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

FORM 10-K

|                                            |                                                                                           
|------------------------------------------- | ------------------------------------------------------------------------------------------
|x                                           | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2008
|                                           
|OR                                         
|                                           
|o                                           | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
  THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to
_____

Commission file number 001-32326

|                                                      
|------------------------------------------------------
|U.S. SHIPPING PARTNERS L.P.                           
|(Exact name of registrant as specified in its charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 20-1447743                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

399 Thornall St., 8th Floor 
Edison, NJ 08837 
(Address of principal executive offices) 
(Zip Code)

(732) 635-1500(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 registered
|                    |  |                                          
|Common units        |  | New
  York Stock Exchange through 11/5/08

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 x

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

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 x No o

Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes o 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. (Check one):

Large accelerated filer  oAccelerated filer oNon-accelerated filer (Do not check if smaller reporting
company) oSmaller reporting companyxIndicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

The aggregate market value of
the registrants common units held by non-affiliates as of June 30, 2008, based
on the reported closing price of such units on the New York Stock Exchange on
such date, was approximately $21,297,000. The number of the registrants common
units outstanding as of April 15, 2009 was 11,353,808. At that date, 6,899,968
subordinated units were outstanding.



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U.S. SHIPPING PARTNERS L.P. 
2008 ANNUAL REPORT ON FORM 10-K 
TABLE OF CONTENTS

|         |         |                                                                                                                 |     
|-------- | ------- | --------------------------------------------------------------------------------------------------------------- | ----
|         |         |                                                                                                                 | PAGE
|PART I   |         |                                                                                                                 |     
|         | ITEM 1  | BUSINESS                                                                                                        | 5   
|         | ITEM 1A | RISK
  FACTORS                                                                                                  | 27  
|         | ITEM 1B | UNRESOLVED
  STAFF COMMENTS                                                                                     | 44  
|         | ITEM 2  | PROPERTIES                                                                                                      | 44  
|         | ITEM 3  | LEGAL
  PROCEEDINGS                                                                                             | 45  
|         | ITEM 4  | SUBMISSION
  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                           | 46  
|PART II  |         |                                                                                                                 |     
|         | ITEM 5  | MARKET FOR
  REGISTRANTS COMMON EQUITY, RELATED UNITHOLDER MATTERS AND ISSUER PURCHASES
  OF EQUITY SECURITIES | 46  
|         | ITEM 6  | SELECTED
  FINANCIAL DATA                                                                                       | 49  
|         | ITEM 7  | MANAGEMENTS
  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                         | 53  
|         | ITEM 7A | QUANTITATIVE
  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                    | 84  
|         | ITEM 8  | FINANCIAL
  STATEMENTS AND SUPPLEMENTARY DATA                                                                   | 85  
|         | ITEM 9  | CHANGES IN
  AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                          | 85  
|         | ITEM 9A | CONTROLS
  AND PROCEDURES                                                                                       | 86  
|         | ITEM 9B | OTHER
  INFORMATION                                                                                             | 86  
|PART III |         |                                                                                                                 |     
|         | ITEM 10 | DIRECTORS,
  EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                        | 86  
|         | ITEM 11 | EXECUTIVE
  COMPENSATION                                                                                        | 89  
|         | ITEM 12 | SECURITY
  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNITHOLDER
  MATTERS               | 100 
|         | ITEM 13 | CERTAIN
  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                     | 101 
|         | ITEM 14 | PRINCIPAL
  ACCOUNTING FEES AND SERVICES                                                                        | 106 
|PART IV  |         |                                                                                                                 |     
|         | ITEM 15 | EXHIBITS,
  FINANCIAL STATEMENT SCHEDULES                                                                       | 107 

2

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FORWARD-LOOKING STATEMENTS

Statements
included in this report which 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 which
are forward-looking statements.

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

| |   |                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | forecasts of our ability to successfully reorganize and emerge
  from bankruptcy;                                                                                                
| |   |                                                                                                                                                                                  
| |  | our future financial
  condition or results of operations and our future revenues, expenses and
  liquidity;                                                                     
| |   |                                                                                                                                                                                  
| |  | our business strategy and other plans and objectives for future
  operations;                                                                                                    
| |   |                                                                                                                                                                                  
| |  | planned capital expenditures and availability of capital
  resources to fund capital expenditures;                                                                               
| |   |                                                                                                                                                                                  
| |  | our ability to maximize the use of
  our vessels, particularly those trading in the spot market;                                                                                 
| |   |                                                                                                                                                                                  
| |  | expected demand
  in the domestic tank vessel market in general and the demand for our tank
  vessels in particular;                                                             
| |   |                                                                                                                                                                                  
| |  | increasing supply of newly built tank vessels;                                                                                                                                   
| |   |                                                                                                                                                                                  
| |  | expected
  charter rates;                                                                                                                                                        
| |   |                                                                                                                                                                                  
| |  | our ability to enter into
  and maintain long-term relationships with major oil and chemical companies;                                                                          
| |   |                                                                                                                                                                                  
| |  | future supply of, and demand for, refined petroleum products;                                                                                                                    
| |   |                                                                                                                                                                                  
| |  | increasingly
  stringent industry vetting standards used by our customers;                                                                                                       
| |   |                                                                                                                                                                                  
| |  | increases in
  domestic refined petroleum product consumption;                                                                                                                   
| |   |                                                                                                                                                                                  
| |  | the likelihood of a repeal
  of, or a delay in the phase-out requirements for single-hull vessels
  mandated by the Oil Pollution Act of 1990 (OPA 90);                        
| |   |                                                                                                                                                                                  
| |  | the absence of disputes with our customers; and                                                                                                                                  
| |   |                                                                                                                                                                                  
| |  | our expected cost of
  complying with OPA 90 and our ability to finance such costs, including our
  ability to replace our existing vessels that must be phased out under OPA 90.

These
forward-looking statements are made based upon managements current plans,
expectations, estimates, assumptions and beliefs in light of our experience and
our perception of historical trends, current conditions and expected future
developments. Such forward looking information is subject to known and unknown
risks and uncertainties which may cause actual results, levels of activity and
achievements to differ materially from those expressed or implied by such
information. We caution that forward-looking statements are not guarantees.

3

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Important
factors that could cause our actual results of operations or our actual
financial condition to differ include, but are not necessarily limited to:

| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the time period required
  for us to reorganize and emerge from bankruptcy;                                                                                            
| |   |                                                                                                                                                                        
| |  | the terms of our
  reorganization;                                                                                                                                     
| |   |                                                                                                                                                                        
| |  | insufficient cash from
  operations;                                                                                                                                   
| |   |                                                                                                                                                                        
| |  | our liquidity;                                                                                                                                                         
| |   |                                                                                                                                                                        
| |  | a decline in demand for
  our tank vessels;                                                                                                                            
| |   |                                                                                                                                                                        
| |  | an increase in competitive
  tank vessel capacity;                                                                                                                     
| |   |                                                                                                                                                                        
| |  | our levels of indebtedness
  and our ability to obtain credit on satisfactory terms;                                                                                   
| |   |                                                                                                                                                                        
| |  | our ITBs remaining
  eligible to participate in the UWILD Program;                                                                                                     
| |   |                                                                                                                                                                        
| |  | failure to comply with the
  Merchant Marine Act of 1920 (the Jones Act);                                                                                            
| |   |                                                                                                                                                                        
| |  | intense competition in the
  domestic tank vessel industry;                                                                                                            
| |   |                                                                                                                                                                        
| |  | fluctuations in voyage
  charter rates;                                                                                                                                
| |   |                                                                                                                                                                        
| |  | the effect of our ceasing
  to be the manager of the vessels being constructed by the joint venture
  formed to finance the construction of up to nine product tankers;
| |   |                                                                                                                                                                        
| |  | a decline in demand for
  refined petroleum, petrochemical and commodity chemical products;                                                                            
| |   |                                                                                                                                                                        
| |  | the occurrence of marine
  accidents or other hazards;                                                                                                                 
| |   |                                                                                                                                                                        
| |  | the loss of any of our
  largest customers;                                                                                                                            
| |   |                                                                                                                                                                        
| |  | increases in interest
  rates;                                                                                                                                         
| |   |                                                                                                                                                                        
| |  | weather interference with
  our customers or our business operations;                                                                                                 
| |   |                                                                                                                                                                        
| |  | delays or cost overruns
  in, or insufficient funds to finance, the construction of new vessels;                                                                       
| |   |                                                                                                                                                                        
| |  | changes in international trade agreements;                                                                                                                             
| |   |                                                                                                                                                                        
| |  | modification or
  elimination of the Jones Act; and                                                                                                                    
| |   |                                                                                                                                                                        
| |  | adverse developments in
  our marine transportation business.                                                                                                          

Please
read Risk Factors in Item 1A of this report for a discussion of the factors
that could cause our actual results of operations or our actual financial
condition to differ from our expectations. Except as required by applicable
securities laws, we do not intend to update these forward looking statements
and information.

4

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U.S. SHIPPING PARTNERS L.P.

PART I

ITEM 1. BUSINESS

Unless
the context otherwise requires, throughout this report the words U.S. Shipping
Partners, the Partnership, we, us, and our refer to U.S. Shipping
Partners L.P., a Delaware limited partnership, and its subsidiaries.

Proceedings Under Chapter 11 of the Bankruptcy Code

On
April 29, 2009, U.S. Shipping Partners L.P., together with all of its
wholly-owned subsidiaries, US Shipping General Partner LLC, its general partner
(USSGP), and USS Vessel Management LLC, a wholly-owned subsidiary of USSGP,
filed voluntary petitions for reorganization relief under Chapter 11 of Title
11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United
States Bankruptcy Court for the Southern District of New York (the Bankruptcy
Court). The Chapter 11 cases are being jointly administered under the caption
In re U.S. Shipping Partners L.P. et al., Case No. 09-12711 (RDD) (the
Bankruptcy Cases). We will continue to manage our properties and operate our
businesses as debtors-in-possession under the jurisdiction of the Bankruptcy
Court and in accordance with the applicable provisions of the Bankruptcy Code
and the orders of the Bankruptcy Court.

The
bankruptcy filing was made with a pre-arranged restructuring plan with the
support of a substantial majority of our secured lenders and noteholders.
Effective April 29, 2009, we entered into a Plan Support Agreement with the
holders of (i) in excess of two-thirds of the amounts (including without
limitation in respect of the termination obligations under our interest rate
swaps) due under our Third Amended and Restated Credit Agreement, dated as of
August 7, 2006, as amended, by and among U.S. Shipping Partners, certain of our
subsidiaries, Canadian Imperial Bank of Commerce, as administrative agent, and
the lenders and other agents party thereto (the Credit Agreement and the lenders
thereunder the Senior Secured Lenders) and (ii) approximately 70% of the
amounts due in respect of our 13% Senior Secured Notes due 2014 (the Second
Lien Notes).

The
parties to the Plan Support Agreement have agreed to support and vote for a
plan of reorganization for the Partnership (the Plan) on the terms and
conditions set forth in the Plan Term Sheet attached as Exhibit A to the Plan
Support Agreement. They have also agreed not to support, directly or
indirectly, any other plan, in exchange for our agreement to implement all
steps necessary to solicit the requisite acceptances of the Plan and obtain
from the Bankruptcy Court an order confirming the Plan substantially in
accordance with the terms of the Plan Support Agreement. The Plan Support
Agreement may be terminated under certain circumstances, including in the event
that the Plan and related disclosure statement are not approved by certain
deadlines, the Plan is not consummated within a certain period of time after
its filing with the Bankruptcy Court, a party materially breaches the Plan
Support Agreement, the Chapter 11 cases are converted to cases under Chapter 7
of the Bankruptcy Code or the Bankruptcy Court grants relief that is
inconsistent with the Plan Support Agreement or the Plan Term Sheet.

5

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Under
the proposed plan of reorganization contemplated by the Plan Term Sheet:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Senior Secured Lenders
  will receive (i) new term loan notes in an aggregate principal amount equal
  to approximately $332.6 million plus an amount equal to the termination
  obligation under our interest rate swaps and (ii) fifty percent (50%) of the
  common stock of a reorganized U.S. Shipping Partners, which will be converted
  to a corporation (Reorganized USSP), before giving effect to the common
  stock to be issued pursuant to a management equity plan described below,
  provided that Senior Secured Lenders that are not U.S. Citizens for U.S.
  coastwise trade law purposes will receive a combination of common stock and
  warrants to purchase common stock. The new term loan notes will:
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | bear interest at a rate
  equal to, at our option, (i) LIBOR plus 5%, subject to a 2% LIBOR floor or
  (ii) alternate base rate plus 4%;                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | mature on August 7, 2013;                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | amortize at the rate of 1%
  per year beginning in the first full year following our emergence from
  bankruptcy;                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | be mandatorily prepaid to the extent of excess cash flow (as
  defined in the Plan Term Sheet) once we have achieved a $30 million cash
  balance in the first year following our emergence from bankruptcy and a $20
  million (subject to adjustment under certain circumstances) cash balance
  thereafter;
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | be secured by substantially all our assets; and                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | be subject to certain customary covenants, including without
  limitation an interest coverage test (EBITDA/net interest) and a debt to
  EBITDA coverage ratio, each to be determined.                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                               
| |  | The holders of the Second
  Lien Notes will receive fifty percent (50%) of the common stock of
  Reorganized USSP, before giving effect to the common stock to be issued
  pursuant to a management equity plan described below, provided that holders
  of the Second Lien Notes that are not U.S. Citizens for U.S. coastwise trade
  law purposes will receive a combination of common stock and warrants to
  purchase common stock. The Second Lien Notes will be cancelled.                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | In no event will persons
  who are not U.S. Citizens for U.S. coastwise trade law purposes be issued
  common stock of Reorganized USSP representing in aggregate more than 23% of
  the common stock to be outstanding on the date we emerge from bankruptcy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | Reorganized USSP will
  adopt a management equity plan providing for the issuance to management of
  10% of the outstanding common stock of Reorganized USSP. Five percent (5%) of
  such equity will be issued to management at the time we emerge from
  bankruptcy, with 25% vesting immediately and an additional 25% vesting on the
  first, second and third anniversaries of our emergence from bankruptcy. The
  remaining five percent (5%) available under the management equity plan will
  be issuable from time to time as determined by the board of directors of
  Reorganized USSP.                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | The warrants to be issued
  to the persons who are not U.S. Citizens for U.S. coastwise trade law
  purposes will have an exercise price of $0.001 per share, will expire
  December 31, 2029 and may only be exercised by persons who are U.S. Citizens
  for U.S. coastwise trade law purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | Our existing and
  outstanding common units, subordinated units and general partnership
  interests will be cancelled without the payment of any amount to the holders
  thereof.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | Customary releases will be
  provided to us, our current and former officers and directors, the Senior
  Secured Lenders, the holders of the Second Lien Notes, the various agents and
  trustees under the debt agreements and the respective officers, directors,
  employees, agents, advisors and professionals of each of the foregoing,
  subject to specified exceptions.                                                                                                                                                                                                                                                                                                                                                    

The
implementation of the Plan is dependent upon a number of factors, including
final documentation, the approval of a disclosure statement by the Bankruptcy
Court, confirmation of the Plan by the Bankruptcy Court and consummation of the
Plan in accordance with the provisions of the Bankruptcy Code and the Plan.

Our Partnership

We
are a leading provider of long-haul marine transportation services, principally
for refined petroleum, petrochemical and commodity chemical products, in the
U.S. domestic coastwise trade. Marine transportation is a vital link in the
distribution of refined petroleum, petrochemical and commodity chemical
products in the United States. At various times during 2008 we employed some of
our ITBs to transport grain overseas for humanitarian organizations to improve
utilization of the ITB fleet. Our fleet as of December 31, 2008 consists of
eleven tank vessels: four integrated tug barge units (ITBs); one product
tanker; three chemical parcel tankers; and three articulated tug barge (ATB)
units. We currently have one additional ATB under construction, which is
scheduled to be delivered in August 2009.

Our
primary customers are major oil and chemical companies. We do not assume
ownership of any of the products that we transport on our vessels. Our market
is largely insulated from direct foreign competition because the Jones Act
restricts U.S. point-to-point maritime shipping to vessels operating under the
U.S. flag, built in the United States, at least 75% owned and operated by U.S.
citizens and manned by U.S. crews. All of our vessels are qualified to
transport cargo between U.S. ports under the Jones Act.

6

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We
began operations in September 2002 when we acquired six ITBs from a division of
Amerada Hess Corporation (Hess); certain of the persons that managed these
operations for Hess became executive officers of our general partner. Prior to
2008, our ITBs primarily transported clean refined petroleum products, such as
gasoline, diesel fuel, heating oil, jet fuel and lubricants, from refineries
and storage facilities to a variety of destinations, including other refineries
and distribution terminals. During 2008, all but one of our ITBs participated
in the spot market and, due to significantly decreased demand in the spot
market for petroleum products, we at various times employed some of our ITBs to
transport grain overseas for humanitarian organizations to improve utilization
of the ITB fleet. Until September 13, 2007, regardless of rates in the spot
market, we were assured specified minimum charter rates for our ITBs, subject
to certain limited exceptions, pursuant to a support agreement we entered into
with Hess in connection with our acquisition of the six ITBs. For periods
subsequent to September 13, 2007, our revenues for these vessels are subject to
the rates which we can obtain under time charters or in the spot market, which
will depend on the demand for our vessels and the supply of available vessels
meeting customer requirements. Through 2008, our ITB fleet was our largest
source of revenue and earnings before interest, taxes, depreciation and
amortization (EBITDA). However, the expiration of the Hess support agreement
in September 2007, the fact that all of our ITBs are operating in the spot
market, where vessels are employed on a single voyage basis, rather than under
long-term charters, increased pressure on rates in the spot market due to an
increasing supply of vessels and significantly decreased demand for
transportation services, together with higher operating expenses of our ITBs
due to their age and the new union contracts effective in 2007, has negatively
impacted the operating income and EBITDA provided by our ITBs. We sold two of
our ITBs during the fourth quarter of 2008 and due to continued lack of demand
for our four remaining ITBs, it is likely we will dispose of one or more of our
ITBs during 2009.

