions during periods
when we record net income.

K-Sea General Partner L.P. and its affiliates have conflicts of interest and limited fiduciary duties, which may permit them to favor their own interests
to the detriment of our unitholders.

Affiliates of our general partner indirectly own a 1.27% general partner interest and a 26.17% limited partner interest in us and own
and control K-Sea General Partner GP LLC. Conflicts of interest may arise between K-Sea General Partner L.P. and its affiliates, on the one hand, and us
and our unitholders, on the other hand. As a result of these conflicts, our general partner may favor its own interests and the interests of its affiliates over the interests of our unitholders. These
conflicts include, among others, the following situations:



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Even if unitholders are dissatisfied, they cannot remove our general partner without its consent.

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and,
therefore, limited ability to influence management's decisions regarding our business. Unitholders did not elect our general partner or the board of directors of its general partner and will have no
right to elect our general partner or the board of directors of its general partner on an annual or other continuing basis. The board of directors of the general partner of our general partner is
chosen by its members.

Furthermore,
if the unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. Unitholders are currently
unable to remove our general partner without its consent because our affiliates currently own sufficient units to be able to prevent the general partner's removal. The vote of the holders of at least
662/3% of all outstanding common and subordinated units voting together as a single class is required to remove our general partner. Also, if our general partner is removed without
cause during the subordination period and units held by our general partner and its affiliates are not voted in favor of that removal, all remaining subordinated units will automatically be converted
into common units and any existing arrearages on the common units will be extinguished. A removal of our general partner under these circumstances would adversely affect the common units by
prematurely eliminating their distribution and liquidation preference over the subordinated units, which would otherwise have continued until we had met certain distribution and performance tests.

Cause
is narrowly defined in our partnership agreement to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner
liable for actual fraud, gross negligence or willful or wanton misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business, so
the removal of our general partner during the subordination period because of the unitholders' dissatisfaction with our general partner's performance in managing our partnership will most likely
result in the termination of the subordination period.

Our general partner's discretion in establishing cash reserves may reduce the amount of cash available for distribution to unitholders.

Our partnership agreement gives our general partner broad discretion in establishing financial reserves for the proper conduct of our
business. These reserves also will affect the amount of cash available for distribution. Our general partner may establish reserves for distributions on the subordinated units, but only if those
reserves will not prevent us from distributing the full minimum quarterly distribution, plus any arrearages, on the common units for the following four
quarters. As described above under "Risks Inherent in Our BusinessWe must make substantial expenditures to maintain the operating capacity of our fleet, which will reduce our
cash available for distribution," the partnership agreement requires our general partner to deduct from operating surplus each quarter estimated maintenance capital expenditures as opposed to actual
expenditures, which could reduce the amount of available cash for distribution.

In calculating our available cash from operating surplus each quarter, we are required to deduct estimated maintenance capital expenditures, which may result in less cash
available for distribution to unitholders than if actual maintenance capital expenditures were deducted.

Our partnership agreement requires us to deduct estimated maintenance capital expenditures from operating surplus each quarter, as
opposed to actual maintenance capital expenditures, in order to reduce disparities in operating surplus caused by the fluctuating level of maintenance capital expenditures, such as drydocking. Because
of the capital expenditures we intend to make by January 1, 2015 to replace the operating capacity of our single-hull vessels, our annual estimated maintenance capital expenditures
for purposes of calculating operating surplus also includes an additional $1.25 million to contribute to the cost of replacing this operating capacity.

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The amount of estimated maintenance capital expenditures we deduct from operating surplus is subject to review and change by the board of directors of
K-Sea General Partner GP LLC, with the concurrence of the conflicts committee of such board. In years when estimated maintenance capital expenditures are higher than actual
maintenance capital expenditures, the amount of cash available for distribution to unitholders will be lower than if actual maintenance capital expenditures were deducted from operating surplus.

Please
read "Risks Inherent in Our BusinessWe must make substantial expenditures to maintain the operating capacity of our fleet, which will reduce our cash
available for distribution" for information regarding substantial expenditures that we must make to maintain the operating capacity of our fleet.

We may issue additional common units without the approval of unitholders, which would dilute unitholders' ownership interests.

During the subordination period, without the approval of our unitholders, our general partner may cause us to issue up to 2,082,500
additional common units. Our general partner may also cause us to issue an unlimited number of additional common units or other equity
securities of equal rank with the common units, without unitholder approval, in a number of circumstances such as:



The issuance by us of additional common units or other equity securities of equal or senior rank will have the following
effects:



After
the end of the subordination period, we may issue an unlimited number of limited partner interests of any type without the approval of our unitholders. Our partnership agreement
does not give our unitholders the right to approve our issuance of equity securities ranking junior to the common units at any time.

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Our partnership agreement currently limits the ownership of our partnership interests by individuals or entities that are not U.S. citizens. This restriction could limit the
liquidity of our common units.

In order to ensure compliance with Jones Act citizenship requirements, the board of directors of K-Sea General
Partner GP LLC has adopted a requirement that at least 85% of our partnership interests must be held by U.S. citizens. This requirement may have an adverse impact on the liquidity or
market value of our common units, because unitholders will be unable to sell units to non-U.S. citizens. Any purported transfer of common units in violation of these provisions will be
ineffective to transfer the common units or any voting, dividend or other rights in respect of the common units.

Our general partner has a limited call right that may require unitholders to sell their common units at an undesirable time or price.

If at any time our general partner and its affiliates own more than 80% of the common units, our general partner will have the right,
but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their
then-current market price. As a result, unitholders may be required to sell their common units at an undesirable time or price and may not receive any return on their investment.
Unitholders may also incur a tax liability upon a sale of their units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it
upon exercise of the limited call right. There is no restriction in our partnership agreement that prevents our general partner from issuing additional common units and exercising its call right. If
our general partner exercised its limited call right, the effect would be to take us private and, if the units were subsequently deregistered, we would no longer be subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended.

Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.

Our partnership agreement restricts unitholders' voting rights by providing that any units held by a person that owns 20% or more of
any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of the
general partner of our general partner, cannot vote on any matter. The partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information
about our operations, as well as other provisions limiting the unitholders' ability to influence the manner or direction of management.

Cost reimbursements due our general partner and its affiliates will reduce cash available for distribution to unitholders.

Prior to making any distribution on the common units, we will reimburse our general partner and its affiliates for all expenses they
incur on our behalf, which will be determined by our general partner in its sole discretion. These expenses will include all costs incurred by the general partner and its affiliates in managing and
operating us, including costs for rendering corporate staff and support services to us. In addition, our general partner and its affiliates may provide us with other services for which the general
partner or its affiliates may charge us fees. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates could adversely affect our ability to pay cash
distributions to unitholders.

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Unitholders may not have limited liability if a court finds that unitholder action constitutes control of our business.

As a limited partner in a partnership organized under Delaware law, a unitholder could be held liable for our obligations to the same
extent as a general partner if such unitholder participates in the "control" of our business. Our general partner generally has unlimited liability for the obligations of the partnership, such as its
debts and environmental liabilities, except for those contractual obligations of the partnership that are expressly made without recourse to our general partner. In addition,
Section 17-607 of the Delaware Revised Uniform Limited Partnership Act provides that, under some circumstances, a unitholder may be liable to us for the amount of a distribution for
a period of three years from the date of the distribution. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly
established in some of the other states in which we do business.

Restrictions in our debt agreements may prevent us from engaging in some beneficial transactions or paying distributions.

Our payment of principal and interest on our debt will reduce cash available for distribution on our units. Our credit agreement
prohibits the payment of distributions after the occurrence of the following events, among others, and receipt of notice from our lenders:



Any
subsequent refinancing of our current debt or any new debt could have similar restrictions.

The control of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of
its assets without the consent of the unitholders so long as the third

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party
satisfies the citizenship requirements of the Jones Act. Furthermore, there is no restriction in the partnership agreement on the ability of the partners of our general partner from transferring
their respective partnership interests in our general partner to a third party that satisfies the citizenship requirements of the Jones Act. The new partners of our general partner would then be in a
position to replace the board of directors and officers of the general partner of our general partner with their own choices and to control the decisions taken by the board of directors and officers.

Our affiliates may engage in activities that compete directly with us.

Pursuant to the omnibus agreement entered into in connection with the initial public offering of our common units, certain of our
affiliates have agreed not to engage, either directly or indirectly, in the business of providing marine transportation, distribution and logistics services for refined petroleum products in the
United States to the extent such business generates qualifying income for federal income tax purposes. The omnibus agreement does not prohibit the equity owners of our affiliates from owning assets or
engaging in businesses that compete directly or indirectly with us.

Tax Risks

Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by
individual states. If the IRS were to treat us as a corporation or if we were to become subject to a material amount of entity-level taxation for state or foreign tax purposes, then our cash available
for distribution to unitholders would be substantially reduced.

The anticipated after-tax economic benefit of an investment in us depends largely on our being treated as a partnership for
federal income tax purposes. If less than 90% of our gross income for any taxable year is "qualifying income" from transportation or processing of crude oil, natural gas or products thereof, interest,
dividends or similar sources, we will be taxable as a corporation under Section 7704 of the Internal Revenue Code for federal income tax purposes for that taxable year and all subsequent years.
The IRS has not provided any ruling on this matter.

If
we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our income at the corporate tax rate, which is currently a maximum of 35%, and
would likely pay state income tax at varying rates. Distributions would generally be taxed again to unitholders as corporate distributions and no income, gains, losses, or deductions would flow
through to unitholders. Because a tax would be imposed upon us as an entity, cash available for distribution to unitholders would be substantially reduced. Treatment of us as a corporation would
result in a material reduction in the anticipated cash flow and after-tax return to unitholders and thus would likely result in a substantial reduction in the value of the common units.

Current
law may change so as to cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to entity-level taxation. For example, because of
widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other
forms of taxation. The partnership agreement provides that, if a law is enacted or an existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise
subjects us to entity-level taxation for federal, state, or local income tax purposes, the minimum quarterly distribution amount and the target distribution amounts will be adjusted to reflect the
impact of that law on us.

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and
differing interpretations, possibly on a retroactive basis.

The present United States federal income tax treatment of publicly traded partnerships, including us, or an investment in our common
units may be modified by administrative, legislative or judicial

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interpretation
at any time. Any modification to the United States federal income tax laws and interpretations thereof may or may not be applied retroactively and could make it more difficult or
impossible to meet the exception for us to be treated as a partnership for United States federal income tax purposes that is not taxable as a corporation, affect or cause us to change our business
activities, affect the tax considerations of an investment in us, change the character or treatment of portions of our income and adversely affect an investment in our common units. For example, in
response to certain recent developments, members of Congress are considering substantial changes to the definition of qualifying income under the Internal Revenue Code Section 7704(d) and the
treatment of certain types of income earned from profits interests in partnerships. It is possible that these efforts could result in changes to the existing United States tax laws that affect
publicly traded partnerships, including us. We are unable to predict whether any of these changes, or other proposals will ultimately be enacted. Any such changes could negatively impact the value of
an investment in our common units.

If the IRS contests any of the federal income tax positions we take, the market for our common units may be adversely affected, and the costs of any contest will reduce our
cash available for distribution to unitholders.

The IRS has not provided any ruling with respect to our treatment as a partnership for federal income tax purposes or any other matter
affecting us. The IRS may adopt positions that differ from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take.
A court may not agree with some or all of the positions we take. Any contest with the IRS may materially and adversely impact the market for our common units and the price at which they trade. In
addition, the costs of any contest with the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our cash available for distribution.

Unitholders may be required to pay taxes on their share of our income even if they do not receive any cash distributions from us.

Because our unitholders will be treated as partners to whom we will allocate taxable income, which could be different in amount than
the cash we distribute, our unitholders will be required to pay federal income taxes and, in some cases, state, local, and foreign income taxes on their share of our taxable income, even if they
receive no cash distributions from us. Unitholders may not receive cash distributions equal to their share of our taxable income or even the tax liability that results from that income.

Tax gain or loss on the disposition of our common units could be different than expected.

If a unitholder sells his common units, that unitholder will recognize gain or loss equal to the difference between the amount realized
and the unitholder's tax basis in those common units. Prior distributions in excess of the total net taxable income the unitholder was allocated for a common unit, which decreased the unitholder's tax
basis in that common unit, will, in effect, become taxable income to the unitholder if the common unit is sold at a price greater than the unitholder's tax basis in that common unit, even if the price
the unitholder receives is less than the unitholder's original cost. A substantial portion of the amount realized, whether or not representing gain, may be ordinary income to unitholders. Should the
IRS successfully contest some positions we take, unitholders could recognize more gain on the sale of common units than would be the case under those positions, without the benefit of decreased income
in prior years. In addition, if unitholders sell their common units, they may incur a tax liability in excess of the amount of cash they receive from the sale.

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Tax-exempt entities and foreign persons face unique tax issues from owning common units that may result in adverse tax consequences to them.

Investment in common units by tax-exempt entities, such as individual retirement accounts (known as IRAs) and other
retirement accounts, and
non-U.S. persons, raises issues unique to them. For example, virtually all of our income allocated to organizations exempt from federal income tax, including IRAs and other retirement
plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax
rate, and non-U.S. persons will be required to file United States federal income tax returns and pay tax on their share of our taxable income. If you are a tax-exempt entity or
a foreign person, you should consult your tax advisor before investing in our common units.

We registered as a tax shelter under prior law. This may increase the risk of an IRS audit of us or a unitholder.

Prior to the enactment of the American Jobs Creation Act of 2004, certain types of entities were required to register with the IRS as
"tax shelters," based on a perception that those entities might claim tax benefits that were unwarranted. We registered as a tax shelter under such prior law. The American Jobs Creation Act of 2004
repealed the tax shelter registration requirement and replaced it with a regime that requires reporting of certain "reportable transactions." We do not expect to engage in any reportable transactions.
Nevertheless, our registration as a tax shelter under prior law, or our future participation in a reportable transaction, might increase the likelihood that we will be audited, and any such audit
might lead to tax adjustments.

Should
our tax returns be audited, any adjustments to our tax returns may lead to adjustments to our unitholders' tax returns and may lead to audits of unitholders' tax returns. Our
unitholders' would be responsible for the consequences of any audits to their tax returns.

We treat each purchaser of common units as having the same tax benefits without regard to the units purchased. The IRS may challenge this treatment, which could adversely
affect the value of the common units.

Because we cannot match transferors and transferees of common units and because of other reasons, we will take depreciation and
amortization positions that may not conform to all aspects of the Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to
unitholders. It also could affect the timing of these tax benefits or the amount of gain from the sale of common units and could have a negative impact on the value of our common units or result in
audit adjustments to unitholders' tax returns.

Unitholders may be subject to state, local and foreign taxes and return filing requirements as a result of investing in our common units.

In addition to federal income taxes, unitholders will likely be subject to other taxes, such as state and local income taxes,
unincorporated business taxes and estate, inheritance, or intangible taxes that are imposed by the various jurisdictions in which we do business or own property. Unitholders will likely be required to
file state and local income tax returns and pay state and local income taxes in some or all of the various jurisdictions in which we do business or own property and may be subject to penalties for
failure to comply with those requirements. We own property or conduct business in Alaska, New York, New Jersey, Pennsylvania, Hawaii, Washington and Virginia, all of which impose a state income tax.
We currently conduct certain operations in Puerto Rico, Canada and Venezuela in a manner that we believe does not subject unitholders to direct liability to pay tax or file returns in those countries,
but there can be no assurance that we will conduct our foreign operations in this manner in the future. Taxes we pay with respect to our foreign operations reduce the cash flow available for
distribution to our unitholders. We may do business or own property in other states or foreign

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countries
in the future. It is the responsibility of unitholders to file all federal, state, local, and foreign tax returns.

We have subsidiaries that are treated as corporations for federal income tax purposes and subject to corporate-level income taxes.

We conduct a portion of our operations through subsidiaries that are, or are treated as, corporations for federal income tax purposes.
Currently, those operations consist primarily of our bunkering activities and our operation of a Canadian flagged vessel. We may elect to conduct additional operations in corporate form in the future.
These corporate subsidiaries will be subject to corporate-level tax, which will reduce the cash available for distribution to us and, in turn, to our unitholders. If the IRS were to successfully
assert that these corporate subsidiaries have more tax liability than we anticipate or legislation was enacted that increased the corporate tax rate, our cash available for distribution to our
unitholders would be further reduced.

The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income
tax purposes.

We will be considered to have terminated for federal income tax purposes if there is a sale or exchange of 50% or more of the total
interests in our capital and profits within a twelve-month period. Our termination would, among other things, result in the closing of our taxable year for all unitholders and could result in a
deferral of depreciation deductions allowable in computing our taxable income. If this occurs, you will be allocated an increased amount of federal taxable income for the year in which we are
considered to be terminated as a percentage of the cash distributed to you with respect to that period.

We prorate our items of income, gain, loss, and deduction between transferors and transferees of our units each month based upon the ownership of our units of the first day
of each month, instead of on the basis of the date a particular unit is transferred, which is standard practice for master limited partnerships. The IRS may challenge this treatment, which could
change the allocation of items of income, gain, loss and deduction among our unitholders.

We prorate our items of income, gain, loss, and deduction between transferors and transferees of our units each month based upon the
ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred, which is standard practice for master limited partnerships. The use of this
proration method may not be permitted under existing Treasury regulations. If the IRS were to challenge this method or new Treasury regulations were issued, we may be required to change the allocation
of items of income, gain, loss, and deduction among our unitholders.

A unitholder whose units are loaned to a "short seller" to cover a short sale of units may be considered as having disposed of those units. If so, he would no longer be
treated for tax purposes as a partner with respect to those units during the period of the loan and may recognize gain or loss from the disposition.

Because a unitholder whose units are loaned to a "short seller" to cover a short sale of units may be considered as having disposed of
the loaned units, he may no longer be treated for tax purposes as a partner with respect to those units during the period of the loan to the short seller and the unitholder may recognize gain or loss
from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those units may not be reportable by the unitholder and
any cash distributions received by the unitholder as to those units could be fully taxable as ordinary income. Unitholders desiring to assure their status as
partners and avoid the risk of gain recognition from a loan to a short seller are urged to modify any applicable brokerage account agreements to prohibit their brokers from loaning their units.

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We have adopted certain methodologies that may result in a shift of income, gain, loss and deduction between the general partner and the unitholders. The IRS may challenge
this treatment, which could adversely affect the value of the common units.

When we issue additional units or engage in certain other transactions, we determine the fair market value of our assets and allocate
any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. Our methodology may be viewed as understating the value of our assets. In
that case, there may be a shift of income, gain, loss and deduction between certain unitholders and the general partner, which may be unfavorable to such unitholders. Moreover, subsequent purchasers
of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The
IRS may challenge our valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of income, gain, loss and
deduction between the general partner and certain of our unitholders.

A
successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount
of gain from our unitholders' sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders' tax returns without the benefit
of additional deductions.

ITEM 1B.    UNRESOLVED STAFF COMMENTS.

None.

ITEM 3.    LEGAL PROCEEDINGS.

We are a party to various suits in the ordinary course of business for monetary relief arising principally from personal injuries,
collision or other casualty and to claims arising under vessel charters. All of these personal injury, collision and casualty claims against us are fully covered by insurance, subject to deductibles
ranging from $25,000 to $100,000 in amount. We reserve on a current basis for amounts we expect to pay. Although the outcome of any individual claim or action cannot be predicted with certainty, we
believe that any adverse outcome, individually or in the aggregate, would be substantially mitigated by applicable insurance or indemnification from previous owners of our assets, and would not have a
material adverse effect on our financial position, results of operations or cash flows.

EW
Transportation LLC and its predecessors have been named, together with a large number of other companies, as co-defendants in 39 civil actions by various parties,
including former employees, alleging unspecified damages from past exposure to asbestos and second-hand smoke aboard some of the vessels that it contributed to us in connection with our
initial public offering. EW Transportation LLC and its predecessors have been dismissed from 38 of these lawsuits for an aggregate sum of approximately $47,000, and are seeking to settle the
other case. We may be subject to litigation in the future from these plaintiffs and others alleging exposure to asbestos due to alleged failure to properly encapsulate or remove friable asbestos on
our vessels, as well as for exposure to second-hand smoke and other matters. For a related discussion of insurance coverage, please read "Business and PropertiesInsurance
Program" in Items 1 and 2 of this report.

Our
predecessors have agreed to indemnify us for certain liabilities. For more information, please read "Certain Relationships and Related TransactionsOmnibus
AgreementIndemnification" in Item 13 of this report.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.

No matters were submitted to a vote of security holders during the quarter ended June 30, 2008.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SECURITYHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Price of Common Units, Distributions and Related Unitholder Matters

Our common units are listed on the New York Stock Exchange under the symbol "KSP." As of September 15, 2008, there were
13,633,200 outstanding common units, representing an aggregate 85.6% limited partner interest in us, which were held by approximately 50 holders of record, representing approximately 5,000 beneficial
owners. The following table sets forth, for the periods indicated, the high and low sales prices per common unit, as reported on the New York Stock Exchange, and the amount of cash distributions
declared per common unit:

Price RangeCash
Distribution(1)High

Low2008 Fiscal YearFourth Quarter Ended June 30, 2008

$
38.08

$
31.53

$
0.77Third Quarter Ended March 31, 2008

$
38.22

$
31.14

$
0.76Second Quarter Ended December 31, 2007

$
40.67

$
33.90

$
0.74First Quarter Ended September 30, 2007

$
48.50

$
36.23

$
0.722007 Fiscal YearFourth Quarter Ended June 30, 2007

$
48.00

$
40.01

$
0.70Third Quarter Ended March 31, 2007

$
40.97

$
35.15

$
0.68Second Quarter Ended December 31, 2006

$
36.40

$
33.56

$
0.66First Quarter Ended September 30, 2006

$
34.35

$
30.70

$
0.64






The
aggregate amount of distributions declared in respect of the 2008 and 2007 fiscal years on common units, subordinated units and general partner units, including incentive
distribution rights, totaled $44.6 million and $28.2 million, respectively.

Cash Distribution Policy

Within 45 days after the end of each quarter, we distribute all of our available cash from operating surplus to unitholders of
record on the applicable record date. Our available cash from operating surplus consists generally of all cash on hand at the end of the fiscal quarter, plus all cash on hand resulting from working
capital borrowings made after the end of the quarter up to the date of determination of available cash, less the amount of cash that our general partner determines is necessary or appropriate to,
among others:



Our
ability to distribute available cash is contractually restricted by the terms of our credit facilities, which require us to maintain certain financial ratios and generally prohibit
distributions to unitholders if the distribution would cause an event of default, or an event of default is existing, under

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our
credit facilities. Please read "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesCredit Agreement" in
Item 7 of this report.

Subordination Period

During the subordination period, the common units have the right to receive distributions of available cash from operating surplus in
an amount equal to the minimum quarterly distribution of $0.50 per quarter, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any
distributions of available cash from operating surplus may be made on the subordinated units. Upon expiration of the subordination period, each outstanding subordinated unit will convert into one
common unit and will participate pro rata with the other common units in distributions of available cash.

Definition of Subordination Period.The subordination period will extend until the first day of any quarter, beginning after December 31, 2008, that each of
the following tests are met:



Adjusted
operating surplus is intended to reflect the cash generated from operations during a particular period and; therefore, excludes net increases in working capital borrowings and
net drawdowns of reserves of cash generated in prior periods.

Conversion of Subordinated Units.Our partnership agreement provides that up to 50% of the subordinated units, or 2,082,500 subordinated units, may convert into
common units on a one-for-one basis immediately upon the achievement of certain financial tests. Because we met the required tests for early conversion, 1,041,250 (25%) of our
subordinated units converted to common units on each of February 14, 2007 and February 14, 2008. We expect to satisfy the tests for conversion of the remaining subordinated units in
February 2009.

Incentive Distribution Rights

Incentive distribution rights represent the right to receive an increasing percentage of quarterly distributions of available cash from
operating surplus after the minimum quarterly distribution and certain target distribution levels have been achieved. Our general partner currently holds the incentive distribution rights, but may
transfer these rights separately from its general partner interest, subject to restrictions in the partnership agreement.

If
for any quarter, we have distributed available cash from operating surplus a) to the common and subordinated unitholders an amount equal to the minimum quarterly distribution,
and b) on the common units an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution, then we will distribute any additional available cash
from operating surplus for that quarter among the unitholders and our general partner in the following manner:



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The
percentage interests set forth above for our general partner include its 1.27% general partner interest and assume the general partner has not transferred the incentive distribution
rights. The percentage interests set forth above may change if we issue additional partnership interests and our general partner does not elect to maintain its percentage interest by acquiring
additional general partner units.

Issuer Purchases of Equity Securities

We did not repurchase any of our common units during the fourth quarter of fiscal 2008.

ITEM 6.    SELECTED FINANCIAL DATA.

The following table sets forth selected historical financial and operating data of K-Sea Transportation
Partners L.P. and its predecessors. On January 14, 2004, EW Transportation LLC contributed assets and liabilities constituting its business to us in connection with our initial
public offering of common units. Therefore, the historical financial and operating data presented below for the period prior to January 14, 2004 are for EW Transportation LLC. The
following table should be read in conjunction with the consolidated financial statements, including the notes thereto, included elsewhere in this report, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 of this report.