Our
chemical parcel tankers, the Chemical
Pioneer, the Charleston
and the Sea Venture, and two of
our ATBs, the ATB Freeportand
the ATB Brownsville, primarily
transport specialty refined petroleum, petrochemical and commodity chemical
products, such as lubricants, paraxylene, caustic soda and glycols, from
refineries and petrochemical manufacturing facilities to other manufacturing
facilities or distribution terminals. These vessels (other than the Sea Venture, which is laid up) are
currently operating under contracts with several petroleum and petrochemical
customers with specified minimum volumes that also generally require these
customers to ship on our parcel tankers any additional volumes of these
products shipped to the ports specified in the contracts that accounted for
virtually all of their respective usable capacity for 2008. However, due to the
significant decline in demand for commodity chemical products, our customers
have in general in the last several months only been shipping the specified
minimum volumes, and in some cases less than the specified minimum volumes, and
one of our principal customers has filed for protection under the bankruptcy
laws. As a result, we expect that our chemical vessels will not operate at full
capacity during at least 2009. In light of this reduced demand in general, and
lack of demand for our Sea Venturevessel
in particular due to its age, it is likely we will attempt to sell the Sea Venture during 2009.

Our
product tanker, the Houston, is
trading in clean petroleum products in the coastwise Jones Act trade and
currently operates under a multi-year time charter, which began in June 2006
and accounts for 100% of its usable capacity through the second quarter of
2011.

The
ATB Galveston is trading, and
upon completion of construction the ATB
Corpus Christi will trade, in clean petroleum products in the
coastwise trade under multi-year time charters. In addition, the vessel being
operated by us on behalf of the joint venture is trading in clean petroleum
products in the coastwise trade under a multi-year time charter.

We
manage and own a 40% interest in a joint venture formed to construct and
operate five product tankers, and third parties own the remaining 60% interest.
Due to our control of this joint venture, as well as other aspects of the joint
venture agreement, the financial statements of the joint venture are consolidated
with ours for financial reporting purposes. We present in our consolidated
financial statements the debt of the joint venture, but we have no obligation
for the liabilities of the joint venture in excess of our $70.0 million capital
contribution. The portion of the net income or loss of the joint venture
attributable to the 60% owners of the joint venture is set forth under the
caption Noncontrolling interest in Joint Venture losses/(gains) on the
Consolidated Statements of Operations and Comprehensive Income. We and the
owners of the 60% interest have reached an agreement in principle to settle
litigation between us, as well as between us and the joint venture lenders,
subject to completion of definitive documentation and Bankruptcy Court approval,
that will result in our ceasing to be managing member of the joint venture and
manager of the joint ventures vessels. As a result of our relinquishing our
interest in the joint venture to the 60% owners and no longer controlling the
board of directors of the joint venture, the financial statements of the joint
venture will no longer be consolidated with ours for financial reporting
purposes. See --Our Vessels-New Product Tankers below and Item 3. Legal
Proceedings for a more detailed description of the joint venture and our
commercial dispute with our joint venture partners and lenders.

7

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Prior
to January 1, 2009, we were taxed as a partnership, rather than a corporation,
because we were a publicly traded partnership that generated 90% or more of our
gross income for every taxable year from qualifying income. Qualifying income
includes revenues derived from the transportation, storage and processing of
crude oil, natural gas and products thereof. Other types of qualifying income
include interest (other than from a financial business), dividends, gains from
the sale of real property and gains from the sale or other disposition of
capital assets held for the production of income that otherwise constitutes
qualifying income. However, due to the change in the mix of our products and
the resultant decline in qualifying income, we determined that it was
unlikely that we would be able to meet this requirement beginning in
2009 and therefore effective January 1, 2009, the Partnership elected to be
taxed as a corporation.

Business Strategies

Our
primary business strategies are to:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Operate
  our fleet safely and efficiently to meet the most stringent customer vetting
  and industry standards and remain a preferred supplier to major oil and
  chemical companies.
  Major oil and chemical companies place particular emphasis on strong
  environmental and safety records and efficient operations. We believe we are
  a high quality, cost-efficient and reliable tank vessel operator. We intend
  to continue improving our operational safety and efficiency through the use
  of new technology and comprehensive training programs for new and existing
  employees. We intend to minimize off-hire time and costs by emphasizing
  efficient scheduling and timely completion of planned and preventative
  maintenance both on-shore and at sea. We intend to continue building on our
  reputation for maintaining high standards of performance, reliability and
  safety, which we believe has enabled us to attract highly-selective
  customers.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Contract
  as much of our capacity as possible with major oil and chemical companies for
  periods of one year or more in an effort to maintain steady cash flows from
  creditworthy customers through business cycles. Vessels operating on time charters,
  contracts of affreightment or consecutive voyage contracts generally provide
  more predictable cash flow, while vessels operating under spot charters may
  generate increased profit margins during periods of increasing charter rates.
  Although we pursue a strategy of emphasizing longer-term contracts, we expect
  that due to the newbuild vessels coming into the market and the age of our
  ITBs, our ITBs will only be employed in the spot market and not under time
  charters, contracts of affreightment or consecutive voyage contracts.                                                                                                                                                          

Principal Executive Offices

Our
principal executive offices are located at 399 Thornall Street, 8th
Floor, Edison, New Jersey 08837, and our phone number is (732) 635-1500. We
lease additional office space in New York, NY.

Overview of Our Industry

Introduction

We
participate in the U.S. flag coastwise long-haul marine transportation of
refined petroleum, petrochemical and commodity chemical products. Coastwise
marine transportation of bulk liquids is primarily performed by tank vessels,
including deep-sea self propelled vessels, ITBs and ATBs. U.S. flag tank
vessels generally transport products between ports in the continental United
States (including through the Panama Canal) or between mainland ports and
Puerto Rico, Alaska or Hawaii, although these vessels may at times transport
products internationally. Tank vessels provide a vital link in the
transportation of these products in the United States.

Tank
vessels transport refined petroleum products, such as gasoline, jet fuel,
diesel fuel and feedstocks, from refineries to terminals and facilities engaged
in further processing, often in full vessel loads. Tank vessels with a
relatively high number of tank segregations, called parcel tankers, transport
smaller cargoes of specialty refined petroleum, petrochemicals and commodity
chemicals, such as lubricants, styrene, glycols, paraxylene, caustic soda,
ethanol and other alcohols, in a variety of coastwise distributive and
balancing movements.

The
U.S. flag coastwise marine transportation industry operates under the Jones Act
(Merchant Marine Act of 1920), a set of Federal statutes that mandate that
vessels engaged in trade between U.S. ports must:

| |   |                                                           
| | - | ----------------------------------------------------------
| |  | operate under the U.S.
  flag;                            
| |   |                                                           
| |  | be built in the United
  States;                          
| |   |                                                           
| |  | be at least 75% owned and
  operated by U.S. citizens; and
| |   |                                                           
| |  | be manned by a U.S. crew.                                 

8

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One
of the primary purposes of the Jones Act is to maintain a fleet of vessels
eligible for charter to the U.S. government for national defense requirements.

Methods of Transporting Refined Petroleum,
Petrochemical and Commodity Chemical Products

Refined
petroleum products are transported by pipelines, marine transportation, truck
and railroads. Pipelines are the most efficient mode of transportation for
long-haul movement of refined petroleum products, followed by tank vessels.
Rail and truck transportation of these products are more cost-effective only
over short distances and, therefore, they account for only a small percentage
of total ton miles transported. The carrying capacity of a 30,000 dwt tank
vessel, which can transport approximately 225,000 barrels of refined petroleum
products, is equivalent to approximately 378 average-size rail tank cars and
approximately 945 average-size tractor trailer tank trucks. Marine
transportation provides a vital link between a number of major refined
petroleum product producing and consuming regions of the United States. There
are no pipelines connecting the major refining areas in the Pacific Northwest
and the Texas and Louisiana region with consumption markets in California, or
connecting the major refining areas in the Texas and Louisiana region to the
consuming areas in Florida. The Northeastern United States, a significant
consuming region, is served by capacity-constrained pipelines connecting with
the refining areas in Texas and Louisiana.

Petrochemical
and commodity chemical products are typically produced and moved in volumes
considerably smaller than the capacity of an entire tank vessel. As pipelines
cannot economically transport most petrochemical and commodity chemical
products, most of these products are transported by rail, as the smaller unit
sizes of railcars are conducive to typical shipment sizes. Parcel tankers, with
multiple cargo compartments and cargo handling systems, can cost-effectively
transport these products because they can accommodate the small shipment sizes
without having a portion of the vessel capacity unfilled. Parcel tankers
generally enjoy significant cost advantages to rail transportation between
plants or facilities having access to deep sea marine terminals.

Industry Trends

We
believe the following industry trends will have a significant influence on our
future performance:

We believe the domestic supply of tank vessels will
not decrease at the rate we originally expected and may in fact increase

We
previously expected the supply of domestic tank vessels competing with us to
decrease over the next several years due to OPA 90, which mandates the
phase-out of certain non-double-hulled tank vessels at varying times by January
1, 2015; and the Jones Act, which restricts the supply of new vessels by requiring
that all vessels participating in the coastwise trade be constructed in the
United States. However, with the recent newbuilding programs entered into by
us, the Joint Venture and our competitors, we expect that these new tankers
will become fully utilized on delivery and replace substantially all the
capacity taken out of the market due to OPA 90. This increase in newbuild
vessels, combined with a significant decrease in demand for domestic tank
vessels due to current economic conditions, has resulted in an oversupply of
vessel capacity, which has adversely affected the charter rates that we can
obtain for our vessels and limited our ability to obtain employment for our
ITBs due to their age.

Industry trends away from long-term charters in favor
of shorter-term charters may impact our ability to finance newly built vessels

The
long-haul marine transportation services market for refined petroleum products
in the U.S. domestic coastwise trade appears to be trending away from long-term
charters in excess of three years in favor of shorter-term charters. If this
trend continues, it will become increasingly difficult for us to finance the
construction and purchase of new vessels with long-term debt or capital leases.
In determining the amount of credit to extend with respect to a particular
vessel, lenders place higher values on predictable cash flows that result from
longer-term charters. In addition, as a result of shorter terms charters our
cash flows will be less predictable and may be more volatile, and this
volatility could adversely affect our business, results of operations and
financial condition.

9

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Major
oil and chemical companies are increasingly selective in their choice of tank
vessel operators

These companies place particular emphasis on
strong environmental and safety records, as well as operating performance. We
believe that the increasingly stringent U.S. regulatory environment, the
emphasis on quality and environmental protection and increasingly demanding
customer vetting standards and procedures governing eligibility of vessels to
engage in the coastwise trade for, and enter terminal facilities of, these
customers, will accelerate the obsolescence of older tank vessels and provide a
competitive advantage to newbuild vessels. Further, several of the major oil
companies have imposed a limit on the age of the vessels that they will
utilize, and our ITBs have reached, or will soon reach, these age limits. We
expect that these major oil companies will seek to charter newbuild vessels to
meet their needs, rather than utilize our ITBs. As a result, demand for our
ITBs has decreased and we expect that our ITBs will derive all of their revenue
in the spot market, rather than from long-term charters with these customers,
over the next several years. We sold two of our six ITBs in the fourth quarter
of 2008 and it is likely that we will dispose of at least one ITB and the Sea Venture during 2009.

Our
Vessels

The
following chart provides basic information regarding our existing fleet and
vessels under construction and contracts for construction:

|                         |  |                |  |                      |        |                       |  |                      |  |                           | 
|------------------------ |  | -------------- |  | -------------------- | ------ | --------------------- |  | -------------------- |  | ------------------------- | 
|Vessel Name              |  | Vessel Type    |  | Deadweight
  Tonnage |        | Barrel
  Capacity (1) |  | Current Charter Type | 
|                         |  |                |  |                      |        |                       |  |                      | 
|Owned Vessels            |  |                |  |                      |        |                       |  |                      |  |                           | 
|New York                 |  | ITB Unit       |  |                      | 48,000 |                       |  | 360,000              |  | Laid Up; 3/19/09          | 
|Baltimore                |  | ITB Unit       |  |                      | 48,000 |                       |  | 360,000              |  | Spot                      | 
|Philadelphia             |  | ITB Unit       |  |                      | 48,000 |                       |  | 360,000              |  | Laid Up; 5/13/09          | 
|Mobile                   |  | ITB Unit       |  |                      | 48,000 |                       |  | 360,000              |  | Laid Up; 2/28/09          | 
|Chemical
  Pioneer       |  | Parcel Tanker  |  |                      | 35,000 |                       |  | 213,000              |  | Contract of Affreightment | 
|Charleston               |  | Parcel Tanker  |  |                      | 48,000 |                       |  | 370,000              |  | Contract of Affreightment | 
|Sea Venture              |  | Parcel Tanker  |  |                      | 19,000 |                       |  | 132,000              |  | Laid Up; 3/6/09           | 
|Houston                  |  | Product Tanker |  |                      | 33,000 |                       |  | 240,000              |  | Time                      | 
|ATB Freeport             |  | ATB Unit       |  |                      | 19,999 |                       |  | 140,000              |  | Contract of Affreightment | 
|ATB
  Galveston          |  | ATB Unit       |  |                      | 19,999 |                       |  | 156,000              |  | Time                      | 
|ATB
  Brownsville        |  | ATB Unit       |  |                      | 19,999 |                       |  | 156,000              |  | Spot                      | 
|                         |  |                |  |                      |        |                       |  |                      |  |                           | 
|                         |  |                |  |                      |        |                       |  | 2,847,000            |  |                           | 
|                         |  |                |  |                      |        |                       |  |                      |  |                           | 
|Managed Vessel           |  |                |  |                      |        |                       |  |                      |  |                           | 
|Golden State
  (3)       |  | Product Tanker |  |                      | 49,000 |                       |  | 332,000              |  | Time                      | 
|                         |  |                |  |                      |        |                       |  |                      |  |                           | 
|Under Construction       |  |                |  |                      |        |                       |  |                      |  |                           | 
|ATB Corpus
  Christi (2) |  | ATB Unit       |  |                      | 19,999 |                       |  | 156,000              |  | Time                      | 

| |     |                                                                                                                   
| | --- | ------------------------------------------------------------------------------------------------------------------
| | (1) | Capacity of
  a parcel tanker is measured in barrel capacity and deadweight tons.                                 
| |     |                                                                                                                   
| | (2) | Represents one
  barge and tug under contract for construction. Expected delivery August 2009.                    
| |     |                                                                                                                   
| | (3) | Golden State
  delivered January 2009. We expect to cease managing this vessel during the
  third quarter of 2009.

We
are currently overseeing the construction of four new double-hulled tankers for
the Joint Venture; however, we will not manage these vessels once construction
is completed and the Joint Venture may replace us as construction oversight
manager.

Integrated Tug Barge Unit Fleet

In
September 2002, we acquired a fleet of six refined petroleum product ITBs built
in the United States in the 1980s and qualified for the coastwise trade. ITBs
integrate a dedicated tugboat (which provides propulsion) into a cargo carrying
barge using a coupling system that connects the two vessels. The rigid
connection between the vessels enables the tug barge combination to be handled
as though it were a single vessel, with better handling and maneuverability
than a conventional tug and barge combination. Unlike self-propelled tankers,
ITBs are designed to allow the aft section, containing the more complex
controls and machinery, to be separated from the forebody cargo area. The tug
and barge sections are locked together and are only separated during scheduled
drydockings.

10

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All
of our ITBs are sister vessels of the same design and built to the same
specifications. As sister vessels, we can operate them more efficiently because
we can use common procedures with all the ITB units, while inventory management
can be centralized and crews and officers can be interchanged among vessels. In
addition, sister vessels allow us to substitute vessels in service and service
the same contract with different vessels.

Two
ITBs were sold in 2008. The following table sets forth the specifications and
highlights for our four existing ITBs:

| |                                |  |                                                       
| | ------------------------------ |  | ------------------------------------------------------
| | Deadweight capacity(1)         |  | 48,000 dwt/360,000 bbls                               
| | Service speed                  |  | 14.0 knots                                            
| | Full load draft (summer)       |  | 40.563 feet                                           
| | Hull structure                 |  | Double-bottom                                         
| | Propulsion type                |  | 2x DeLaval Medium Speed
  Diesel                      
| | Fuel consumption (at sea)      |  | 42 long tons of IFO 180
  CST/day                     
| | Number of cargo
  segregations |  | 7 different types of
  refined products(2)            
| | Classification                 |  | American Bureau of
  Shipping A1 (all four vessels)(3)

| |      |                                                                                                                                                                                                                                                                                                                      
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1). | A vessels cargo capacity
  is less than its deadweight capacity as a result of the fuel it carries for
  its operation. A vessels cargo capacity may be further reduced to the extent
  draft clearance limits the ability of a vessel to enter or leave port with a
  full load.                                  
| |      |                                                                                                                                                                                                                                                                                                                      
| | (2). | One ITB has10 cargo
  segregations.                                                                                                                                                                                                                                                                                  
| |      |                                                                                                                                                                                                                                                                                                                      
| | (3). | The American Bureau of
  Shipping, or ABS, is an independent classification society that inspects the
  hull and machinery of commercial ships to assess compliance with minimum
  criteria as set by U.S. and international regulations. The classification of
  A1 is ABS highest hull structure classification.

Because
the ITBs have two independent propulsion plants and are equipped with dual
propellers and rudders, the risk of mechanical failure and unscheduled downtime
for this fleet is lessened. We can perform engine maintenance at sea while the
vessel is operating on the other engine.

The
following table summarizes information about our ITBs:

|             |  |                      |  |                 |  |                
|------------ |  | -------------------- |  | --------------- |  | ---------------
|             |  |                      |  | Month/Year      |  | OPA 90         
|Vessel       |  | Current Charter Type |  | Built           |  | Phase-out Date 
|             |  |                      |  |                 |  |                
|            
|New York     |  | Laid
  Up; 3/19/09   |  | February
  1983 |  | February
  2013
|             |  |                      |  |                 |  |                
|Baltimore    |  | Spot                 |  | May
  1983      |  | May
  2013     
|             |  |                      |  |                 |  |                
|Philadelphia |  | Laid
  Up; 5/13/09   |  | June
  1984     |  | June
  2014    
|             |  |                      |  |                 |  |                
|Mobile       |  | Laid
  Up; 2/28/09   |  | August
  1984   |  | August
  2014  

Three
of our ITBs are currently laid up and one is on a grain voyage. Until September
13, 2007, regardless of rates in the spot market, we were assured specified
minimum charter rates for our ITBs, subject to certain limited exceptions,
pursuant to a support agreement we entered into with Hess in connection with
our acquisition of the six ITBs. For periods subsequent to September 13, 2007,
our revenues for these vessels are subject to the rates which we can obtain
under time charters or in the spot market, which will depend on the demand for
our vessels and the supply of available vessels meeting customer requirements.
These rates are subject to price and demand fluctuations in the market for
these vessels. Due to the over-supply of and reduced demand for vessels, any
employment of our ITBs will only be in the spot market and not on time or
consecutive voyage charters.

11

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Vessels
are required by both domestic (United States Coast Guard) and international
(International Maritime Organization) regulatory bodies to be inspected twice
every five years. To date, our ITBs have participated in the Underwater
Inspection In Lieu of Drydock (UWILD) Program which allows vessels to be
drydocked once every five years with a mid-period UWILD. In April 2007, we were
advised by the U.S. Coast Guard that it will allow continued participation in
the UWILD Program of non-or double hulled tank barges that are over 15 years of
age if they only trade domestically. We expect that our ITBs will qualify to
remain in the UWILD Program. The ATBs also qualify for the UWILD program.
Because of their age, our parcel tankers and the Houstonmust be
drydocked twice every five years.

During
a drydocking, an ITB is removed from service (typically for 50-70 days) and
major inspection, repair and maintenance work is carried out. We estimate
future drydock costs for our ITBs will be approximately $4.5 million per vessel
for work occurring in U.S. shipyards. We can drydock the ITBs in foreign
shipyards where the drydocking costs may be lower. However, if we choose to
drydock an ITB unit in a foreign shipyard, the ITB may be off-hire and,
therefore, not earning any revenue for a longer period of time as it travels to
and from the foreign shipyard if we cannot find a cargo to transport during
that voyage. In addition to drydocking each ITB unit every five years, for each
ITB unit that qualifies for the UWILD Program, we are required to conduct a
mid-period underwater survey in lieu of drydocking the ITB for inspection. An
underwater survey only requires a vessel to be removed from service for
approximately 12 days at an approximate cost of $0.5 million. If we are
required to conduct a second drydock in each five year period rather than rely
on an underwater survey, we estimate that our ITBs will be out of service for
approximately 14 to 20 days and the second drydock will cost approximately $1.0
million to $2.0 million. Drydocking costs are considered maintenance capital
expenditures for financial statement purposes but are generally expensed for
tax purposes to the extent that the expenditures relate to repairs and
maintenance.

The
following table sets forth information regarding the drydocking of our ITBs:

|                |  |                |  |                |       |  |                 |  |                            | 
|--------------- |  | -------------- |  | -------------- | ----- |  | --------------- |  | -------------------------- | 
|                |  |                |  |                |       |  |                 |  | Next
  Scheduled
  Drydock | 
|                |  | Last
  Drydock |  |                | Costs |  | Days
  Off-Hire |  |                           
|                |  |                |  |                |       | 
|Vessel          |  |                |  | (in thousands) |       |  |                
|                |  |                |  |                |       |  |                 |  |                           
|               
|New York(1)     |  | 2005           |  | $              | 6,024 |  | 62              |  | 2010                       | 
|Baltimore(1)(2) |  | 2007           |  | $              | 5,767 |  | 67              |  | UWILD
  2009               | 
|Philadelphia(3) |  | 2007           |  | $              | 5,267 |  | 79              |  | UWILD
  2010               | 
|Mobile(1)       |  | 2006           |  | $              | 5,000 |  | 59              |  | UWILD
  2009               | 

| |     |                                                                                                                                                                                                                                                          
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Drydocked
  outside the US; includes transit time to and from shipyard.                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                          
| | (2) | Does not
  include 61 days off-hire to repair damage it sustained during Hurricane Dean
  while in the shipyard after completing its regularly scheduled drydocking.
  (3) Drydocked in northeast shipyard; includes transit time to and from
  shipyard.
| |     |                                                                                                                                                                                                                                                          
| | (3) | Drydocked in northeast shipyard; includes transit time to and from
  shipyard.                                                                                                                                                                           

Given
the lack of demand for our ITBs and the cost of drydocking them, we do not
currently plan to drydock any of the ITBs; rather, we will dispose of them
prior to their next scheduled drydocking.

During
the third quarter of 2008, we determined that the carrying amounts of our ITBs
exceeded their fair values and recorded an impairment charge of $72.3 million.
Factors indicating the impairment of the ITBs included the deterioration in the
spot petroleum market; the likelihood that there will be no further demand for
the ITBs in the spot petroleum market due to the available capacity of
double-hulled vessels, which are the preferred vessels of the major oil
companies; the entry of the ITB New York
into the spot market when its time charter expired on December 31, 2008;
increasing competition for the ITBs in the grain market as other bulk carriers
compete for these cargoes, and the decision to sell, and the anticipated sales
price of, the ITB Grotonand the ITB Jacksonville.

Hess Support Agreement

In connection with our purchase of the six
ITBs from Hess, we entered into a support agreement with Hess. Pursuant to this
agreement, we were assured specified minimum charter rates for our ITBs through
September 13, 2007, subject to certain limited exceptions, in connection with
our acquisition of the six ITBs. For periods subsequent to September 13, 2007,
our revenues for these vessels are subject to the rates which we can obtain
under time charters or in the spot market, which will depend on the demand for
our vessels and the supply of available vessels meeting customer requirements.

12

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Product Tanker Fleet

In
September 2005, we acquired the Houston,a
U.S. flagged, double-hulled product tanker qualified to trade in the Jones Act.
The vessel, being double-hulled, has no OPA 90 phase-out date. The vessel is
capable of carrying approximately 240,000 barrels of petroleum products. The
vessels last drydock occurred in November 2008, at a cost of $1.9 million. Its
next drydock is required in 2010. Future drydocks will require the vessel to be
off-hire for 35 to 60 days and will cost between $3.5 million and $6.0 million.
TheHouston, formerly the Gus W. Darnell, was built for use by the
Military Sealift Command of the U.S. Navy as part of a fleet of five vessels
that have been used primarily to deliver jet fuel to various locations around
the world.

In
June 2006 we commenced a multi-year time charter for the vessel through
mid-2011 that accounts for 100% of its usable capacity.

The
following table sets forth the specifications and highlights of our product
tanker:

| |                                |  |                                                        
| | ------------------------------ |  | -------------------------------------------------------
| | Deadweight Capacity(1)         |  | 30,610 dwt / 240,000 bbl                               
| | Service Speed                  |  | 16 knots                                               
| | Full load draft (summer)       |  | 36 feet                                                
| | Hull Structure                 |  | Double-hull                                            
| | Propulsion Type                |  | Single slow speed diesel
  burning heavy fuel (IFO 380)
| | Fuel Consumption (at sea)      |  | 36 tons/day                                            
| | Number of Cargo
  Segregations |  | 7                                                      
| | Classification                 |  | American Bureau of
  Shipping (ABS)                    
| | Condition Assessment           |  | Cap II                                                 

(1)
A vessels cargo capacity is less than its deadweight capacity as a result of
the fuel it carries for its operations.

Parcel Tanker Fleet

Our
parcel tankers carry specialty refined petroleum, petrochemical and commodity
chemical products primarily from refineries and chemical manufacturing plants
and storage tank facilities along the coast of the U.S. Gulf of Mexico to
industrial users in and around East Coast ports. The specialty refined
petroleum products transported on our parcel tankers are generally not the
types of refined petroleum products transported by our ITBs or our product tanker,
but are products shipped in smaller volumes and used primarily in the
manufacture of other products. Petrochemical and commodity chemical products
transported by our parcel tankers consist primarily of paraxylene, caustic
soda, alcohol, chlorinated solvents, alkylates, toluene and ethylene glycol.

Because
of the smaller cargo lot size requirements, parcel tankers are designed with
many small cargo tanks. Unlike conventional tankers, parcel tankers are
typically designed with one dedicated cargo pump, and associated piping system,
for each tank, in order to eliminate cargo contamination. Some of the specialty
refined petroleum, petrochemical and commodity chemical products transported
must be carried in vessels with specially coated or stainless steel cargo
tanks, as many of these cargos are very sensitive to contamination and require
special cargo handling equipment.

We
currently own three parcel tankers: the Chemical
Pioneer, which we acquired from Dow Chemical in May 2003, the Charleston, which we acquired from
ExxonMobil in April 2004, and the Sea
Venture, which we acquired from Marine Transport Corporation in
November 2005.

13

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The
following table sets forth the specifications and highlights of our parcel
tankers:

|                               |  |                       |  |                          |  |                         
|------------------------------ |  | --------------------- |  | ------------------------ |  | ------------------------
|                               |  | CHARLESTON            |  | CHEMICAL PIONEER         |  | SEA VENTURE             
|                               |  |                       |  |                          |  |                         
|Deadweight capacity(1)         |  | 48,000
  dwt          |  | 35,000
  dwt             |  | 19,000
  dwt            
|Service speed                  |  | 16.0
  knots          |  | 16.0
  knots             |  | 13.0
  knots            
|Full load draft (summer)       |  | 42.0
  feet           |  | 35.656
  feet            |  | 29.2125
  feet          
|Hull structure                 |  | Double-bottom         |  | Double-hull              |  | Double-bottom           
|                               |  |                       |  | (non-OPA
  90 compliant) |  |                         
|                               |  |                       |  |                          |  |                         
|Propulsion Type                |  | Slow-speed
  diesel   |  | Steam
  turbine          |  | Medium-speed
  diesel   
|Fuel consumption (at sea)      |  | 52
  MT/Day (IFO 380) |  | 75
  MT/Day (IFO 380)    |  | 19.75
  MT/Day (IFO 180)
|Number of cargo
  segregations |  | 46
  different types  |  | 48
  different types     |  | 21
  different types    
|                               |  | of
  products         |  | of
  products            |  | of
  products           
|Classification(2)              |  | American
  Bureau of  |  | American
  Bureau of     |  | American
  Bureau of    
|                               |  | Shipping
  A1         |  | Shipping
  A1            |  | Shipping
  A1           
|Condition Assessment(3)        |  | CAP
  II              |  | CAP
  II                 |  | CAP
  II                

| |     |                                                                                                                                                                                                                                                                                    
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | A vessels cargo capacity
  is less than its deadweight capacity as a result of the fuel it carries for
  its operation. A vessels cargo capacity may be further reduced to the extent
  draft clearance limits the ability of a vessel to enter or leave port with a
  full load.
| |     |                                                                                                                                                                                                                                                                                    
| | (2) | The classification of A1
  is ABS highest hull structure classification.                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                    
| | (3) | ABS provides a condition
  assessment rating system; a CAP I rating is equivalent to a new build steel
  structure and a CAP II rating is equivalent to a five year old ship.                                                                                                      

The
Chemical Pioneer, the Charlestonand theSea Venture are among the last
independently owned carriers scheduled to be retired under OPA 90, with
phase-out dates in 2013. Although the Chemical
Pioneer is double-hulled, it is not OPA 90 compliant; however, we
believe that a minor modification will bring the Chemical Pioneer into compliance with OPA 90. The Charlestonand theSea Venture are not OPA 90 compliant;
however, we believe we will be able to obtain a waiver allowing us to carry
refined petroleum products in the Charlestons
center tanks and non-petroleum-based products in the other tanks.
Alternatively, since tankers carrying products or chemicals not regulated by
OPA 90 (i.e.,
non-petroleum-based) are not subject to the mandated OPA 90 phase-out dates
and, therefore, have extended trading lives, we may elect to change the
operation of the parcel tankers to avoid having to retrofit them or phase them
out. However, this change could materially adversely affect their value to us.

The
Chemical Pioneer has over 40
cargo segregations and the Charleston
and the SeaVenture each have
over 20 cargo segregations, which are configured, strengthened and coated to
handle various sized parcels of a wide variety of petroleum products and
industrial chemicals, giving them the ability to handle a broader range of
specialty refined petroleum, petrochemical and commodity chemical products than
other chemical-capable product carriers. Many of the petroleum and chemical
products we transport in our parcel tankers are hazardous substances and,
therefore, require highly qualified management and crew to operate the vessel
safely.

Our
parcel tankers, the Chemical Pioneer,
the Charleston and the Sea Venture, primarily transport specialty
refined petroleum, petrochemical and commodity chemical products, such as
lubricants, paraxylene, caustic soda and glycols, from refineries and
petrochemical manufacturing facilities to other manufacturing facilities or
distribution terminals. These vessels are currently operating under contracts
with several petroleum and petrochemical customers with specified minimum
volumes that also generally require these customers to ship on our parcel
tankers any additional volumes of these products shipped to the ports specified
in the contracts that accounted for virtually all of their respective usable
capacity for 2008. These contracts expire at various dates between 2009 and
2014. However, due to the significant decline in demand for commodity chemical
products, our customers have in general in the last several months only been
shipping the specified minimum volumes, and in some cases less than the
specified minimum volumes, and one of our principal customers has filed for
protection under the bankruptcy laws. As a result, we expect that our chemical
vessels will not operate at full capacity during at least 2009. In light of
this reduced demand in general, and reduced demand for our Sea Venturevessel in particular due to
its age, the Sea Venture is
currently laid up and it is
likely we will attempt to sell the Sea
Venture during 2009.

14

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Our
parcel tankers are required by both domestic (U.S. Coast Guard) and
international (International Maritime Organization) regulatory bodies to be
drydocked twice in a five year period. During a drydocking the vessel is
removed from service (typically for 35 to 60 days) and major repair and
maintenance work is carried out. We currently estimate future drydock costs to
be $2.6 million to $6.0 million per vessel for work occurring in U.S.
shipyards. Drydocking costs are considered maintenance capital expenditures for
financial statement purposes but are generally expensed for tax purposes to the
extent that the expenditures relate to repairs and maintenance.

The
following table sets forth information regarding the drydocking of our parcel
tankers:

|                 |  |         |      |                  |   |         |  |         |   
|---------------- |  | ------- | ---- | ---------------- | - | ------- |  | ------- | --
|                 |  | Last    |      | Costs            |   | Days    |  | Next    |   
|Vessel           |  | Drydock |      | (in
  thousands) |   | Offhire |  | Drydock |   
|                 |  |         |      |                  |   |         |  |         |   
|                
|Charleston       |  |         | 2008 |                  | $ | 4,380   |  |         | 48
|Chemical Pioneer |  |         | 2008 |                  | $ | 5,100   |  |         | 57

The
Sea Venture must be drydocked in
June 2009. Unless we obtain a contract of affreightment for the Sea Venture, we will not drydock the
vessel. If we do drydock the Sea Venture,
we expect it to cost approximately $3.5 million. At December 31, 2008, we
reviewed the overall business climate, age and projected utilization of our
remaining fleet and based on this review, we recorded an additional impairment
of $2.6 million on the Sea Venture.

Articulated Tug Barge Fleet

ATBs,
similar to ITBs, consist of a tugboat (which provides propulsion) and a cargo
carrying barge using a coupling system that connects the two vessels. Unlike
the rigid connection found on ITBs, an ATB uses a hinged connection. The ATB
configuration offers crewing cost advantages similar to those of an ITB. In
addition, ATBs offer the additional advantage of substitutability, because the
barge and tug may be decoupled. This offers operational and commercial
flexibility, allowing the barge unit to be towed by a third party tug in
certain situations.

In
July 2007, we completed construction and commenced commercial operations of the
ATB Freeport. The ATB Freeport serves our chemical
customers, and we believe that it is the most technologically advanced ATB in
the U.S. flag Jones Act deep sea trade. The total cost of this vessel was
$99.2 million, including capitalized interest of $7.8 million but after giving
effect to a payment by the original contractor to cover certain cost overruns,
which was substantially higher than original estimates, and the vessel was
completed more than a year behind schedule. In August 2004, we entered into a
contract with Southeastern New England Shipbuilding Corporation (SENESCO) to
build this ATB at a price of $45.4 million to be delivered in early 2006. In
November 2005, SENESCO indicated that they were not able to complete the ATB on
the contract terms due to infrastructure problems and production line issues,
and that the completion of the barge would be delayed. In November 2005, we
entered into a revised agreement with SENESCO providing for completion of the
ATB at another facility that SENESCO would operate. In order to address completion
issues experienced by SENESCO, on June 1, 2006, pursuant to a settlement with
SENESCO, we cancelled our agreement with SENESCO to construct the ATB unit and
took possession of the tug and barge under construction. SENESCO has paid us
$21.0 million to cover a portion of the cost overruns. We continue to pursue
SENESCO for the remainder of the cost overruns for which we believe they are
responsible, although there can be no assurance that we will successfully
recover any of such costs. We hired a naval architecture and marine engineering
firm to manage and supervise the completion of the ATB Freeport. The ATB
Freeport is under contracts of affreightment to transport commodity
chemical products with specified minimum volumes that, together with a requirement
that the customer ship any excess volume of the products covered by the
contract on the ATB unit, utilized substantially all of such ATB units usable
capacity in 2008. These contracts expire at various dates between 2009 and
2014.