Years Ended June 30,2008

2007

2006

2005

2004Income Statement Data:Voyage revenue

$
312,680

$
216,924

$
176,650

$
118,811

$
93,899Bareboat charter and other revenue


13,600


9,650


6,118


2,583


1,900Total revenues


326,280


226,574


182,768


121,394


95,799Voyage expenses


79,427


45,875


37,973


24,220


16,339Vessel operating expenses


124,551


96,005


77,325


49,296


38,809General and administrative expenses


28,947


20,472


17,309


11,163


8,149Depreciation and amortization


48,311


33,415


26,810


21,399


18,643Net (gain) loss on sale of vessels


(601
)

102


(313
)

(264
)

255Total operating expenses


280,635


195,869


159,104


105,814


82,195Operating income


45,645


30,705


23,664


15,580


13,604Interest expense (income), net


21,275


14,097


10,118


5,949


6,370Net loss on reduction of debt(1)








7,224


1,359


3,158Other (income) expense, net


(1,827
)

(63
)

(64
)

(27
)

(253
)Income before provision (benefit) for income taxes


26,197


16,671


6,386


8,299


4,329Provision (benefit) for income taxes(2)


529


851


484


163


(16,845
)Net income


25,668

$
15,820

$
5,902

$
8,136

$
21,174Net income per unit

basic


1.97

$
1.56

$
0.60

$
0.95

$
2.26diluted


1.95

$
1.55

$
0.60

$
0.95

$
2.25


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Years Ended June 30,2008

2007

2006

2005

2004Balance Sheet Data (at year end):Vessels and equipment, net

$
608,209

$
358,580

$
316,237

$
235,490

$
193,646Total assets


798,308


439,833


389,220


275,267


228,144Total debt


439,206


244,287


193,380


114,005


78,817Partners' capital/members' equity


275,178


152,653


163,943


141,940


135,698Cash Flow Data:Net cash provided by (used in):Operating activities


40,507

$
41,176

$
20,072

$
24,163

$
10,904Investing activities


(292,196
)

(63,704
)

(105,398
)

(55,901
)

(59,167
)Financing activities


252,529


22,614


86,064


31,447


48,616Other Financial Data:Capital expenditures(3):Maintenance


27,836

$
20,337

$
13,753

$
8,024

$
7,957Expansion (including vessel and company acquisitions)


240,710


25,960


98,073


39,337


52,747Total


268,546

$
46,297

$
111,826

$
47,361

$
60,704Construction of tank vessels


51,987

$
33,315

$
20,702

$
16,816

$
16,512Distributions declared per common unit in respect of the period

$
2.990

$
2.680

$
2.380

$
2.180

$
0.955Operating Data:Number of tank barges (at period end)


74


60


61


44


34Number of tankers (at period end)


1


1


2


2


2Number of tugboats (at period end)


66


44


41


25


19Total barrel-carrying capacity (in thousands at period end)


4,423


3,464


3,357


2,561


2,410Net utilization(4)


84
%

85
%

83
%

85
%

86
%Average daily rate(5)

$
11,334

$
10,097

$
9,245

$
8,734

$
8,095


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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following is a discussion of the historical consolidated financial condition and results of operations of K-Sea
Transportation Partners L.P. and should be read in conjunction with our historical consolidated financial statements and notes thereto included elsewhere in this report.

GENERAL

We are a leading provider of marine transportation, distribution and logistics services for refined petroleum products in the United
States. We currently operate a fleet of 74 tank barges and 66 tugboats that serves a wide range of customers, including major oil companies, oil
traders and refiners. With approximately 4.4 million barrels of capacity, we believe we currently operate the largest coastwise tank barge fleet in the United States.

Demand
for our services is driven primarily by demand for refined petroleum products in the areas in which we operate. We generate revenue by charging customers for the transportation
and distribution of their products utilizing our tank vessels and tugboats. These services are generally provided under the following four basic types of contractual
relationships:



In
addition, a variation of a voyage charter is known as a "consecutive voyage charter." Under this arrangement, consecutive voyages are performed for a specified period of time.

The
table below illustrates the primary distinctions among these types of contracts:

Time
Charter

Contract of
Affreightment

Voyage
Charter(1)

Bareboat
CharterTypical contract length

One year or more

One year or more

Single voyage

Two years or moreRate basis

Daily

Per barrel

Varies

DailyVoyage expenses(2)

Customer pays

We pay

We pay

Customer paysVessel operating expenses(2)

We pay

We pay

We pay

We payIdle time

Customer pays as long as vessel is available for operations

Customer does not pay

Customer does not pay

Customer pays


---

For contracts of affreightment and voyage charters, revenue is recognized based upon the relative transit time in each period, with expenses
recognized as incurred. Although contracts of affreightment and certain contracts for voyage charters may be effective for a period in excess of one year, revenue is recognized over the transit time
of individual voyages, which are generally less than ten days in duration. For time charters and bareboat charters, revenue is recognized ratably over the contract period, with expenses recognized as
incurred.

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One
of the principal distinctions among these types of contracts is whether the vessel operator or the customer pays for voyage expenses, which include fuel, port charges, pilot fees,
tank cleaning costs and canal tolls. Some voyage expenses are fixed, and the remainder can be estimated. If we, as the vessel operator, pay the voyage expenses, we typically pass these expenses on to
our customers by charging higher rates under the contract or re-billing such expenses to them. As a result, although voyage revenue from different types of contracts may vary, the net
revenue that remains after subtracting voyage expenses, which we call net voyage revenue, is comparable across the different types of contracts. Therefore, we principally use net voyage revenue,
rather than voyage revenue, when comparing performance between different periods. Since net voyage revenue is a non-GAAP measurement, it is reconciled to the nearest GAAP measurement,
voyage revenue, under "Results of Operations" below.

SIGNIFICANT EVENTS DURING FISCAL 2008

On August 14, 2007, we completed the acquisition of all of the equity interests in Smith Maritime, Ltd., Go Big
Chartering, LLC, and Sirius Maritime, LLC (collectively, the "Smith Maritime Group"). This transaction was part of our business strategy to expand our fleet through strategic and
accretive acquisitions. The Smith Maritime Group provides marine transportation and logistics services to major oil companies, oil traders and refiners in Hawaii and along the West Coast of the United
States. The aggregate purchase price was $203.7 million, consisting of $168.9 million of cash, including $1.5 million of direct expenses, $23.5 million of assumed debt and
common units valued at approximately $11.3 million. As further described below, we financed the cash portion of the purchase through additional borrowings under our revolving credit agreement
and a bridge loan.

The
acquisition of the Smith Maritime Group added eleven petroleum tank barges and ten tugboats, aggregating 777,000 barrels of capacity (of which 669,000 barrels, or 86%, are
double-hulled) to our fleet, representing a 22% increase in our barrel-carrying capacity as of the acquisition date.

Acquisition Financing

To finance the acquisition of the Smith Maritime Group, on August 14, 2007 we amended and restated our revolving credit
agreement with KeyBank National Association, as administrative agent and lead arranger, to provide for (1) an increase in availability to $175.0 million under our senior secured
revolving credit facility, with an increase in the term to seven years, (2) a $45.0 million 364-day senior secured revolving credit facility, (3) amendments to certain
financial covenants and (4) a reduction in interest rate margins. We also entered into a bridge loan facility for up to $60.0 million with an affiliate of KeyBank National Association.
On August 14, 2007, we borrowed $67.0 million under the revolving facility, $45.0 million under the 364-day facility, and $60.0 million under the bridge loan
facility to fund the cash portion of the purchase price of the Smith Maritime Group. See "Liquidity and Capital ResourcesCredit Agreement" below for further discussion of these
facilities.

Common Unit Offering

On September 26, 2007, we completed a public offering of 3,500,000 common units representing limited partner interests. The
price to the public was $39.50 per unit. The net proceeds of $131.9 million from the offering, after payment of underwriting discounts and commissions and expenses, were used to repay
borrowings under our revolving credit agreement, including the $45.0 million 364-day facility, and also the $60.0 million bridge loan described above.

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RECENT DEVELOPMENT

On
August 20, 2008, we completed a public offering of 2,000,000 common units representing limited partner interests. The price to the public was $25.80 per unit. The net proceeds
of $50 million from the offering, after payment of underwriting discounts and commissions, were used to repay borrowings under our credit agreements and to make construction progress payments
in connection with our vessel new building program.

DEFINITIONS

In order to understand our discussion of our results of operations, it is important to understand the meaning of the following terms
used in our analysis and the factors that influence our results of operations:



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48

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Table of Contents

RESULTS OF OPERATIONS

The following table summarizes our results of operations for the periods presented (dollars in thousands, except average daily rates):

For the Years Ended June 30,2008

2007

2006Voyage revenue

$
312,680

$
216,924

$
176,650Bareboat charter and other revenue


13,600


9,650


6,118Total revenues


326,280


226,574


182,768Voyage expenses


79,427


45,875


37,973Vessel operating expenses


124,551


96,005


77,325% of voyage and vessel operating expenses to total revenues


62.5
%

62.6
%

63.1
%General and administrative expenses


28,947


20,472


17,309% of total revenues


8.9
%

9.0
%

9.5
%Depreciation and amortization


48,311


33,415


26,810Net (gain) loss on sale of vessels


(601
)

102


(313
)Operating income


45,645


30,705


23,664% of total revenues


14.0
%

13.6
%

12.9
%Interest expense, net


21,275


14,097


10,118Net loss on reduction of debt








7,224Other (income) expense, net


(1,827
)

(63
)

(64
)Income before provision for income taxes


26,197


16,671


6,386Provision for income taxes


529


851


484Net income

$
25,668

$
15,820

$
5,902Net voyage revenue by tradeCoastwiseTotal tank vessel days


15,103


11,032


9,430Days worked


13,174


9,954


8,467Scheduled drydocking days


831


511


403Net utilization


87
%

90
%

90
%Average daily rate

$
13,731

$
12,375

$
11,967Total coastwise net voyage revenue(a)

$
180,893

$
123,182

$
101,324LocalTotal tank vessel days


9,267


8,864


8,537Days worked


7,406


6,987


6,534Scheduled drydocking days


174


232


317Net utilization


80
%

79
%

77
%Average daily rate

$
7,070

$
6,851

$
5,717Total local net voyage revenue(a)

$
52,360

$
47,867

$
37,353Tank vessel fleetTotal tank vessel days


24,370


19,896


17,967Days worked


20,580


16,941


15,001Scheduled drydocking days


1,005


743


720Net utilization


84
%

85
%

83
%Average daily rate

$
11,334

$
10,097

$
9,245Total fleet net voyage revenue(a)

$
233,253

$
171,049

$
138,677


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Fiscal Year Ended June 30, 2008 Compared to the Fiscal Year Ended June 30, 2007

Voyage Revenue and Voyage Expenses

Voyage revenue was $312.7 million for the fiscal year ended June 30, 2008, an increase of $95.8 million, or 44%,
as compared to voyage revenue of $216.9 million for the fiscal year ended June 30, 2007. Voyage expenses were $79.4 million for the fiscal year ended June 30, 2008, an
increase of $33.5 million, or 73%, as compared to voyage expenses of $45.9 million for the fiscal year ended June 30, 2007.

Net Voyage Revenue

Net voyage revenue was $233.3 million for the fiscal year ended June 30, 2008, an increase of $62.3 million, or
36%, as compared to net voyage revenue of $171.0 million for the fiscal year ended June 30, 2007. In our coastwise trade, net voyage revenue was $180.9 million for the fiscal year
ended June 30, 2008, an increase of $57.7 million, or 47%, as compared to $123.2 million for the fiscal year ended June 30, 2007. Net utilization in our coastwise trade was
87% for the fiscal year ended June 30, 2008 as compared to 90% for the fiscal year ended June 30, 2007. Net utilization in fiscal 2008 was adversely affected by a larger than usual
number of shipyard days. The acquisition of the
Smith Maritime Group in August 2007 resulted in increased coastwise net voyage revenue of $42.4 million for the fiscal year ended June 30, 2008. Net voyage revenue increased by an
additional $13.4 million during the fiscal year ended June 30, 2008 due to an increase in the number of working days for (1) the DBL 104, which began operations in April 2007,
(2) the DBL 134, which was in shipyard being coupled with the Irish Sea in the prior fiscal period, (3) the DBL 151, which was in shipyard for an extended stay in the prior fiscal period
and (4) the Columbia, which was purchased and placed in service in September 2007. Average daily rates in our coastwise trade increased 11% to $13,731 for the fiscal year ended June 30,
2008 from $12,375 for the fiscal year ended June 30, 2007.

Net
voyage revenue in our local trade for the fiscal year ended June 30, 2008 increased by $4.5 million, or 9%, to $52.4 million from $47.9 million for the
year ended June 30, 2007. Local net voyage revenue increased by $8.3 million for the fiscal year ended June 30, 2008 due to the increased number of work days for the
new-build barges DBL 27, DBL 22, DBL 23, DBL 24 and DBL 25 delivered in January 2007, June 2007, September 2007, December 2007 and March 2008, respectively. This increase was partially
offset by the retirement of four single-hulled tank vessels, which decreased net voyage revenue by $2.1 million, and also by weakness in the market for certain older, smaller units and an
unseasonably warm winter in the northeast, which reduced demand for heating oil. Net utilization in our local trade was 80% for the fiscal year ended June 30, 2008, compared to 79% for the
fiscal year ended June 30, 2007. Average daily rates in our local trade increased 3% to $7,070 for the fiscal year ended June 30, 2008 from $6,851 for the fiscal year ended
June 30, 2007. Net utilization in fiscal 2008 was positively impacted by higher utilization for our new build barges.

Bareboat Charter and Other Revenue

Bareboat charter and other revenue was $13.6 million for the fiscal year ended June 30, 2008, compared to
$9.7 million for the fiscal year ended June 30, 2007. Of this $3.9 million increase, the Smith Maritime Group contributed $5.2 million and the eight tugboats purchased from
Roehrig Maritime in June 2008 contributed $0.8 million. These increases were partially offset by a $2.3 million decrease in chartering of tank barges to third parties.

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Vessel Operating Expenses

Vessel operating expenses were $124.6 million for the fiscal year ended June 30, 2008, an increase of
$28.6 million, or 30%, as compared to $96.0 million for the fiscal year ended June 30, 2007. Voyage and vessel operating expenses as a percentage of total revenues decreased to
62.5% for the fiscal year ended June 30, 2008 from 62.6% for the fiscal year ended June 30, 2007. Vessel labor and related costs increased $18.6 million during fiscal 2008 as a
result of contractual labor rate increases and a higher average number of employees due to the operation of the additional barges described under "Net voyage revenue" above, the
acquisition of the Smith Maritime Group during August 2007 and additional tugboats purchased during fiscal 2008. Insurance costs and vessel repairs and supplies increased $9.7 during fiscal
2008 million as a result of the operation of the larger number of vessels. Additionally, outside towing costs decreased $1.3 million due to additional tugboats purchased during fiscal
2008.

Depreciation and Amortization

Depreciation and amortization was $48.3 million for the fiscal year ended June 30, 2008, an increase of
$14.9 million, or 45%, as compared to $33.4 million for the fiscal year ended June 30, 2007. The increase resulted from additional depreciation and drydocking amortization on our
newbuild and purchased vessels described above in addition to the vessels acquired in the Smith Maritime Group transaction.

General and Administrative Expenses

General and administrative expenses were $28.9 million for the fiscal year ended June 30, 2008, an increase of
$8.4 million, or 41%, as compared to general and administrative expenses of $20.5 million for the fiscal year ended June 30, 2007. As a percentage of total revenues, general and
administrative expenses decreased to 8.9% for the fiscal year ended June 30, 2008 from 9.0% for the fiscal year ended June 30, 2007. The $8.4 million increase during fiscal 2008
was mainly a result of increased personnel costs resulting from the Smith Maritime Group acquisition, additional increased headcount to support our growth, and the additional facilities costs of our
new offices in Philadelphia and Hawaii.

Interest Expense, Net

Net interest expense was $21.3 million for the fiscal year ended June 30, 2008, or $7.2 million higher than the
$14.1 million incurred in fiscal year ended June 30, 2007. The increase resulted from higher average debt balances resulting from increased credit line and term loan borrowings in
connection with our acquisition and vessel new building program. In addition, we incurred $1.1 million of interest expense during fiscal 2008 for bridge financing in connection with the Smith
Maritime Group acquisition.

Provision for Income Taxes

For the fiscal year ended June 30, 2008, our effective tax rate was 2.0% as compared to a rate of 5.1% for the fiscal year ended
June 30, 2007. Our effective tax rate comprises the New York City Unincorporated Business Tax and foreign taxes on our operating partnership, plus federal, state, local and foreign corporate
income taxes on the taxable income of our operating partnership's corporate subsidiaries. Our effective tax rate for the fiscal year ended June 30, 2008 was lower than the comparable prior year
period primarily due to adjustments to the estimated tax liabilities for certain foreign jurisdictions based on tax returns filed.

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Net Income

Net income was $25.7 million for the fiscal year ended June 30, 2008, an increase of $9.9 million compared to net
income of $15.8 million for the fiscal year ended June 30, 2007. This increase resulted primarily from a $14.9 million increase in operating income, a $1.8 million increase
in other income and a $0.3 decrease in the provision for income taxes, partially offset by a $7.2 million increase in interest expense.

Fiscal Year Ended June 30, 2007 Compared to the Fiscal Year Ended June 30, 2006

Voyage Revenue and Voyage Expenses

Voyage revenue was $216.9 million for the fiscal year ended June 30, 2007, an increase of $40.2 million, or 23%,
as compared to voyage revenue of $176.7 million for the fiscal year ended June 30, 2006. Voyage expenses were $45.9 million for the fiscal year ended June 30, 2007, an
increase of $7.9 million, or 21%, as compared to voyage expenses of $38.0 million for the fiscal year ended June 30, 2006.

Net Voyage Revenue

Net voyage revenue was $171.0 million for the fiscal year ended June 30, 2007, an increase of $32.3 million, or
23%, as compared to net voyage revenue of $138.7 million for the fiscal year ended June 30, 2006. In our coastwise trade, net voyage revenue was $123.2 million for the fiscal year
ended June 30, 2007, an increase of $21.9 million, or 22%, as compared to $101.3 million for the fiscal year ended June 30, 2006. Net utilization in our coastwise trade
remained constant at 90% for both the fiscal year ended June 30, 2007 and 2006. The acquisition of Sea Coast Transportation LLC, or Sea Coast, in October 2005 resulted in increased
coastwise net voyage revenue of $14.3 million for the fiscal year ended June 30, 2007, as compared to the fiscal year ended June 30, 2006. Increases totaling $7.6 million
in coastwise net voyage revenue resulted from an increase in days worked by the following vessels: (1) the DBL 103, which was placed in service in January 2006, (2) the DBL 104, which
was placed in service in April 2007, (3) the McCleary's Spirit, which was purchased in October 2005, and (4) the DBL 53, which commenced operations in June 2006 after being rebuilt.
These increases were partially offset by a $1.0 million decrease in coastwise net voyage revenue resulting from the loss of the DBL 152 in the previously reported November 2005 barge incident.
Average daily rates in our coastwise trade increased 3% to $12,375 for the fiscal year ended June 30, 2007 from $11,967 for the fiscal year ended June 30, 2006, which accounted for
approximately $3.5 million of increased net voyage revenue.

Net
voyage revenue in our local trade for the fiscal year ended June 30, 2007 increased by $10.5 million, or 28%, to $47.9 million from $37.4 million for the
year ended June 30, 2006. The acquisition of Sea Coast in October 2005 resulted in increased local net voyage revenue of $1.8 million for the fiscal year ended June 30, 2007, as
compared to the fiscal year ended June 30, 2006. Additionally, local net voyage
revenue increased by $8.6 million for the fiscal year ended June 30, 2007 due to the increased number of work days for the newbuild barges DBL 28, DBL 29 and DBL 26, and DBL 27 delivered
in March 2006, May 2006, August 2006, and January 2007, respectively. This was partially offset by the retirement of three small tank vessels which decreased net voyage revenue by $3.4 million.
Net utilization in our local trade was 79% for the fiscal year ended June 30, 2007, compared to 77% for the fiscal year ended June 30, 2006. Average daily rates in our local trade
increased 20% to $6,851 for the fiscal year ended June 30, 2007 from $5,717 for the fiscal year ended June 30, 2006, reflecting the positive impact of higher charter rates resulting from
strong market conditions, particularly for short term charters. Increased charter rates accounted for approximately $5.1 million of increased net voyage revenue for the fiscal year ended
June 30, 2007.

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Bareboat Charter and Other Revenue

Bareboat charter and other revenue was $9.7 million for the fiscal year ended June 30, 2007, compared to
$6.1 million for the fiscal year ended June 30, 2006. Of this $3.6 million increase, $1.5 million was generated by increased outside chartering of tank barges and
$1.9 million was generated by a small lube oil operation purchased in the fall of 2006.

Vessel Operating Expenses

Vessel operating expenses were $96.0 million for the fiscal year ended June 30, 2007, an increase of
$18.7 million, or 24%, as compared to $77.3 million for the fiscal year ended June 30, 2006. Voyage and vessel operating expenses as a percentage of total revenues decreased to
62.6% for the fiscal year ended June 30, 2007 from 63.1% for the fiscal year ended June 30, 2006. Vessel labor and related costs increased $11.4 million as a result of contractual
labor rate increases and a higher average number of employees due to the operation of the additional barges described under "Net voyage revenue" above, and additional tugboats purchased
in October 2005, November 2006, and April 2007. Insurance costs and vessel repairs and supplies increased $4.0 million as a result of the operation of the larger number of vessels.
Additionally, outside towing increased $1.3 million during fiscal 2007 due to higher shipyard days of our tugboats.

Depreciation and Amortization

Depreciation and amortization was $33.4 million for fiscal 2007, an increase of $6.6 million, or 25%, as compared to
$26.8 million for the fiscal year ended June 30, 2006. The increase resulted from additional depreciation and drydocking amortization on our newbuild and purchased vessels described
above, plus $0.4 million in increased amortization of certain intangible assets acquired in our acquisition of Sea Coast.

General and Administrative Expenses

General and administrative expenses were $20.5 million for the fiscal year ended June 30, 2007, an increase of
$3.2 million, or 18%, as compared to general and administrative expenses of $17.3 million for the fiscal year ended June 30, 2006. As a percentage of total revenues, general and
administrative expenses decreased to 9.0% for the fiscal year ended June 30, 2007 from 9.5% for the fiscal year ended June 30, 2006. The $3.2 million increase included
$1.1 million of increased personnel and facilities costs resulting from the Sea Coast acquisition, and also a $2.2 million increase relating to increased headcount and facilities costs
of our new corporate office and a small satellite office in Philadelphia to support our growth.

Interest Expense, Net

Net interest expense was $14.1 million for the fiscal year ended June 30, 2007, or $4.0 million higher than the
$10.1 million incurred in fiscal year ended June 30, 2006. The increase resulted from higher average debt balances resulting from increased credit line and term loan borrowings in
connection with our acquisition and vessel newbuilding program, and higher average interest rates.

Loss on Reduction of Debt

In November 2005, in connection with our redemption of the Title XI bonds (see "Liquidity and Capital Resources- Title XI
Borrowings" below), we made a make-whole payment of $4.0 million. After writing off $2.7 million in unamortized deferred financing costs relating to the Title XI bonds, and
after

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costs
and expenses relating to the transaction, we recorded a loss on reduction of debt of $6.9 million. We recorded an additional $0.3 million of loss on reduction of debt in April 2006
resulting from the write-off of deferred financing costs relating to a downsizing of our revolving credit facility.

Provision for Income Taxes

For fiscal 2007, our effective tax rate decreased to 5.1%, compared to 7.6% in fiscal 2006. Our effective tax rate comprises the New
York City Unincorporated Business Tax and foreign taxes on our operating partnership, plus federal, state, local and foreign corporate income taxes on the income of our operating partnership's
corporate subsidiaries. Our effective tax rate for the fiscal year ended June 30, 2007 was lower than the comparable prior year period primarily because a smaller percentage of our
pre-tax book income related to our corporate subsidiaries.

Net Income

Net income was $15.8 million for the fiscal year ended June 30, 2007, an increase of $9.9 million compared to net
income of $5.9 million for the fiscal year ended June 30, 2006. This increase resulted primarily from a $7.2 million decrease in net loss on reduction of debt and a
$7.0 million increase in operating income partially offset by a $4.0 million increase in interest expense and a $0.4 million increase in the provision for income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Operating Cash Flows.Net cash provided by operating activities was $40.5 million in fiscal 2008, $41.2 million in fiscal 2007 and
$20.1 million in fiscal 2006. The decrease of $0.7 million in fiscal 2008, compared to fiscal 2007, resulted from a $12.9 million negative impact from changes in operating working
capital and by increased drydocking payments of $10.6 million, offset by $22.8 million of improved operating results, after adjusting for non-cash expenses such as
depreciation and amortization. The increase of $21.1 million in fiscal 2007, compared to fiscal 2006, resulted primarily from $14.7 million of improved operating results, after adjusting
for non-cash expenses such as depreciation and amortization and net loss on reduction of debt, and a $9.2 million positive impact from changes in operating working capital,
partially offset by increased drydocking payments of $2.9 million. During fiscal 2008, our working capital increased mainly due to increased accounts receivable as a result of increased
revenues, and increased prepaid expenses as a result of increased fuel inventory which resulted from higher fuel prices. During fiscal 2007, our working capital decreased mainly due to increases in
accrued expenses and other current liabilities resulting from increased payroll, self-insured medical and claim accruals, and decreased prepaid and other current assets resulting mainly
from the collection of insurance claim receivables.

Investing Cash Flows.Net cash used in investing activities totaled $292.2 million in fiscal 2008, $63.7 million in fiscal 2007 and
$105.4 million in fiscal 2006. Fiscal 2008 included the $168.9 million cash portion of the purchase price for the Smith Maritime Group. Vessel acquisitions for fiscal 2008 included
$60.5 million to acquire two existing barges and eleven additional tugs. The seller issued a $3.0 million note on one of the barge purchases, which was paid in November 2007. Vessel
acquisitions totaled $16.2 million for fiscal 2007, which related to the purchase of five tugboats and certain small tank vessels. In fiscal 2006, we spent $76.5 million in cash, net, to
acquire Sea Coast in October 2005. Also during fiscal 2006, we acquired an 85,000-barrel integrated tug-barge unit for approximately $13.1 million. Tank vessel
construction for fiscal 2008 aggregated $52.0 million and included progress payments on the construction of three new 80,000-barrel tank barges, three new 28,000-barrel
tank barges, a new 50,000-barrel tank barge, a new 100,000-barrel tank barge and a new 185,000-barrel articulated tug-barge unit. Tank vessel
construction of $33.3 million in fiscal 2007 included progress

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payments
on construction of a new 100,000-barrel tank barge, three new 80,000-barrel tank barges and six new 28,000-barrel tank barges. Construction of tank vessels
for fiscal 2006 totaled $20.7 million, including payments for two new 100,000-barrel tank barges and four new 28,000-barrel tank barges. Other capital expenditures,
totaling $13.3 million in fiscal 2008, related primarily to the coupling of tugboats to our newbuild tank barges, tank renovations on two tank barges and improvements to a newly purchased tug.
Capital expenditures of $14.8 million in fiscal 2007 included the coupling of tugboats to our newbuild tank barges and the rebuilding of one of our larger existing tank barges. Other capital
expenditures of $9.1 million in fiscal 2006 related primarily to re-powering of, and installation of coupling systems on, certain tugboats used with our newbuild tank barges, and
expenditures related to upgrading the vessels acquired in December 2004. Capital expenditures made in the normal course of business are generally financed by cash from operations and, where necessary,
borrowings under our credit agreement.

Financing Cash Flows.Net cash provided by financing activities was $252.5 million in fiscal 2008, $22.6 million in fiscal 2007 and
$86.1 million in fiscal 2006. The primary financing activities for fiscal 2008 were $138.3 million in gross proceeds from the issuance of 3.5 million new common units in September
2007, $105.0 million of borrowings related to the Smith Maritime Group acquisition, which were repaid with the equity offering proceeds, and $161.9 million of other term loans to finance
our vessel newbuilding program, certain tug and barge purchases including the purchase of eight tugboats from Roehrig Maritime LLC as described under "Term Loans" below. Repayment
of term loans during fiscal 2008 totaled $171.8 million, which included the $105.0 million related to the Smith Maritime Group referred to above and $27.5 million of bridge
financing for the purchase of eight tugboats from Roehrig Maritime LLC. We also increased our credit line borrowings by $69.0 million relating to the Smith Maritime Group acquisition and
for progress payments on barges under construction, and paid $40.4 million in distributions to partners as described under "Payment of Distributions" below.