In
2006, the Partnership entered into a contract with Manitowoc Marine Group
(MMG) for the construction of four barges, each of which is specified to have
a carrying capacity of approximately 156,000 barrels at 98% of capacity,
although the Partnership had an option to cancel the fourth barge, which it
exercised immediately prior to its expiration on June 30, 2008. In 2006, the
Partnership entered into a contract for the construction of three tugs with
Eastern Shipbuilding Group, Inc. (Eastern) to be joined with the barges to
complete three new ATB units. The contract with Eastern included an option to
construct and deliver an additional tug which would have been combined with the
fourth barge referenced above; however, the Partnership let this option expire in
connection with the cancellation of the contract to construct the fourth barge.
The first of these ATB units, the ATB
Galveston,was completed at a total cost of $66.6 million (excluding
capitalized interest, which totaled $6.8 million) and entered service in August
2008. The cost increase over the originally budgeted amount of $65.0 million
was principally due to contractually provided cost increases related to
increases in major components and change orders. The second ATB, ATB Brownsville,
was completed during November 2008 at a total cost of $67.9 million (excluding
capitalized interest, which totaled $6.4 million) and entered service in
December 2008. The cost increase over the originally budgeted amount of $65.5
million was principally due to contractually provided cost increases related to
increases in major components and change orders.
The Partnership expects that the
final ATB will be completed in August 2009 at a cost of approximately $71.3 million
(excluding capitalized interest which totaled $5.1 million at December 31, 2008). The cost
increase over the originally budgeted amount of $66.0 million is principally due to
contractually provided cost increases related to increases in major components, customer
requested modifications and change orders. At December 31, 2008, the Partnership had
restricted cash and funds in escrow totaling approximately $8.0 million of which $5.7
million was used to pay costs incurred in 2009 to complete the ATB Brownsville and
this final ATB and $2.3 million was used to pay costs incurred prior to December 31, 2008
to construct these vessels. The Partnership expects that it will need to fund
approximately $8.3 million of construction costs to complete the final ATB from its
operating cash flows.

15

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During
the quarter ended March 31, 2008, we determined that the fourth ATB unit
referenced above was impaired, as we did not obtain financing for its
construction, and assessed the fair value of the construction in progress of
this ATB unit at zero, which resulted in an impairment charge of $6.0 million,
which included $3.8 million previously paid for construction of the barge
portion of this ATB unit, $1.4 million for deposits on certain owner furnished
equipment and $0.5 million of capitalized interest cost. During the year ended
December 31, 2008, we accrued additional expenses related to owner furnished
equipment in the amount of $0.3 million. We have no further financial
obligations with regard to either the tug or the barge.

The
following table sets forth the specifications and highlights of our ATBs
currently in service or under construction:

|                                   |  |                                                    |  |                                                   
|---------------------------------- |  | -------------------------------------------------- |  | --------------------------------------------------
|                                   |  | ATBs (In Service)                                 |  | ATB (Under Construction)                          
|                                   |  | Freeport, Galveston and Brownsville (2)            |  | Corpus Christi                                    
|                                   |  |                                                    |  |                                                   
|Deadweight capacity(1)             |  | 19,999 dwt                                         |  | 19,999 dwt                                        
|Barrels(2)                         |  | 156,000 bbl                                        |  | 156,000 bbl                                       
|Service speed                      |  | 13.5 knots                                         |  | 13.5 knots                                        
|Full load draft (summer)           |  | 290                                              |  | 290                                             
|Hull structure                     |  | Double-hull                                        |  | Double-hull                                       
|Propulsion Type                    |  | Twin medium speed diesel 
  burning heavy fuel oil |  | Twin medium speed diesel 
  burning heavy fuel oil
|Fuel consumption (at sea)          |  | 38 tons/day                                        |  | 38 tons/day                                       
|Number of cargo
  segregations (3) |  | 10 tanks; 5 segregations                           |  | 10 tanks; 5 segregations                          
|Classification                     |  | Tug: ABS A1, Towing Vessel,
  AMS ACCU             |  | Tug: ABS A1, Towing Vessel,
  AMS ACCU            
|                                   |  | Barge: ABS A1 Oil and
  Chemcial, Tank Barge       |  | Barge: ABS A1 Oil and
  Chemcial, Tank            

|    |                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------
|(1) | A vessels cargo capacity
  is less than its deadweight capacity as a result of the fuel it carries for
  its operations.
|    |                                                                                                                          
|(2) | The ATB Freeport is 140,000
  barrels.                                                                                   
|    |                                                                                                                          
|(3) | The Freeport has 10 tanks
  and 10 segregations.                                                                         

New Product Tankers

On
March 14, 2006, the Partnership, through its subsidiary, USS Product Carriers
LLC (Product Carriers), entered into a contract with the National Steel and
Shipbuilding Company (NASSCO), a subsidiary of General Dynamics Corporation
(General Dynamics), for the construction of nine 49,000 deadweight tons
(dwt) double-hulled tankers. General Dynamics provided a performance
guarantee to Product Carriers in respect of the obligations of NASSCO under the
construction contract. The Partnership expected the cost to construct these
nine tankers to aggregate approximately $1.2 billion (including an estimate for
price escalation based on projected increases in certain published price
indexes), exclusive of capitalized interest. In addition, NASSCO and Product
Carriers share in any cost savings achieved measured against the original
contract price based on the terms of the construction contract.

On
August 7, 2006 Product Carriers entered into a joint venture, USS Products
Investor LLC (the Joint Venture), to finance the construction of the first
five tankers. Third parties, led by affiliates of The Blackstone Group (the
Joint Venture Investors), committed to provide an aggregate of $105 million of
equity financing and we committed to provide $70 million of equity financing to
the Joint Venture, all of which had been contributed by December 31, 2008. In
addition, the Joint Venture entered into a revolving notes facility agreement
pursuant to which the Joint Venture Investors have made available $325 million
of revolving credit loans to finance construction of the tankers. Upon
formation of the Joint Venture, Product Carriers assigned its rights and
obligations with respect to the construction of the first five tankers to the
Joint Venture and we received an arrangement fee of $4.5 million. NASSCO
released Product Carriers from any obligation under the construction contract
relating to the first five tankers.

16

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The
first tanker, the Golden State,
was delivered and placed in service in January 2009. The second tanker, the Pelican State, was delivered and placed in
service in June 2009. The third tanker, the Sunshine
State, is currently scheduled to
be delivered and placed in service in December 2009. The remaining two tankers
are currently scheduled to be delivered and placed in service in 2010.

As
tankers are constructed, we originally had the right to purchase completed
tankers from the Joint Venture at specified prices subject to adjustment,
provided that such prices were within the range of fair values as determined by
appraisal. If we did not elect to purchase a tanker within a specified time
period, the Joint Venture could sell the tanker to a third party; however, the
Joint Venture was first obligated to allow us to make an offer to purchase the
tanker (except in certain limited circumstances). The Joint Venture intended to
use the proceeds from the sale of the tankers to us, or to third parties if we
did not exercise our purchase options, to, among other things, repay debt and
to fund future milestone payments to NASSCO relating to the construction of the
remaining tankers and ultimately to make distributions to the Joint Ventures
equity holders, first to the third party equity investors, until they received
a specified return, then to Product Carriers until it received a specified
return, and then on a shared basis dependent on the returns generated. Our
ability to take delivery of these vessels from our Joint Venture was dependent
on our ability to finance the purchase of these vessels upon their completion
and, given our current financial situation and current market conditions, we
were not able to purchase the Golden Stateor
the Pelican State and did not
expect to be able to purchase any of the remaining three vessels in the
immediate future. As a result of our inability to purchase these vessels and
the loss of our right to manage the Joint Ventures vessels, we will not
receive the bulk of the benefits associated with ownership of these vessels,
which will adversely affect our growth strategy and our OPA 90 compliance
strategy for replacement of our ITB fleet, which could have a material adverse
effect on our business, results of operations and financial condition. Because
we were unable to purchase the first two vessels from the Joint Venture and it
is unlikely, in light of current market conditions, that the Joint Venture will
be able to sell the vessels to a third party at this time, the Joint Venture
will need to obtain debt and equity financing of approximately $253.7 million
to finance the completion of the remaining vessels. There can be no assurance
the Joint Venture will be able to obtain financing on acceptable terms or at
all.

Because
the Joint Venture did not exercise its option to have the rights and
obligations under the NASSCO contract to construct up to four additional
tankers assigned to the Joint Venture and due to Product Carriers inability to
obtain the necessary financing to construct these four tankers due to its
financial condition and current market conditions, the Partnership has been
advised by NASSCO that it is exercising its rights under the construction
contract with Product Carriers to use commercially reasonable efforts to sell
and assign Product Carriers rights under the construction contract to have
four product tankers constructed. Product Carriers is obligated to reimburse
NASSCO for any damages incurred by NASSCO as a result of these tankers not
being constructed, or if they are transferred to a third party at a loss to
NASSCO, up to a maximum of $10 million (plus costs and expenses incurred by
NASSCO) for each such tanker, with such amounts being funded solely out of
monies received by Product Carriers in respect of its equity investment in the
first five vessels constructed by the Joint Venture. As a result, the
Partnership believed that there was substantial uncertainty that the
Partnership would realize any monetary return on or of its $70 million equity
investment in the Joint Venture.

We
own a 40% equity interest in the Joint Venture, with the Joint Venture
Investors owning in aggregate a 60% equity interest. The obligations and
liabilities of the Joint Venture are intended to be non-recourse to us,
although the Joint Ventures financial statements are consolidated with ours
for financial reporting purposes as a result of our control of the board of
directors of the Joint Venture, and, other than our commitment to provide $70
million of equity funding (which commitment has been fulfilled), to guaranty
USS Product Manager LLCs (Product Manager), our wholly-owned subsidiary,
obligation under the management agreement and certain indemnification
obligations, we do not have any further obligation to contribute funds to the
Joint Venture.

We
had the right to and appointed three of the directors to the Joint Venture, and
the other equity holders had the right to and appointed two directors. Upon the
occurrence of specified events, we would lose the right to appoint two of our
three directors. There is an independent director, who can only vote when the
board is considering a voluntary bankruptcy of the Joint Venture. In addition,
in all circumstances the taking of certain fundamental actions will require the
consent of a director appointed by the other equity holders. In February 2009
certain of the Joint Venture Investors asserted that one of the specified
events that causes us to lose the right to appoint two of our three directors
occurred and purported to remove those two directors and to remove Product
Carriers as the managing member of the Joint Venture. See Item 3. Legal
Proceedings.

17

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The
Joint Venture agreement prohibits us from acquiring any vessels engaged in the
coastwise trade built since January 1, 1996 that are greater than 30,000 dwt
until all the vessels being constructed by the Joint Venture have been sold or
have entered into charters meeting specified minimum standards.

Product
Manager manages the construction and operation of the tankers for the Joint
Venture, for which it receives the following, subject to certain specified
limitations:

|  |                                                                                                                                                                                 
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | an oversight fee of $1.0
  million per tanker, payable ratably over the course of construction of such
  tanker;                                                                
|  |                                                                                                                                                                                 
| | an annual management fee
  of $1.0 million for each completed tanker that is operated by the Joint
  Venture;                                                                   
|  |                                                                                                                                                                                 
| | a delivery fee of up to
  $0.75 million per tanker, depending on the delivery date and cost of
  construction; and                                                              
|  |                                                                                                                                                                                 
| | a sale fee of up to $1.5
  million per tanker upon its sale to us or a third party, depending on the
  price obtained and whether a charter meeting specified terms is in place.

In
December 2007, Product Manager agreed to assume responsibility for certain site
supervision activities previously performed by the Joint Venture in exchange
for fees that will total $1.0 million per vessel constructed, subject to
certain limitations, in addition to the oversight fees. However, in January
2009, the Joint Venture reassumed these responsibilities and engaged a third
party to provide these site supervision services.

The
management agreement between Product Manager and the Joint Venture has an
initial term of 10 years, subject to early termination under certain
circumstances. The obligations under the management agreement are being
performed by employees of our general partner. Certain members of our
management devote significant time to the management and operation of the Joint
Venture. In February 2009 certain of the Joint Venture Investors asserted that
a termination event occurred under the management agreement and, in their
purported capacity as managing member of the Joint Venture, purported to
terminate Product Managers rights under the management agreement other than
the right to manage the operations of the Golden
State pending the Joint Venture finding a replacement manager. See
Item 3. Legal Proceedings.

In
addition, in February 2009 the Partnership received a notice from the agent for
the lenders to the Joint Venture asserting events of default under that certain
revolving notes facility agreement with the Joint Venture have occurred and
that the lenders were intending to foreclose on the Golden State vessel owned by the Joint Venture that the
Partnership is managing pursuant to the management agreement. See Item 3.
Legal Proceedings.

We
and the Joint Venture Investors and lenders have reached an agreement in
principle to settle the litigation surrounding the actions taken by the Joint
Venture Investors and lenders, subject to completion of definitive
documentation and Bankruptcy Court approval that will result in our ceasing to
be managing member of the Joint Venture and manager of the Joint Ventures
vessels.

Our Customers

Our
three largest customers in each of 2008, 2007 and 2006, based on revenue,
accounted for approximately 39%, 47% and 60%, respectively of our consolidated
revenues for those periods. No other customer accounted for more than 10% of
our consolidated revenues for those periods. See note 4 to the consolidated
financial statements in Item 8 of this report for a breakdown of revenues among
these customers.

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. 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.

18

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The
American Bureau of Shipping and the U.S. Coast Guard establish drydocking
schedules. 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 price and time to
complete. 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 crew members 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. We are
focused on avoiding personal injuries and reducing occupational health hazards.
We seek 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 reduce overall emissions and
waste generation from our operations 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, safety and training programs. The
operations department identifies areas that may require special emphasis,
including new initiatives that evolve within the industry. Supervisors are
responsible for carrying out and monitoring compliance for all of the safety
and health policies on their vessels.

Tanker Characteristics

To protect the environment, todays tanker
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 tankers that carry clean 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 tanker 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.

Safety Management Systems

We are currently certified under the
standards of the International Safety Management (ISM) system. The ISM standards
were promulgated by the International Maritime Organization (IMO) several
years ago 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 standards, will promote safer operations and will
provide us with necessary operational flexibility as we continue to grow. We
have been awarded ISO 9001 Quality Management System certification as well as
ISO 14001 Environmental Management System certification. These standards are
part of a series of standards established by the International Organization for
Standardization. ISO 9001 is one of a series of quality management system
standards, while ISO 14001 is one of a series of standards relating to the
environment and its protection.

Ship Management, Crewing and Employees

We
maintain an experienced and highly qualified work force of shore-based and
seagoing personnel. As of March 1, 2009, we employed 390 persons, comprised of
approximately 37 shore staff and approximately 353 fleet personnel. Our
collective bargaining agreements with two maritime unions, the American
Maritime Officers union, which covers the officers of our vessels, and the
Seafarers International Union, which covers all of the other seagoing
personnel, expired in the second quarter of 2007. In September 2007, we reached
an agreement with the American Maritime Officers union. The agreement was retroactive
to May 1, 2007 and expires on April 30, 2010. A five year agreement with the
Seafarers International Union was reached in October 2007. This agreement was
retroactive to July 1, 2007 and expires in 2012. These are the only two
collective bargaining agreements to which we are subject. Under the terms of
the collective bargaining agreements, we are required to make contributions to
pension and other welfare programs managed by the unions. Management believes
there are no unfunded pension liabilities under any of these agreements. These
two agreements require substantially higher wages and benefits than the
agreements that expired in 2007. Our shore-based personnel are generally
salaried and are primarily located at our headquarters in Edison, New Jersey.

19

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Our
shore staff provides support for all aspects of our fleet and business
operations, including sales and scheduling, crewing and human resources
functions, compliance and technical management, financial and insurance
services.

Classification, Inspection and Certification

In
accordance with standard industry practice, all of our coastwise vessels have
been certified as being in class by the American Bureau of Shipping. 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
an in class certification by a classification society before they will extend
coverage to any 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 country of
registry of such vessel and the international conventions of which that country
is a member. Inspections of our vessels are conducted 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,
which is generally conducted through an underwater survey and a special survey
every five years. As part of an intermediate survey, our vessels may be
required to be drydocked every 24 to 30 months for inspection of the underwater
parts of such vessel and for any necessary repair work related to such
inspection. Because of their age, our parcel tankers and the Houston must be
drydocked twice every five years.

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

Our
vessels are 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 shore side staff are
advantages when competing against other vessel operators for long-term
business.

Insurance Program

We
believe that we have arranged for adequate insurance coverage to protect
against the accident-related risks involved in the conduct of our business and
risks of liability for environmental damage and pollution, consistent with
industry practice. We cannot assure you, however, 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, fire, grounding, engine breakdown and other casualties up to an
agreed value per vessel. Our war-risks insurance covers risks of confiscation,
seizure, capture, vandalism, sabotage and other war-related risks. We do not
carry loss-of-hire insurance covering the loss of revenue during extended tank
vessel off-hire periods.

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 $1.0 billion per incident and is provided by United
Kingdom P&I Club (UK P&I Club), which is a member of the
International Group of protection and indemnity mutual assurance associations.
The 17 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 approximately $4.3 billion per non-pollution incident. As
a member of UK P&I Club, we are subject to calls payable to the
associations based on our claims records, as well as the claim records of all
other members of the individual associations and members of UK P&I Club.

20

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In
November 2008, we received a notice from our protection and indemnity
association that due to the impact of the recent financial market turmoil
combined with substantial association claims, the association needed to
increase its reserves, which they would accomplish through levying
supplementary premiums for the 2006 and 2007 policy years. The association also
issued an estimate of a supplementary premium on the 2008 policy year and
ordered a general increase for the forthcoming 2009 policy year. The
supplementary premium to be levied is set at 20% and 25% of the policy years
annual premiums for the 2006 and 2007 policy years, respectively. There is an
estimate of 20% supplementary premium for the 2008 policy year which will be
reviewed in October 2009 and adjusted according to claims activity as well as
investment income. Supplemental premiums for the 2006 and 2007 policy years are
approximately $342,000 and $487,000, respectively, and are reflected in our
financial statements for the year ended December 31, 2008 as other expense.
These premiums are payable in March 2009 and June 2009, respectively. An
estimated $474,000 was recognized as other expense for the year ended December
31, 2008 related to the additional supplemental premium for the 2008 policy
year. The association will review the supplementary premium to be levied for
the 2008 policy year in October 2009. Renewals for the policy beginning in
February 2009 increased by 6.7%.

We
are not currently the subject of any claims alleging exposure to contaminants,
although such claims may be brought in the future. In connection with our
purchase of the six ITBs from Hess, we and Hess agreed that we would share
liability for any claims by employees for exposure to contaminants including,
without limitation, polychlorinated biphenyls, asbestos and radioactive
substances, or working conditions on the vessels, based on the number of days
such employee worked for Hess compared to the number of days such employee
worked for us. If, notwithstanding the foregoing, 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 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
Jones Act restricts U.S. point-to-point maritime shipping to vessels operating
under the U.S. flag, built in the United States, at least 75% 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
vessels and U.S. flag parcel tankers, including the captive fleets of major oil
and chemical companies. The domestic tank vessel industry is highly
competitive.

In
the spot charter markets, 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 longer-term charter market, competition is based primarily on price and
availability, although we believe charterers have become more selective with
respect to the quality of vessels they hire, with particular emphasis on
factors such as age and double-hulls and the reliability and quality of
operations. We believe major oil and chemical companies are increasingly
demonstrating a preference for modern vessels based on concerns about the
environmental risks associated with older vessels.

U.S.
flag tank vessels compete with petroleum product pipelines and are affected by
the level of imports on foreign flag products carriers. Because the existing
U.S. pipeline network offers a low cost method of transporting oil and refined
petroleum products, it is capacity constrained in many markets. 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 expanded or converted to carry
refined petroleum products. Either of these occurrences could have an adverse
effect on our ability to compete in particular locations.

A
substantial majority of all long-haul shipments of chemicals in the United
States are currently by rail, with a smaller portion shipped by deep-sea
tanker. We believe that the cost to ship by rail is significantly higher than
shipping by tanker, even when inventory and logistics costs are factored in. In
addition, we believe that this lower cost and the availability of vessels with
many tank segregations, such as our chemical vessels, that allow smaller
quantities of product to be carried will increase the demand for tanker
transportation of chemicals.

21

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In
addition, the Joint Venture agreement prohibits us from acquiring any vessels
engaged in the coastwise trade built since January 1, 1996 that are greater
than 30,000 dwt until all the vessels being constructed by the Joint Venture have
been sold or have entered into charters meeting specified minimum standards.
This restriction could adversely affect our ability to grow our business
through vessel acquisitions and our ability to pay interest on, and principal
of, our indebtedness.

Regulation

Our
operations are subject to significant federal, state and local regulation, the
principal provisions of which are 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 more stringent 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 have a material adverse effect on our results of operations, financial
condition and cash flows.

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
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 or other port state control authorities), classification societies, flag
state administration and charterers, particularly terminal operators and oil
companies.

We
manage our exposure to losses from potential discharges of pollutants through
the use of well maintained, well managed 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,
including potential criminal prosecution and civil penalties for negligent or
intentional discharge of pollutants. 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. OPA 90
established an extensive regulatory and liability regime for the protection of
the environment from oil spills. 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. In general, all newly-built or converted tankers
carrying crude oil and petroleum-based products in U.S. waters must be built
with double-hulls. Existing single-hull, double-sided and double-bottomed tank
vessels are to be phased out of service by 2015 based on their tonnage and age.

22

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The following table sets forth the OPA phase out dates for our ITB and Parcel
Tanker vessels:

|                   |  |               |  |          
|------------------ |  | ------------- |  | ---------
|                   |  |               |  | Phase Out
|Vessel Name        |  | Vessel Type   |  | Date     
|                   |  |               |  |          
|                  
|New York           |  | ITB Unit      |  | Feb 2013 
|Baltimore          |  | ITB Unit      |  | May 2013 
|Philadelphia       |  | ITB Unit      |  | June 2014
|Mobile             |  | ITB Unit      |  | Aug 2014 
|Chemical
  Pioneer |  | Parcel Tanker |  | Jan 2013 
|Sea Venture        |  | Parcel Tanker |  | Jan 2013 
|Charleston         |  | Parcel Tanker |  | Oct 2013 

Due
to high shipyard costs, projected market capacity resulting from newbuild
programs and customer reluctance to employ older vessels, we do not currently
believe it is economically viable to retrofit any of the ITBs to meet OPA 90
standards or to repurpose these vessels to transport products not subject to
OPA 90 requirements. Although the Charleston
is not OPA 90 compliant, we believe we will be able to obtain a waiver allowing
us to carry refined petroleum products in the vessels center tanks and
non-petroleum-based products in the other tanks. Although the Chemical Pioneer is double-hulled, it is
not OPA 90 compliant; however, we believe that a minor modification that must
be made by its mandatory phase-out date in 2013, will bring the Chemical Pioneer into compliance with OPA
90. The Houston and our ATBs are
double-hulled vessels and therefore do not have phase-out dates.

Under
OPA 90, owners or operators of 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:

| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | address a worst case
  scenario and identify and ensure, through contract or other approved means,
  the availability of necessary private response resources;
| |   |                                                                                                                                                                 
| |  | describe crew training and
  drills; and                                                                                                                        
| |   |                                                                                                                                                                 
| |  | identify a qualified
  individual with specific authority and responsibility to implement removal
  actions in the event of an oil spill.                       

Our
vessel response plans have been accepted by the U.S. Coast Guard, and all of
our vessel crew members and spill management team personnel have been trained
to comply with these guidelines. 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 tank 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 from tank vessels, 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 a tank vessel to the
greater of $1,200 per gross registered ton or $10.0 million per discharge. This
limit does 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.

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In
addition to removal costs, OPA 90 provides for recovery of damages, including:

| |   |                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | natural resource damages
  and related assessment costs;                                                                                                   
| |   |                                                                                                                                                            
| |  | real and personal property
  damages;                                                                                                                      
| |   |                                                                                                                                                            
| |  | net loss of taxes,
  royalties, rents, fees and other lost revenues;                                                                                       
| |   |                                                                                                                                                            
| |  | net costs of public
  services necessitated by a spill response, such as protection from fire,
  safety or health hazards;                                 
| |   |                                                                                                                                                            
| |  | loss of profits or
  impairment of earning capacity due to the injury, destruction or loss of real
  property, personal property and natural resources; and
| |   |                                                                                                                                                            
| |  | loss of subsistence use of
  natural resources.                                                                                                            

OPA
90 expressly provides that individual states are entitled to enforce their own
pollution liability laws, even if inconsistent with or imposing greater
liability than OPA 90. There is no uniform liability scheme among the states.
Some states have OPA 90-like schemes for limiting 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 where we are not at fault. Some states have established their
own requirements for financial responsibility.

Parties
affected by oil pollution may pursue relief from the Oil Spill Liability Trust
Fund, absent full recovery by them against a responsible party. Responsible
parties may seek contribution from the fund for costs incurred that exceeded
the liability limits of OPA 90. The responsible party would need to establish
that it is entitled to both a statutory defense against liability and to a
statutory limitation of liability to obtain contribution from the fund. If we
are deemed a responsible party for an oil pollution incident and are ineligible
for contribution from the fund, 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
our protection and indemnity club, the UK P&I Club, our current coverage
for oil pollution is $1.0 billion per incident. It is possible, however, that
our liability for an oil pollution incident may exceed the insurance coverage
we maintain.

We
are subject to potential liability arising under the U.S. Comprehensive
Environmental Response,  Compensation
and Liability Act (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 tank vessels for cleanup and removal of
hazardous substances and provides for additional penalties in connection with
environmental damage. Liability under CERCLA for releases of hazardous
substances from vessels is limited to the greater of $300 per gross ton or $5.0
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 $10.0 million per discharge
and the CERCLA liability limit of $300 per gross ton or $5.0 million per discharge.
We have satisfied these requirements and obtained a U.S. Coast Guard
Certificate of Financial Responsibility. OPA 90 and CERCLA each preserve the
right to recover damages under other existing laws, including maritime tort
law.

Water. The Federal Water Pollution Control
Act, also referred to as the 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 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.

24

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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 (RCRA), and comparable
state and local requirements. In August 1998, the EPA added four petroleum
refining wastes to the list of RCRA hazardous wastes. 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 pick up or deliver cargo
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 might still be liable for clean up costs under
CERCLA or the equivalent state laws.

Air Emissions. The federal Clean Air Act
of 1970, as amended by the Clean Air Act Amendments of 1977 and 1990 (CAA),
requires the EPA to promulgate standards applicable to emissions of volatile
organic compounds and other air contaminants. Our vessels are subject to vapor
control and recovery requirements for certain cargoes when loading, unloading,
ballasting, cleaning and conducting other operations in regulated port areas.
Our vessels are equipped with vapor control systems that satisfy these
requirements. In addition, in December 1999, the EPA issued a final rule
regarding emissions standards for marine diesel engines. The final rule applies
emissions standards to new engines beginning with the 2004 model year. In the
preamble to the final rule, the EPA 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. Finally,
the EPA has entered into a settlement that will expand this rulemaking to
include certain large diesel engines not previously addressed in the final
rule. Adoption of such standards could require modifications to some existing
marine diesel engines and may result in material expenditures, however, we do
not believe at this time that any of our vessels will be affected by this
rulemaking.

The
CAA 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 vessels 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.

Coastwise Laws

Substantially
all 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 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:

| |   |                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | it is organized under the
  laws of the United States or of a state;                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                 
| |  | its chief executive
  officer, by whatever title, its chairman of its board of directors and all
  persons authorized to act in the absence or disability of such persons are a
  U.S. citizen;                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                 
| |  | no more than a minority of
  the number of its directors (or equivalent persons) necessary to constitute a
  quorum are non-U.S. citizens;                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                 
| |  | at least 75% of the stock
  or equity interest and voting power in the corporation is beneficially owned
  by U.S. citizens free of any trust, fiduciary arrangement or other agreement,
  arrangement or understanding whereby voting power may be exercised directly
  or indirectly by non-U.S. citizens; and
| |   |                                                                                                                                                                                                                                                                                                                 
| |  | in the case of a limited
  partnership, the general partner meets U.S. citizenship requirements for U.S.
  coastwise trade.                                                                                                                                                                                     

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Because
we could lose our 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 or those of our general partner, our limited partnership
agreement currently restricts foreign ownership and control of our common and
subordinated units, and those of our general partner, to not more than 24% of
the respective 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 Service 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
vessel operations are subject to occupational safety and health regulations
issued by the U.S. Coast Guard and, to an extent, by the U.S. Occupational
Safety and Health Administration. These regulations currently require us to perform
monitoring, medical testing and recordkeeping with respect to personnel engaged
in the handling of the various cargoes transported by our vessels.

Security

Heightened
awareness of security needs brought about by the events of September 11, 2001
has caused the U.S. Coast Guard, the International Maritime Organization, and
the states and local ports to adopt heightened security procedures relating to
ports and vessels. We have updated our procedures in light of the requirements.

In
2002, Congress passed the Maritime Transportation Security Act of 2002 (the
MTS Act) which, together with the International Maritime Organizations
recent security proposals (collectively known as The International Ship and
Port Security Code), requires specific security plans for our vessels and more
rigorous crew identification requirements. We have implemented vessel security
plans and procedures for each of our vessels pursuant to rules implementing the
MTS Act that have been issued by the U.S. Coast Guard.

Vessel
Condition

Our
vessels are subject to periodic inspection and survey by, and drydocking and
maintenance requirements of, the U.S. Coast Guard, the American Bureau of
Shipping, or both. 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.

Investor and Other Information

We
are subject to the informational requirements of the Securities Exchange Act of
1934 (the Exchange Act). Accordingly, we file periodic reports and other information with the Securities and Exchange Commission (the
SEC). Such reports and other information may be obtained by visiting the
Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549
or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an
Internet site (www.sec.gov) that contains reports and information statements
and other information regarding us and other issuers that file electronically.

26

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Our
website address is www.usslp.com. We make available, without charge through our
website, access to our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably
practicable after such reports are filed with or furnished to the SEC. We also
make available, without charge on our website, our board committee charters,
code of business conduct and ethics and corporate governance guidelines.

ITEM 1A. RISK FACTORS

In
addition to the other information set forth elsewhere in this report, you
should carefully consider the following factors when evaluating U.S. Shipping
Partners L.P.:

Our common units have no value.

Under
the proposed plan of reorganization contemplated by the Plan Term Sheet, our
existing and outstanding common units, subordinated units and general
partnership interests will be cancelled without the payment of any amount to
the holders thereof. Accordingly, our outstanding common units have no value.

The value of our Second Lien Notes is
uncertain.

Under
the proposed plan of reorganization contemplated by the Plan Term Sheet,
holders of our Second Lien Notes will receive fifty percent (50%) of the common
stock of Reorganized USSP, before giving effect to the common stock to be
issued pursuant to a management equity plan, provided that holders of the
Second Lien Notes that are not U.S. Citizens for U.S. coastwise trade law
purposes will receive a combination of common stock and warrants to purchase
common stock. The Second Lien Notes will be cancelled. Accordingly, trading in
the Second Lien Notes during the pendency of the Bankruptcy Cases is highly
speculative and poses substantial risks to purchasers of such securities, as
holders may not be able to resell such securities and the common stock and
warrants received under the Plan in respect of the Second Lien Notes may have a
value less than the purchase price of such securities.

We filed for reorganization under Chapter
11 on April 29, 2009 and are subject to the risks and uncertainties associated
with the Bankruptcy Cases.

For
the duration of the Bankruptcy Cases, our operations and our ability to execute
our business strategy will be subject to the risks and uncertainties associated
with bankruptcy. These risks include:

| |   |                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to continue as
  a going concern;                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                     
| |  | our ability to operate
  within the restrictions and the liquidity limitations of the cash collateral
  order entered by the Bankruptcy Court in connection with the Bankruptcy
  Cases;                                                                            
| |   |                                                                                                                                                                                                                                                                     
| |  | our ability to obtain
  Bankruptcy Court approval with respect to motions filed in the Bankruptcy
  Cases from time to time;                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                     
| |  | our ability to develop,
  prosecute, confirm and consummate the Plan;                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                     
| |  | the ability of third
  parties to seek and obtain court approval to terminate or shorten the
  exclusivity period for us to propose and confirm a plan of reorganization, to
  appoint a Chapter 11 trustee or to convert the Bankruptcy Cases to Chapter 7
  cases;
| |   |                                                                                                                                                                                                                                                                     
| |  | our ability to obtain and
  maintain normal payment and other terms with customers, vendors and service
  providers;                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                     
| |  | our ability to attract,
  motivate and retain key employees;                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                     
| |  | our ability to attract and
  retain customers; and                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                     
| |  | our ability to fund and
  execute our business plan.                                                                                                                                                                                                                

27

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We
will also be subject to risks and uncertainties with respect to the actions and
decisions of our creditors and other third parties who have interests in the
Bankruptcy Cases that may be inconsistent with our plans.

These
risks and uncertainties could affect our business and operations in various
ways. For example, negative events or publicity associated with the Bankruptcy
Cases and the resulting uncertainty regarding our future prospects may hinder
our ongoing business activities and our ability to operate, fund and execute
our business plan by impairing relations with existing and potential customers,
negatively impacting our ability to attract, retain and compensate key
executives and employees and to retain employees generally, limiting our
ability to obtain trade credit, and impairing present and future relationships
with vendors and service providers, all of which in turn could adversely affect
our operations and financial condition. Also, pursuant to the Bankruptcy Code,
we need Bankruptcy Court approval for transactions outside the ordinary course
of business, which may limit our ability to respond timely to events or take
advantage of opportunities. Because of the risks and uncertainties associated
with the Bankruptcy Cases, we cannot predict or quantify the ultimate impact
that events occurring during the Chapter 11 reorganization process will have on
our business, financial condition and results of operations, and there is no
certainty as to our ability to continue as a going concern.

As
a result of the Bankruptcy Cases, realization of assets and liquidation of
liabilities are subject to uncertainty. While operating under the protection of
the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as
permitted in the normal course of business, we may sell or otherwise dispose of
assets and liquidate or settle liabilities for amounts other than those
reflected in our consolidated financial statements. Further, a plan of
reorganization could materially change the amounts and classifications reported
in our consolidated historical financial statements, which do not give effect to
any adjustments to the carrying value of assets or amounts of liabilities that
might be necessary as a consequence of confirmation of a plan of
reorganization.

A long period of operating under Chapter 11
could harm our business.

A
long period of operating under Chapter 11 could adversely affect our business
and operations. So long as the Bankruptcy Cases continue, our senior management
will be required to spend a significant amount of time and effort dealing with
the Bankruptcy Cases instead of focusing exclusively on business operations. A
prolonged period of operating under Chapter 11 will also make it more difficult
to attract and retain management and other key personnel necessary to the
success and growth of our business. In addition, the longer the Bankruptcy
Cases continue, the more likely it is that our customers, vendors and employees
will lose confidence in our ability to successfully reorganize our business. As
a result, our customers may elect not to enter into new charters with us, our
vendors may seek to establish alternative arrangements for providing us with
goods and services, including alternative payment arrangements and our
employees may seek new employment, all of which in turn could have an adverse
effect on our liquidity and/or results of operations. Our having sought
bankruptcy protection may also adversely affect our ability to negotiate
favorable terms from customers and vendors and others with whom we do business
and to attract and retain customers, vendors and employees, all of which could
adversely affect our financial performance.

We may not be able to obtain confirmation
of our Chapter 11 plan, and our emergence from Chapter 11 proceedings is not
assured.

Although a substantial majority of our Senior
Secured Lenders and the holders of the Second Lien Notes have agreed to vote in
favor of the Plan, there can be no assurance the Bankruptcy Court will confirm
it. If the Plan is not confirmed by the Bankruptcy Court, it is unclear whether
we would be able to reorganize our business and what, if any, distributions
holders of claims against us, including our Senior Secured Lenders, holders of
our Second Lien Notes and other secured creditors, would ultimately receive
with respect to their claims. If an alternative reorganization could not be
agreed upon, it is possible that we would have to liquidate our assets, in
which case it is likely that holders of secured claims would receive
substantially less favorable treatment than they would receive if we were to
emerge as a viable, reorganized entity. While we expect to emerge from Chapter
11 proceedings in the future, there can be no assurance as to whether we will
successfully reorganize and emerge from Chapter 11 proceedings or, if we do
successfully reorganize, as to when we would emerge from Chapter 11
proceedings.