During
fiscal 2007, we increased our credit line borrowings by $43.1 million, increased borrowings on term loans by $14.9 million to finance the construction of new tank
barges, repaid term loans by $7.7 million, and paid $27.1 million in distributions to partners.

In
fiscal 2006, our primary financing activities were the issuance of $109.4 million in new term loans and $34.0 million in gross proceeds from the sale of 950,000 common
units in October 2005. These proceeds were used to finance the Sea Coast acquisition and the other investing activities described above. Additionally, we paid $36.8 million to redeem the
principal balance of the Title XI bonds, and made $23.0 million of distributions to partners. We also amended our revolving credit agreement (see "Credit Agreement" below) and
increased our credit line borrowings by $6.9 million.

Payment of Distributions.The board of directors of K-Sea General Partner GP LLC declared the following quarterly distributions to
unitholders: $0.70 per unit in respect of the quarter ended June 30, 2007, which was paid on July 24, 2007 to unitholders of record on July 18, 2007; $0.72 per unit in respect of
the quarter ended September 30, 2007, which was paid on November 14, 2007 to unitholders of record on November 8, 2007; $0.74 per unit in respect of the quarter ended
December 31, 2007, which was paid on February 14, 2008 to unitholders of record on February 8, 2008; and $0.76 per unit in respect of the quarter ended March 31, 2008,
which was paid on May 15, 2008 to unitholders of record on May 8, 2008. Additionally, the board declared a quarterly distribution of $0.77 per unit in respect to the quarter ended
June 30, 2008, which was paid on August 14, 2008 to unitholders of record on August 6, 2008.

Oil Pollution Act of 1990.Tank vessels are subject to the requirements of OPA 90. OPA 90 mandates that all single-hull tank vessels operating in U.S.
waters be removed from petroleum and petroleum product transportation services at various times through January 1, 2015, and provides a

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schedule
for the phase-out of the single-hull vessels based on their age and size. At September 1, 2008, approximately 76% of the barrel-carrying capacity of our tank
vessel fleet was double-hulled in compliance with OPA 90, and the remainder will be in compliance with OPA 90 until January 2015.

Ongoing Capital Expenditures.Marine transportation of refined petroleum products is a capital intensive business, requiring significant investment to maintain an
efficient fleet and to stay in regulatory compliance. We estimate that, over the next five years, we will spend an average of approximately $23.0 million per year to drydock and maintain our
fleet. We expect drydocking and maintenance
expenditures to approximate $22.0 million in fiscal 2009. In addition, we anticipate that we will spend $1.0 million annually for other general capital expenditures. Periodically, we
also make expenditures to acquire or construct additional tank vessel capacity and/or to upgrade our overall fleet efficiency. For a further discussion of maintenance and expansion capital
expenditures, please read footnote 3 to the table in "Selected Financial Data" in Item 6 of this report. The following table summarizes total maintenance capital expenditures, including
drydocking expenditures, and expansion capital expenditures for the periods presented (in thousands):

Years Ended June 30,2008

2007

2006Maintenance capital expenditures

$
27,836

$
20,337

$
13,753Expansion capital expenditures (including vessel and company acquisitions)


240,710


25,960


98,073Total capital expenditures

$
268,546

$
46,297

$
111,826Construction of tank vessels

$
51,987

$
33,315

$
20,702


During
fiscal 2008, we took delivery of the following newbuild vessels: in June 2008, an 80,000-barrel tank barge, the DBL 77; in March 2008, a 28,000-barrel tank
barge, the DBL 25; in December 2007, a 28,000-barrel tank barge, the DBL 24; and in September 2007, a 28,000-barrel tank barge, the DBL 23. In total, we have agreements with
shipyards for the construction of eight additional new tank barges as follows:

Vessels

Expected DeliveryTwo 80,000-barrel tank barges

1st  2nd Quarter fiscal 2009One 185,000-barrel articulated tug-barge unit

2nd Quarter of fiscal 2010One 100,000-barrel tank barge

2nd Quarter fiscal 2010Four 50,000-barrel tank barges

3rd Q fiscal 2010  2nd Q fiscal 2011


The above tank barges are expected to cost, in the aggregate and after the addition of certain special equipment, approximately
$165.0 million, of which $40.4 million has been spent as of June 30, 2008. We have an agreement for a long-term charter for the 185,000-barrel unit with a
major customer that is expected to commence upon delivery.

Additionally,
we intend to retire, retrofit or replace 25 (including four chartered-in) single-hull tank vessels by December 2014, which at September 1,
2008 represented approximately 24% of our barrel-carrying capacity. The capacity of certain of these single-hulled vessels has already been effectively replaced by double-hulled vessels placed into
service in the past several years. We estimate that the current cost to replace the remaining capacity with newbuildings and by retrofitting certain of our existing vessels totals approximately
$50.0 million. This capacity can also be replaced by acquiring existing double-hulled tank vessels as opportunities arise. We evaluate the most cost-effective means to replace this
capacity on an ongoing basis.

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Liquidity Needs.Our primary short-term liquidity needs are to fund general working capital requirements, distributions to unitholders, and drydocking
expenditures while our long term liquidity needs are primarily associated with expansion and other maintenance capital expenditures. Expansion capital expenditures are primarily for the purchase of
vessels, while maintenance capital expenditures include drydocking expenditures and the cost of replacing tank vessel operating capacity. Our primary sources of funds for our short term liquidity
needs are cash flows from operations and borrowings under our credit agreement, while our long term sources of funds are cash from operations, long term bank borrowings and other debt or equity
financings.

We
believe that cash flows from operations and borrowings under our credit agreement, described under "Credit Agreement" below, will be sufficient to meet our liquidity
needs for the next 12 months.

Credit Agreement.We maintain a revolving credit agreement with a group of banks, with KeyBank National Association as administrative agent and lead arranger, to
provide financing for our operations. On August 14, 2007, we amended and restated our revolving credit agreement to provide for (1) an increase in availability to $175.0 million
under the primary revolving facility, with an increase in the term to seven years, (2) an additional $45.0 million 364-day senior secured revolving credit facility,
(3) amendments to certain financial covenants and (4) a reduction in interest rate margins. Under certain conditions, we have the right to increase the primary revolving facility by up
to $75.0 million, to a maximum total facility amount of $250.0 million. On November 7, 2007, we exercised this right and increased the facility by $25.0 million to
$200.0 million. The primary revolving facility is, and the 364-day facility was, collateralized by a first perfected security interest in vessels having a total fair market value of
approximately $275.0 million and certain equipment and machinery related to such vessels. On August 14, 2007, we borrowed $67.0 million under the revolving facility and
$45.0 million under the 364-day facility to fund a portion of the purchase price of the Smith Maritime Group.

Also
on August 14, 2007, we entered into a bridge loan facility for up to $60.0 million with an affiliate of KeyBank National Association in connection with the Smith
Maritime Group acquisition. While outstanding, the bridge loan facility bore interest at an annual rate of LIBOR plus 1.5%, and was to mature on November 12, 2007.

Both
the $45.0 million 364-day senior secured facility and the $60.0 million bridge loan were repaid on September 26, 2007 upon closing of an offering of
common units by us. See "Issuance of Common Units" below. As of June 30, 2008, we had $162.4 million outstanding on the revolving facility.

The
following table summarizes the rates of interest and commitment fees for the revolving credit agreement:

Ratio of Total Funded Debt to EBITDA

LIBOR
Margin

Base Rate
Margin

Commitment
FeeLess than 2.00 : 1.00


0.70
%

0.00
%

0.150
%Greater than or equal to 2.00 : 1.00 and less than 2.50 : 1.00


0.85
%

0.00
%

0.150
%Greater than or equal to 2.50 : 1.00 and less than 3.00 : 1.00


1.10
%

0.00
%

0.200
%Greater than or equal to 3.00 : 1.00 and less than 3.50 : 1.00


1.25
%

0.00
%

0.200
%Greater than or equal to 3.50 : 1.00


1.50
%

0.25
%

0.300
%


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Interest on a base rate loan is payable monthly over the five-year term of the credit agreement. Interest on a LIBOR-based loan is due, at our
election, one, two or three months after such loan is made. Outstanding principal amounts are due upon termination of the credit agreement.

Loan
proceeds under the credit agreement may be used for any purpose in the ordinary course of business, including vessel acquisitions, ongoing working capital needs and distributions.
Amounts borrowed and repaid may be re-borrowed. Borrowings made for working capital purposes must be reduced to zero for a period of at least 15 consecutive days once each year.

The
credit agreement contains covenants that include, among others:



The
credit agreement contains customary events of default. If a default occurs and is continuing, we must repay all amounts outstanding under the agreement.

We
also maintain a separate $5.0 million revolver with a commercial bank to support our daily cash management activities. Advances under this facility bear interest at
30-day LIBOR plus a margin of 1.40%; amounts outstanding at June 30, 2008 totaled $3.7 million.

On
November 30, 2007, we entered into agreements with a financial institution to swap the LIBOR-based, variable rate interest payments on $104.9 million of our credit
agreement borrowings to fixed rates, for a term of three years. The fixed rates to be paid by us average 4.01% plus the applicable margin. The fair value of the swap contracts ($1.2 million) as
of June 30, 2008 is included in other liabilities in the consolidated balance sheet.

Term Loans.On June 5, 2008, we closed the last of eleven fixed-rate term loans aggregating $72.1 million, which were entered into
between April 30, 2008 and June 5, 2008. These loans were arranged with a financial institution, which assigned all but two to other financial institutions. The loans have a term of ten
years, maturing between April 1, 2018 and June 1, 2018, except one loan for $16.5 million which has a term of seven years and matures on June 1, 2015. These loans bear a
weighted average interest rate of 6.35% and are repayable in an aggregate fixed monthly payment of $0.6 million. Final balloon payments of principal total $10.7 million on June 1,
2015 and $24.8 million between April 1, 2018 and June 1, 2018. The loans are collateralized by eleven tank barges and tugboats. The proceeds of these loans were used to repay
borrowings under our credit agreement, except for $15.0 million which was used to repay an advance on such loans which was used to repay a separate term loan. These term loan agreements contain
customary events of default, including a cross default to our credit agreement, and also the fixed charge coverage ratio requirement that is included in the credit agreement. Borrowings outstanding on
these loans totaled $71.9 million at June 30, 2008.

Also
on June 5, 2008, in connection with the acquisition of eight tugboats and ancillary equipment from Roehrig Maritime LLC, we entered into a $31.7 million bridge
loan agreement with a financial institution. The bridge loan was to mature on October 5, 2008; we have since refinanced $27.5 million of the bridge loan with term loans and repaid the
balance on July 13, 2008 using our revolving credit

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agreement.
The term loans all have terms of seven years. Two of the loans totaling $19.9 million bear a weighted average interest rate of 6.52% and are repayable in an aggregate fixed monthly
amount of $0.2 million, with final balloon payments of principal totaling $12.1 million due at maturity on July 1, 2015. A third term loan bears interest at LIBOR plus 2.0%, is
repayable in fixed principal amounts ranging from $30,896 to $41,946 monthly, plus interest, and matures on July 1, 2015 at which time a final balloon payment of principal of
$4.6 million is due. These term loans are collateralized by six tugboats. Borrowings outstanding on these term loans totaled $27.5 million at June 30, 2008.

On
June 4, 2008, we entered into a credit agreement (the "ATB Agreement") with a financial institution pursuant to which the lender agreed to provide financing during the
construction period, and thereafter, for a 185,000-barrel articulated tug-barge unit in an amount equal to 80% of the acquisition costs of the unit, up to a maximum of
$57.6 million. Obligations under the ATB Agreement are collateralized during the construction period by an assignment of our rights under the construction contract with the related shipyard
and, after delivery, by a first preferred mortgage interest in the tug-barge unit. Interest is payable quarterly at the applicable LIBOR rate plus a margin ranging from 1.05% to 1.85%
based upon our ratio of Total Funded Debt to EBITDA, as defined in the agreement. At the delivery date of the unit, which is expected during the fourth quarter of calendar 2009, the aggregate of the
advances taken during the construction period will be converted to a term loan repayable in twenty-eight quarterly payments covering 37.5% of the term loan, which are expected to approximate
$0.8 million each, plus interest at LIBOR plus the applicable margin. The twenty eighth and final payment will also include a balloon payment of 62.5% of the term loan, estimated at
$36.0 million. The ATB Agreement contains the same financial covenants as are contained in our credit agreement described above, as well as customary events of default. We had outstanding
borrowings of $10.4 million at June 30, 2008 under the ATB agreement. On June 13, 2008, we also entered into an agreement with the financial institution to swap the LIBOR-based,
variable rate interest payments on the outstanding balance of the ATB agreement to a fixed rate of 5.08% over the same term, resulting in a total fixed interest rate of 5.08% plus the applicable
margin. The fair value of the swap contract of ($0.9 million) as of June 30, 2008 is included in other liabilities in the consolidated balance sheet.

On
February 22, 2008, we closed a new ten-year, $5.4 million term loan to finance purchase of a tugboat. The loan bears interest at 6.15%, and is repayable in
monthly installments of $46,220 with a final payment at maturity of $2.4 million. The loan is collateralized by the related tugboat. The principal balance of the loan was $5.4 million at
June 30, 2008.

On
August 14, 2007, in connection with the acquisition of the Smith Maritime Group, we assumed two term loans totaling $23.5 million. The first, in the amount of
$19.5 million, bears interest at LIBOR plus 1.25% and is repayable in equal monthly installments of $147,455, plus interest, through August 2018. The second, in the amount of
$4.0 million, bears interest at LIBOR plus 1.0% and is repayable in monthly installments ranging from $59,269 to $81,320, plus interest, through May 2012. These loans are collateralized by
three tank barges. We also agreed with the lender to assume the two existing interest rate swaps relating to these two loans. The LIBOR-based, variable rate interest payments on these loans have been
swapped for fixed payments at an average rate of 5.44%, plus a margin, over the same terms as the loans. Borrowings outstanding on the term loans were $21.4 million at June 30, 2008. The
fair value of the swap contract of ($1.2 million) as of June 30, 2008 is included in other liabilities in the consolidated balance sheet.

On
April 3, 2006, we entered into an agreement with a lending institution under which we borrowed $80.0 million, for which we pledged six tugboats and six tank barges as
collateral. We used the proceeds of these loans to repay indebtedness under our credit agreement. Borrowings are represented by six loans which have been assigned to other lending institutions. These
loans bear interest at a rate equal to LIBOR plus 1.40%, and are repayable in 84 monthly installments with the remaining principal payable at maturity. The agreement contains certain prepayment
premiums. Borrowings outstanding on these loans totaled $71.9 million as of June 30, 2008. Also on April 3, 2006,

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we
entered into an agreement with the lending institution to swap the one-month, LIBOR based, variable interest payments on the $80.0 million of loans for a fixed payment at a rate
of 5.2275%, over the same terms as the loans. This swap results in a fixed interest rate on the loans of 6.6275% for their seven-year term. The fair value of the swap contract of
($3.5 million) and $0.4 million as of June 30, 2008 and 2007, respectively, is included in other liabilities and other assets in the consolidated balance sheet.

The
interest rate swap contracts referred to above have all been designated as cash flow hedges and, therefore, the unrealized gains and losses resulting from the change in fair value of
each of the contracts are being reflected in other comprehensive income.

On
December 19, 2005, one of our subsidiaries entered into a seven year Canadian dollar term loan to refinance the purchase of an integrated tug-barge unit. The
proceeds of US $13.0 million were used to repay borrowings under our credit agreement, which had been used to finance the purchase of the unit. The loan bears interest at a fixed rate of 6.59%
and is repayable in 60 monthly installments of CDN $136,328 and 23 monthly installments of CDN $215,991 with the remaining principal amount of CDN $7.7 million payable at
maturity. This loan is collateralized by the related tug-barge unit and one other tank barge. Borrowings outstanding on this loan totaled US $13.2 million as of June 30,
2008.

In
May 2006, we entered into an agreement to borrow up to $23.0 million to partially finance construction of two 28,000-barrel and one 100,000-barrel tank
barges. The loan bears interest at 30-day LIBOR plus 1.40%, and is repayable in monthly principal payments of $120,958, plus accrued interest, over seven years, with the remaining
principal amount of $10.3 million payable at maturity. The loan is collateralized by the related tank barges and two other tank vessels. Borrowings outstanding on this loan totaled
$18.9 million at June 30, 2008.

In
June 2005, we entered into an agreement to borrow up to $18.0 million to finance the purchase of an 80,000-barrel double-hull tank barge and
construction of two 28,000-barrel double-hull tank barges. The loan bears interest at 30-day LIBOR plus 1.71%, and is repayable in monthly principal installments of
$107,143 with the remaining principal amount of $9.0 million payable at maturity. The loan is collateralized by the related tank barges. Borrowings outstanding on this loan were
$15.3 million at June 30, 2008.

In
March 2005, we entered into an agreement to borrow up to $11.0 million to partially finance construction of a 100,000-barrel tank barge. The loan bears interest at
30-day LIBOR plus 1.05%, and is repayable in monthly principal installments of $65,500 with the remaining principal amount of $5.5 million payable at maturity. The loan is
collateralized by the related tank barge. Borrowings outstanding on this loan totaled $9.1 million at June 30, 2008.

Title XI Borrowings.On June 7, 2002, to provide financing for four newbuild tank vessels, we privately placed $40.4 million of bonds ("Title XI
bonds"), which were guaranteed by the Maritime Administration of the U.S. Department of Transportation, or MARAD, pursuant to Title XI of the Merchant Marine Act of 1936. The proceeds of
$39.1 million, net of certain closing fees, were deposited in a reserve account with the U.S. Department of the Treasury and used to fund construction of the related vessels. On
November 29, 2005, we redeemed the outstanding $36.8 million principal balance of bonds, paid $0.8 million of accrued interest, and made a make-whole payment of
$4.0 million as required under the trust indenture. We funded the redemption using funds from our revolving credit agreement. After writing off $2.7 million in unamortized deferred
financing costs, and after costs and expenses relating to the transaction, we recorded a loss on reduction of debt of $6.9 million in fiscal 2006. Retirement of the Title XI bonds improved our
borrowing flexibility, and eliminated certain restrictive covenants, collateral requirements, and working capital constraints.

Restrictive Covenants.The agreements governing our credit facility and term loans contain restrictive covenants that, among others, (a) prohibit
distributions under defined events of default,

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(b) restrict
investments and sales of assets, and (c) require us to adhere to certain financial covenants, including defined ratios of fixed charge coverage and funded debt to EBITDA
(earnings before interest, taxes, depreciation and amortization, as defined).

Issuances of Common Units.On August 14, 2007, we issued 250,000 common units to certain sellers in connection with our acquisition of the Smith Maritime
Group. On September 26, 2007, we completed a public offering of 3,500,000 common units representing limited partner interests. The price to the public was $39.50 per unit. The net proceeds of
$131.9 million from the offering, after payment of underwriting discounts and commissions and expenses, were used to repay borrowings under the credit agreement.

On
October 14, 2005, we sold 950,000 common units in a public offering under our shelf registration statement. The net proceeds of $33.1 million from the offering, after
payment of underwriting discounts and commissions but before payment of expenses, were used to repay borrowings under our credit agreement. On October 18, 2005, we issued 125,000 units to the
seller in connection with our acquisition of Sea Coast.

On
August 20, 2008, we completed a public offering of 2,000,000 common units. The price to the public was $25.80 per unit. The net proceeds of $50.0 million from the
offering, after payment of underwriting discounts and commissions but before payment of expenses, were used to repay borrowings under our credit agreements and to make construction progress payments
in connection with our vessel new building program.

Conversion of Subordinated Units.On January 14, 2004, we completed our initial public offering of common units representing limited partner interests and,
in connection therewith, also issued to our predecessor companies an aggregate of 4,165,000 subordinated units representing limited partner interests. During the subordination period, the subordinated
units are not entitled to receive any distributions until the common units have received their minimum quarterly distribution plus any arrearages from prior quarters. The subordination period will end
once we meet certain financial tests described in the partnership agreement, but it generally cannot end before December 31, 2008. When the subordination period ends, all subordinated units
will convert into common units on a one-for-one basis, and the common units will no longer be entitled to
arrearages. We have met certain financial tests in our partnership agreement and, accordingly, 50% (or 2,082,500) of the subordinated units have already converted into common units.

Contractual Obligations and Contingencies.Our contractual obligations at June 30, 2008 consisted of the following (in thousands):

Payments Due by Period

Total

Less than
1 Year

2-3 Years

4-5 Years

After
5 YearsLong-term debt and capital lease obligations

$
439,206

$
16,754

$
39,967

$
112,249

$
270,236Interest on long-term debt and capital lease obligations(1)


71,541


12,884


23,325


19,141


16,191Operating lease obligations


6,844


3,146


1,647


1,112


939Purchase obligations(2)


124,105


76,561


47,544





$
641,696

$
109,345

$
112,483

$
132,502

$
287,366


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Certain
executive officers of K-Sea General Partner GP LLC have entered into employment agreements with K-Sea Transportation Inc., our
indirect wholly owned corporate subsidiary. Each of these employment agreements had an initial term of one year, which is automatically extended for successive one-year terms unless either
party gives 30 days written notice prior to the end of the term that such party desires not to renew the employment agreement. These executive officers currently receive aggregate base annual
salaries of $960,000. In addition, each employee is eligible to receive an annual bonus award based upon consideration of our partnership performance and individual performance. If the employee's
employment is terminated without cause or if the employee resigns for good reason, the employee will be entitled to severance in an amount equal to the greater of (a) the product of 1.3125
(1.75 multiplied by .75) multiplied by the employee's base salary at the time of termination or resignation and (b) the product of 1.75 multiplied
by the remaining term of the employee's non-competition provisions multiplied by the employee's base salary at the time of termination or resignation.

The
European Union is currently working toward a new directive for the insurance industry, called "Solvency 2", that is expected to become law within four to five years and require
increases in the level of free, or unallocated, reserves required to be maintained by insurance entities, including protection and indemnity clubs that provide coverage for the maritime industry. The
West of England Ship Owners Insurance Services Ltd. ("WOE"), a mutual insurance association based in Luxembourg, provides our protection and indemnity insurance coverage and would be impacted
by the new directive. In anticipation of these new regulatory requirements, the WOE has assessed its members an additional capital call which it believes will contribute to achievement of the
projected required free reserve increases. Our capital call of $1.1 million was paid during calendar 2007. A further request for capital may be made in the future; however, the amount of such
further assessment, if any, cannot be reasonably estimated at this time. As a shipowner member of the WOE, we have an interest in the WOE's free reserves, and therefore have recorded the additional
$1.1 million capital call as an investment, at cost, subject to periodic review for impairment. This amount is included in other assets in the June 30, 2008 balance sheet.

We
are the subject of various claims and lawsuits in the ordinary course of business for monetary relief arising principally from personal injuries, collisions and other casualties.
Although the outcome of any individual claim or action cannot be predicted with certainty, we believe that any adverse outcome, individually or in the aggregate, would be substantially mitigated by
applicable insurance or indemnification from previous owners of our assets, and would not have a material adverse effect on our financial position, results of operations or cash flows. We are also
subject to deductibles with respect to its insurance coverage that range from $25,000 to $100,000 per incident and provides on a current basis for estimated payments thereunder.

Inflation

During the last three years, inflation has had a relatively minor effect on our financial results. Our contracts generally contain
escalation clauses whereby certain cost increases, including labor and fuel, can be passed through to our customers.

Related Party Transactions

For information regarding related party transactions, please read "Certain Relationships and Related Transactions" in Item 13 of
this report.

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Seasonality

We operate our tank vessels in markets that exhibit seasonal variations in demand and, as a result, in charter rates. For example,
movements of clean oil products, such as motor fuels, generally increase during the summer driving season. In certain regions, movements of black oil products and distillates, such as heating oil,
generally increase during the winter months, while movements of asphalt products generally increase in the spring through fall months. Unseasonably cold winters result in significantly higher demand
for heating oil in the northeastern United States. Meanwhile, our operations along the West Coast and in Alaska historically have been subject to seasonal variations in demand that vary from those
exhibited in the East Coast and Gulf Coast regions. The summer driving season can increase demand for automobile fuel in all of our markets and, accordingly, the demand for our services. A decline in
demand for, and level of consumption of, refined petroleum products could cause demand for tank vessel capacity and charter rates to decline, which would decrease our revenues and cash flows. Our West
Coast operations provide seasonal diversification primarily as a result of its services to our Alaskan markets, which experience the greatest demand for petroleum products in the summer months, due to
weather conditions. Considering the above, we believe seasonal demand for our services is lowest during our third fiscal quarter. We do not see any significant seasonality in the Hawaiian market.

CRITICAL ACCOUNTING POLICIES

The accounting treatment of a particular transaction is governed by generally accepted accounting principles, or GAAP, and, in certain
circumstances, requires us to make estimates, judgments and assumptions that we believe are reasonable based upon information available. We base our estimates, judgments and assumptions on historical
experience and known facts that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. We believe that, of our
significant accounting policies discussed in note 2 to our audited consolidated financial statements, the following may involve a higher degree of judgment.

Revenue Recognition

We earn revenue under contracts of affreightment, voyage charters, time charters and bareboat charters. For contracts of affreightment
and voyage charters, revenue is recognized based upon the relative transit time in each period, with expenses recognized as incurred. Although contracts of affreightment and certain contracts for
voyage charters may be effective for a period in excess of one year, revenue is recognized over the transit time of individual voyages, which are generally less than ten days in duration. For time
charters and bareboat charters, revenue is recognized ratably over the contract period, with expenses recognized as incurred. Estimated losses on contracts of affreightment and charters are accrued
when such losses become evident.

Depreciation

Vessels and equipment are recorded at cost, including capitalized interest where appropriate, and depreciated using the
straight-line method over the estimated useful lives of the individual assets as follows: tank vesselsten to twenty-five years; tugboatsten to twenty
years; and pier and office equipmentfive years. For single-hull tank vessels, these useful lives are limited to the remaining period of operation prior to mandatory retirement
as required by OPA 90. Also included in vessels are drydocking expenditures that are capitalized and amortized over three years. Major renewals and betterments of assets are capitalized and
depreciated over the remaining useful lives of the assets. Maintenance and repairs that do not improve or extend the useful lives of the assets are expensed. To date, our experience confirms that
these policies are reasonable, although there may be events or changes in circumstances in the future that indicate the recovery of the carrying amount of a vessel might not be possible. Examples of
events or changes in circumstances that could indicate that the

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recoverability
of a vessel's carrying amount should be assessed might include a change in regulations such as OPA 90, or continued operating losses, or projections thereof, associated with a vessel or
vessels. If events or changes in circumstances as set forth above indicate that a vessel's carrying amount may not be recoverable, we would then be required to estimate the undiscounted future cash
flows expected to result from the use of the vessel and its eventual disposition. If the sum of the undiscounted expected future cash flows is less than the carrying amount of the vessel, we would
recognize an impairment loss to the extent the carrying value exceeds its fair value by appraisal. Our assumptions and estimates would include, but not be limited to, the estimated fair market value
of the assets and their estimated future cash flows, which are based on additional assumptions such as asset utilization, length of service of the asset and estimated salvage values. Although we
believe our assumptions and estimates are reasonable, deviations from the assumptions and estimates could produce a materially different result.