Our financial results may be volatile and may not reflect
historical trends.

While
in bankruptcy, we expect our financial results to continue to be volatile as
asset impairments, asset dispositions, restructuring activities, contract
terminations and rejections, and claims assessments may significantly impact
our consolidated financial statements. As a result, our historical financial
performance is likely not indicative of our financial performance after April
29, 2009, the date we commenced the Bankruptcy Cases. In addition, if we emerge
from bankruptcy, the amounts reported in subsequent consolidated financial
statements may materially change relative to historical consolidated financial
statements, including as a result of revisions to our operating plans pursuant
to a plan of reorganization. In addition, if we emerge from bankruptcy, we may
be required to adopt fresh start accounting. If fresh start accounting is
applicable, our assets and liabilities will be recorded at fair value as of the
fresh start reporting date. The fair value of our assets and liabilities may
differ materially from the recorded values of assets and liabilities on our
consolidated balance sheets. In addition, if fresh start accounting is
required, our financial results after the application of fresh start accounting
may be different from historical trends. See Note 3 of the notes to the
consolidated financial statements included elsewhere herein for further
information on our accounting while in bankruptcy.

28

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Conducting a successful Chapter 11
reorganization will depend significantly on our ability to retain and motivate
management and key employees.

Our
success depends significantly on the skills, experience and efforts of our
personnel. The loss of any of our officers could have a material adverse effect
upon our results of operations and our financial position and could delay or
prevent the achievement of our business objectives. Our ability to develop and
successfully consummate a plan of reorganization will be highly dependent upon
the skills, experience and effort of our senior management and other personnel.
Our ability to attract, motivate and retain key employees is restricted,
however, by provisions of the Bankruptcy Code, which limit or prevent our
ability to implement a retention program or take other measures intended to
motivate key employees to remain with us during the pendency of the Chapter 11
proceedings. The Plan Support Agreement also precludes us from adopting any
retention or similar program without the approval of the steering committee of
our lenders. In addition, we must obtain Bankruptcy Court approval of
employment contracts and other employee compensation programs. The loss of the
services of one or more members of our senior management or certain employees
with critical skills, or a diminution in our ability to attract talented,
committed individuals to fill vacant positions when needs arise, could have a
material adverse effect on our ability to successfully reorganize, emerge from
bankruptcy or sell all or a portion of our assets as part of the bankruptcy
process. The loss of our ability to manage the Joint Ventures vessels will
exacerbate the difficulty in retaining and motivating management and key
employees.

We may not have sufficient available cash
to operate our business.

We
may not have sufficient cash to operate our business. We are dependent on our
cash flow from operations to meet our operating, debt service and working
capital requirements. Our cash flow from operations fluctuates from quarter to
quarter based on, among other things:

| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | the level of consumption
  of refined petroleum, petrochemical and chemical products in the markets in
  which we operate;             
| |   |                                                                                                                                        
| |  | level of demand for
  overseas transportation of grain for humanitarian organizations;                                                 
| |   |                                                                                                                                        
| |  | the prices
  we obtain for our services;                                                                                               
| |   |                                                                                                                                        
| |  | the level of demand for our vessels;                                                                                                   
| |   |                                                                                                                                        
| |  | the
  level of our operating costs, including payments to our general partner;                                                         
| |   |                                                                                                                                        
| |  | delays in the delivery of
  newbuilds and the resulting delay in receipt of revenue from those vessels;                                
| |   |                                                                                                                                        
| |  | the effect of governmental
  regulations and maritime self-regulatory organization standards on the
  conduct of our business;         
| |   |                                                                                                                                        
| |  | the level of unscheduled
  off-hire days and the timing of, and number of days required for, scheduled
  drydockings of our vessels;   
| |   |                                                                                                                                        
| |  | prevailing economic and
  competitive conditions;                                                                                      
| |   |                                                                                                                                        
| |  | the level of capital
  expenditures we make, including for drydockings for repairs, newbuildings and
  compliance with new regulations;
| |   |                                                                                                                                        
| |  | the restrictions contained
  in our debt instruments and our debt service requirements;                                                
| |   |                                                                                                                                        
| |  | fluctuations in
  our working capital needs; and                                                                                       
| |   |                                                                                                                                        
| |  | the refusal of certain of our vendors to
  extend trade credit to us.                                                                  

29

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Our
cash flow from operations has come under increasing pressure due to the
difficult current market conditions we are facing. During 2008, all but one of
our ITBs began to operate in the spot market for the transportation of
petroleum products, which has increased the volatility of our revenues and
working capital requirements, and decreased the predictability of our cash
flows. Beginning in late March 2008 market conditions in the spot market, where
all of our four remaining ITBs currently operate, deteriorated substantially
due to overall declining economic activity and decreased demand for the
domestic coastwise transportation of petroleum products. Additionally, refinery
utilization has declined considerably, fuel prices for operating our vessels
were at record levels during the second and third quarters of 2008 and are
still higher than historical levels, and newbuilds have increased capacity
serving the Jones Act market at a faster rate than demand and the decrease in
capacity due to the required phase-outs under OPA 90. Due to these market
shifts, as well as the age of our ITBs, our ITBs operating in the spot market
have, beginning in the second quarter of 2008, incurred idle periods greater
than, and charter rates below, our expectations at the beginning of 2008. Three
of our four ITBs are currently laid up due to lack of demand for their
services. During the first half of 2008, we also experienced modest decreased
demand for the domestic coastwise transportation of chemical products served by
our chemical transporting vessels, which we believe was primarily due to our
customers working off inventory levels due to the decline in economic activity.
Beginning again in the fourth quarter of 2008 and continuing into 2009, we have
experienced a more significant decrease in demand for the domestic coastwise
transportation of chemical products served by our chemical transporting vessels
due to declining worldwide economic activity.

Through
2008, our ITB fleet was our largest source of revenue and earnings before
interest, taxes, depreciation and amortization (EBITDA). However, the
expiration of the Hess support agreement in September 2007, the fact that all
of our ITBs are operating in the spot market, where vessels are employed on a
single voyage basis, rather than under long-term charters, increased pressure
on rates in the spot market due to an increasing supply of vessels and
significantly decreased demand for transportation services, together with
higher operating expenses of our ITBs due to their age and the new union
contracts, has negatively impacted the operating income and EBITDA provided by
our ITBs. We sold two of our ITBs during the fourth quarter of 2008 and due to
continued lack of demand for our four remaining ITBs, it is likely we will
dispose of one or more of our ITBs during 2009.

Additionally,
participation in the spot market requires us to carry higher amounts of working
capital than operating under time charters, as under spot charters fuel costs
are our responsibility and are paid at the time fuel is delivered, and not
realized economically until payment is made to us by the customer.
Additionally, payment generally occurs at the completion of a voyage, compared
to time charters, where payment is generally made by the customer at the
beginning of a fixed period of time, such as a month. In addition, grain
voyages, where we are paid following delivery of the grain to its final
destination, tend to be substantially longer in duration than refined petroleum
product voyages. Certain of our vendors have been unwilling to extend trade
credit to us, instead requiring payment up front due to our limited liquidity.
With the addition of two ATBs in 2008 and all of our four remaining ITBs now participating
in the spot market, we expect our working capital requirements to increase. We
have no availability under our revolving credit facility to finance this
increase in working capital requirements and therefore must finance our working
capital requirements solely from cash flow from operations. In order to assure
that we have sufficient cash to operate our business, we agreed with our
lenders not to make the December 31, 2008 and March 31, 2009 principal and
interest payments due under our senior credit facility and also not to make the
February 15, 2009 interest payment due on our Second Lien Notes to the holders
of approximately 91% of the outstanding notes who waived such interest payment.
Not making these payments provided us with approximately $21.0 million of cash
to finance our operations and working capital needs.

In
addition to the cash requirements necessary to fund ongoing operations, we have
incurred significant professional fees and other costs in connection with the
Bankruptcy Cases and expect that we will continue to incur significant
professional fees and costs. We cannot assure you that the amounts of cash
available from operations will be sufficient to fund our operations, including
operations during the period until such time as the Plan is confirmed by the
Bankruptcy Court.

30

---



Our
liquidity and our ability to continue as a going concern, including our ability
to meet our ongoing operational obligations, is dependent upon, among other
things: (i) our ability to comply with the terms and conditions of the cash
collateral order entered by the Bankruptcy Court in connection with the
Bankruptcy Cases; (ii) our ability to maintain adequate cash on hand; (iii) our
ability to generate cash from operations; (iv) our ability to obtain
confirmation of and to consummate the Plan under the Bankruptcy Code; and (v)
the cost, duration and outcome of the reorganization process. Our ability to
maintain adequate liquidity depends in part upon industry conditions and
general economic, financial, competitive, regulatory and other factors beyond
our control. Accordingly, there can be no assurance as to the success of our
efforts. If we are unable to generate enough cash to meet our liquidity needs,
we could be forced to discontinue some or all of our operations. Our long-term
liquidity requirements and the adequacy of our capital resources are difficult
to predict at this time and ultimately cannot be determined until the Plan is
confirmed by the Bankruptcy Court. Because we will not have a revolving credit
facility upon emergence from bankruptcy, our inability to finance our
operations and working capital needs from our operating cash flow will have a
material adverse effect on our business.

Our
efforts to improve our liquidity position will be challenging given the current
economic climate. Current economic fundamentals portray a negative outlook for
the petroleum and chemical businesses for at least a significant portion of
2009 due to a global recession that is already the longest and most severe in
the post war period. These economic conditions have resulted in a decrease in
demand for our vessels and a decline in our revenues and available capital.

Difficult conditions in the global economy
and capital markets have materially adversely affected our business, results of
operations and financial condition and we do not expect these conditions to
improve in the near future.

The
success of our business is dependent upon global economic conditions and
conditions in the global financial markets, which conditions are outside our
control and difficult to predict. A lengthy continuation of the slowdown in the
U.S. economy or other economic conditions affecting capital markets, such as
declining oil and commodity chemical prices, failing or weakened financial
institutions, inflation, deteriorating business conditions and interest rates,
will continue to adversely affect our business and financial condition by
reducing demand for our services.

The
consequences of a recession include a lower level of economic activity and
uncertainty regarding energy prices and the capital and commodity markets. The
lower level of economic activity has resulted in a decline in energy
consumption and manufacturing activity, which combined with the significant
decrease in oil and commodity chemical prices, has significantly reduced demand
for our services and materially adversely affected, and will continue to
materially adversely affect, our revenue, liquidity and future growth. Instability
in the financial markets, as a result of recession or otherwise, also affects
the cost of capital and our ability to raise capital. These events increase our
vulnerability to further adverse general economic consequences and industry
conditions and the likelihood that our cash flows and financial condition will
be materially adversely affected as a result thereof.

The
economic situation could also have an impact on our customers, causing them to
fail to meet their obligations to us. Additionally, the current economic
situation could lead to further reduced demand for, and/or reductions in the
prices of, oil or commodity chemicals, which could have a negative impact on
demand for our services, which will adversely affect our business, results of
operations and financial condition. While the ultimate outcome and impact of
the current financial crisis cannot be predicted, it has had a material adverse
effect on our business, results of operations and financial condition.

The
capital and credit markets have been experiencing significant volatility and
disruption for more than twelve months, which has exerted significant downward
pressure on availability of liquidity and credit capacity for substantially all
companies. Adverse capital and credit market conditions will continue to
significantly affect our ability to meet liquidity needs, our access to
capital, our cost of capital, and our ability to conduct our business.

In
response to the financial crises affecting the banking system and financial
markets and going concern threats to financial institutions, the Federal
Government, Federal Reserve and other governmental and regulatory bodies have
taken or are considering taking actions to address the financial crisis. We cannot
predict what impact such actions will have on the financial markets and whether
such actions will be successful. Such continued volatility could materially and
adversely affect our business, financial condition and results of operations.
We cannot predict whether or when such actions may occur, or what impact, if
any, such actions could have on our business, cash flow, results of operations
and financial condition.

31

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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 or repealed.

We
are subject to the Jones Act and other federal laws that restrict maritime
transportation between points in the United States to vessels operating under
the U.S. flag, built in the United States, at least 75% owned and operated by
U.S. citizens and manned by U.S. crews. Compliance with the Jones Act increases
our operating costs. We are responsible for monitoring the ownership of our
common units and other partnership interests to ensure our compliance with the
Jones Act. 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

During
the past several years, interest groups have lobbied Congress to modify or
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. Foreign vessels generally have lower construction costs and
generally operate at significantly lower costs than we do in the U.S. markets,
which would likely result in reduced charter rates. We believe that continued
efforts will be made 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 significantly increased competition and have a material
adverse effect on our business, results of operations and financial condition.
As a result of Hurricanes Katrina and Rita, a short-term waiver, which expired
on October 24, 2005, was granted by the U.S. Department of Homeland Security,
lifting the Jones Act restriction on foreign-flag carriers, allowing these
carriers to replace transporting needs arising from out-of- service pipelines.
We cannot assure that future waivers will not be granted or that any such
waivers will not have a material adverse effect on our business, results of
operation and financial condition.

We must make substantial expenditures to
comply with mandatory drydocking requirements for our fleet.

Vessels
are required by both domestic (United States Coast Guard) and international
(International Maritime Organization) regulatory bodies to be inspected twice
every five years. To date, our ITBs have participated in the Underwater
Inspection In Lieu of Drydock (UWILD) Program which allows vessels to be
drydocked once every five years with a mid-period UWILD. In April 2007, we were
advised by the U.S. Coast Guard that it will allow continued participation in
the UWILD Program of non-or double hulled tank barges that are over 15 years of
age if they only trade domestically. We expect that our ITBs will qualify to
remain in the UWILD Program. The ATBs should also qualify for the UWILD
program. Because of their age, our parcel tankers and the Houstonmust be drydocked twice every five years.

Two
of our ITB units are scheduled for UWILDs in 2009 and, in 2010, one ITB unit is
scheduled for drydocking and another for a UWILD. Given the lack of demand for
our ITBs and the cost of drydocking them, we do not currently plan to drydock
any of the ITBs; rather, we will dispose of them prior to their next scheduled
drydocking. Accordingly, if an ITB is not permitted to participate in the UWILD
Program, we would likely dispose of the vessel at that time rather than
undertake a drydock, which will reduce our revenue. If we elect to drydock an
ITB that is no longer permitted to participate in the UWILD Program, we will
experience additional off-hire days, which will reduce our revenue. In
addition, vessels may have to be drydocked in the event of accidents or other
unforeseen damage.

We
estimate that future drydockings of ITBs will cost approximately $4.5 million
per vessel. We estimate drydocking of the parcel and product tankers will cost
approximately $3.5 million to $6.0 million per vessel and drydocking of the ATB
units will initially cost approximately $1.0 million to $2.0 million per
vessel. When drydocked, each of our ITB units will be out of service for
approximately 50 to 70 days, each of our parcel tankers and the Houston will be out of service for
approximately 35 to 60 day and each of our ATB units will be out of service
approximately 25 days. If we are required to conduct a second drydock for our
ITBs in each five year period rather than rely on an underwater survey, we
estimate that our ITBs will be out of service for approximately 14 to 20 days
and the second drydock will cost approximately $1.0 million to $2.0 million.
Even if our ITBs continue to participate in the UWILD Program, we will need to
conduct an enhanced survey, which will result in the vessel being off-hire, and
therefore not earning any revenue, for an additional 12 days each time a survey
is conducted, at a cost of approximately $0.5 million. The longer out of
service period and increased expense of a drydocking as compared to the time
required for and the cost of conducting an underwater survey could adversely
affect our business, financial condition and results of operations. At the time
we drydock these vessels, the actual cost of drydocking may be higher due to
inflation and other factors. In addition, vessels in drydock will not generate
any income, which will reduce our revenue.

32

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The
Sea Venture must be drydocked in
June 2009. Unless we obtain a contract of affreightment for the Sea Venture, we will not drydock the
vessel, which could have a material adverse effect on our business, results of
operations and financial condition.

We will need to acquire OPA 90 compliant
vessels in order to maintain a significant presence in the domestic coastwise
transportation of petroleum products, which will be expensive, and we currently
do not have the financial ability to do so.

As
part of our OPA 90 compliance program, we entered into a contract with NASSCO
for the construction of nine 49,000 deadweight tons (dwt) double-hulled
tankers, the first five of which were being financed through the Joint Venture.
Our ability to purchase these vessels from the Joint Venture was dependent on
our ability to finance the purchase of these vessels upon their completion and,
given our current financial situation and current market conditions, we were
not able to purchase the Golden Stateor
the Pelican Stateand did not
expect to be able to purchase any of the remaining vessels in the immediate
future and, as a result, we will not receive the bulk of the benefits
associated with ownership of these vessels, which will adversely affect our
growth strategy and our OPA 90 compliance strategy for replacement of our ITB
fleet, which could have a material adverse effect on our business, results of
operations and financial condition. Pursuant to the terms of the credit
facility under the proposed Plan, we will not be able to incur additional debt
other than pursuant to sale/leaseback financings, which will adversely affect
our ability to acquire OPA 90 compliant vessels to replace our aging fleet,
which could limit our ability to continue to operate our business as currently
conducted.

Because
the Joint Venture did not exercise its option to have the rights and
obligations under the NASSCO contract to construct up to four additional
tankers assigned to the Joint Venture and due to Product Carriers inability to
obtain the necessary financing to construct these four tankers due to its
financial condition and current market conditions, the Partnership has been
advised by NASSCO that it is exercising its rights under the construction
contract with Product Carriers to use commercially reasonable efforts to sell
and assign Product Carriers rights under the construction contract to have
four product tankers constructed. Product Carriers is obligated to reimburse
NASSCO for any damages incurred by NASSCO as a result of these tankers not
being constructed, or if they are transferred to a third party at a loss to
NASSCO, up to a maximum of $10.0 million (plus costs and expenses incurred by
NASSCO) for each such tanker, with such amounts being funded solely out of
monies received by Product Carriers in respect of its equity investment in the
first five vessels constructed by the Joint Venture. As a result, the
Partnership believed that there was substantial uncertainty that the
Partnership would realize any monetary return on or of its $70 million equity
investment in the Joint Venture.