Amortization of Drydocking Expenditures

Drydocking expenditures are capitalized and amortized over three years based on regulatory drydocking requirements. Drydocking of
vessels is required by both the U.S. Coast Guard and by the applicable classification society, which in our case is the American Bureau of Shipping. Such drydocking activities include, but are not
limited to, the inspection, refurbishment and replacement of steel, engine components, tailshafts, mooring equipment and other parts of the vessel. Amortization of drydocking expenditures is included
in depreciation and amortization expense.

Accounts Receivable

We extend credit to our customers in the normal course of business. We regularly review our accounts, estimate the amount of
uncollectible receivables each period, and establish an allowance for uncollectible amounts. The amount of the allowance is based on the age of unpaid amounts, information about the current financial
strength of customers, and other relevant information. Estimates of uncollectible amounts are revised each period, and changes are recorded in the period they become known. Historically, credit risk
with respect to our trade receivables has generally been considered minimal because of the financial strength of our customers.

Deferred Income Taxes

We provide deferred taxes for the tax effects of differences between the financial reporting and tax bases of assets and liabilities at
enacted tax rates in effect in the jurisdictions where we operate for the years in which the differences are expected to reverse. A valuation allowance is provided, if necessary, for deferred tax
assets that are not expected to be realized.

New Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 155, "Accounting for Certain
Hybrid Financial Instruments, an amendment
of FASB Statements No. 133 and 140" ("FAS 155"). FAS 155 amends FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" and FASB Statement
No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". We adopted FAS 155 as of July 1, 2007, and such adoption did not have any
impact on our financial position, results of operations or cash flows.

In
June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109"
("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109,
"Accounting for Income Taxes". FIN 48 prescribes a

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recognition
threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We adopted FIN 48 as of July 1, 2007, and such adoption did
not have any impact on our financial position, results of operations or cash flows.

At
the date of the adoption of FIN 48, there were no unrecognized tax benefits and consequently no related interest and penalties. The significant jurisdictions in which we file
tax returns and are subject to tax include New York City, Venezuela and Puerto Rico. The significant jurisdictions in which our corporate subsidiaries file tax returns and are subject to tax include
the United States and Canada. The tax returns filed in the United States and state jurisdictions are subject to examination for the years 2004 through 2007 and in foreign jurisdictions for the years
2005 through 2007. We have adopted a policy to record tax related interest and penalties under interest expense and general and administrative expenses, respectively.

In
September 2006, the FASB issued FASB Statement No. 157, "Fair Value Measurements" ("FAS 157"). FAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. FAS 157 applies under other accounting pronouncements that require or permit fair
value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007, and we are currently analyzing its impact, if any.

In
February 2007, the FASB issued FASB Statement No. 159,"The Fair Value Option for Financial Assets and Financial Liabilities"
("FAS 159"). FAS 159 provides an option to report selected financial assets and liabilities at fair value. FAS 159's objective is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. FAS 159 also establishes presentation and disclosure requirements designed
to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. FAS 159 is effective for fiscal years beginning after
November 15, 2007, and we are currently analyzing its impact, if any.

In
December 2007, the FASB issued FASB Statement No. 141 (revised 2007), "Business Combinations" ("FAS 141(R)") which replaces FAS No.141, "Business Combinations."
FAS 141(R) retains the underlying concepts of FAS 141 in that all business combinations are still required to be accounted for at fair value under the purchase method of accounting, but
FAS 141(R) changed the method of applying the purchase method in a number of significant aspects. FAS 141(R) is effective on a prospective basis for all business combinations for which
the acquisition date is on or after the beginning of the first fiscal year subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and
acquired tax contingencies. FAS 141(R) amends FAS 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions
that closed prior to the effective date of FAS 141(R) would also apply the provisions of FAS 141(R). We are currently analyzing the impact, if any, of this standard.

In
December 2007, the FASB issued FASB Statement No. 160, "Non-controlling Interests in Consolidated Financial Statements, an Amendment of ARB 51" ("FAS 160").
FAS 160 amends ARB 51 to establish new standards that will govern the accounting for and reporting of (1) non-controlling interest in partially owned consolidated
subsidiaries and (2) the loss of control of subsidiaries. FAS 160 is effective on a prospective basis for all fiscal years, and interim periods within those fiscal years beginning, on or
after December 15, 2008, except for the presentation and disclosure requirements, which will be applied retrospectively. We are currently analyzing the impact, if any, of this standard.

In
March 2008, the FASB issued FASB Statement No. 161, "Disclosure about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
("FAS 161"). FAS 161 requires qualitative disclosure about objectives and strategies for using derivatives, quantitative

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disclosures
about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements.
FAS 161 is effective for fiscal years beginning after November 15, 2008. We are currently analyzing the impact, if any, of this standard.

In
April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3). FSP
FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under
SFAS 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 allows an entity to use its own historical experience in renewing or extending similar arrangements, adjusted
for entity-specific factors, in developing assumptions about renewal or extension used to determine the useful life of a recognized intangible asset. As a result, the determination of intangible asset
useful lives is now consistent with the method used to determine the period of expected cash flows used to measure the fair value of the intangible assets, as described in other accounting principles.
The guidance for determining the useful life of a recognized intangible asset is to be applied prospectively to intangible assets acquired after the effective date. Disclosure requirements are to be
applied prospectively to all intangible assets recognized as of, and subsequent
to, the effective date. The provisions of FSP FAS 142-3 are effective as of the beginning of our fiscal year 2010. We are currently analyzing the impact, if any, of this standard.

In
May 2008, the FASB issued FASB Statement (SFAS) No. 162, The Hierarchy of Generally Accepted Accounting Principles (FAS 162). FAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in
the United States. This statement is not expected to change existing practices but rather reduce the complexity of financial reporting. This statement will go into effect 60 days after the
Securities and Exchange Commission approves related auditing rules and is not expected to have a material effect on our consolidated financial statements.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our primary market risk is the potential impact of changes in interest rates on our variable rate borrowings. After considering the
interest rate swap agreements discussed below, as of June 30, 2008 approximately $312.4 million of our long- term debt bears interest at fixed interest rates ranging from
5.26% to 6.81%. Borrowings under our revolving credit agreement and certain other term loans, totaling $126.8 million at June 30, 2008, bear interest at a floating rate based on LIBOR,
which will subject us to increases or decreases in interest expense resulting from movements in that rate. Based on our total outstanding floating rate debt as of June 30, 2008, the impact of a
1% change in interest rates would result in a change in interest expense, and a corresponding impact on income before income taxes, of approximately $1.3 million annually.

As
of June 30, 2008, we had six outstanding interest rate swap agreements that expire over the periods from 2012 to 2018, concurrently with the hedged loans. As of June 30,
2008, the notional amount of the swaps was $198.2 million and we were paying a weighted average fixed rate of 5.91%, and were receiving a weighted average variable rate of 3.77%. The primary
objective of these contracts is to reduce the aggregate risk of higher interest costs associated with variable rate debt. The interest rate swap contracts we hold have been designated as cash flow
hedges and, accordingly, gains and losses resulting from changes in the fair value of these contracts are recognized as other comprehensive income as required by Statement of Financial Accounting
Standards No. 133. We are exposed to credit related losses in the event of non-performance by counterparties to these instruments; however, the counterparties are major financial
institutions and we consider such risk of loss to be minimal. We do not hold or issue derivative financial instruments for trading purposes.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements set forth on pages F-1 to F-31 of this report are incorporated herein by
reference.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A.    CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the
supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of
the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of
June 30, 2008 because of the material weakness in our internal control over financial reporting discussed below.

Notwithstanding
the material weakness, based upon additional analysis and other post closing procedures, we have concluded that our audited consolidated financial statements for the year
ended
June 30, 2008 are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States of America for each of the periods presented herein.

Management's Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Management assessed the effectiveness of our internal control over financial reporting as of June 30,
2008 based on the criteria established in "Internal ControlIntegrated Framework," issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").

A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

We
did not maintain effective controls over the accuracy of depreciation expense and accumulated depreciation. Specifically, an effective control was not designed and in place to compare
depreciation expense as calculated under the mid-year convention to what would have been calculated using the dates fixed assets were placed in service. This deficiency led to material
misstatements and the restatement of our financial statements for the quarters ended September 30, 2007, December 31, 2007 and March 31, 2008, along with audit adjustments to the
consolidated financial statements for the fiscal year ended June 30, 2008. We have determined that this control deficiency constitutes a material weakness which, if not remediated, could result
in further material misstatements of our annual or interim consolidated financial statements that would not be prevented or detected.

As
a result of the material weakness identified above, management has concluded that we did not maintain effective internal control over financial reporting as of June 30, 2008
based on the criteria established in Internal ControlIntegrated Framework issued by the COSO.

Management
excluded Smith Maritime LLC and K-Sea Hawaii Inc. from its assessment of internal control over financial reporting as of June 30, 2008 because
they were acquired in a purchase business combination during fiscal 2008. Smith Maritime LLC and K-Sea Hawaii Inc. are wholly-owned

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subsidiaries
whose total assets and total revenues represent $136.2 million and $27.3 million, respectively, of the related consolidated financial statement amounts as of and for the
year ended June 30, 2008.

The
effectiveness of our internal control over financial reporting as of June 30, 2008 has been audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which is included under the heading "Report of Independent Registered Public Accounting Firm" on page F-2.

Remediation Plan for Material Weakness

We have established a control over the accuracy of depreciation expense by changing our depreciation control with respect to the
calculation of depreciation for assets placed in service in the current period.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the three months ended June 30,
2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.    OTHER INFORMATION.

None.

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PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

K-Sea General Partner GP LLC, as the general partner of K-Sea General Partner L.P., our
general partner, manages our operations and activities. Our general partner is not elected by our unitholders and is not subject to re-election on a regular basis. Unitholders are not
entitled to elect the directors of K-Sea General Partner GP LLC or directly or indirectly participate in our management or operation.

Set
forth below is information concerning the directors and executive officers of K-Sea General Partner GP LLC as of September             , 2008.
Executive officers and directors are elected for one-year terms.

Name

Age

Position with K-Sea General Partner GP LLCJames J. Dowling


62

Chairman of the BoardTimothy J. Casey


48

President, Chief Executive Officer and DirectorAnthony S. Abbate


68

DirectorBarry J. Alperin


68

DirectorBrian P. Friedman


52

DirectorFrank Salerno


49

DirectorJohn J. Nicola


54

Chief Financial OfficerThomas M. Sullivan


49

Chief Operating Officer and PresidentAtlantic RegionRichard P. Falcinelli


47

Executive Vice President and SecretaryGregory J. Haslinsky


45

Vice President, Sales and MarketingCharles Kauffman


57

Vice President, Corporate DevelopmentGordon Smith


39

President, Pacific Region


James J. Dowlinghas served as our Chairman of the Board since July 2003, has served as Chairman of the Board of EW
Transportation LLC (formerly K-Sea Transportation LLC) since January 2002 and has served as a director of EW Transportation LLC since its formation in April 1999.
Mr. Dowling has been a Managing Director of Jefferies Capital Partners, a private investment firm, since January 2002, and is a director of various private companies in which Jefferies Capital
Partners has an interest. Jefferies Capital Partners is the manager of Furman Selz Investors II L.P. and its affiliated entities, principal owners of our general partner.

Timothy J. Caseyhas served as our President, Chief Executive Officer and Director since July 2003. Mr. Casey has served as
President, Chief Executive Officer and Director of EW Transportation LLC since April 1999. Mr. Casey is also a Vice Chairman for American Waterways Operators, a board member of The
Seamen's Church Institute and a member of the American Bureau of Shipping.

Anthony S. Abbatehas served as a Director since February 2004. Mr. Abbate was President, Chief Executive Officer and a director of
Interchange Financial Services Corporation, a bank holding company, since 1984 until his retirement in 2007 and President, Chief Executive Officer and a director of its principal subsidiary,
Interchange Bank, from 1981 until his retirement in 2007. In April 2007, Mr. Abbate joined the Board of Directors of Sussex Bancorp, a bank holding company.

Barry J. Alperinhas served as a Director since February 2004. Mr. Alperin is a business consultant who retired from
Hasbro Inc. in 1996 after 11 years in various senior executive positions, including Vice Chairman and Director. Mr. Alperin is currently on the board of Henry Schein, Inc.,
a distributor of healthcare products to office-based practitioners, and The Hain Celestial Group, Inc., a natural and organic beverage, snack, specialty food and personal care products company.

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Brian P. Friedmanhas served as a director since July 2003. Since 1997, Mr. Friedman has been President of Jefferies Capital
Partners, a private equity investment firm. Mr. Friedman also serves as Chairman of the Executive Committee of Jefferies & Company, Inc., a global securities and investment
banking firm, and as a director of Jefferies Group, Inc. As a result of his management of various private equity funds and the significant equity positions those funds hold in their portfolio
companies, Mr. Friedman serves on several boards of directors of private portfolio companies.

Frank Salernohas served as a Director since February 2004. Mr. Salerno has served as a director for WisdomTree
Investments, Inc. (formerly known as Index Development Partners) since July 2005 and as a director for Crystal International Travel Group since April 2006. From mid-1999 until
his retirement in February 2004, Mr. Salerno was Managing Director and Chief Operating Officer of Merrill Lynch Investment AdvisorsAmericas Institutional Division, an investment
advisory company.

John J. Nicolahas served as our Chief Financial Officer since July 2003, and has served as Chief Financial Officer of EW
Transportation LLC since July 2000. Mr. Nicola was employed from November 1993 to July 2000 by Maersk Sealand, a container shipping company, in various senior financial management roles,
including Chief Financial Officer of Maersk's East Coast and Gulf terminal operating subsidiary. Mr. Nicola is a Certified Public Accountant and a member of the American Institute of Certified
Public Accountants.

Thomas M. Sullivanhas served as Chief Operating Officer and PresidentAtlantic Region since April 2008. Mr. Sullivan
served as Vice President of Operations from July 2003 to April 2008. Mr. Sullivan served as Vice President of Operations for EW Transportation LLC since April 1999. Mr. Sullivan
also served as Vessel Supervisor for EW Transportation LLC's predecessor from March 1995 until April 1999.

Richard P. Falcinellihas served as Executive Vice President and Secretary since April 2008. Mr. Falcinelli served as Vice
President of Administration and Secretary from July 2003 to April 2008. Mr. Falcinelli has served as Vice President of Administration and Secretary of EW Transportation LLC since April
1999.

Gregory J. Haslinskyhas served as our Vice President, Sales and Marketing since October 2005 and has been employed by K-Sea
Transportation since December 1999 in various sales capacities. Mr. Haslinsky was employed from November 1988 to November 1999 by Maritrans, a marine transportation company, holding various
sales and marketing positions within the organization.

Charles Kauffmanhas served as our Vice President, Corporate Development since the acquisition of Sea Coast Transportation in October
2005. Mr. Kauffman was employed from February 1984 to October 2005 by Saltchuk Resources Inc., a privately held maritime company, where he held various senior management positions,
including President of Sea Coast Transportation since July 2002.

Gordon Smithhas served as our PresidentPacific Region since April 2008. From August 2007 to April 2008, Mr. Smith
served as Vice Chairman. Mr. Smith was President of Smith Maritime, Ltd. from 1992 and Vice President of Sirius Maritime LLC from 2002 until our acquisition of that company in
August 2007.

Meetings and Committees of the Board of Directors

Meetings

K-Sea General Partner GP LLC's board of directors held eight meetings during fiscal 2008. During fiscal 2008,
each director attended at least 75% of the aggregate of (1) the total number of meetings of the board of directors of K-Sea General Partner GP LLC and (2) the
total number of meetings held by all committees of such board on which he served.

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Audit Committee

K-Sea General Partner GP LLC has a standing audit committee consisting of Messrs. Abbate, Alperin
(Chairman) and Salerno. The board of directors of K-Sea General Partner GP LLC has determined that all members of the audit committee are independent within the meaning of
the listing standards of the New York Stock Exchange and the applicable rules of the Securities and Exchange Commission. In addition, the board of directors of K-Sea General
Partner GP LLC has determined that Mr. Abbate is an audit committee financial expert within the meaning of the rules of the Securities and Exchange Commission.

The
primary responsibilities of the audit committee are to assist the board of directors of K-Sea General Partner GP LLC in overseeing (1) the integrity
of our financial statements, (2) our independent registered public accounting firm's qualifications, independence, and performance, (3) the effectiveness of our internal controls and
procedures and our internal audit function, and (4) our compliance with legal and regulatory requirements. The audit committee has the sole authority to appoint, retain and terminate our
independent registered public accounting firm, which reports directly to the audit committee.

The
audit committee has established procedures for the receipt, retention and treatment of complaints we receive regarding accounting, internal accounting controls or auditing matters
and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters.

Compensation Committee

K-Sea General Partner GP LLC has a standing compensation committee consisting of Messrs. Alperin,
Dowling and Friedman. The compensation committee, among other tasks, determines and approves the chief executive officer's compensation, makes recommendations to the board with respect to other
executive officer compensation, and reviews from time to time the compensation and benefits of non-employee directors.

Conflicts Committee

K-Sea General Partner GP LLC has a standing conflicts committee consisting of Messrs. Abbate, Alperin
and Salerno. The conflicts committee reviews specific matters that the board of directors of K-Sea General Partner GP LLC believes may involve conflicts of interest and takes
such other action as may be required under the terms of our partnership agreement.

Finance Committee

K-Sea General Partner GP LLC has a standing finance committee consisting of Messrs. Dowling and Casey. The finance
committee is authorized to review and approve derivative transactions (including interest rate swaps) with respect to up to 50% of our total outstanding indebtedness.

Director Independence

For information on director independence, please read "Item 13. Certain Relationships and Related Transactions, and Director
Independence."

Policies and Procedures for Approval of Related Person Transactions

The Board of Directors of K-Sea General Partner GP LLC has adopted a policy pursuant to which related party
transactions are reviewed, approved or ratified. The policy applies to any transaction in which (1) we are a participant, (2) any related person has a direct or indirect material
interest and (3) the amount involved exceeds $120,000, but excludes any transaction that does not require disclosure under Item 404(a) of Regulation S-K. The Conflicts
Committee is responsible for reviewing, approving

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and
ratifying any related person transaction, except those related to compensation which is the responsibility of the compensation committee.

Code of Business Conduct and Ethics

The board of directors of K-Sea General Partner GP LLC has adopted a code of business conduct and ethics for
all employees, officers and directors. If any amendments are made to the code or if K-Sea General Partner GP LLC grants any waiver, including any implicit waiver, from a
provision of the code that the SEC or the New York Stock Exchange ("NYSE") requires us to disclose, we will disclose the nature of such amendment or waiver on our website or in a current report on
Form 8-K.

Corporate Governance Guidelines

The board of directors of K-Sea General Partner GP LLC has adopted corporate governance guidelines in
accordance with the rules of the New York Stock Exchange.

Availability of Corporate Governance Documents

Copies of the board committee charters, code of business conduct and ethics and corporate governance guidelines are available, without
charge, on our website atwww.k-sea.comand in print, free of charge, upon written request to the Secretary, K-Sea General
Partner GP LLC, One Tower Center Blvd., 17th Floor, East Brunswick, New Jersey 08816.

Annual Certification

We have filed the required certifications under Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2
to this report. For fiscal 2007, we submitted to the NYSE the CEO certification required by Section 303A.12(a) of the NYSE's Listed Company Manual. For fiscal 2008, we expect to submit this
certification to the NYSE within 30 days after filing this report.

Executive Sessions of the Board of Directors

Messrs. Abbate, Alperin, Dowling, Friedman and Salerno, who are non-management directors of K-Sea
General Partner GP LLC, meet at regularly scheduled executive sessions without management. These meetings are chaired on a rotating basis by the chairmen of the audit committee and
compensation committee. Persons wishing to communicate with our non-management directors may do so by writing to them at K-Sea General Partner GP LLC, c/o Board
of Directors, One Tower Center Blvd., 17th Floor, East Brunswick, New Jersey 08816.

Messrs. Abbate,
Alperin, and Salerno, who are independent non-management directors of K-Sea General Partner GP LLC, meet at least annually in
executive sessions without management and the other directors. Mr. Abbate serves as the presiding director at those executive sessions.

Communications with Independent Directors

Persons wishing to communicate with our independent non-management directors may do so by writing to them at
K-Sea General Partner GP LLC, c/o Board of Directors, One Tower Center Blvd., 17th Floor, East Brunswick, New Jersey 08816.

Payments to Our General Partner

K-Sea General Partner LP does not receive any management fee or other compensation in connection with its management
of us; however, K-Sea General Partner LP or its affiliates who perform services for us and/or our subsidiaries are reimbursed at cost for all expenses incurred on our behalf which
are necessary or appropriate to the conduct of our business. There were no reimbursable expenses in fiscal 2008 or fiscal 2007. We also directly pay the fees of the independent directors of

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K-Sea
General Partner GP LLC and reimburse meeting-related expenses of all directors of K-Sea General Partner GP LLC.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than 10% of a
registered class of our equity securities, to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Officers, directors and greater than 10% unitholders are required
by SEC regulations to furnish us with copies of all Section 16(a) forms.

Based
solely on our review of the copies of such forms we received, or representations from certain reporting persons that no Form 4s were required for those persons, we believe
that during the fiscal year ended June 30, 2008, all of our officers, directors, and greater than 10% beneficial owners complied on a timely basis with all applicable filing requirements under
Section 16(a) of the Securities Exchange Act of 1934, except for the failure to timely file a Form 3 by Mr. Smith and the failure to timely file four Form 4s by
Mr. Sullivan.

ITEM 11.    EXECUTIVE COMPENSATION.

Compensation Discussion and Analysis

This Compensation Discussion and Analysis is intended to provide investors with an understanding of our compensation policies and
decisions regarding our named executive officers for fiscal 2008. Our named executive officers are our Chief Executive Officer, our Chief Financial Officer and our three other most highly compensated
executive officers for fiscal 2008.

Executive Compensation Philosophy

In establishing executive compensation, we believe that:



Purpose of Our Executive Compensation Program

Our primary business objective is to increase our distributable cash flow ("DCF") per unit, which serves as a basis for our
distribution payments to unitholders, by executing the following business strategies:



For
additional information regarding our business strategies, please see "Items 1 and 2. Business and PropertiesOur Partnership."

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The
purpose of our executive compensation program is to assist us in achieving our business objectives by developing and retaining talented senior executives with a competitive
compensation package, and to motivate them to achieve our strategic goals and increase our DCF and unitholder value. DCF is a non-GAAP financial measure which is among the measures used to
evaluate our operating performance and our ability to make cash distributions.

Role of the Compensation Committee



The Compensation Committee of K-Sea General Partner GP LLC has overall responsibility for determining the
compensation of our named executive officers. The specific duties and responsibilities of the Compensation Committee are described above under "Item 10. Directors, Executive Officers and
Corporate GovernanceMeetings and Committees of the Board of DirectorsCompensation Committee" and in the charter of the Compensation Committee, which is available on the
"Investor RelationsGovernance" section of our website atwww.k-sea.com.

For
fiscal 2008, the compensation payable to all of our named executive officers was reviewed and approved by the Compensation Committee. The Compensation Committee seeks input from
Timothy J.
Casey, our President and Chief Executive Officer, regarding the amount of compensation payable to, and the individual performance of, our named executive officers (other than Mr. Casey).



In fiscal 2007, the Compensation Committee retained Pearl Meyer and Partners ("PMP") as an independent consultant on executive
compensation matters. The Compensation Committee met with PMP multiple times over several months during late fiscal 2007 and early fiscal 2008 to review and refine the partnership's compensation
methodology. The Compensation Committee considered advice and information from PMP in determining the amount and form of compensation for named executive officers and other employees. This work
included establishing a comparator group of companies, providing relevant market data and alternatives to consider for named executive officer compensation, and meeting with the Compensation Committee
and Mr. Casey to discuss executive compensation matters. The Partnership has not engaged PMP for any other purpose.

The
Compensation Committee did not retain PMP or any other compensation consultant with respect to the determination of base salaries for fiscal 2009 or the amount or form of incentive
compensation to be paid to executive officers with respect to performance in fiscal 2008.



The Compensation Committee meets after the end of each fiscal year to review base salaries for the then-current year, to
consider incentive compensation (consisting of cash bonuses and equity-based awards) and to review and, as appropriate, make changes to our executive compensation program. The Compensation Committee
also meets at other times during the year and acts by written consent when necessary and appropriate. During fiscal 2008, the Compensation Committee met three times. The Chairman of the Compensation
Committee also met with members of our management team on several occasions to discuss our executive compensation policies and programs.

We
do not time the release of material non-public information for the purpose of affecting the values of executive compensation. At the time of making equity-based
compensation decisions, the Compensation Committee may be aware of material non-public information and takes such information into account, but it does not adjust the size of grants to
reflect possible market reaction. Prior to August 2007, the Compensation Committee made grants of equity-based compensation on a periodic basis to reflect specific achievements. In August 2007, the
Compensation Committee decided to consider grants of equity-based compensation on an annual basis shortly after the end of each fiscal

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year,
although specific grants may be made at other times to recognize the promotion of an employee, a change in responsibility or a specific achievement.

Elements of Compensation

Our executive compensation program includes three main elements: a base salary, an annual cash bonus and an annual equity-based
incentive award. These individual components are designed to:



We
view the various components of compensation as related, but distinct, and emphasize "pay for performance." A significant portion of total executive compensation reflects a risk aspect
and is tied to
our financial and strategic goals. Our compensation philosophy is to foster entrepreneurship at all levels of the organization by making long-term equity-based incentives, in particular
through participation in the growth of our quarterly distributions, a significant component of executive compensation. We determine the appropriate level for each compensation component based in part,
but not exclusively, on our view of internal equity and consistency, and other considerations we deem relevant, such as rewarding extraordinary performance. The Compensation Committee has not yet
adopted any policies for allocating compensation between long-term and currently paid out compensation, between cash and non-cash compensation, or among different forms of
non-cash compensation.

As
described in more detail below, our executive compensation program is designed to reward partnership and individual performance.





Timothy J. Casey, John J. Nicola, Thomas M. Sullivan and Richard P. Falcinelli have entered into employment agreements with
K-Sea Transportation Inc., one of our indirect wholly owned subsidiaries. The employment agreements contemplate that each employee will serve as an officer of the general partner of
our general partner and other affiliates. Each of the employment agreements had an initial term of one year. The term of each employment agreement is automatically extended for successive
one-year terms unless either party gives 30-days written notice prior to the end of the term that such party desires not to renew the employment agreement.

Each
employment agreement established an annual base salary for the named executive officer, which has been subsequently increased by the Compensation Committee. Under the employment
agreement, each employee is eligible to receive an annual incentive bonus based upon the financial performance of us and our subsidiaries. The board of directors of K-Sea GP will
determine the amount of any incentive bonus award and may issue additional awards to each employee in the amounts and at the times it so determines. Further, Messrs. Casey, Nicola, Sullivan and
Falcinelli are each furnished an

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automobile
for business use and reimbursed for reasonable costs of insurance, gasoline and repairs for the automobile in accordance with our reimbursement policies.

Each
employment agreement also provides for certain payments upon termination of employment. For more information, please read below "Executive Compensation TablesPotential
Payments upon Termination or Change in Control." The Compensation Committee is currently evaluating potential revisions to the employment agreements.



In late fiscal 2007 and early fiscal 2008, the Compensation Committee evaluated the executive compensation programs and practices for
our executive officers against a comparator group in order to achieve a competitive level of compensation. The comparator group was selected based on, among other things, industry, EBITDA, equity
market capitalization and enterprise value. For fiscal 2007, the comparator group consisted of the following 12 transportation companies and six master limited partnerships:



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The
Compensation Committee did not review fiscal 2008 comparator group data when setting fiscal 2009 base salaries for our executive officers or awarding incentive compensation with
respect to performance in fiscal 2008.

In
late fiscal 2007 and early fiscal 2008, the Compensation Committee compared the companies' executive compensation programs as a whole, and also compared the pay of individual
executives if the jobs were sufficiently similar to make a comparison meaningful.

In
late fiscal 2007 and early fiscal 2008, the Compensation Committee used the comparator group data to ensure that executive officer compensation as a whole was appropriately
competitive, given our performance. The Compensation Committee, however, did not target a specific percentile of comparator group compensation in determining the level of executive officer
compensation. The composition of the comparator group is subject to change from time to time based on a review by the Compensation Committee to reflect, among other things, best practices in executive
compensation, changes in our business including the size and complexity thereof, and changes in the competitive marketplace resulting from mergers and acquisitions or other activity.



In September 2008, the Compensation Committee evaluated our financial condition and results of operations, our fiscal 2008 performance
in light of industry fundamentals and how effectively management adapted to changing industry conditions and opportunities during fiscal 2008. In addition, the Compensation Committee considered the
following accomplishments, among others, in measuring partnership performance during fiscal 2008:



Base Salary

In evaluating the base salaries of our named executive officers for fiscal 2009, the Compensation Committee considered the historical
and expected future performance of each such executive and competitive market data provided by PMP in early fiscal 2008. Based on these
factors, together with the partnership's performance and the individual performance of each executive during fiscal 2008, the Compensation Committee increased the base salaries of our named executive
officers for fiscal 2009 as follows:

Name

Fiscal 2009 Base Salary(1)

Increase Over Fiscal 2008Timothy J. Casey

$
300,000

$
0John J. Nicola

$
220,000

$
10,000Thomas Sullivan

$
220,000

$
10,000Richard P. Falcinelli

$
220,000

$
10,000Gregory J. Haslinksy

$
220,000

$
20,000






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Annual Cash Bonus

The amount of the annual cash bonus is determined by the Compensation Committee on an annual basis after considering partnership and
individual performance. For fiscal 2008, the Compensation Committee had targeted an annual cash bonus of 80% of base salary for Mr. Casey and 40% of base salary for other named executive
officers. The partnership performed at the Compensation Committee's expectations in fiscal 2008. Based on that performance and after considering the individual performance of each named executive
officer, the Compensation Committee decided to award cash bonuses at approximately the targeted amounts. The following table sets forth the amount of each named executive officer's annual cash bonus
for fiscal 2008 and the percentage of such bonus in relation to the named executive officer's base salary for fiscal 2008:

Name

Total Annual Cash
Bonus for Fiscal 2008

Percentage of
Fiscal 2008 Base SalaryTimothy J. Casey

$
240,000


80
%John J. Nicola

$
84,000


40
%Thomas Sullivan

$
84,000


40
%Richard P. Falcinelli

$
84,000


40
%Gregory J. Haslinsky

$
84,000


42
%


Equity-Based Incentive Awards

In respect of fiscal 2008, the Compensation Committee made phantom unit grants in amounts intended to result in approximately 50% of
the executive's total annual incentive compensation being equity based. A "phantom" unit entitles the grantee to receive a common unit upon the vesting of the phantom unit or, in the discretion of the
Compensation Committee, cash equivalent to the fair market value of a common unit. Holders of phantom units also have the right to receive an amount in cash equal to, and payable at the same time as,
the cash distribution made with respect to a common unit during the period the phantom unit is outstanding. The Compensation Committee believes that making a portion of an executive's compensation
contingent on long-term unit price performance more closely aligns the executive's interests with those of our unitholders. Like cash bonuses, phantom unit awards reflect progress toward
our corporate goals and individual performance.

The
following table sets forth awards of phantom units in September 2008 with respect to each named executive officer's performance in fiscal 2008:

Name

Phantom Units

Grant Date Fair Value(1)Timothy J. Casey


9,700

$
240,269John J. Nicola


3,400

$
84,218Thomas Sullivan


3,400

$
84,218Richard P. Falcinelli


3,400

$
84,218Gregory J. Haslinsky


3,400

$
84,218






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The awards of phantom units in the table above vest in five equal annual installments beginning on October 1, 2009, subject to earlier vesting or
forfeiture as provided in the applicable award agreement.

Perquisites and Other Benefits

Messrs. Casey, Nicola, Sullivan, Falcinelli and Haslinsky are furnished an automobile for business use and reimbursed for
reasonable costs of insurance, gasoline and repairs for the automobile in accordance with our reimbursement policies.

We
seek to provide benefit plans, such as medical, life and disability insurance, in line with market conditions. Executive officers are eligible for the same benefit plans provided to
other exempt employees, including insurance plans and supplemental plans chosen and paid for by employees who wish additional coverage. We do not have any special insurance plans for executive
officers.

Other Compensation Related Matters



Although we encourage our executive officers to retain ownership in our partnership, we do not have a policy requiring maintenance of a
specified equity ownership level. In the aggregate, as of June 30, 2008, our named executive officers beneficially owned an aggregate of 264,860 common units and 40,000 phantom units.
Additionally, our named executive officers receive an aggregate of approximately 9.4% of the cash distributions received by our general partner and its affiliates through their ownership interest in
these entities. These arrangements further tie the interests of these executive officers to the interests of unitholders.

Our
policies prohibit our executive officers from using puts, calls or options to hedge the economic risk of their ownership.



We do not have a policy with respect to adjustment or recovery of awards or payments if relevant performance measures upon which
previous awards were based are restated or otherwise adjusted in a manner that would reduce the size of such award or payment.

Impact of Tax and Accounting Treatment



Effective July 1, 2005, we adopted SFAS 123R, which requires that companies recognize in their financial statements the
cost of employee services received in exchange for awards of equity instruments based on the grant date fair value of those awards.



Section 162(m) of the Code generally disallows a tax deduction to publicly traded corporations for compensation in excess of
$1 million paid to the Chief Executive Officer or any of the four other most highly compensated officers. Because we are organized as a limited partnership, we are not subject to the provisions
of Section 162(m) of the Code.

Section 409A
of the Code imposes new constraints on nonqualified deferred compensation, and some awards under our long-term incentive plan and severance benefits under
employment agreements with our officers may be subject to these new rules. Failure to comply with Section 409A may result in the early taxation of deferred compensation and the imposition of a
20% penalty. Employers generally will have until December 31, 2008 to amend plans and arrangements to comply with Section 409A. We

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intend
to design our compensation arrangements to be either exempt from Section 409A or to comply with Section 409A, and we may be required to amend certain arrangements before
December 31, 2008.

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed with management the compensation discussion and analysis required by
Item 402(b) of Regulation S-K. Based on the review and discussion referred to above, the Compensation Committee recommended to the board of directors that this compensation
discussion and analysis be included in this Form 10-K.

Compensation Committee:James J. Dowling (Chairman)
Barry J. Alperin
Brian P. Friedman


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or
more of its executive officers serving as a member of our general partner's board of directors or compensation committee.

There
are no matters relating to interlocks or insider participation that we are required to report.

EXECUTIVE COMPENSATION TABLES

Summary Compensation Table

Name and Principal Position

Fiscal
Year

Salary
($)

Bonus
($)

Stock
Awards
($)(1)

Option
Awards
($)

Non-Equity
Incentive Plan
Compensation
($)

Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
($)

All Other
Compensation
($)(2)

Total
($)Timothy J. Casey


2008

$
300,000

$
240,000

$
251,174

$


$


$


$
25,862

$
817,036President and


2007

$
250,000

$
300,750

$
202,117

$


$


$


$
21,616

$
774,483Chief ExecutiveOfficerJohn J. Nicola


2008

$
210,000

$
84,000

$
82,089

$


$


$


$
22,820

$
398,909Chief Financial


2007

$
200,000

$
90,225

$
67,372

$


$


$


$
18,194

$
375,791OfficerThomas M. Sullivan


2008

$
210,000

$
84,000

$
82,089

$


$


$


$
20,510

$
396,599Vice President,


2007

$
200,000

$
90,225

$
67,372

$


$


$


$
18,911

$
376,508OperationsRichard P. Falcinelli


2008

$
210,000

$
84,000

$
82,089

$


$


$


$
21,468

$
397,557Vice President,


2007

$
200,000

$
90,225

$
67,372

$


$


$


$
20,741

$
378,338Administrationand SecretaryGregory J. Haslinsky


2008

$
200,000

$
84,000

$
66,464

$


$


$


$
18,983

$
369,447Vice President,Sales


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Grants of Plan-Based Awards Table

The following table sets forth awards of phantom units granted in fiscal 2008 for each of our named executive officers.

Name

Grant Date

All Other Stock
Awards: Number of
Shares of Stock or
Units(1)

Grant Date Fair
Value of Stock and
Option Awards(2)T. Casey


8/7/2007


7,000

$
299,250J. Nicola


8/7/2007


2,100

$
89,775T. Sullivan


8/7/2007


2,100

$
89,775R. Falcinelli


8/7/2007


2,100

$
89,775G. Haslinsky


8/7/2007


2,100

$
89,775


---

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth information concerning the outstanding equity awards made for each named executive officer as of
June 30, 2008.

Stock Awards(1)Name

Number of
Shares or Units
of Stock That
Have Not
Vested (#)

Market Value
of Shares or
Units of Stock
That Have Not
Vested ($)(2)

Equity Incentive
Plan Awards:
Number of
Unearned Shares,
Units or Other
Rights That Have
Not Vested (#)

Equity Incentive Plan
Awards: Market or
Payout Value of
Unearned Shares, Units
or Other Rights That
Have Not Vested (#)T. Casey


22,000

$
698,940





J. Nicola


7,100

$
225,567





T. Sullivan


7,100

$
225,567





R. Falcinelli


7,100

$
225,567





G. Haslinsky


6,100

$
193,797








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Table of Contents

Option Exercises and Stock Vested Table

The following table sets forth the number of shares acquired upon the vesting of phantom unit awards, and the value realized upon
exercise or vesting of such awards, for each of our named executive officers in fiscal 2008.

Stock AwardsName

Number of Shares
Acquired on Vesting
(#)

Value Realized on
Vesting
($)(1)T. Casey


6,000

$
232,500J. Nicola


2,000

$
77,500T. Sullivan


2,000

$
77,500R. Falcinelli


2,000

$
77,500G. Haslinsky


1,500

$
58,125






Pension Benefits

We do not maintain any plans that provide for payments or other benefits at, following or in connection with retirement, other than a
401(k) plan that is available to all U.S. employees.

Non-Qualified Deferred Compensation

We do not maintain any defined contribution or other plan that provides for the deferral of compensation on a basis that is not
tax-qualified under the Internal Revenue Code.

Potential Payments upon Termination or Change-in-Control

Timothy J. Casey, John J. Nicola, Thomas M. Sullivan and Richard P. Falcinelli have entered into employment agreements with
K-Sea Transportation Inc., one of our indirect wholly owned subsidiaries. The employment agreements do not provide for any payments in the event of a change in control. If the
employee's employment is terminated without cause or if the employee resigns for good reason, the employee is entitled to severance in an amount equal to the greater of (a) the product of
1.3125 (1.75 multiplied by 0.75) multiplied by the employee's base salary at the time of termination or resignation and (b) the product of 1.75 multiplied by the remaining term of the
employee's non-competition provisions multiplied by the employee's base salary at the time of termination or resignation. In addition, we will make COBRA payments on behalf of the employee
for a period of one year. If the employee is terminated for cause or terminates employment without good reason (other than death or disability), the employee is entitled to receive only earned but
unpaid compensation and benefits. If the employee is terminated due to death, the employee's designated beneficiary or, if none, his estate, is entitled to receive an amount equal to
one-half of the employee's annual base salary at the time of death. If the employee is terminated due to disability, the employee is entitled to receive an amount equal to
one-half of the employee's annual base salary at the time of disability and, if the employee so elects, COBRA payments for one year following termination.

Under
the employment agreements, "cause" and "good reason" are defined as follows:



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If
a change in control were to have occurred as of June 30, 2008, all phantom units awarded to named executive officers awards under our long-term incentive plan would
have immediately vested. In addition, all such awards would immediately vest upon the death, disability or retirement (after reaching age 65) of the named executive. If the named executive
officer is terminated other than in connection with a change in control or the executive's death, disability or retirement (after reaching age 65), any unvested phantom units awarded to such executive
would be forfeited.

The
following tables set forth potential amounts payable to our named executive officers upon termination of employment under various circumstances, as if terminated on June 30,
2008.

Change in ControlCasey

Nicola

Sullivan

Falcinelli

HaslinskyAccelerated vesting of phantom units(1)

$
698,940

$
225,567

$
225,567

$
225,567

$
193,797


---

Termination Without Cause or Resignation for Good Reason(1)Casey

Nicola

Sullivan

Falcinelli

HaslinskySeverance payment

$
1,050,000

$
735,000

$
735,000

$
735,000


COBRA payments


13,260


13,260


13,260


13,260


Total

$
1,063,260

$
748,260

$
748,260

$
748,260





---

Termination in the Event of DeathCasey

Nicola

Sullivan

Falcinelli

HaslinskySeverance payment

$
150,000

$
105,000

$
105,000

$
105,000

$
COBRA payments


13,260


13,260


13,260


13,260


Accelerated vesting of phantom units


698,940


225,567


225,567


225,567


193,797Total

$
862,200

$
343,827

$
343,827

$
343,827

$
193,797




Termination in the Event of DisabilityCasey

Nicola

Sullivan

Falcinelli

HaslinskySeverance payment

$
150,000

$
105,000

$
105,000

$
105,000

$
COBRA payments


13,260


13,260


13,260


13,260


Accelerated vesting of phantom units


698,940


225,567


225,567


225,567


193,797Total

$
862,200

$
343,827

$
343,827

$
343,827

$
193,797


Director Compensation

K-Sea GP pays no additional remuneration to its employees for serving as directors. Also, neither Mr. Dowling
nor Mr. Friedman received any remuneration during fiscal 2008 for serving as a director; however, they were reimbursed for expenses attendant to board membership.

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Table of Contents

The
following table sets forth a summary of the compensation paid to non-employee directors in fiscal 2008:

Name

Fees
Earned or
Paid in
Cash
($)

Stock
Awards
($)(1)

Option
Awards
($)

Non-Equity
Incentive Plan
Compensation
($)

Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings
($)

All Other
Compensation
($)

Total
($)(2)(3)Brian P. Friedman

$


$


$


$


$


$


$
James J. Dowling




$
93,750













$
93,750Anthony S. Abbate

$
22,000

$
50,724













$
72,724Barry J. Alperin

$
28,000

$
50,724













$
78,724Frank Salerno

$
21,500

$
50,724













$
72,224


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Table of Contents

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SECURITYHOLDER MATTERS.

A diagram depicting our current organizational structure is presented below.

GRAPHIC

K-Sea Transportation Partners L.P.

The following table sets forth the beneficial ownership of units of K-Sea Transportation Partners L.P. as of
September 1, 2008 by beneficial owners of 5% or more of such units by each

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Table of Contents

director
and named executive officer of K-Sea General Partner GP LLC and by all directors and named executive officers as a group.

Name of Beneficial Owners(1)

Common
Units(2)

Percentage
of
Common
Units

Subordinated
Units

Percentage of
Subordinated Units

Percentage of
Total
Common
and
Subordinated
UnitsBeneficial Owners of 5% or MoreEW Transportation LLC(3)


2,082,500


15.3
%

2,082,500


100.0
%

26.5
%EW Holding Corp.(4)








1,181,818


56.8
%

7.5
%EW Transportation Corp.








454,545


21.8
%

2.9
%Tortoise Energy Infrastructure Corporation(5)


612,800


4.5
%







3.9
%Tortoise Capital Advisors, L.L.C.(5).


1,165,685


8.6
%







7.4
%Directors and Executive OfficersJames J. Dowling


25,000


*








*Timothy J. Casey


26,400


*








*Anthony S. Abbate


16,500


*








*Barry J. Alperin


11,500


*








*Brian P. Friedman(6)


2,126,412


15.6
%

2,082,500


100.0
%

26.8
%Frank Salerno


5,800


*








*John J. Nicola


17,620


*








*Thomas M. Sullivan


8,605


*








*Richard P. Falcinelli


8,620


*








*Gregory J. Haslinsky


5,695


*








*All directors and executive officers as a group (12 persons)


2,455,572


18.0
%

2,082,500


100.0
%

28.9
%


---

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Table of Contents



Name of Beneficial Owner

Economic Interest

Equity InterestKSP Investors A L.P(a).


57.6
%
62.9%KSP Investors B L.P(a).


19.8
%
21.7%KSP Investors C L.P(a).


12.6
%
13.7%Park Avenue Transportation Inc.(a)


90.0
%
98.3%James J. Dowling(b)




Timothy J. Casey


5.5
%
*Anthony S. Abbate




*Barry J. Alperin




*Brian P. Friedman(a)


90.0
%
98.3%Frank Salerno




*John J. Nicola


1.3
%
*Thomas M. Sullivan


1.3
%
*Richard P. Falcinelli


1.3
%
*Gregory S. Haslinsky


*

*All directors and executive officers of K-Sea General Partner GP LLC as a group (12 persons)


99.5
%
99.9%






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Table of Contents



K-Sea General Partner GP LLC

The following table sets forth the economic interest in, and the beneficial ownership of equity interests of, K-Sea General
Partner GP LLC, the general partner of our general partner, as of September 1, 2008:

Name of Beneficial Owner

Economic Interest/
Equity InterestKSP Investors A L.P.


57.6
%KSP Investors B L.P.


19.8
%KSP Investors C L.P.


12.6
%Park Avenue Transportation Inc.(1)


90.0
%James J. Dowling(2)


Timothy J. Casey


5.5
%Anthony S. Abbate


Barry J. Alperin


Brian P. Friedman(1)


90.0
%Frank Salerno


John J. Nicola


1.3
%Thomas M. Sullivan


1.3
%Richard P. Falcinelli


1.3
%Gregory S. Haslinsky


All directors and executive officers of K-Sea General Partner GP LLC as a group (12 persons)


99.5
%






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Table of Contents



Equity Compensation Plan Information

The following table sets forth in tabular format a summary of our equity plan information as of September 1, 2008:

(a)

(b)

(c)Plan Category

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and
rights

Weighted-average
exercise price of
outstanding
options,
warrants and
rights

Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))Equity compensation plans approved by securityholders(1)








279,769
(2)Equity compensation plans not approved by securityholders








Total








279,769


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Table of Contents

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Distributions and Payments to Our General Partner and Its Affiliates

We generally distribute 98.73% of our available cash to our unitholders, including EW Transportation LLC, EW Holding Corp. and
EW Transportation Corp. in their capacity as holders of an aggregate of 2,082,500 subordinated units and 2,082,500 common units, and the remaining 1.27% of our available cash to our general partner.
If distributions exceed the $0.50 per unit minimum quarterly distribution and other higher target levels, our general partner is entitled to increasing percentages of the distributions, up to 50% of
the distributions above the highest target level. We refer to the rights to the increasing distributions as "incentive distribution rights." Please read
"Market For Registrant's Common Equity, Related Securityholder Matters and Issuer Purchases of Equity SecuritiesIncentive Distribution Rights" in Item 5 of this report. Assuming we
pay the $0.50 per unit minimum quarterly distribution on all of our outstanding units, our general partner would receive an annual distribution of $404,894 on its 1.27% general partner interest, and
affiliates of our general partner would receive an annual distribution of approximately $4,165,000 on their subordinated units and $4,165,000 on their common units. In July 2008, the board of
directors of the general partner of our general partner increased the quarterly cash distribution to $0.77 per common unit. If distributions continue at that level on all of our outstanding units, our
general partner would receive an annual distribution of $4,969,972 on its 1.27% general partner interest and incentive distribution rights, and affiliates of our general partner would receive an
annual distribution of approximately $6,414,100 on their subordinated units and $6,414,100 on their common units. No assurances can be made, however, that distributions will continue at that level.

Our
general partner and its affiliates do not receive a management fee or other compensation for the management of our partnership. Our general partner and its affiliates are entitled to
be reimbursed, however, for all direct and indirect expenses incurred on our behalf. Our general partner has sole discretion in determining the amount of these expenses. There were no reimbursed
expenses in fiscal 2008 or fiscal 2007.

If
our general partner withdraws or is removed, its general partner interest and its incentive distribution rights will either be sold to the new general partner for cash or converted
into common units, in each case for an amount equal to the fair market value of those interests.

Upon
our liquidation, the partners, including our general partner, will be entitled to receive liquidating distributions according to their particular capital account balances.

Omnibus Agreement

We are a party to an omnibus agreement with KSP Investors A L.P. ("KSP A"), KSP Investors B L.P. ("KSP B"), KSP Investors
C L.P. ("KSP C" and, together with KSP A and KSP B, the "KSP Entities"), EW Transportation LLC, EW Acquisition Corp., EW Holding Corp., EW Transportation Corp., K-Sea General
Partner LP (our general partner), K-Sea General Partner GP LLC (the general partner of our general partner), K-Sea OLP GP LLC (the general
partner of our operating partnership) and K-Sea Operating Partnership L.P. (our operating partnership).

Noncompetition

Under the omnibus agreement, neither the KSP Entities nor their controlled affiliates may engage, either directly or indirectly, in the
business of providing refined petroleum product marine transportation, distribution and logistics services in the United States to the extent such business generates qualifying income for federal
income tax purposes. The restriction does not apply to the assets that were retained by our predecessors at the closing of our initial public offering in

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January 2004.
Except as provided above, neither the KSP Entities nor their controlled affiliates are prohibited from engaging in activities in which they compete directly or indirectly with us.
Jefferies Capital Partners, and the funds it manages, are not prohibited from owning assets or engaging in businesses that compete directly or indirectly with us.

Indemnification

Under the omnibus agreement, the KSP Entities, EW Transportation LLC and the subsidiaries of EW Transportation LLC
(collectively, "the Indemnitors") have jointly and severally agreed to indemnify us until January 14, 2009 against certain environmental and toxic tort liabilities and, until January 14,
2014, against certain other toxic tort liabilities associated with the operation of the assets before January 14, 2004. Liabilities resulting from changes in law after the closing of our
initial public offering are excluded from the environmental indemnity. We have agreed to indemnify the Indemnitors for events and conditions associated with the operation of our assets that occur on
or after January 14, 2004 to the extent the Indemnitors are not required to indemnify us. There is an aggregate cap of $10 million on the amount of indemnity coverage provided by the
Indemnitors for the environmental and toxic tort liabilities.

The
Indemnitors have also agreed to indemnify us for liabilities related to:



Amendments

The omnibus agreement may not be amended without the prior approval of the conflicts committee if the proposed amendment will, in the
reasonable discretion of our general partner, adversely affect holders of our common units.

Operations Manager

We currently employ William Sullivan as an operations manager at our Staten Island, New York location. William Sullivan is the brother
of Thomas M. Sullivan, Chief Operating Officer and PresidentAtlantic Region. William Sullivan received total compensation of approximately $164,790 in respect of fiscal 2008.
Additionally, we currently employ Bernard Casey as an operations manager at our Honolulu, Hawaii location. Bernard Casey is the brother of Timothy J. Casey, President, Chief Executive Officer and
Director. Bernard Casey received total compensation of approximately $184,611, including a housing allowance and relocation expenses, in respect of fiscal 2008. The compensation for Mr. William
Sullivan and Mr. Bernard Casey is reviewed and approved by the Compensation Committee.

Purchase of Tugboats

On June 5, 2008, we completed the acquisition of eight tugboats and ancillary equipment from Roehrig Maritime LLC and its
affiliates, or Roehrig. The purchase price was $41.5 million in cash. Roehrig and EW Transportation LLC each owned a 50% interest in a joint venture that owned one of

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the
tugboats. We paid $5.2 million for the tugboat, which was the estimated fair market value of the tugboat. The transaction was approved by the Conflicts Committee of K-Sea
General Partner GP LLC.

Properties

We lease our Staten Island, New York office and pier facilities from, and charter certain vessels to, affiliates of an employee who is
not an executive officer or director. Additionally, we utilize one of these affiliates for tank cleaning services. Please read note 7 to our audited consolidated financial statements included
elsewhere in this report.

We
lease a parcel of land used for storage of vessel parts and equipment from Gordon Smith for $12,000 per month.

Director Independence

The board of directors of K-Sea General Partner GP LLC has determined that Messrs. Abbate, Alperin and
Salerno are independent within the meaning of the listing standards for general independence of the New York Stock Exchange. Under the listing standards, the audit committee is required to be composed
solely of directors who are independent. The standards for audit committee membership include additional requirements under rules of the SEC.

The
listing standards relating to general independence consist of both a requirement for a board determination that the director has no material relationship with the listed company and
a listing of several specific relationships that preclude independence. To assist it in making determinations of independence, the board has adopted categorical standards as permitted under the
listing standards. Although the board considers all relevant facts and circumstances in assessing whether a director is independent, relationships falling within the categorical standards are not
required to be disclosed or separately discussed in this report in connection with the board's independence determinations. A relationship falls within the categorical standards adopted by the board
if it:



but
under those rules neither requires disclosure nor precludes a determination of independence, or



None
of the independent directors had relationships relevant to an independence determination that were outside the scope of the board's categorical standards.