Capital expenditures and other costs
necessary to operate and maintain our vessels tend to increase with the age of
the vessel and may increase due to changes in governmental regulations, safety
or other equipment standards.

Capital
expenditures and other costs necessary to operate and maintain our vessels tend
to increase with the age of the vessel. Accordingly, it is likely that the
operating costs of our older vessels will increase. 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, if the U.S. Coast Guard or the American Bureau of
Shipping, an independent classification society that inspects the hull and
machinery of commercial ships to assess compliance with minimum criteria as set
by U.S. and international regulations, enacts new standards, we may be required
to make significant expenditures for alterations or the addition of new
equipment. In order to satisfy any such requirement, we may be required to take
our vessels out of service for extended periods of time, with corresponding
losses of revenues. In the future, market conditions, including customer
requirements, may not justify these expenditures or enable us to operate our
older vessels profitably during the remainder of their economic lives.

If we are unable to fund our capital expenditures,
we may not be able to continue to operate some of our vessels which would have
a material adverse effect on our business, results of operations and cash flow.

We
must make substantial capital expenditures to maintain the operating capacity
of our fleet. These capital expenditures include expenditures for drydocking
our vessels, modifying our vessels and acquiring new vessels to replace
existing vessels as they reach the end of their useful lives. In order to fund
our capital expenditures, we may be required to incur borrowings, enter into
sale/leaseback transactions 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 of any such financing, the
nature of the employment of the vessel and offering 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 or construct or
purchase new vessels and could have a material adverse effect on our business,
results of operations and financial condition. Incurring additional debt may
significantly increase our interest expense, which could have a material
adverse effect on our liquidity and capital resources. Pursuant to the terms of the credit facility
under the proposed Plan, we will not be able to incur additional debt other
than pursuant to sale/leaseback financings, which will adversely affect our
ability to acquire OPA 90 compliant vessels to replace our aging fleet, which
could limit our ability to continue to operate our business as currently
conducted.

33

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A decline in demand for refined petroleum,
petrochemical and commodity chemical products, or decreases in U.S. refining
activity, particularly in the coastal regions of the United States, or a
decrease in the cost of importing refined petroleum products, could cause
demand for U.S. flag tank vessel capacity and charter rates and vessel values
to decline which would decrease our revenues and our cash flow.

The
nature, timing and degree of changes in U.S. flag shipping industry conditions
are subject to market forces that have proven to be unpredictable and may
adversely affect the values of our vessels and may result in significant
fluctuations in the amount of charter hire we earn, which could result in
significant fluctuations in our quarterly results. Charter rates and vessel
values may fluctuate over time due to changes in the demand for U.S. flag
product carriers and barges, which will affect our revenue and cash flows and
our ability to pay interest on, and principal of, our indebtedness. Because our
vessels constitute a major component of the assets securing our indebtedness, a
decrease in vessel value could adversely affect our ability to borrow or to
repay our debt using proceeds from the sale of vessels.

The
demand for U.S. flag tank vessel capacity is influenced by the demand for
refined petroleum, petrochemical and commodity chemical products and other
factors including:

| |   |                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | global and regional
  economic and political conditions;                                                                                                                           
| |   |                                                                                                                                                                                    
| |  | developments in
  international trade;                                                                                                                                             
| |   |                                                                                                                                                                                    
| |  | changes in seaborne and
  other transportation patterns, including changes in the distances that
  cargoes are transported;                                                        
| |   |                                                                                                                                                                                    
| |  | environmental concerns;                                                                                                                                                            
| |   |                                                                                                                                                                                    
| |  | availability and cost of
  alternative methods of transportation of products; and                                                                                                  
| |   |                                                                                                                                                                                    
| |  | in the case of tank
  vessels transporting refined petroleum products, competition from alternative
  sources of energy, such as natural gas, and alternate transportation methods.

Any
of these factors could adversely affect the demand for U.S. flag tank vessel
capacity and charter rates. Any decrease in demand for tank vessel capacity or
decrease in charter rates could have a material adverse effect on our business,
results of operations and cash flow.

Additionally,
the demand for our services is heavily influenced by the level of refinery
capacity in the United States, particularly in the Gulf Coast region. Any
decline in refining capacity on the Gulf Coast, even on a temporary basis, may
significantly reduce the demand for waterborne movements of refined petroleum
products. For example, following Hurricanes Katrina and Rita in 2005, movements
of refined petroleum products from the Gulf Coast were significantly curtailed
in 2005 and 2006, with repairs to hurricanedamaged Gulf Coast refineries being
completed in late 2006. As a result of the current recession, the level of
refinery capacity in the United States, including the Gulf Coast region, has
declined significantly, which has adversely affected our business, results of
operations and financial condition.

The
demand for U.S. flag tank vessel capacity is influenced by the cost of
importing refined petroleum products. Historically, charter rates for vessels
qualified to participate in the coastwise trade under the Jones Act have been
higher than charter rates for foreign flag vessels because of the higher
construction and operating costs of U.S. flag vessels due to the Jones Act
requirements that such vessels must be built in the United States and manned by
U.S. crews. Therefore, it has historically been cheaper for certain areas of
the United States, such as the northeastern United States, to import refined
petroleum products than to obtain them from U.S. refineries. International
shipping rates can influence the amount of refined petroleum products imported
into the United States. As a result of the worldwide decrease in demand for
petroleum tankers due to the current recession, charter rates for foreign flag
vessels have declined, making it cheaper to import refined petroleum products
to other regions of the East Coast and the West Coast to meet demand and
resulting in increased imports of refined petroleum products into the United
States, which has had a material adverse effect on our business, results of
operations and financial condition. Declining economic activity has also led to
a significant decrease in demand for the domestic coastwise transportation of
chemical products served by our chemical transporting vessels.

34

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The current economic situation could
adversely affect the collectability of our trade receivables.

We
are subject to certain credit risks with respect to our counterparties on
contracts and failure of such counterparties to meet their obligations could
cause us to suffer losses on such contracts, decreasing revenues and EBITDA. We
charter our vessels to other parties on both a short-term and long-term basis,
who pay us a daily rate of hire. As a result, we are reliant on the ability of
charterers to pay charter hire, especially when spot market rates are less than
previously agreed upon time charter rates. Historically, we have not
experienced any material problem collecting charter hire but the global
economic recession that commenced in 2008 may affect charterers more severely
than the prior recessions that have occurred, and some of our customers have
filed, or may file, for protection under the U.S. bankruptcy laws and may
reject their charter agreement with us. One of our principal customers for our
chemical fleet has filed for bankruptcy and is operating its business as a
debtor-in-possession.

Marine transportation has inherent
operating risks and our insurance may not be adequate to cover our losses.

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

| |   |                                              
| | - | ---------------------------------------------
| |  | marine disasters;                            
| |   |                                              
| |  | bad weather;                                 
| |   |                                              
| |  | mechanical failures;                         
| |   |                                              
| |  | grounding, fire,
  explosions and collisions;
| |   |                                              
| |  | human error; and                             
| |   |                                              
| |  | war and terrorism.                           

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,
results of operations and cash flow.

We
carry insurance to protect against most of the accident-related risks involved
in the conduct of our business. Nonetheless, risks may arise against which we
are not adequately insured. For example, a catastrophic spill could exceed our
insurance coverage and any claims covered by insurance would be subject to
deductibles, the aggregate amount of which could be material. In addition, our
insurance may be voidable by the insurers as a result of certain of our
actions, such as our vessels failing to maintain certification with applicable
maritime self-regulatory organizations. Any uninsured or underinsured loss
could harm our business and financial condition and have a material adverse
effect on our operations. In addition, we may not be able to procure adequate
insurance coverage at commercially reasonable rates in the future, and we
cannot guarantee that any particular insurance claim will be paid. In the past,
new and 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.
Furthermore, even if insurance coverage is adequate to cover our losses, we may
not be able to timely obtain a replacement ship in the event of a loss.

We
do not carry loss-of-hire insurance, which covers the loss of revenue during
extended vessel off-hire periods, such as for unscheduled drydocking due to
damage to the vessel from accidents. Accordingly, any loss of a vessel or
extended vessel off-hire, due to accident or otherwise, could have a material
adverse effect on our business, results of operations and financial condition
and our ability to pay interest on, and principal of, our indebtedness. See
We have a limited number of vessels, and any loss of use of a vessel could
adversely affect our results of operations.

Because we obtain some of our insurance
through protection and indemnity associations, we 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.

We
may be subject to calls, or premiums, in amounts based not only on our 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 have a material adverse
effect on our business, results of operations and cash flow and our ability to
pay interest on, and principal of, our indebtedness.

35

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In
November 2008 we received a notice from our protection and indemnity
association that due to the impact of the recent financial market turmoil
combined with substantial association claims, the association needed to
increase its reserves, which they would accomplish through levying supplementary
premiums for the 2006 and 2007 policy years. The association also issued an
estimate of a supplementary premium on the 2008 policy year and ordered a
general increase for the forthcoming 2009 policy year. The supplementary
premium to be levied is set at 20% and 25% of the policy years annual premiums
for the 2006 and 2007 policy years, respectively. There is an estimate of 20%
supplementary premium for the 2008 policy year which will be reviewed in
October 2009 and adjusted according to claims activity as well as investment
income. Supplemental premiums for the 2006 and 2007 policy years are
approximately $342,000 and $487,000, respectively, and are reflected in our
financial statements for the year ended December 31, 2008 as other expense.
These premiums are payable in March 2009 and June 2009, respectively. An
estimated $474,000 was recognized as other expense for the year ended December
31, 2008 related to the additional supplemental premium for the 2008 policy
year. The association will review the supplementary premium to be levied for
the 2008 policy year in October 2009. Renewals for the policy beginning in
February 2009 increased by 6.7%.

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 their 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.
Under our spot voyage charters, we bear the risk of delays due to weather
conditions. For example, our revenues and EBITDA were negatively impacted
during 2007 by approximately $2.3 million and $2.0 million, respectively, due
to the 61 day unplanned out-of-service period for the ITB Baltimore to repair damages it
sustained from Hurricane Dean while in the shipyard after completing its
regularly scheduled drydocking.

An increase in the price of fuel may
adversely affect our business and results of operations.

The
cost of fuel for our vessels is a significant component of our voyage expenses
under our voyage charters and during most of 2008 we experienced significant
increases in the cost of fuel used in our operations. While we have been able
to pass a portion of these increases on to our customers pursuant to the terms
of our charters, there can be no assurances that we will be able to pass on any
future increases in fuel prices. If fuel prices increase and we are not able to
pass such increases on to our customers, our business, results of operations
and financial condition may be adversely affected.

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.

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. Our three largest customers each in 2008, 2007 and 2006, based on
revenue, accounted for approximately 39%, 47% and 60% of our consolidated
revenues for those periods, respectively. No other customer accounted for more
than 10% of our consolidated revenues for those periods. At any given time in
the future, the cash reserves of our customers may be diminished or exhausted
and we cannot assure you that the customers will be able to make charter
payments to us. If our customers are unable to make charter payments to us, our
results of operations and financial condition will be materially adversely
affected. In addition, we could lose a charterer or the benefits of a time
charter because of disagreements with a customer or if a customer exercises
specific limited rights to terminate a charter. If we were to lose any of these
customers or if any of these customers significantly reduced its use of our
services, our business and operating results could be adversely affected. The
loss of our ability to manage the Joint Ventures vessels could adversely
affect our ability to retain our existing customers or obtain new customers.

Our
vessels are inspected and audited periodically by our customers, in some cases
as a precondition to chartering our vessels. Failure to meet our customers
inspection standards could cause them not to contract with us, and could
adversely impact our operating results.

36

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We may not be able to renew our long-term
contracts when they expire or obtain contracts for the vessels we have under
construction which could adversely affect our operations.

Our
three parcel tankers, the Chemical Pioneer,
the Charleston and the Sea Venture, as well as the ATB Freeport and the ATB Brownsville, primarily transport
specialty refined petroleum, petrochemical and commodity chemical products,
such as lubricants, paraxylene, caustic soda and glycols, from refineries and
petrochemical manufacturing facilities to other manufacturing facilities or
distribution terminals. These vessels (other than the Sea Venture, which is laid up) are
currently operating under contracts with several petroleum and petrochemical
customers with specified minimum volumes that also generally require these
customers to ship on our parcel tankers any additional volumes of these
products shipped to the ports specified in the contracts that accounted for
virtually all of their respective usable capacity for 2008. However, due to the
significant decline in demand for commodity chemical products, our customers
have in general in the last several months only been shipping the specified
minimum volumes, and in some cases less than the specified minimum volumes, and
one of our principal customers has filed for protection under the bankruptcy
laws. These contracts expire at various dates between 2009 and 2014.
Additionally, we commenced a long-term charter that accounts for 100% of the
usable capacity of the Houston
through mid-2011. The ATB Galvestonis operating under a long-term
charter that accounts for 100% of its usable capacity through September 2011,
and the ATB Corpus Christi will, upon completion of
construction, begin to operate under a long-term charter that accounts for 100%
of its usable capacity through September 2012. These arrangements may not be
renewed or, if renewed, may not be renewed at similar rates.

Of
our six ITBs that were in operation at the beginning of 2008, one is currently
operating in the spot market, two were sold in the fourth quarter of 2008, and
three are laid up in port due to lack of demand. As a result of the newbuild
vessels entering the market, as well as the age of our vessels, the charter rates
for and utilization of the ITBs will in combination provide revenue and EBITDA
that on average are substantially below the revenue and EBITDA achieved under
the old contracts and the Hess support agreement, which has had, and will
continue to have, a material adverse effect on our business, results of
operations and financial condition. Further, our failure to obtain rates on our
newbuild ATBs that provide a reasonable return on these new vessels will also
have a material adverse effect on our business, results of operations and
financial condition. Additionally, to the extent that vessels are employed in
the spot market, rather than pursuant to long-term charters, our cash flows
will be less predictable and may be more volatile, and this volatility could
adversely affect our business, results of operations and financial condition,
and will adversely affect our ability to pay principal of, and interest on, our
debt.

Our
business has high fixed costs that continue even if our vessels are not in service.
In addition, low utilization due to reduced demand or other causes or a
significant decrease in charter rates has had, and will continue to have, a
significant negative effect on our operating results and financial condition.

Industry trends away from long-term
charters in favor of shorter-term charters may impact our ability to finance
newly built vessels.

The
long-haul marine transportation services market for refined petroleum products
in the U.S. domestic coastwise trade appears to be trending away from
long-term charters in excess of three years in favor of shorter-term charters.
If this trend continues, it will become increasingly difficult for us to
finance the construction and purchase of new vessels with long-term debt or capital
leases. In determining the amount of credit to extend with respect to a
particular vessel, lenders place higher values on predictable cash flows that
result from longer-term charters. If we cannot secure long-term charters for
the product tankers currently under construction, we many not be able to obtain
adequate debt financing to acquire these vessels on reasonable terms or at all.

We have a limited number of vessels and any
loss of use of a vessel could adversely affect our results of operations.

We
currently own four ITB units, one product tanker, three parcel tankers and
three ATB units. Our product tanker, parcel tankers and ATBs are committed to
certain customers through long term contracts, and most of our customers under
these long-term contracts will not accept our ITBs. In the event any of our
vessels under long-term contract has to be taken out of service for more than a
few days, we may be unable to fulfill our obligations under our long-term
contracts with our remaining vessels. If we are unable to fulfill such
obligations, we would have to contract with a third-party for use of a vessel,
at our expense, to transport the charterers products, which might not be
possible on acceptable terms or at all, or default under the contract, which
would allow the charterer to terminate the contract.

Also,
if our one ATB unit currently under construction is not completed by the
scheduled due date, we may be unable to fulfill our obligations under the
long-term contract we have in place for that vessel. If we are unable to
fulfill such obligations, we would have to contract with a third party for use
of a vessel, at our expense, to transport the charterers products, which may
not be possible on acceptable terms or at all, or default under the contract,
which would allow the charterer to terminate the contract.

37

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Our
revenues and EBITDA were negatively impacted during 2007 by approximately $2.3
million and $2.0 million, respectively, due to the 61 day unplanned out-of-service
period for the ITB Baltimore in
2007 to repair damages it sustained from Hurricane Dean while in the shipyard
after completing its regularly scheduled drydocking.

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 and operated more
diverse assets.

Maritime claimants could arrest our vessels
which could interrupt our cash flow.

Crew members, suppliers of
goods and services to a vessel, shippers of cargo and other parties may be
entitled to a maritime lien against that vessel for unsatisfied debts, claims
or damages. In many jurisdictions, a maritime lien holder may enforce its lien
by arresting a vessel through foreclosure proceedings. The arrest or attachment
of one or more of our vessels could interrupt our cash flow and require us to
pay whatever amount may be required to have the arrest lifted.

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

Contracts for our vessels
are generally awarded on a competitive basis, and competition in the markets we
serve is intense and obtaining such charters 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:

| |   |                                                             
| | - | ------------------------------------------------------------
| |  | availability, age and
  capability of the vessels;          
| |   |                                                             
| |  | ability to meet the
  customers schedule;                  
| |   |                                                             
| |  | price;                                                      
| |   |                                                             
| |  | safety record;                                              
| |   |                                                             
| |  | ability to satisfy the
  customers vetting requirements;   
| |   |                                                             
| |  | reputation, including
  perceived quality of the vessel; and
| |   |                                                             
| |  | quality and experience of
  management.                     

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-hulled vessels more rapidly and
withstand the effects of declines in charter rates for a longer period of time.
They may be better able to address a downturn in the domestic demand for
refined petroleum, petrochemical or commodity chemical products. As a result,
we could lose customers and market share to these competitors.