Because
we are a limited partnership, the listing standards of the New York Stock Exchange do not require K-Sea General Partner GP LLC to have a majority of
independent directors or a nominating/corporate governance or compensation committee.

92

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Table of Contents

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The following table presents fees for services rendered by PricewaterhouseCoopers LLP during fiscal 2008 and fiscal 2007.

Year Ended
June 30, 2008

Year Ended
June 30, 2007Audit fees(1)

$
1,480,359

$
1,341,700Audit-related fees(2)


406,159


53,146Tax fees(3)


861,001


586,939All other fees





Total

$
2,747,519

$
1,981,785






The
audit committee has considered whether the provision of the non-audit services described above is compatible with maintaining the independence of
PricewaterhouseCoopers LLP and determined that the provision of such services was compatible with maintaining such independence.

Audit Committee Policies and Procedures for Pre-approval of Audit and Non-Audit Services

Consistent with SEC policies regarding auditor independence, the audit committee is responsible for pre-approving all audit
and non-audit services performed by the independent registered public accounting firm. In addition to its approval of the audit engagement, the audit committee takes action at least
annually to authorize the performance by the independent registered public accounting firm of several specific types of services within the categories of audit-related services and tax services.
Audit-related services include assurance and related services that are reasonably related to the performance of the audit or review of the financial statements. Authorized tax services include
compliance-related services such as services involving tax filings, as well as consulting services such as tax planning, transaction analysis and opinions. Services are subject to
pre-approval of the specific engagement if they are outside the specific types of services included in the periodic approvals or if they are in excess of specified fee limitations. The
audit committee may delegate pre-approval authority to subcommittees. During 2008 no pre-approval requirements were waived.

93

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Table of Contents

PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)(1) Financial Statements.

See
"Index to Financial Statements" set forth on page F-1.

(a)(2) Financial Statement Schedules.

None.

(a)(3) Exhibits.

Exhibit
Number



Description2.1*




Agreement and Plan of Merger, dated June 25, 2007, by and among K-Sea Acquisition1, LLC, K-Sea Transportation Partners L.P., Smith Maritime, Ltd., Go Big Chartering, LLC, Gordon L.
K. Smith, The Gordon L. K. Smith Trust, Barbara Smith SML Trust, 235LX, LLC and the other parties signatory thereto (incorporated by reference to Exhibit 10.1 to the Partnership's Current Report on Form 8-K filed with the with the
Securities and Exchange Commission on June 27, 2007).3.1.1*




Certificate of Limited Partnership of K-Sea Transportation Partners L.P. (incorporated by reference to Exhibit 3.1 to the Partnership's Registration Statement on Form S-1 (Registration No. 107084), as amended (the "Registration
Statement"), originally filed with the Securities and Exchange Commission on July 16, 2003).3.2.2*




Amendment No. 1 to the Third Amended and Restated Agreement of Limited Partnership of K-Sea Transportation Partners L.P. (incorporated by reference to Exhibit 3.1 to the Partnership's Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 20, 2007).3.2*




Third Amended and Restated Agreement of Limited Partnership of K-Sea Transportation Partners L.P. (including specimen unit certificate for the common units) (incorporated by reference to Exhibit 3.1 to the Partnership's Current Report on
Form 8-K filed with the Securities and Exchange Commission on May 5, 2006).3.3*




Certificate of Limited Partnership of K-Sea Operating Partnership L.P. (incorporated by reference to Exhibit 3.3 to the Registration Statement).3.4*




Amended and Restated Agreement of Limited Partnership of K-Sea Operating Partnership L.P. (incorporated by reference to Exhibit 3.4 to the Partnership's Quarterly Report on Form 10-Q for the period ended December 31,
2003).3.5*




Certificate of Limited Partnership of K-Sea General Partner L.P. (incorporated by reference to Exhibit 3.5 to the Registration Statement).3.6*




First Amended and Restated Agreement of Limited Partnership of K-Sea General Partner L.P. (incorporated by reference to Exhibit 3.6 to the Partnership's Quarterly Report on Form 10-Q for the period ended December 31,
2003).3.7*




Certificate of Formation of K-Sea General Partner GP LLC (incorporated by reference to Exhibit 3.7 to the Registration Statement).3.8*




First Amended and Restated Limited Liability Company Agreement of K-Sea General Partner GP LLC (incorporated by reference to Exhibit 3.8 to the Partnership's Quarterly Report on Form 10-Q for the period ended December 31,
2003).


94

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Table of Contents

Exhibit
Number



Description10.1*




Contribution, Conveyance and Assumption Agreement, dated as of January 14, 2004, among K-Sea Investors L.P., K-Sea Transportation LLC, EW Holding Corp., K-Sea Transportation Corp., K-Sea Transportation Partners L.P. and K-Sea
Operating Partnership L.P. (incorporated by reference to Exhibit 10.2 to the Partnership's Quarterly Report on Form 10-Q for the period ended December 31, 2003).10.2*




Omnibus Agreement, dated as of January 14, 2004, among K-Sea Investors L.P., K-Sea Acquisition Corp., New EW Holding Corp., New K-Sea Transportation Corp., K-Sea General Partner L.P., K-Sea General Partner GP LLC, K-Sea
Transportation Partners L.P., K-Sea OLP GP, LLC and K-Sea Operating Partnership L.P. (incorporated by reference to Exhibit 10.3 to the Partnership's Quarterly Report on Form 10-Q for the period ended December 31,
2003).10.3.1*




K-Sea Transportation Partners L.P. Long-Term Incentive Plan (incorporated by reference to Exhibit 10.7 to the Partnership's Quarterly Report on Form 10-Q for the period ended March 31, 2004).10.3.2*




Form of Director Phantom Unit Award Agreement (incorporated by reference to Exhibit 10.1 to the Partnership's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 7, 2004).10.3.3*




Form of Employee Phantom Unit Award Agreement (incorporated by reference to Exhibit 10.2 to the Partnership's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 7, 2004).10.4*




K-Sea Transportation Partners L.P. Employee Unit Purchase Plan (incorporated by reference to Exhibit 4.2 to the Partnership's Registration Statement on Form S-8 (Registration No. 333-117251) filed on July 9,
2004).10.5*




Employment Agreement, dated as of January 14, 2004, between K-Sea Transportation Inc. and Timothy J. Casey (incorporated by reference to Exhibit 10.9 to the Partnership's Quarterly Report on Form 10-Q for the period ended
December 31, 2003).10.6*




Employment Agreement, dated as of January 14, 2004, between K-Sea Transportation Inc. and John J. Nicola (incorporated by reference to Exhibit 10.10 to the Partnership's Quarterly Report on Form 10-Q for the period ended
December 31, 2003).10.7*




Employment Agreement, dated as of January 14, 2004, between K-Sea Transportation Inc. and Richard P. Falcinelli (incorporated by reference to Exhibit 10.11 to the Partnership's Quarterly Report on Form 10-Q for the period ended
December 31, 2003).10.8*




Employment Agreement, dated as of January 14, 2004, between K-Sea Transportation Inc. and Thomas M. Sullivan (incorporated by reference to Exhibit 10.12 to the Partnership's Quarterly Report on Form 10-Q for the period ended
December 31, 2003).10.9*




Form of Indemnification Agreement (incorporated by reference to Exhibit 10.12 to the Partnership's Annual Report on Form 10-K for the fiscal year ended June 30, 2005)


95

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Table of Contents

Exhibit
Number



Description10.10*




Amended and Restated Loan and Security Agreement, dated as of August 14, 2007, among K-Sea Operating Partnership L.P., as borrower, LaSalle Bank National Association and Citibank, N.A., as co-syndication agents, Citizens Bank of
Pennsylvania and HSBC Bank USA National Association, as co-documentation agents, and KeyBank National Association, as administrative agent and collateral trustee, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the
Partnership's Current Report on Form 8-K filed with the with the Securities and Exchange Commission on August 20, 2007).10.12*




Master Loan and Security Agreement dated as of April 3, 2006 by and among K-Sea Operating Partnership L.P., as Borrower, Key Equipment Finance Inc., as Lender, and K-Sea Transportation Partners L.P., K-Sea Transportation Inc.
and Sea Coast Transportation LLC, as Guarantors (incorporated by reference to Exhibit 10.1 to the Partnership's Current Report on Form 8-K filed with the Securities and Exchange Commission on April 7, 2006).21.1




List of Subsidiaries.23.1




Consent of PricewaterhouseCoopers LLP.31.1




Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2




Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1




Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2




Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99.1*




Loan Agreement, dated as of March 17, 2005, between K-Sea Operating Partnership L.P. and First Union Commercial Corporation (incorporated by reference to Exhibit 10.3 to the Partnership's Quarterly Report on Form 10-Q for the
period ended March 31, 2005).99.2*




Loan Agreement, dated as of June 28, 2005, between K-Sea Operating Partnership L.P. and Citizens Asset Finance, a d/b/a of Citizens Leasing Corporation (incorporated by reference to Exhibit 10.16 to the Partnership's Annual Report on
Form 10-K for the fiscal year ended June 30, 2005).99.3*




Loan Agreement dated December 19, 2005 between K-Sea Canada Corp. (as Borrower) and Citizens Leasing Corp. d/b/a Citizens Asset Finance (as Lender) (incorporated by reference to Exhibit 10.3 to the Partnership's Quarterly Report on
Form 10-Q for the period ended December 31, 2005).99.4*




Loan Agreement dated as of May 12, 2006 among K-Sea Operating Partnership L.P., as Borrower, Citizens Leasing Corporation, as Lender, and Citizens Leasing Corporation, as agent and collateral trustee for the other lenders that may become
parties to the loan agreement (incorporated by reference to Exhibit 99.4 to the Partnership's Annual Report on Form 10-K for the fiscal year ended June 30, 2006).


96

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Table of Contents

Exhibit
Number



Description99.5




Secured Term Loan Credit Facility dated June 4, 2008 by K-Sea Operating Partnership L.P., as Borrower, and DnB NOR Bank ASA, as Mandated Lead Arranger, Bookrunner, Administrative Agent and Security Trustee, and the banks and financial
institutions indentified therein, as Lenders.


---

97

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Table of Contents



INDEX TO CONSOLIDATED STATEMENTS



PageReport of Independent Registered Public Accounting Firm

F-2Consolidated Balance Sheets as of June 30, 2008 and 2007

F-4Consolidated Statements of Operations for the fiscal years ended June 30, 2008, 2007 and 2006

F-5Consolidated Statements of Partners' Capital for the fiscal years ended June 30, 2008, 2007 and 2006

F-6Consolidated Statements of Cash Flows for the fiscal years ended June 30, 2008, 2007 and 2006

F-7Notes to Consolidated Financial Statements

F-9


F-1

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Table of Contents

Report of Independent Registered Public Accounting Firm

To
the General Partner and Unitholders of K-Sea Transportation Partners L.P.,

In
our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of
K-Sea Transportation Partners L.P. and its subsidiaries (collectively, the "Partnership") at June 30, 2008 and June 30, 2007, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2008 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion,
the Partnership did not maintain, in all material respects, effective internal control over financial reporting as of June 30, 2008, based on criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because of a
material weakness in internal control over financial reporting related to the accuracy of recording depreciation expense and accumulated depreciation, specifically, an effective control was not
designed and in place to compare the depreciation expense as
calculated under the mid-year convention to what would have been calculated using the dates fixed assets were placed in service. A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented
or detected on a timely basis. The material weakness referred to above is described in Management's Report on Internal Control over Financial Reporting appearing on Item 9A of this Annual
Report on Form 10-K. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements
as of and for the year ended June 30, 2008 and our opinion regarding the effectiveness of the Partnership's internal control over financial reporting does not affect our opinion on those
consolidated financial statements. The Partnership's management is responsible for these financial statements and for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on these financial statements
and on the Partnership's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide

F-2

---



Table of Contents

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

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

As
described in Management's Report on Internal Control over Financial Reporting, management has excluded Smith Maritime LLC and K-Sea Hawaii Inc. from its
assessment of internal control over financial reporting as of June 30, 2008 because they were acquired by the Partnership in a purchase business combination during fiscal 2008. We have also
excluded Smith Maritime LLC and K-Sea Hawaii Inc. from our audit of internal control over financial reporting. Smith Maritime LLC and K-Sea
Hawaii Inc. are wholly-owned subsidiaries whose total assets and total revenues represent $136.2 million and $27.3 million, respectively, of the related consolidated financial
statement amounts as of and for the year ended June 30, 2008.

PricewaterhouseCoopers LLP
Florham Park, New Jersey
September 10, 2008

F-3

---





Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.        CONSOLIDATED BALANCE SHEETS        (in thousands)

June 30,2008

2007AssetsCurrent AssetsCash and cash equivalents

$
1,752

$
912Accounts receivable, net


42,090


30,683Deferred taxes


1,184


948Prepaid expenses and other current assets


19,861


5,073Total current assets


64,887


37,616Vessels and equipment, net


608,209


358,580Construction in progress


40,370


13,285Deferred financing costs, net


3,829


1,106Goodwill


54,300


16,385Other assets


26,713


12,861Total assets

$
798,308

$
439,833Liabilities and Partners' CapitalCurrent LiabilitiesCurrent portion of long-term debt

$
16,754

$
9,270Accounts payable


35,335


17,091Accrued expenses and other current liabilities


19,211


12,044Deferred revenue


14,219


10,019Total current liabilities


85,519


48,424Term loans and capital lease obligation


256,381


137,946Credit line borrowings


166,071


97,071Other liabilities


6,707


Deferred taxes


3,933


3,739Total liabilities


518,611


287,180Non-controlling interest in equity of joint venture


4,519


Commitments and contingenciesPartners' Capital


275,178


152,653Total liabilities and partners' capital

$
798,308

$
439,833


See
accompanying notes to consolidated financial statements.

F-4

---





Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.        CONSOLIDATED STATEMENTS OF OPERATIONS        (in thousands, except per unit amounts)

For the Years Ended June 30,2008

2007

2006Voyage revenue

$
312,680

$
216,924

$
176,650Bareboat charter and other revenue


13,600


9,650


6,118Total revenues


326,280


226,574


182,768Voyage expenses


79,427


45,875


37,973Vessel operating expenses


124,551


96,005


77,325General and administrative expenses


28,947


20,472


17,309Depreciation and amortization


48,311


33,415


26,810Net (gain) loss on sale of vessels


(601
)

102


(313
)Total operating expenses


280,635


195,869


159,104Operating income


45,645


30,705


23,664Interest expense, net


21,275


14,097


10,118Net loss on reduction of debt








7,224Other (income) expense, net


(1,827
)

(63
)

(64
)Income before provision for income taxes


26,197


16,671


6,386Provision for income taxes


529


851


484Net income

$
25,668

$
15,820

$
5,902Other comprehensive income:Fair market value adjustment for interest rate swap, net of taxes


(6,720
)

(698
)

1,136Foreign currency translation adjustment


10


2


85Comprehensive income

$
18,958

$
15,124

$
7,123General partner's interest in net income

$
405

$
316

$
118Limited partners' interest:Net income

$
25,263

$
15,504

$
5,784Net income per unitbasic

$
1.97

$
1.56

$
0.60diluted

$
1.95

$
1.55

$
0.60Weighted average units outstandingbasic


12,847


9,936


9,605diluted


12,952


10,020


9,672


See
accompanying notes to consolidated financial statements.

F-5

---





Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.        CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL        (in thousands)

Limited PartnersCommon

SubordinatedGeneral
Partner

Accumulated
Other Comprehensive IncomeUnits

$

Units

$

TOTALBalance of Partners' Capital at June 30, 2005


4,667

$
96,842


4,165

$
43,688

$
1,410




$
141,940Issuance of common units under long-term incentive plan


13


390














390Issuance of common units, net of costs of $1,645


950


32,365














32,365Issuance of common units forSea Coast acquisition


125


4,376














4,376Capital contribution














792





792Fair market value adjustment for interest rate swap
















$
1,136


1,136Foreign currency translation adjustment

















85


85Distributions to partners





(12,739
)




(9,663
)

(641
)




(23,043
)Net income





3,276





2,508


118





5,902Balance of Partners' Capital at June 30, 2006


5,755

$
124,510


4,165

$
36,533

$
1,679

$
1,221

$
163,943Issuance of common units under long-term incentive plan


23


731














731Conversion of subordinated units to common units


1,041


8,575


(1,041
)

(8,575
)







Fair market value adjustment for interest rate swap, net of taxes

















(698
)

(698
)Foreign currency translation adjustment

















2


2Distributions to partners





(15,713
)




(10,121
)

(1,311
)




(27,145
)Net income





9,619





5,885


316





15,820Balance of Partners' Capital at June 30, 2007


6,819

$
127,722


3,124

$
23,722

$
684

$
525

$
152,653Issuance of common units under long-term incentive plan


23


725














725Conversion of subordinated units to common units, net of tax related adjustments (note 1)


1,041


3,382


(1,041
)

(3,382
)







Fair market value adjustment for interest rate swap, net of taxes

















(6,720
)

(6,720
)Foreign currency translation adjustment

















10


10Issuance of common units, net of transaction costs of $6,332


3,500


131,918














131,918Issuance of common units for the Smith Maritime Group


250


11,298














11,298Distributions to partners





(29,076
)




(8,330
)

(2,968
)




(40,374
)Net income





19,892





5,371


405





25,668Balance of Partners' Capital at June 30, 2008


11,633

$
265,861


2,083

$
17,381

$
(1,879
)
$
(6,185
)
$
275,178


See accompanying notes to consolidated financial statements.

F-6

---





Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.        CONSOLIDATED STATEMENTS OF CASH FLOWS        (in thousands)

For the Years Ended June 302008

2007

2006Cash flows from operating activities:Net income

$
25,668

$
15,820

$
5,902Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


48,820


33,720


27,144Payment of drydocking expenditures


(25,908
)

(15,357
)

(12,506
)Provision for doubtful accounts


549


454


232Deferred income taxes


478


395


172Net (gain) loss on sale of vessels


(601
)

102


(313
)Gain on settlement of legal proceedings


(2,073
)




Unit compensation costs


1,156


803


499Net loss on reduction of debt








7,224Prepayment costs on long-term debt








(4,196
)Other


245


167


71Changes in operating working capital:Accounts receivable


(12,248
)

(4,623
)

(6,488
)Prepaid expenses and other current assets


(13,437
)

3,159


(2,362
)Accounts payable


7,957


547


1,898Accrued expenses and other current liabilities


5,505


2,176


(1,677
)Deferred revenue


4,200


3,827


4,187Other assets


196


(14
)

285Net cash provided by operating activities


40,507


41,176


20,072Cash flows from investing activities:Vessel acquisitions


(60,475
)

(16,184
)

(13,105
)Acquisition of the Smith Maritime Group, net of cash acquired


(168,881
)




Acquisition of Sea Coast, net of cash acquired








(76,512
)Construction of tank vessels


(51,987
)

(33,315
)

(20,702
)Other capital expenditures


(13,282
)

(14,756
)

(9,050
)Proceeds from Title XI reserve funds








2,876Proceeds from settlement of legal proceedings


2,073





Net proceeds on sale of vessels


2,192


740


11,095Investment in joint venture


(1,836
)




Other





(189
)

Net cash used in investing activities


(292,196
)

(63,704
)

(105,398
)Cash flows from financing activities:Net increase in credit line borrowings


69,000


43,056


6,903Gross proceeds from equity offering


138,250





34,010Payments to Title XI reserve funds








(674
)Proceeds from issuance of long-term debt


266,931


14,891


109,437Redemption of Title XI bonds








(36,788
)Payment of term loans


(171,840
)

(7,722
)

(2,059
)Financing costs paidequity offerings


(6,234
)

(98
)

(1,645
)Financing costs paiddebt issuance


(3,204
)

(368
)

(869
)Capital contribution from general partner








792Distributions to partners


(40,374
)

(27,145
)

(23,043
)Net cash provided by financing activities


252,529


22,614


86,064Cash and cash equivalents:Net increase (decrease)


840


86


738Balance at beginning of year


912


826


88Balance at end of year

$
1,752

$
912

$
826


F-7

---



Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)

For the Years Ended June 302008

2007

2006Supplemental disclosure of cash flow information:Cash paid during the year for:Interest, net of amounts capitalized

$
21,799

$
14,457

$
9,767Income taxes

$
375

$
13

$
322Supplemental disclosure of non-cash investing and financing activities:Acquisition of the Smith Maritime Group:Value of common units issued to sellers

$
11,298Debt assumed

$
23,511Acquisition of the Sea Coast Transportation LLC:Value of common units issued to sellers







$
4,376Debt assumed







$
Purchase of vessel with note payable

$
3,000


See accompanying notes to consolidated financial statements.

F-8

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (dollars in thousands, except unit and per unit amounts)

Note 1: Basis of Presentation

K-Sea Transportation Partners L.P. (the "Partnership") provides marine transportation, distribution and logistics services for refined petroleum products in the United
States. On January 14, 2004, the Partnership completed its initial public offering of common units representing limited partner interests and, in connection therewith, also issued to its
predecessor companies an aggregate of 4,165,000 subordinated units representing limited partner interests. During the subordination period the subordinated units are not entitled to receive any
distributions until the common units have received their minimum quarterly distribution plus any arrearages from prior quarters. The subordination period will end once the Partnership meets certain
financial tests described in its partnership agreement, but it generally cannot end before December 31, 2008. When the subordination period ends, all subordinated units will convert into common
units on a one-for-one basis, and the common units will no longer be entitled to arrearages. The Partnership met certain financial tests described in its partnership agreement
for early conversion of the first 50% of subordinated units and, as a result, 1,041,250 of these subordinated units converted to common units on each of February 14, 2007 and
February 14, 2008. The Partnership's consolidated statement of partners' capital includes a reclassification of $4,676 related to the allocation of a deferred tax benefit from common limited
partners capital to subordinated limited partners capital. Such reclassification is included in the line item "Conversion of subordinated units to common units, net of tax related adjustments" in such
statement. Additionally, certain prior year amounts have been reclassified to conform to the current year presentation.

The
Partnership's general partner, K-Sea General Partner L.P., holds 202,447 general partner units, representing a 1.45% general partner interest in the Partnership as
of June 30, 2008, as well as certain incentive distribution rights in the Partnership. Incentive distribution rights represent the right to receive an increasing percentage of cash
distributions after the minimum quarterly distribution, any cumulative arrearages on common units, and certain target distribution levels have been achieved. The target distribution levels entitle the
general partner to receive an additional 13% of total quarterly cash distributions in excess of $0.55 per unit until all unitholders have received $0.625 per unit, an additional 23% of total quarterly
cash distributions in excess of $0.625 per unit until all unitholders have received $0.75 per unit, and an additional 48% of total quarterly cash distributions in excess of $0.75 per unit. The
Partnership is required to distribute all of its available cash from operating surplus, as defined in its partnership agreement. Additional contributions by the general partner to the Partnership upon
issuance of new common units are not mandatory.

Note 2: Summary of Significant Accounting Policies

Basis of Consolidation.These consolidated financial statements are for the Partnership and its wholly owned subsidiaries. All material inter-company transactions
and balances have been eliminated in consolidation.

Cash and Cash Equivalents.The Partnership considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

Vessels and Equipment.Vessels and equipment are recorded at cost, including capitalized interest where appropriate, and depreciated using the
straight-line method over the estimated useful lives of the individual assets as follows: tank vesselsten to twenty-five years; tugboatsten to twenty
years; and pier and office equipmentfive years. For single-hull tank vessels, such useful lives are limited to the remaining period of operation prior to mandatory retirement
as required by the Oil Pollution Act of

F-9

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 2: Summary of Significant Accounting Policies (Continued)

1990
("OPA 90"). OPA 90 requires that the 25 (including four chartered-in) single-hull vessels currently operated by the Partnership, representing approximately 24% of total
barrel-carrying capacity as of June 30, 2008, be retired or retrofitted to double-hull by December 31, 2014.

Included
in vessels and equipment are drydocking expenditures that are capitalized and amortized over three years based on regulatory drydocking requirements. Drydocking of vessels is
required both by the United States Coast Guard and by the applicable classification society, which in the Partnership's case is the American Bureau of Shipping. Such drydocking activities include, but
are not limited to, the inspection, refurbishment and replacement of steel, engine components, tailshafts, mooring equipment and other parts of the vessel.

Major
renewals and betterments of assets are capitalized and depreciated over the remaining useful lives of the assets. Leasehold improvements are capitalized and depreciated over the
shorter of their useful lives or the remaining term of the lease. Maintenance and repairs that do not improve or extend the useful lives of the assets are expensed.

The
Partnership assesses impairment on long-lived assets used in operations when indicators of impairment are present. An impairment loss would be recognized if the
undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts, and to the extent the carrying value exceeds fair value by appraisal.

When
property items are retired, sold or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts with any gain or loss on the dispositions
included in income. Assets to be disposed of are reported at the lower of their carrying amounts or fair values, less the estimated costs of disposal.

Fuel Supplies.Fuel used to operate the Partnership's vessels, and on hand at the end of the period, is
recorded at cost. Such amounts totaled $8,389 and $2,660 as of June 30, 2008 and 2007, respectively, and are included in prepaid expenses and other current assets in the consolidated balance
sheets.

Deferred Financing Costs.Direct costs associated with obtaining long-term financing are deferred and amortized over the terms of the related
financings. Deferred financing costs are stated net of accumulated amortization which, at June 30, 2008 and 2007, amounted to $939 and $457, respectively.

Goodwill.Goodwill represents the excess of the purchase price over the fair value of the net assets of the acquired business at the date of the acquisition. The
Partnership tests for impairment at least annually using a two-step process. The first step identifies potential impairment by comparing the fair value of a reporting unit with its book
value, including goodwill. If the fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired and the second step is not necessary. If the carrying value exceeds the fair
value, the second step calculates the possible impairment loss by comparing the implied fair value of goodwill with the carrying amount. If the implied fair value of goodwill is less than the carrying
amount, a write-down is recorded.

Intangible Assets.Included in other assets are intangible assets acquired as part of business combinations which are recorded at fair value at their acquisition
date and are amortized on a straight-line basis over their estimated useful lives. The Partnership reviews intangible assets to evaluate whether events or changes have occurred that would
suggest an impairment of carrying value. An

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 2: Summary of Significant Accounting Policies (Continued)

impairment
would be recognized when expected undiscounted future operating cash flows are lower than the carrying value, and to the extent the carrying value exceeds fair value. Intangible assets are
stated net of accumulated amortization, which at June 30, 2008 and 2007 amounted to $7,486 and $4,694, respectively.

Revenue Recognition.The Partnership earns revenue under contracts of affreightment, voyage charters, time charters and bareboat charters. For contracts of
affreightment and voyage charters, revenue is recognized based upon the relative transit time in each period, with expenses recognized as incurred. Although contracts of affreightment and certain
contracts for voyage charters may be effective for a period in excess of one year, revenue is recognized over the transit time of individual voyages, which are generally less than ten days in
duration. For time charters and bareboat charters, revenue is
recognized ratably over the contract period, with expenses recognized as incurred. Estimated losses on contracts of affreightment and charters are accrued when such losses become evident.

Deferred revenue.Deferred revenue arises in the normal course of business from advance billings under charter agreements. Revenue is recognized ratably over the
contract period.

Use of Estimates.The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during
the reporting period. The most significant estimates relate to depreciation of the vessels, liabilities incurred from workers' compensation, commercial and other claims, the allowance for doubtful
accounts and deferred income taxes. Actual results could differ from these estimates.

Concentrations of Credit Risk.Financial instruments which potentially subject the Partnership to concentrations of credit risk are primarily cash and cash
equivalents and trade accounts receivable. The Partnership maintains its cash and cash equivalents on deposit at a financial institution in amounts that, at times, may exceed insurable limits.

With
respect to accounts receivable, the Partnership extends credit based upon an evaluation of a customer's financial condition and generally does not require collateral. The
Partnership maintains an allowance for doubtful accounts for potential losses, totaling $1,970 and $939 at June 30, 2008 and 2007, respectively, and does not believe it is exposed to
concentrations of credit risk that are likely to have a material adverse effect on its financial position, results of operations or cash flows. For the fiscal years ended June 30, 2008, 2007
and 2006, the Partnership's allowance for doubtful amounts was impacted by additional charges of $549, $454, and $232, and write-offs of ($7), $206 and $209, respectively.

Currency Translation.Assets and liabilities related to the Partnership's Canadian subsidiary are translated at the exchange rate prevailing on the balance sheet
date, and revenues and expenses are translated at the weighted average exchange rate for the period. Translation gains and losses represent other comprehensive income and are reflected in partners'
capital.

Derivative instruments.The Partnership utilizes derivative financial instruments to reduce interest rate risks. The Partnership does not hold or issue derivative
financial instruments for trading purposes. Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 2: Summary of Significant Accounting Policies (Continued)

Hedging Activities, ("SFAS No. 133"), as amended, establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Changes in the fair value of those instruments are
reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. The accounting for gains and losses associated with changes in
the fair value of the derivative and the effect on the consolidated financial statements will depend on its hedge designation and whether the hedge is highly effective in achieving offsetting changes
in fair value of cash flows of the asset or liability hedged.

Income Taxes.The Partnership's effective tax rate comprises the New York City Unincorporated Business Tax and foreign taxes on its operating partnership, plus
federal, state, local and foreign corporate income taxes on the income of the operating partnership's corporate subsidiaries.

Deferred
taxes represent the tax effects of differences between the financial reporting and tax bases of the Partnership's assets and liabilities, as applicable, at enacted tax rates in
effect for the years in which the differences are expected to reverse. The recoverability of deferred tax assets is evaluated and a valuation allowance established when it is more likely than not that
some portion or all of the deferred tax assets will not be realized.

Unit-Based Compensation.The Partnership has adopted a long-term incentive plan that permits the granting of awards to directors and
employees in the form of restricted units and unit options. The Partnership recognizes compensation cost for the restricted units on a straight-line basis over the vesting periods of the
awards, which range from three to five years. No unit options have been granted.

Net Income per Unit.Basic net income per unit is determined by dividing net income, after deducting the amount of net income allocated to the general partner
interest, by the weighted average number of units outstanding during the period. Diluted net income per unit is calculated in the same manner as basic net income per unit, except that the weighted
average number of outstanding units is increased to include the dilutive effect of outstanding unit options or restricted units granted under the Partnership's
long-term incentive plan. For diluted net income per unit, the weighted average units outstanding were increased by 105, 84 and 67 for the fiscal years ended June 30, 2008, 2007 and
2006, respectively, due to the dilutive effect of restricted units.

As
required by Emerging Issues Task Force Issue No. 03-6, "Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings
per Share" ("EITF 03-6"), the general partner's interest in net income is calculated as if all net income for the year was distributed according to the terms of the partnership
agreement. The partnership agreement does not provide for the distribution of net income; rather, it provides for the distribution of available cash, which is a contractually defined term that
generally means all cash on hand at the end of each quarter after provision for certain cash requirements. Unlike available cash, net income is affected by non-cash items, such as
depreciation and amortization.

As
described in note 1 above, the general partner's incentive distribution rights entitle it to receive an increasing percentage of distributions when the quarterly cash
distribution exceeds $0.55 per unit. Under EITF 03-6, the impact of these increasing percentages is reflected in the calculation of the general partner's interest in quarterly net
income when such net income exceeds $0.55 per unit.

F-12

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 2: Summary of Significant Accounting Policies (Continued)

Distributions per Unit.Distributions to limited partners were $2.92, $2.60 and $2.32 per unit for the years ended June 30, 2008, 2007 and 2006,
respectively.

Note 3: Acquisitions

The Smith Maritime Group

On August 14, 2007, the Partnership, through certain wholly owned subsidiaries, completed the acquisition of all of the equity
interests in Smith Maritime, Ltd., Go Big Chartering, LLC and Sirius Maritime, LLC (collectively, the "Smith Maritime Group"). This transaction is part of the Partnership's
business strategy to expand its fleet through strategic and accretive acquisitions. The Smith Maritime Group provides marine transportation and logistics services to major oil companies, oil traders
and refiners in Hawaii and along the West Coast of the United States. The aggregate purchase price was $203,690. As further described in note 5 below, the Partnership financed the cash portion
of the purchase through additional borrowings under its revolving credit agreement and a bridge loan.

Under
the purchase method of accounting, the Partnership has included the Smith Maritime Group's results of operations from August 14, 2007, the acquisition date, through
June 30, 2008. The aggregate recorded purchase price of $203,690 consisted of $168,881 of cash, including $1,496 of direct expenses, $23,511 of assumed debt, and $11,298 representing 250,000
common units valued at their average market value during the five-day period surrounding the announcement of the definitive agreement. The Partnership allocated the purchase price to the
tangible assets, intangible assets, and liabilities acquired based on their fair values. The purchased identifiable intangible assets are being amortized on a straight-line basis over
their respective estimated useful lives. The excess of the purchase price over the fair value of the acquired net assets has been recorded as goodwill, which is not amortized but which will be
reviewed annually for impairment. Such purchase price was in excess of the net assets acquired because the Partnership believes that the cash flows generated from the acquired business will be
accretive. The Partnership's allocation of the purchase price is as follows. This allocation, due to the finalization of obtaining information relating to the acquisition, has been adjusted at
June 30, 2008 from previously reported amounts to reflect a decrease in goodwill of $403 to adjust certain prepaid expenses and other current assets.

Current assets

$
8,229Vessels and equipment, net


158,660Intangible assets


20,115Goodwill


37,915Other assets


9224,928Liabilities and capital lease obligations


21,238Total purchase price

$
203,690


The
identifiable intangible assets purchased in the acquisition include customer relationships and covenants not to compete, valued at $17,400 which will be amortized over
20 years and $100 which will be amortized over 3 years, respectively. Amortization expense for the customer relationships and the covenant not to compete for the year ended
June 30, 2008 were $725 and $28, respectively. The annual

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 3: Acquisitions (Continued)

amortization
expense for the identifiable intangibles is $903. A substantial portion of the goodwill is expected to be deductible for tax purposes.

The
acquisition also included an option to purchase a 50% interest in a tank barge, at less than fair market value, which resulted in recognition of an intangible asset of $2,615 at the
acquisition date. Upon exercise of the option in October 2007, the Partnership obtained a 50% interest in a joint venture newly-formed to own and charter the tank barge, which joint venture is
considered a variable interest entity and is consolidated in the accompanying financial statements. As a result, the consolidated balance sheet reflects $4,519 for the non-controlling
interest in this joint venture at June 30, 2008. Other income (expense) includes an allocation of $337 for the non-controlling interest's portion of the joint venture's net income.
The joint venture has a term loan, which matures on October 1, 2012, that is collateralized by the related tank barge. Borrowings outstanding on this term loan at June 30, 2008 were
$2,830.



The unaudited pro forma financial information for the fiscal years ended June 30, 2008 and 2007 combines the historical results
of the Partnership with the historical results of the Smith Maritime Group for the period preceding the August 14, 2007 acquisition. The unaudited financial information in the table below
summarizes the combined results of operations of the Partnership and the Smith Maritime Group, on a pro forma basis, as though the acquisition had been completed as of the beginning of each period
presented. This pro forma financial data is presented for information purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition
actually taken place at those dates.

For the Year Ended June 30,2008

2007(unaudited)Revenues

$
332,618

$
283,546Net income

$
27,636

$
28,103Basic net income per limited partner unit

$
1.99

$
2.01Fully diluted net income per limited partner unit

$
1.97

$
2.00


Sea Coast Transportation

On October 18, 2005, the Partnership completed the acquisition, through a wholly owned subsidiary, of all of the membership
interests in Sea Coast Transportation LLC (formerly Sea Coast Towing, Inc.) ("Sea Coast") from Marine Resources Group, Inc. ("MRG"). Also on October 18, 2005, Sea Coast
acquired four tugboats from MRG. This transaction is part of the Partnership's business strategy to expand its fleet through strategic and accretive acquisitions. Sea Coast is a provider of marine
transportation and logistics services to major oil companies, oil traders and refiners along the West Coast of the United States and Alaska. The aggregate purchase price for Sea Coast and the four
tugboats comprised $77,000 in cash and 125,000 common units representing limited partner interests in the Partnership. The Partnership financed the cash portion of the purchase price through
additional borrowings under its credit agreement.

F-14

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 3: Acquisitions (Continued)

Under
the purchase method of accounting, the Partnership has included Sea Coast's results of operations from October 18, 2005, the date of acquisition. The aggregate recorded
purchase price was $82,382, comprising $77,000 of cash, $4,376 representing 125,000 common units, and $1,006 of direct
expenses. The Partnership allocated the purchase price to the tangible assets, intangible assets, and liabilities acquired based on their fair values. The purchased identifiable intangible assets are
being amortized on a straight-line basis over their respective estimated useful lives. The excess of the purchase price over the fair value of the acquired net assets has been recorded as
goodwill, which is not amortized but which will be reviewed annually for impairment. The amount of goodwill that is deductible for tax purposes was $14,693. The total purchase price has been allocated
as follows:

Working capital

$
550Vessels and equipment, net


55,931Intangible assets


10,150Goodwill


16,579Other assets


71183,921Capital lease obligation


1,539Total purchase price

$
82,382


The
identifiable intangible assets purchased in the Sea Coast acquisition included those in the table below. Amortization expense for the customer relationships and the covenant not to
compete for the year ended June 30, 2006 were $647 and $75, respectively; the annual amortization expense is $970 and $112, respectively.

Gross
Value

Weighted-
average
Useful LifeCustomer relationships

$
9,700

10 yearsCovenant not to compete


450

4 yearsTotal

$
10,150

9.7 years


The
expected future amortization expense related to these intangible assets is as follows:

Year ending June 30,2009

$
1,0822010


1,0082011


9702012


9702013 and thereafter


3,233Total

$
7,263


F-15

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 3: Acquisitions (Continued)

Pro Forma Financial Information

The unaudited financial information in the table below summarizes the combined results of operations of the Partnership and Sea Coast,
on a pro forma basis, as though the acquisition had been completed as of the beginning of the period presented. This pro forma financial data is presented for information purposes only and is not
necessarily indicative of the results of operations that would have been achieved had the acquisition actually taken place at that date. The unaudited pro forma financial information combines the
historical results of the Partnership with the historical results of Sea Coast for the fiscal 2006 period preceding the October 18, 2005 acquisition.

For the
Year Ended
June 30, 2006(unaudited)Revenues

$
201,338Net income

$
7,996Basic net income per limited partner unit

$
0.81Fully diluted net income per limited partner unit

$
0.81


Note 4: Vessels and Equipment and Construction in Progress

At June 30, 2008 and 2007, vessels and equipment and construction in progress comprised the following:

2008

2007Vessels

$
739,153

$
475,441Pier and office equipment


5,967


5,967745,120


481,408Less accumulated depreciation and amortization


(136,911
)

(122,828
)Vessels and equipment, net

$
608,209

$
358,580Construction in progress

$
40,370

$
13,285


Depreciation
and amortization of vessels and equipment for the fiscal years ended June 30, 2008, 2007 and 2006 was $45,519, $31,411 and $25,274, respectively. Such depreciation
and amortization includes amortization of drydocking expenditures for the fiscal years ended June 30, 2008, 2007 and 2006 of $13,679, $9,826 and $7,391, respectively.

On
June 5, 2008, the Partnership completed the acquisition of eight tugboats and ancillary equipment from Roehrig Maritime LLC and its affiliates. The purchase price was
$41,541 in cash and was financed using available cash plus borrowings under a bridge loan agreement as described in note 5.

As
described in note 3, on August 14, 2007 the Partnership acquired the Smith Maritime Group, including $158,660 of vessels, pier and office equipment.

During
fiscal 2008, the Partnership took delivery of the following newbuild vessels: in June 2008, an 80,000-barrel tank barge, the DBL 77; in March 2008, a
28,000-barrel tank barge, the DBL 25; in

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 4: Vessels and Equipment and Construction in Progress (Continued)

December
2007, a 28,000-barrel tank barge, the DBL 24; and in September 2007, a 28,000-barrel tank barge, the DBL 23. Additionally, the Partnership acquired two additional
tugboats and two tank barges during the year. These tank barges and tugboats cost, in the aggregate, $51,888. The Partnership has also entered into agreements with shipyards for the construction of
additional new tank barges, as follows:

Vessels

Expected DeliveryTwo 80,000-barrel tank barges

1st  2nd Quarter fiscal 2009One 185,000-barrel articulated tug-barge unit

2nd Quarter fiscal 2010One 100,000-barrel tank barge

2nd Quarter fiscal 2010Four 50,000-barrel tank barges

3rd Quarter fiscal 2010 
2nd Quarter fiscal 2011


Construction
in progress at June 30, 2008 comprises expenditures for each of the tank barges described above.

In
June 2007, the partnership took delivery of a 28,000-barrel tank barge, the DBL 22. In March 2007, the partnership took delivery of a 100,000-barrel tank
barge, the DBL 104. In January 2007 and August 2006, the partnership took delivery of two 28,000-barrel tank barges, the DBL 27 and the DBL 26, respectively. Additionally, the
Partnership acquired five tugboats during fiscal year 2007. These tank barges and tugboats cost, in the aggregate, $40,124.

On
March 15, 2006 and May 11, 2006, the Partnership took delivery of two new 28,000-barrel tank barges, the DBL 28 and DBL 29, respectively. On
December 30, 2005, the Partnership took delivery of a new 100,000-barrel tank barge, the DBL 103. The total cost, after addition of certain special equipment and integration with
existing tugboats, plus capitalized interest, was approximately $23,421. As described in note 3, on October 18, 2005 the Partnership acquired Sea Coast, including $55,931 of vessels,
pier and office equipment. On October 20, 2005, the Partnership acquired an 85,000-barrel integrated tug-barge unit for $13,105, including transaction costs.



On November 11, 2005, one of the Partnership's tank barges, the DBL 152, struck submerged debris in the U.S. Gulf of Mexico,
causing significant damage which resulted in the barge eventually capsizing. The barge was declared a constructive total loss, and the Partnership has received the total $11,000 insured value from its
hull and machinery insurers. The excess of this insurance recovery over the net book value of the barge, totaling $415, is included as a net gain on disposal of vessels in the consolidated statements
of operations for the year ended June 30, 2006.

Note 5: Financing



The Partnership maintains a revolving credit agreement with a group of banks, with KeyBank National Association as administrative agent
and lead arranger, to provide financing for its operations. On August 14, 2007, the Partnership amended and restated its revolving credit agreement to provide

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 5: Financing (Continued)

for
(1) an increase in availability to $175,000 under the primary revolving facility, with an increase in the term to seven years, (2) an additional
$45,000 364-day senior secured revolving credit facility, (3) amendments to certain financial covenants and (4) a reduction in interest rate margins. Under
certain conditions, the Partnership has the right to increase the primary revolving facility by up to $75,000, to a maximum total facility amount of $250,000. On November 7, 2007, the
Partnership exercised this right and increased the facility by $25,000 to $200,000. The primary revolving facility is, and the 364-day facility was, collateralized by a first perfected
security interest in vessels and certain equipment and machinery related to such vessels having a total fair market value of approximately $275,000. The revolving facility bears interest at the London
Interbank Offered Rate, or LIBOR (2.46% at June 30, 2008), plus a margin ranging from 0.7% to 1.5% depending on the Partnership's ratio of total funded debt to EBITDA (as defined in the
agreement). The Partnership also incurs commitment fees, payable quarterly, on the unused amount of the facility at a rate ranging from 0.15% to 0.30% based also upon the ratio of Total Funded Debt to
EBITDA. On August 14, 2007, the Partnership borrowed $67,000 under the primary revolving facility and $45,000 under the 364-day facility to fund a portion of the purchase price of
the Smith Maritime Group (see note 3).

Also
on August 14, 2007, the Partnership entered into a bridge loan facility for up to $60,000 with an affiliate of KeyBank National Association in connection with the Smith
Maritime Group acquisition. While outstanding, the bridge loan facility bore interest at an annual rate of LIBOR plus 1.5%, and was to mature on November 12, 2007. During an event of default,
the bridge loan facility provided for interest at an annual rate of LIBOR plus 7.5%.

Both
the $45,000 364-day senior secured facility and the $60,000 bridge loan were repaid on September 26, 2007 upon closing of an offering of common units
by the Partnership. See "Common Unit Offerings" below. As of June 30, 2008, the Partnership had $162,350 outstanding on the revolving facility.

The
Partnership initially entered into this credit agreement on March 24, 2005. The five-year $80,000 credit agreement replaced the Partnership's existing $47,000
revolving credit agreement, which was repaid and terminated. On October 18, 2005, to partially finance the acquisition of Sea Coast (see note 3), the Partnership amended the credit
agreement to increase the available borrowings to $120,000, of which $77,000 was drawn down to pay the cash portion of the purchase price. On November 29, 2005, to fund the redemption of its
Title XI bonds (see "Title XI Bonds" below), the Partnership further amended the credit agreement to increase the maximum borrowings to $155,000. On April 3, 2006, the Partnership used the net
proceeds from the issuance of $80,000 in new term loans to repay outstanding borrowings under the credit agreement, and further amended it to reduce the available borrowings, to release certain
vessels from the collateral pool, and to reduce certain covenant requirements. During fiscal 2007, the Partnership further amended the credit agreement to add additional bank participants, increase
the available borrowings to $125,000, amend certain financial covenants and reduce interest rates.

The
Partnership also maintains a separate $5,000 revolver with a commercial bank to support its daily cash management activities. Advances under this facility bear interest at
30-day LIBOR plus a margin of 1.40%; amounts outstanding at June 30, 2008 totaled $3,721.

F-18

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 5: Financing (Continued)

On November 30, 2007, the Partnership entered into agreements with a financial institution to swap the LIBOR-based, variable rate interest payments on $104,850 of its credit
agreement borrowings for fixed rates, for a term of three years. The fixed rates to be paid by the Partnership average 4.01% plus the applicable margin. The fair value of the swap contract of ($1,156)
as of June 30, 2008 is included in other liabilities in the consolidated balance sheet.



Term loans and capital lease obligations outstanding at June 30, 2008 and 2007 were as follows. Descriptions of these borrowings
are included below:

2008

2007Term loans due:March 24, 2008

$


$
9,821October 5, 2008


4,265


May 1, 2012


3,418


October 1, 2012


2,830


December 31, 2012


9,102


9,889January 1, 2013


13,243


13,360April 30, 2013


15,321


16,607May 1, 2013


71,916


75,923June 1, 2014


18,869


20,321June 1, 2015


16,497


July 1, 2015


27,465


December 1, 2016


10,381


February 28, 2018


5,370


April 1, 2018


4,275


May 1, 2018


46,858


June 1, 2018


4,300


August 1, 2018


17,990


Capital lease obligations and other


1,035


1,295273,135


147,216Less current portion


16,754


9,270$
256,381

$
137,946


On
June 5, 2008, the Partnership closed the last of eleven fixed-rate term loans aggregating $72,147, which were entered into between April 30,
2008 and June 5, 2008. These loans were arranged with a financial institution, which assigned all but two to other financial institutions. The loans have a term of ten years, maturing between
April 1, 2018 and June 1, 2018, except one loan for $16,497 which has a term of seven years and matures on June 1, 2015. These loans bear a weighted average interest rate of 6.35%
and are repayable in an aggregate fixed monthly payment of $624. Final balloon payments of principal total $10,664 on June 1, 2015 and $24,836 between April 1, 2018 and June 1,
2018. The loans are collateralized by eleven tank barges and tugboats. The proceeds of these loans were used to repay borrowings under the Partnership's credit agreement, except for $15,000 which was
used to repay an advance on such loans which was borrowed on March 21, 2008 concurrent with repayment of a separate term loan which came due and was repaid on March 24, 2008. These term
loan agreements contain customary events of default, including a cross default to the Partnership's

F-19

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 5: Financing (Continued)

credit
agreement, and also the fixed charge coverage ratio requirement that is included in the credit agreement. Borrowings outstanding on these loans totaled $71,930 at June 30, 2008.

Also
on June 5, 2008, in connection with the acquisition of eight tugboats and ancillary equipment described in note 4 above, the Partnership entered into a bridge loan
agreement with a financial institution, pursuant and subject to which the lender agreed to extend a bridge loan in the original principal amount of $31,730. The bridge loan was to mature on
October 5, 2008; the Partnership has since refinanced $27,465 of the bridge loan with term loans and repaid the balance on July 13, 2008 using its revolving credit agreement. The term
loans all have terms of seven years. Two of the loans totaling $19,860 bear a weighted average interest rate of 6.52% and are repayable in an aggregate fixed monthly amount of $182, with final balloon
payments of principal totaling $12,141 due at maturity on July 1, 2015. A third term loan bears interest at LIBOR plus 2.0%, is repayable in fixed principal amounts ranging from $31 to
$42 monthly, plus interest, and matures on July 1, 2015 at which time a final balloon payment of principal of $4,605 is due. These term loans are collateralized by, in the aggregate, six
tugboats. Borrowings outstanding on these term loans totaled $27,465 at June 30, 2008.

On
June 4, 2008, the Partnership entered into a credit agreement (the "ATB Agreement") with a financial institution pursuant to which the lender agreed to provide financing during
the construction period, and thereafter, for a 185,000-barrel articulated tug-barge unit in an amount equal to 80% of the acquisition costs of the unit, up to a maximum of
$57,600. Obligations under the ATB Agreement are collateralized during the construction period by an assignment of the Partnership's rights under the construction contract with the related shipyard
and, after delivery, by a first preferred mortgage interest in the tug-barge unit. Interest is payable quarterly at the applicable LIBOR rate plus a margin ranging from 1.05% to 1.85%
based upon the Partnership's ratio of Total Funded Debt to EBITDA, as defined in the agreement. At the delivery date of the unit, which is expected during the fourth quarter of calendar 2009, the
aggregate of the advances taken during the construction period will be converted to a term loan repayable in twenty-eight quarterly payments covering 37.5% of the term loan, which are expected to
approximate $771 each, plus interest at LIBOR plus the applicable margin. The twenty eighth and final payment will also include a balloon payment of 62.5% of the acquisition cost, estimated at
$36,000. The ATB Agreement contains the same financial covenants as are contained in the Partnership's credit agreement described above, as well as customary events of default. Outstanding borrowings
were $10,381 at June 30, 2008 under the agreement. On June 13, 2008, the Partnership also entered into an agreement with the Bank to swap the LIBOR-based, variable rate interest payments
on the outstanding balance of the ATB agreement to a fixed rate of 5.08% over the same term, resulting in a total fixed interest rate of 5.08% plus the applicable margin. The fair value of the swap
contract of ($881) as of June 30, 2008 is included in other liabilities in the consolidated balance sheet.

On
February 22, 2008, the Partnership closed a new ten-year, $5,425 term loan to finance the purchase of a tugboat. The loan bears interest at 6.15%, and is repayable
in monthly installments of $46 with a final payment at maturity of $2,417. The loan is collateralized by the related tugboat. The principal balance of the loan was $5,370 at June 30, 2008.

On
August 14, 2007, in connection with the acquisition of the Smith Maritime Group, the Partnership assumed two term loans totaling $23,511. The first, in the amount of $19,464,
bears interest at LIBOR plus 1.25% and is repayable in equal monthly installments of $147, plus interest, through August 2018. The second, in the amount of $4,047, bears interest at LIBOR plus 1.0%
and is repayable in monthly installments ranging from $59 to $81, plus interest, through May 2012. These loans are

F-20

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 5: Financing (Continued)

collateralized
by three tank barges. The Partnership also agreed with the lender to assume the two existing interest rate swaps relating to these two loans. The LIBOR-based, variable rate interest
payments on these loans have been swapped for fixed payments at an average rate of 5.44%, plus a margin, over the same terms as the loans. Borrowings outstanding on the term loans were $21,408 at
June 30, 2008. The fair value of the swap contract of ($1,219) as of June 30, 2008 is included in other liabilities in the consolidated balance sheet.

On
April 3, 2006, the Partnership entered into an agreement with a lending institution to borrow $80,000, for which it pledged six tugboats and six tank barges as collateral. The
proceeds of these loans were used to repay indebtedness under the Partnership's credit agreement. Borrowings are represented by six notes which have been assigned to other lending institutions. These
loans bear interest at a rate equal to LIBOR plus 1.40%, and are repayable in 84 monthly installments with the remaining principal payable at maturity on May 1, 2013. The agreement
contains certain prepayment premiums. Borrowings outstanding on these loans totaled $71,916 as of June 30, 2008. Also on April 3, 2006, the Partnership entered into an agreement with the
lending institution to swap the one-month, LIBOR based, variable interest payments on the $80,000 of loans for a fixed payment at a rate of 5.2275%, over the same terms as the loans. This
swap results in a fixed interest rate on the Notes of 6.6275% for their seven-year term. The fair value of the swap contract of ($3,451) and $446 as of June 30, 2008 and 2007,
respectively, is included in other liabilities and other assets in the consolidated balance sheet.

The
interest rate swap contracts referred to above have all been designated as cash flow hedges and, therefore, the unrealized gains and losses resulting from the change in fair value of
each of the contracts are being reflected in other comprehensive income.

On
December 19, 2005, one of the Partnership's subsidiaries entered into a seven year Canadian dollar term loan to refinance purchase of an integrated tug-barge unit.
The proceeds of US $13,000 were used to repay borrowings under the credit agreement which had been used to finance purchase of the unit. The loan bears interest at a fixed rate of 6.59%, is
repayable in 60 monthly installments of CDN $136 and 23 monthly installments of CDN $216 with the remaining principal amount of CDN $7,688 payable at maturity, and
is collateralized by the related tug-barge unit and one other tank barge. Borrowings outstanding on this loan total US $13,243 as of June 30, 2008.

In
May 2006, the Partnership entered into an agreement to borrow up to $23,000 to partially finance construction of two 28,000-barrel and one 100,000-barrel tank
barges. The loan bears interest at 30-day LIBOR plus 1.40%, and is repayable in monthly
principal payments of $121, plus accrued interest, over seven years, with the remaining principal amount of $10,281 payable at maturity on June 1, 2014. The loan is collateralized by the
related tank barges and two other tank vessels. Borrowings outstanding on this loan total $18,869 at June 30, 2008.

In
June 2005, the Partnership entered into an agreement to borrow up to $18,000 to finance the purchase of an 80,000-barrel double-hull tank barge and
construction of two 28,000-barrel double-hull tank barges. The loan bears interest at 30-day LIBOR plus 1.71%, and is repayable in monthly principal installments of
$107 with the remaining principal amount of $9,000 payable at maturity. The loan is collateralized by the related tank barges. Borrowings outstanding on this loan were $15,321 at June 30, 2008.

In
March 2005, the Partnership entered into an agreement to borrow up to $11,000 to partially finance construction of a 100,000-barrel tank barge. The loan bears interest at
30-day LIBOR plus

F-21

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 5: Financing (Continued)

1.05%,
and is repayable in monthly principal installments of $66 with the remaining principal amount of $5,500 payable at maturity. The loan is collateralized by the related tank barge. Borrowings
outstanding on this loan totaled $9,102 at June 30, 2008.



On June 7, 2002, the Partnership's predecessor issued bonds aggregating $40,441, in four series, through a private placement for
the purpose of providing long-term financing for the construction of four new double-hull tank vessels. The bonds were guaranteed by the Maritime Administration of the U.S.
Department of Transportation ("MARAD") pursuant to Title XI of the Merchant Marine Act of 1936 (the "Title XI bonds"). On November 29, 2005, the Partnership redeemed the outstanding $36,787
principal balance of Title XI bonds, paid $828 of accrued interest, and made a make-whole payment of $3,953 as required under the Trust Indenture. The Partnership funded the redemption
using funds from its credit agreement. After writing off $2,702 in unamortized deferred financing costs relating to the Title XI bonds, and after costs and expenses relating to the transaction, the
Partnership recorded a loss on reduction of debt of $6,898. Retirement of the Title XI bonds improved the Partnership's borrowing flexibility, and eliminated certain restrictive covenants, collateral
requirements, and working capital constraints.



The agreements governing the credit agreement and the term loans contain restrictive covenants that, among others, (a) prohibit
distributions under defined events of default, (b) restrict investments and sales of assets, and (c) require the Partnership to adhere to certain financial covenants, including defined
ratios of fixed charge coverage and funded debt to EBITDA, as defined in the agreement.



Interest expense, net of amounts capitalized, and interest income, was as follows:

For the Years Ended June 30,2008

2007

2006Interest costs incurred

$
22,955

$
14,878

$
10,670Less interest capitalized


1,592


738


471Interest expense


21,363


14,140


10,199Interest income


(88
)

(43
)

(81
)Interest expense, net

$
21,275

$
14,097

$
10,118


The
weighted average interest rate on the term loans was 5.9% and 6.6% at June 30, 2008 and 2007, respectively, which debt is subject to prepayment fees. Interest
payable totaled $1,739 and $1,238 as of June 30, 2008 and 2007, respectively, and is included in accrued expenses and other current liabilities in the consolidated balance sheets. At
June 30, 2008 and 2007, accounts payable included book overdrafts of $5,445 and $2,022, respectively, representing outstanding checks.

F-22

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 5: Financing (Continued)



As of June 30, 2008, maturities of long-term debt for each of the next five years were as follows:

2009

$
16,7542010


18,8452011


21,1222012


22,4112013


89,838




On September 26, 2007, the Partnership closed a public offering of 3,500,000 common units representing limited partner
interests. The price to the public was $39.50 per unit. The net proceeds of $131,918 from the offering, after payment of underwriting discounts and commissions and expenses, were used to repay
borrowings under the credit agreement, including the $45,000 364-day facility, and also the $60,000 bridge loan facility described above. In addition, as described in
note 3, the Partnership issued 250,000 common units to the sellers in the Smith Maritime Group acquisition, valued at $11,298, in a transaction not involving a public offering.

On
October 14, 2005, the Partnership closed a public offering of 950,000 common units. Net proceeds of $33,060 from the offering, after payment of underwriting discounts and
commissions but before payment of expenses associated with the offering, were used to repay borrowings under the Partnership's credit agreement. In addition, as described in note 3, the
Partnership issued 125,000 common units to the sellers, valued at $4,376, in a transaction not involving a public offering.

On
June 1, 2005, the Partnership issued and sold 500,000 common units in a private placement for proceeds of $16,000, before expenses associated with the offering. The proceeds
were used to repay indebtedness incurred under the Partnership's credit agreement in connection with its December 2004 vessel acquisition.

Note 6: Income Taxes

The components of the provision for income taxes for the fiscal years ended June 30, 2008, 2007 and 2006 are as follows:

2008

2007

2006Current:Federal

$


$
102

$
State and local


36


24


Foreign


15


330


31251


456


312Deferred:Federal


380


152


59State and local


310


218


79Foreign


(212
)

25


34478


395


172Provision for income taxes

$
529

$
851

$
484


F-23

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 6: Income Taxes (Continued)

A
reconciliation of income tax expense, as computed using the federal statutory income tax rate of 34%, to the Partnership provision for income taxes for the fiscal years
ended June 30, 2008, 2007 and 2006 is as follows:

2008

2007

2006Tax at federal statutory rate of 34%

$
8,906

$
5,668

$
2,171Entities not subject to federal income taxes


(8,517
)

(5,393
)

(1,885
)State and local income taxes, net of federal benefit


312


241


79Foreign taxes, net of federal benefit


(187
)

340


318Valuation allowance








(201
)Other


15


(5
)

2Total

$
529

$
851

$
484


Significant
components of deferred income tax liabilities and assets as of June 30, 2008 and 2007 are as follows:

2008

2007Deferred tax liabilities:Book basis of vessels and equipment in excess of tax basis

$
5,343

$
4,461Total deferred tax liabilities

$
5,343

$
4,461Deferred tax assets:Allowance for doubtful accounts

$
104

$
58Accrued expenses


997


898Net operating loss carry-forwards


1,357


679Other


136


35Total deferred tax assets

$
2,594

$
1,670


The
Partnership had temporary differences at June 30, 2008 primarily related to the excess of the book basis of vessels and equipment over the related tax basis in
the amount of $168,903. This amount will result in taxable income, in the years these differences reverse, that will be included in the overall allocation of taxable income to the unitholders of the
Partnership.

At
June 30, 2008, the Partnership's corporate subsidiaries had federal net operating losses of $997 which begin to expire in 2024, state and local net operating losses of $4,910
which begin to expire in 2024, and foreign net operating losses of $3,355 which begin to expire in 2026.

Note 7: Commitments and Contingencies

The Partnership leases its New York office and pier facilities from an affiliate of an employee under an agreement which extends through April 2009. Terms of the agreement provide for
annual rental payments of $400 annually through April 2009. Rent expense was $400 for the fiscal years ended June 30, 2008, 2007 and 2006. In addition, a subsidiary of the Partnership leases
office and pier facilities and a water treatment facility in Virginia under an agreement with a third party that extends through January 2010. The Virginia lease agreement requires annual rental
payments of $250 through January 8, 2010. The subsidiary receives $84 from sublease of a portion of the Virginia property which extends to December 31, 2009. The subsidiary has an option
to buy the Virginia premises for an aggregate purchase price of $4,200. Rent expense, net of the sublease, was $166 for the fiscal years

F-24

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 7: Commitments and Contingencies (Continued)

ended
June 30, 2008, 2007 and 2006. The Partnership and subsidiary are also responsible for real estate taxes, insurance and all other costs associated with occupying these properties.
Effective July 1, 2006, the Partnership also leases office space in New Jersey under an agreement with a third party that extends through December 2013. The New Jersey lease requires annual
rental payments of $392 through December 2009, $408 through December 2010 and $423 through December 2013. Rent expense was $260 and $220 for the fiscal years ended June 30, 2008 and 2007,
respectively.

In
connection with the acquisition of Sea Coast Transportation LLC, the Partnership assumed agreements with the port authority in Seattle, Washington covering the lease of
terminal facilities and docking rights for its vessels. The lease expires in October 2008 with a renewal option for one additional five-year term. The lease requires monthly payments of
$26 with escalation each year based on the consumer price index. Rent expense for the years ended June 30, 2008, 2007 and 2006 was $239, $265 and $208, respectively. Additionally, the
Partnership leases one tugboat and three barges under non-cancelable operating leases which expire in October 2008 through February 2011. The future minimum lease payments for the one tug
and three barge operating leases as of June 30, 2008 are as follows:

Year ending June 30,2009

$
1,8412010


3832011


1922012


2013 and thereafter


Total

$
2,416


Charter
expenses were $2,724, $2,995 and $2,092 for the tug and barge operating leases for the years ended June 30, 2008, 2007 and 2006, respectively.

Included
in total revenues are time charter and bareboat charter revenues of $157,209, $105,621 and $60,582 for the fiscal years ended June 30, 2008, 2007 and 2006, respectively.
Such revenues include $514 , $513 and $513 for the fiscal years ended June 30, 2008, 2007 and 2006, respectively, related to vessels chartered to an affiliate of an employee. The Partnership
also utilizes such affiliate for tank cleaning services at a cost of $1,601, $1,894 and $1,609 for the years ended June 30, 2008, 2007 and 2006, respectively. The Partnership's time charters
and bareboat charters extend over various periods which expire between 2008 and 2014.

At
June 30, 2008, minimum contractually agreed future revenue under time and bareboat charters was as follows:

Year ending June 30,2009

$
167,9722010


76,9762011


43,4382012


19,2182013 and thereafter


28,587Total

$
336,191


The
Partnership has entered into employment agreements with certain of its executive officers. Each of the employment agreements had an initial term of one year, which is
automatically extended

F-25

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 7: Commitments and Contingencies (Continued)

for
successive one-year terms unless either party gives 30-days written notice prior to the end of the term that such party desires not to renew the employment agreement. These
executive officers currently receive aggregate base annual salaries of $960. In addition, each employee is eligible to receive an annual bonus award based upon the performance of the Partnership and
individual performance. If the employee's employment is terminated without cause or if the employee resigns for good reason, the employee will be entitled to severance in an amount equal to the
greater of (a) the product of 1.3125 (1.75 multiplied by 0.75) multiplied by the employee's base salary at the time of termination or resignation and (b) the product of 1.75 multiplied
by the remaining term of the employee's non-competition provisions multiplied by the employee's base salary at the time of termination or resignation.

The
European Union is currently working toward a new directive for the insurance industry, called "Solvency 2", that is expected to become law within three to four years and require
increases in the level of free, or unallocated, reserves required to be maintained by insurance entities, including protection and indemnity clubs that provide coverage for the maritime industry. The
West of England Ship Owners Insurance Services Ltd. ("WOE"), a mutual insurance association based in Luxembourg, provides the Partnership's protection and indemnity insurance coverage and would
be impacted by the new directive. In anticipation of these new regulatory requirements, the WOE has assessed its members an additional capital call which it believes will contribute to achievement of
the projected required free reserve increases. The Partnership's capital call of $1,119 was paid during calendar 2007. A further request for capital may be made in the future; however, the amount of
such further assessment, if any, cannot be reasonably estimated at this time. As a shipowner member of the WOE, the Partnership has an interest in the WOE's free reserves, and therefore has recorded
the additional $1,119 capital call as an investment, at cost, subject to periodic review for impairment. This amount is included in other assets in the June 30, 2008 balance sheet.

As
discussed in Note 4, in November 2005 one of the Partnership's tank barges, the DBL 152, struck submerged debris in the U.S. Gulf of Mexico, causing significant damage which
resulted in the barge eventually capsizing. At the time of the incident, the barge was carrying approximately 120,000 barrels of No. 6 fuel oil, a heavy oil product. In January 2006, submerged
oil recovery operations were suspended and a monitoring program, which sought to determine if any recoverable oil could be found on the ocean floor, was begun. In February 2007, the Coast Guard agreed
to end the cleanup and response phase, including the Partnership's obligation to conduct any further monitoring of the area around the spill site. The Partnership's incident response effort is
complete. The Partnership is not aware of any further recovery, cleanup or other costs. However, if any such costs are incurred, they are expected to be paid by the Partnership's insurers.

The
Partnership's insurers responded to the pollution-related costs and environmental damages resulting from the incident, paying approximately $65,000 less $60 in total deductibles. In
December 2007, a court made a final determination of liability in this case, resulting in a financial recovery by the Partnership's insurers, and also by the Partnership. As a result of the ruling,
the Partnership was awarded a reimbursement of certain expenses totaling $2,073, which is included in other expense (income) in the Partnership's consolidated statements of operations. The Partnership
received payment in January 2008.

The
Partnership is the subject of various claims and lawsuits in the ordinary course of business for monetary relief arising principally from personal injuries, collisions and other
casualties. Although the outcome of any individual claim or action cannot be predicted with certainty, the Partnership believes that any adverse outcome, individually or in the aggregate, would be
substantially mitigated by

F-26

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 7: Commitments and Contingencies (Continued)

applicable
insurance or indemnification from previous owners of the Partnership's assets, and would not have a material adverse effect on the Partnership's financial position, results of operations or
cash flows. The Partnership is also subject to deductibles with respect to its insurance coverage that range from $25 to $100 per incident and provides on a current basis for estimated payments
thereunder. Insurance claims receivable outstanding totaled $8,801 and $959 at June 30, 2008 and 2007, respectively, and is included in prepaid expenses and other current assets. Insurance
claims payable at June 30, 2008 and 2007 totaled $7,594 and $1,468, respectively, and is included in accrued expenses and other current liabilities.

As
discussed in Note 4, the Partnership has agreements with shipyards for the construction of one new articulated tug-barge unit and seven additional new tank barges.

Note 8: Long-term Incentive Plan

In January 2004, K-Sea General Partner GP LLC, the general partner of the Partnership's general partner, adopted the K-Sea Transportation
Partners L.P. Long-term Incentive Plan (the "Plan") for directors and employees of K-Sea General Partner GP LLC and its affiliates. The Plan currently
permits the grant of awards covering an aggregate of 440,000 common units in the form of restricted units and unit options and is administered by the Compensation Committee of the Board of Directors
of K-Sea General Partner GP LLC. The Board of Directors of K-Sea General Partner GP LLC, in its discretion, may terminate the Plan at any time with
respect to any restricted units for which a grant has not yet been made, and also reserves the right to alter or amend the Plan from time to time, including increasing the number of common units with
respect to which awards may be granted subject to unitholder approval as required by the New York Stock Exchange. No change in any outstanding grant may be made, however, which would materially impair
the rights of the participant without the consent of such participant. Subject to certain exceptions, restricted units are subject to forfeiture if employment is terminated prior to vesting. As the
restricted units vest, K-Sea General Partner GP LLC has the option to either acquire common units in the open market for delivery to the recipient or distribute newly issued
common units from the Partnership. In all cases, K-Sea General Partner GP LLC is reimbursed by the Partnership for such expenditures.

The
Partnership follows the provisions of FAS 123R, which states "equity instruments awarded to employees is to be estimated at fair value at the grant date." There is only a
service condition ("vesting period") in respect to the awards, they are not conditional upon any performance or market conditions. The Partnership estimated forfeitures over the vesting period to be
zero. Therefore, the fair value estimate is based solely upon the unit price at the grant dates.

Unit
compensation expense amounted to $1,411, $1,007 and $652, for the years ended June 30, 2008, 2007 and 2006, respectively. The total fair value of units vested during the
years June 30, 2008, 2007 and 2006 were $725, $731, and $390, respectively. As of June 30, 2008, there was $2,962 of unamortized compensation cost related to non-vested
restricted units, which is expected to be recognized over a remaining weighted-average vesting period of 3.1 years. A summary of the status of the Partnership's restricted unit awards as of
June 30, 2008 and 2007, and of changes in restricted units
outstanding under the Partnership's long-term incentive plan during the year ended June 30, 2008, is as follows:

Number of units

Weighted-
average grant
priceRestricted unit awards outstanding at June 30, 2007


76,872

$
32.01Units granted


48,912

$
43.02Units vested and issued


(22,900
)
$
31.67Restricted unit awards outstanding at June 30, 2008


102,884

$
37.32


F-27

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 9: Retirement Plans

Effective June 29, 2006, the Partnership's money purchase pension plan was terminated and all the assets were merged into the Partnership's 401(k) Savings Plan (the "Plan"). Also
effective June 29, 2006, the Sea Coast defined contribution plan was terminated and all the assets were merged into the Plan. The Plan is a defined contribution plan that qualifies under
Section 401(k) of the Internal Revenue Code. The Plan covers all eligible employees. The Plan provides that eligible employees may make contributions, subject to Internal Revenue Code
limitations, and the Partnership will match the first two percent of employee compensation contributed, subject to a maximum amount. In addition, the plan allows for an annual discretionary employer
contribution up to five percent of an employee's annual compensation. Employer contribution expense under the Plan totaled $3,743 and $2,981 for the years ended June 30, 2008 and 2007,
respectively. The Plan expenses for the fiscal year ended June 30, 2006, which excluded the money purchase pension plan and the Sea Coast defined contribution plan, totaled $499.

Under
the terms of the money purchase pension plan, the Partnership contributed five percent of each eligible employee's annual compensation, as defined in the plan document. For the
money purchase plan, expenses totaled $1,127 for the fiscal year ended June 30, 2006.

In
connection with the purchase of Sea Coast, the Partnership acquired an additional defined contribution plan that qualified under Section 401(k) of the Internal Revenue Code.
The plan covered all eligible employees and provided that eligible employees may make contributions, subject to Internal Revenue Code limitations, and the Partnership would match the first 25% of
employee compensation contributed, up to a maximum of 4%. In addition, the plan allowed for an annual discretionary employer contribution up to 4% of an employee's annual compensation. Employer
contribution expenses under this plan totaled $372 from the acquisition date through June 30, 2006.

Accrued
expenses for all retirement plans totaled $2,881 and $2,173 as of June 30, 2008 and 2007, respectively, and are included in accrued expenses and other current liabilities
in the consolidated balance sheets. Additionally, accrued expenses for payroll-related costs totaled $3,969 and $2,989 as of June 30, 2008 and 2007, respectively, which are also included in
accrued expenses and other current liabilities in the consolidated balance sheets.

Note 10: Major Customers

Three customers accounted for 16%, 12% and 11% of consolidated total revenues for the fiscal year ended June 30, 2008. Two customers accounted for 19% and 17% of consolidated
total revenues for the fiscal year ended June 30, 2007 and two customers accounted for 20% and 15% of consolidated total revenues for the fiscal year ended June 30, 2006.

There
were no customers that accounted for 10% or more of consolidated accounts receivable at June 30, 2008 and 2007.

Note 11: Fair Value of Financial Instruments

As of June 30, 2008, the fair value of long-term debt was approximately $445,851 based on the borrowing rates currently available to the Partnership for bank loans
with similar terms and average maturities. The fair value of the Partnership's other financial instruments approximated their cost bases as such instruments are short-term in nature or
were recently negotiated.

F-28

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 12: New Accounting Pronouncements

In February 2006, the FASB issued FASB Statement No. 155, "Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140"
("FAS 155"). FAS 155 amends FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" and FASB Statement No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". The Partnership adopted FAS 155 as of July 1, 2007, and such adoption did not have any impact on its financial
position, results of operations or cash flows.

In
June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109"
("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109,
"Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Partnership adopted
FIN 48 as of July 1, 2007, and such adoption did not have any impact on its financial position, results of operations or cash flows.

At
the date of the adoption of FIN 48, there were no unrecognized tax benefits and consequently no related interest and penalties. The significant jurisdictions in which the
Partnership files tax returns and is subject to tax include New York City, Venezuela and Puerto Rico. The significant jurisdictions in which the Partnership's corporate subsidiaries file tax returns
and are subject to tax include the United States and Canada. The tax returns filed in the United States and state jurisdictions are subject to examination for the years 2004 through 2007 and in
foreign jurisdictions for the years 2005 through
2007. The Partnership has adopted a policy to record tax related interest and penalties under interest expense and general and administrative expenses, respectively.

In
September 2006, the FASB issued FASB Statement No. 157, "Fair Value Measurements" ("FAS 157"). FAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. FAS 157 applies under other accounting pronouncements that require or permit fair
value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007, and the Partnership is currently analyzing its impact, if any.

In
February 2007, the FASB issued FASB Statement No. 159,"The Fair Value Option for Financial Assets and Financial Liabilities"
("FAS 159"). FAS 159 provides an option to report selected financial assets and liabilities at fair value. FAS 159's objective is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. FAS 159 also establishes presentation and disclosure requirements designed
to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. FAS 159 is effective for fiscal years beginning after
November 15, 2007, and the Partnership is currently analyzing its impact, if any.

In
December 2007, the FASB issued FASB Statement No. 141 (revised 2007), "Business Combinations" ("FAS 141(R)") which replaces FAS No.141, "Business Combinations."
FAS 141(R) retains the underlying concepts of FAS 141 in that all business combinations are still required to be accounted for at fair value under the purchase method of accounting, but
FAS 141(R) changed the

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 12: New Accounting Pronouncements (Continued)

method
of applying the purchase method in a number of significant aspects. FAS 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or
after the beginning of the first fiscal year subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies.
FAS 141(R) amends FAS 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the
effective date of FAS 141(R) would also apply the provisions of FAS 141(R). The Partnership is currently analyzing the impact, if any, of this standard.

In
December 2007, the FASB issued FASB Statement No. 160, "Non-controlling Interests in Consolidated Financial Statements, an Amendment of ARB 51"
("FAS 160"). FAS 160 amends ARB 51 to establish new standards that will govern the accounting for and reporting of (1) non-controlling interest in partially
owned consolidated subsidiaries and (2) the loss of control of subsidiaries. FAS 160 is effective on a prospective basis for all fiscal years, and interim periods within those fiscal
years beginning, on or after December 15, 2008, except for the presentation and disclosure requirements, which will be applied retrospectively. The Partnership is currently analyzing the
impact, if any, of this standard.

In
March 2008, the FASB issued FASB Statement No. 161, "Disclosure about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
("FAS 161"). FAS 161 requires qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. FAS 161 is effective for fiscal years beginning after
November 15, 2008. The Partnership is currently analyzing the impact, if any, of this standard.

In
April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3). FSP
FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under
SFAS 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 allows an entity to use its own historical experience in renewing or extending similar arrangements, adjusted
for entity-specific factors, in developing assumptions about renewal or extension used to determine the useful life of a recognized intangible asset. As a result, the determination of intangible asset
useful lives is now consistent with the method used to determine the period of expected cash flows used to measure the fair value of the intangible assets, as described in other accounting principles.
The guidance for determining the useful life of a recognized intangible asset is to be applied prospectively to intangible assets acquired after the effective date. Disclosure requirements are to be
applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. The provisions of FSP FAS 142-3 are effective as of the beginning of the
Partnership's fiscal year 2010. The Partnership is currently analyzing the impact, if any, of this standard.

In
May 2008, the FASB issued FASB Statement (SFAS) No. 162, The Hierarchy of Generally Accepted Accounting Principles (FAS 162). FAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in
the United States. This statement is not expected to change existing practices but rather reduce the complexity of financial

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Table of Contents

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 12: New Accounting Pronouncements (Continued)

reporting.
This statement will go into effect 60 days after the Securities and Exchange Commission approves related auditing rules and is not expected to have a material effect on the
Partnership's consolidated financial statements.

Note 13: Quarterly Results of Operations (Unaudited)

The following summarizes certain quarterly results of operations for each of the fiscal years ended June 30, 2008 and 2007:

Three Months EndedSeptember 30

December 31

March 31

June 30(in thousands, except per unit amounts)Fiscal 2008Total revenues

$
71,761

$
83,676

$
80,749

$
90,094Operating income

$
12,049

$
12,423

$
9,329

$
11,844Net income

$
6,006

$
8,976

$
4,325

$
6,361General partners' interest in net income

$
149

$
314

$
63

$
93Limited partners' interest in net income

$
5,857

$
8,662

$
4,262

$
6,268Net income per limited partner unit:Basic

$
0.57

$
0.63

$
0.31

$
0.46Diluted

$
0.56

$
0.63

$
0.31

$
0.45




Three Months EndedSeptember 30

December 31

March 31

June 30(in thousands, except per unit amounts)Fiscal 2007Total revenues

$
54,910

$
56,031

$
55,630

$
60,003Operating income

$
7,517

$
7,758

$
7,601

$
7,829Net income

$
4,086

$
3,946

$
3,996

$
3,792General partners' interest in net income

$
82

$
79

$
80

$
75Limited partners' interest in net income

$
4,004

$
3,867

$
3,916

$
3,717Net income per limited partner unit:Basic

$
0.40

$
0.39

$
0.39

$
0.37Diluted

$
0.40

$
0.39

$
0.39

$
0.37


Note 14: Subsequent Event

On August 20, 2008, the Partnership completed a public offering of 2,000,000 common units representing limited partner interests. The price to the public was $25.80 per unit. The
net proceeds of $50,000 from the offering, after payment of underwriting discounts and commissions, were used to repay borrowings under the Partnership's credit agreements and to make construction
progress payments in connection with the Partnership's vessel new-building program.

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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

K-SEA TRANSPORTATION PARTNERS L.P.By: K-SEA GENERAL PARTNER L.P.,
its General Partner.By: K-SEA GENERAL PARTNER GP LLC,
its General PartnerSeptember 15, 2008

By:

/s/TIMOTHY J. CASEYTimothy J. Casey President and Chief Executive Officer


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated:

Name

Title

Date/s/TIMOTHY J. CASEYTimothy J. Casey

President and Chief Executive Officer and Director (Principal Executive Officer)

September 15, 2008/s/JOHN J. NICOLAJohn J. Nicola

Chief Financial Officer (Principal Financial and Accounting Officer)

September 15, 2008/s/JAMES J. DOWLINGJames J. Dowling

Chairman of the Board and Director

September 15, 2008/s/ANTHONY S. ABBATEAnthony S. Abbate

Director

September 15, 2008/s/BARRY J. ALPERINBarry J. Alperin

Director

September 15, 2008/s/BRIAN P. FRIEDMANBrian P. Friedman

Director

September 15, 2008/s/FRANK SALERNOFrank Salerno

Director

September 15, 2008


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