All
of our ITBs were originally constructed more than 24 years ago. While all of
these vessels are in-class, meaning the vessel has been certified by a
classification society as being built and maintained in accordance with the
rules of that classification society and comply with the applicable rules and
regulations of the United States Coast Guard, some existing and potential
customers have stated that they will not charter vessels that are more than 20
years old. As a result of this age limitation, and the number of newbuilds
expected to come into the market in the next several years, demand for our ITBs
has been materially adversely affected.

We
originally expected the supply of domestic tank vessels competing with us to
decrease over the next several years due to OPA 90, which mandates the
phase-out of certain non-double-hulled tank vessels at varying times by January
1, 2015; and the Jones Act, which restricts the supply of new vessels by
requiring that all vessels participating in the coastwise trade be constructed
in the United States. However, with the announced newbuilding programs, we
expect that these new vessels will become fully utilized on delivery and
replace substantially all the capacity taken out of the market due to OPA 90.
The level of newbuilds, combined with the decline in demand for marine
transportation due to the decrease in economic activity, has resulted in an
over-supply of vessel capacity, which has resulted in a decrease in charter
rates, particularly in the spot market. In addition, any additional
newbuildings or retrofittings of existing tank vessels may result in additional
capacity that the market will not be able to absorb at the anticipated demand
levels. The availability of additional capacity could adversely affect the
charter rates that we can obtain for, and utilization of, our vessels, and
limit our ability to obtain charters for our ITBs at reasonable rates or at
all. If supply increases at a faster rate than demand, the charter rates and
demand for our vessels could decline significantly. Three of our four ITBs are
currently laid up due to lack of demand.

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We
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, the expansion of existing pipelines and
the conversion of existing non-refined petroleum product pipelines, could
adversely affect our ability to compete in particular locations.

Our
transportation of petrochemical and commodity chemical products faces intense
competition from railroads, which we estimate transport approximately
two-thirds of all petrochemical and commodity chemical products. We believe the
cost of transporting these products by rail is generally higher than the cost
of marine transportation, and any decrease in rail rates could adversely affect
the amount of petrochemical and commodity chemical products we carry and the
rates we can charge.

Our vessels, particularly our ITBs, may be
limited from international transportation of petroleum products due to
international regulations similar to OPA 90. This may limit the overseas
opportunities of our vessels.

International
standards, as promulgated by the International Maritime Organization (IMO),
require that our vessels meet standards similar to OPA 90 standards four years
prior to OPA 90 phase-out requirements. While we do not currently transport
petroleum internationally, our ITBs will not be permitted to trade petroleum
products internationally beyond the IMO phase-out dates that commence in 2009
or 2010, limiting alternate uses. Additionally, if we were to utilize vessels
to trade petroleum internationally, such vessels may not qualify for
participation in the UWILD Program, which requires that the barges older than
15 years participating in the UWILD Program only trade domestically.

Delays or cost overruns in the construction
of a new vessel or the drydock maintenance of existing vessels could adversely
affect our business. Revenue from new or retrofitted vessels may not be
immediate or as high as expected.

We
currently have one new ATB unit under construction and are overseeing the
construction of four new product tankers on behalf of the Joint Venture. In
addition, our vessels are required by both domestic (United States Coast Guard)
and international (International Maritime Organization) regulatory bodies to be
inspected twice every five years. To date, our vessels have participated in the
Underwater Inspection In Lieu of Drydock (UWILD) Program which allows vessels
to be drydocked once every five years with a mid-period UWILD. In April 2007,
we were advised by the U.S. Coast Guard that it will allow continued
participation in the UWILD Program of non-or double hulled tank barges that are
over 15 years of age if they only trade domestically. Also, on occasion, our
vessels may undergo unscheduled drydocking due to damage.

To
the extent our vessels are unable to participate in the UWILD program, we could
experience additional off-hire days, which will reduce our revenue, and
increased costs, which will adversely affect our cash flow. During a
drydocking, an ITB is removed from service (typically for 50-70 days), each of
our parcel tankers and the Houston
will be out of service for approximately 35 to 60 day and each of our ATB units
will be out of service approximately 25 days, during which major inspection,
repair and maintenance work is carried out. We estimate future drydock costs
for our ITBs will be approximately $4.5 million per vessel for work occurring
in U.S. shipyards. We can drydock the ITBs in foreign shipyards where the
drydocking costs may be lower. However, if we choose to drydock an ITB unit in
a foreign shipyard, the ITB may be off-hire and, therefore, not earning any
revenue for a longer period of time as it travels to and from the foreign
shipyard if we cannot find a cargo to transport during that voyage. In addition
to drydocking each ITB unit every five years, for each ITB unit that qualifies
for the UWILD Program, we are required to conduct a mid-period underwater
survey in lieu of drydocking the ITB for inspection. An underwater survey only
requires a vessel to be removed from service for approximately 12 days at an
approximate cost of $0.5 million. If we are required to conduct a second
drydock in each five year period rather than rely on an underwater survey, we
estimate that our ITBs will be out of service for approximately 14 to 20 days
and the second drydock will cost approximately $1.0 million to $2.0 million. We
estimate drydocking of the parcel and product tankers will cost approximately
$3.5 million to $6.0 million per vessel and drydocking of the ATB units will
initially cost approximately $1.0 million to $2.0 million per vessel.

39

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Construction and drydocking
will be subject to the risk of delay or cost overruns caused by the following:

| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | inability of the selected
  contractors to perform their obligations under the various construction
  agreements;                                                
| |   |                                                                                                                                                                  
| |  | unforeseen quality or engineering problems;                                                                                                                      
| |   |                                                                                                                                                                  
| |  | work stoppages or labor
  shortages;                                                                                                                             
| |   |                                                                                                                                                                  
| |  | unanticipated cost
  increases;                                                                                                                                  
| |   |                                                                                                                                                                  
| |  | our requests for changes
  to the original vessel specifications;                                                                                                
| |   |                                                                                                                                                                  
| |  | inability to have the work performed in the United States;                                                                                                       
| |   |                                                                                                                                                                  
| |  | delays in receipt of
  necessary equipment;                                                                                                                      
| |   |                                                                                                                                                                  
| |  | inability to obtain the
  requisite permits, approvals or certifications from the U.S. Coast Guard and
  the American Bureau of Shipping upon completion of work;
| |   |                                                                                                                                                                  
| |  | changes in governmental
  regulations or maritime self-regulatory organization standards; and                                                                    
| |   |                                                                                                                                                                  
| |  | weather related
  conditions, such as hurricanes.                                                                                                                

Significant
delays or construction cost overruns could have a material adverse effect on
expected contract commitments for new or modified vessels and our future
revenues, liquidity and cash flows. The construction of the remaining ATB unit
and the new tankers may not be completed on schedule or at all or at the
budgeted cost. Our first delivered ATB unit, the ATB Freeport, was delivered more than one year after its
originally scheduled delivery date and at a cost (after giving effect to a
payment by the original contractor to cover certain cost overruns, but
exclusive of capitalized interest and credits and other legal claims that we
believe we can recover) approximately $46 million higher than the original cost
under the contract; this delay and cost overrun had an adverse effect on our
liquidity and results of operations. The construction contracts for the
remaining ATB and the tankers being constructed contain cost escalators that
could increase the cost of constructing these vessels. In addition, our
anticipated revenues may not increase immediately upon the expenditure of funds
to construct or purchase the vessels. For instance, when we build a new vessel,
the construction will occur over an extended period of time and we will not
receive any material increases in revenues until after the vessel is put in
operation. Moreover, significant delays in construction of new vessels could
allow a charterer to cancel the charter or require us to charter additional
vessels to meet our contractual obligations. Furthermore, customer demand for,
and revenues from, new vessels may not be as high as we currently anticipate
and, as a result, our business, results of operations and financial condition
and our ability to pay interest on, and principal of, our indebtedness may be
adversely affected.

There
is limited availability in U.S. shipyards for drydocking a vessel. As a result,
the costs of performing drydock maintenance in the United States may be
significantly higher than they are overseas. Furthermore, U.S. shipyards may
not have available capacity to perform drydock maintenance on our vessels at
the times they require drydock maintenance, particularly in the event of an
unscheduled drydock due to accident or other damage, in which event we will be
required to have the work performed in an overseas shipyard. This may result in
the vessel being off-hire, and therefore not earning any revenue, for a longer
period of time because of the time required to travel to and from the overseas
shipyard. In addition, we may be required to place a deposit in order to
reserve shipyard slots for construction of new vessels, which may not be
refundable if we elect not to proceed with such new construction.

The growth of our business will be
adversely affected due to the termination of our right to manage the vessels
constructed by the Joint Venture.

One
of the ways we intended to grow our business and replace vessels that are not
OPA 90 compliant was through the construction and purchase of new vessels. In
our efforts to expand our business by constructing new vessels, we entered into
a contract with NASSCO to construct nine 49,000 dwt double-hulled petroleum
tankers. We formed the Joint Venture for the construction of the first five
petroleum tankers by NASSCO, and provided $70 million of equity financing. As a
result of our agreement in principle to settle the litigation between us and
the owners of the 60% interest in, and the lenders to, the Joint Venture,
subject to completion of definitive documentation and Bankruptcy Court
approval, we will no longer manage the Joint Ventures vessels, nor will we
retain the right to purchase, at previously negotiated prices, the Joint
Venture vessels upon completion of construction, although we anticipate we will
have a right of first offer for any vessel that the Joint Venture determines to
sell. Our loss of these rights will adversely affect our growth strategy and
our OPA 90 compliance strategy for replacement of our ITB fleet, which could
have a material adverse effect on our business, results of operations and
financial condition and our ability to pay interest on, and principal of, our
indebtedness. See Item 3. Legal Proceedings.

40

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We are subject to complex laws and
regulations, including environmental regulations, which can adversely affect
the cost, manner or feasibility of doing business and which may affect our
ability to sell, lease, charter or otherwise transfer our vessels.

Increasingly
stringent federal, state and local laws and regulations governing worker health
and safety, insurance requirements and the manning, construction, operation and
transfer of vessels significantly affect our operations. Many aspects of the
marine transportation industry are subject to extensive governmental regulation
by the U.S. Coast Guard, the International Maritime Organization, the National Transportation
Safety Board, the U.S. Customs Service and the U.S. Maritime Administration, as
well as 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 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 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 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 under other federal
and state laws or civil actions. 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.

In
order to maintain compliance with existing and future laws, we incur, and
expect to continue to incur, substantial costs in meeting maintenance and
inspection requirements, developing and implementing emergency preparedness procedures,
and obtaining insurance coverage or other required evidence of financial
ability sufficient to address pollution incidents. These laws can:

| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | reduce the economic value
  of our vessels;                                                 
| |   |                                                                                             
| |  | require a reduction in
  cargo carrying capacity or other structural or operational changes;
| |   |                                                                                             
| |  | make our vessels less
  desirable to potential charterers;                                  
| |   |                                                                                             
| |  | lead to decreases in
  available insurance coverage for affected vessels; or                
| |   |                                                                                             
| |  | result in the denial of
  access to certain ports.                                          

We
believe that regulation of the shipping industry will continue to become more
stringent and more expensive for us and our competitors. Further, a serious
marine incident occurring in U.S. waters that results in significant oil
pollution could result in additional regulation. Future environmental and other
requirements may be adopted that could limit our ability to operate, require us
to incur substantial additional costs or otherwise have a material adverse
effect on our business, results of operations or financial condition and our
ability to pay interest on, and principal of, our indebtedness.

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

All
unlicensed marine personnel are employed under a collective bargaining
agreement with the Seafarers International Union that expires in 2012.
Licensed officers, including our Captains, are employed under a collective
bargaining agreement with the American Maritime Officers union that expires in
2010. Both union agreements effectively commenced in the second quarter of
2007. Any work stoppages or other labor disturbances could have a material
adverse effect on our business, results of operations and financial condition
and our ability to pay interest on, and principal of, our indebtedness.

41

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

All
of our seagoing employees are covered by provisions of the Jones Act 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 have greater exposure for claims made by these employees as
compared to employers whose employees are not covered by these provisions.

We depend on key personnel for the success
of our business and one of those persons faces conflicts in the allocation of
his time to our business.

We
depend on the services of our senior management team and other key personnel.
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.
We currently do not carry any key man insurance on any of our employees. In
addition, we may not be able to hire crew personnel meeting our standards if we
expand our fleet. In addition, as a result of the planned expansion of our
fleet through the construction of new vessels, we may need to hire additional
key technical, support and other qualified personnel to ensure that
construction is completed timely and on budget. If we are unsuccessful in
attracting such personnel, it could have a material adverse effect on our
business, results of operations and financial condition. Our current financial
situation makes it more difficult to attract and retain personnel, and the loss
of our ability to manage the Joint Ventures vessels will exacerbate the
difficulty in attracting and retaining management and key employees.

The
employment agreement of Mr. Jeffrey Miller, our vice presidentchartering, only
requires him to spend a majority of his business time in managing our
operations. Mr. Miller currently provides services to entities that own and
operate two Jones Act barges that have been transporting caustic soda and
calcium chloride under contracts with third parties, and are permitted to
acquire and operate additional tank barges of less than 15,000 deadweight tons
under specified circumstances for the transportation of chemical products other
than petroleum or petroleum products. Mr. Miller may face conflicts regarding
the allocation of his time between our business and this barge business. If Mr.
Miller were to spend less time in managing our business and affairs than he
does currently, our business, results of operations and financial condition may
be adversely affected.

In
addition, certain members of our management expect to devote a significant
portion of their business time overseeing the construction of the new vessels
by the Joint Venture. This will reduce the amount of time they have to spend on
our business. To the extent that such individuals devote time to the Joint
Venture, they will not be able to devote such time to us, which could have an
adverse effect on our business.

Terrorist attacks have resulted in
increased costs and any new attacks could disrupt our business.

Heightened
awareness of security needs after the terrorist attacks of September 11, 2001
have caused the U.S. Coast Guard, the International Maritime Organization and
the states and local ports to adopt heightened security procedures relating to
ports and vessels. Complying with these procedures, as well as the
implementation of security plans for our vessels required by the Maritime
Transportation Security Act of 2002, have increased our costs of security.

Any
future terrorist attacks could disrupt harbor operations in the ports in which
we operate, lead to, among other things, bodily injury or loss of life, vessel
or other property damage, increased vessel operating costs, including insurance
costs, and the inability to transport oil, petrochemical and commodity chemical
products to or from certain locations. Terrorist attacks, war or other events
beyond our control that adversely affect the distribution, production or
transportation of oil, petrochemical and commodity chemical products to be
shipped by us could entitle our customers to terminate the charters for our
vessels, which would harm our cash flow and our business, which would disrupt
our operations and result in lost revenue. 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.

42

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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 affect our ability to raise capital.

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 ports in the United States,
generally known as maritime cabotage or coastwise trade, is subject to U.S.
laws, including the Jones Act, that restrict maritime cabotage to U.S. flag vessels
qualified to engage in U.S. coastwise trade. Additionally, the Jones Act
restrictions on the provision of maritime cabotage services are subject to
certain exceptions under certain international trade agreements, including the
General Agreement on Trade in Services and the North American Free Trade
Agreement. If maritime cabotage services were included in the General Agreement
on Trade in Services, the North American Free Trade Agreement or other
international trade agreements, or if the restrictions contained in the Jones
Act were otherwise altered, the transportation of maritime cargo between U.S.
ports could be opened to foreign-flag or foreign-manufactured vessels. Because
foreign vessels may have lower construction costs and operate at significantly
lower costs than we do in U.S. markets, this could significantly increase
competition in the coastwise trade, which could have a material adverse effect
on our business, results of operations and financial condition and our ability
to pay interest on, and principal of, our indebtedness.

Our partnership agreement limits our
general partners fiduciary duties to unitholders and restricts the remedies
available to unitholders for actions taken by our general partner that might
otherwise constitute breaches of fiduciary duty.

Our
partnership agreement contains provisions that reduce the standards to which
our general partner would otherwise be held by state fiduciary duty law. For
example, our partnership agreement:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | permits our general partner
  to make a number of decisions in its individual capacity, as opposed to in
  its capacity as our general partner. This entitles our general partner to
  consider only the interests and factors that it desires, and it has no duty
  or obligation to give any consideration to any interest of, or factors
  affecting, us, our affiliates or any limited partner or unitholder. Decisions
  made by our general partner in its individual capacity will be made by its
  sole owner, United States Shipping Master LLC, and not by the board of
  directors of our general partner. Examples include the exercise of its
  limited call right, its rights to transfer or vote the units it owns and its
  determination whether or not to consent to any merger or consolidation of the
  partnership or amendment of the partnership agreement;
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | provides that our general
  partner will not have any liability to us or our unitholders for decisions
  made in its capacity as general partner so long as it acted in good faith,
  meaning that it reasonably believed that the decision is in our best
  interests;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | generally provides that
  affiliated transactions and resolutions of conflicts of interest not approved
  by the conflicts committee of the board of directors of our general partner
  and not involving a vote of unitholders must be on terms no less favorable to
  us than those generally being provided to or available from unrelated third
  parties or be fair and reasonable to us and that, in determining whether a
  transaction or resolution is fair and reasonable, our general partner may
  consider the totality of the relationships between the parties involved,
  including other transactions that may not be particularly advantageous or
  beneficial to us;                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | provides that in resolving
  conflicts of interest, it will be presumed that in making its decision the
  general partner or its conflicts committee acted in good faith, and in any
  proceeding brought by or on behalf of any limited partner or us, the person
  bringing or prosecuting such proceeding will have the burden of overcoming
  such presumption; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | provides that our general
  partner and its officers and directors will not be liable for monetary
  damages to us, our limited partners or assignees for any acts or omissions
  unless there has been a final and non-appealable judgment entered by a court
  of competent jurisdiction determining that the general partner or those other
  persons acted in bad faith or engaged in fraud, willful misconduct or gross
  negligence.                                                                                                                                                                                                                                                                                                                                                                                                                                        

The
Plan contemplates that each of our current and former officers and directors
will be given a full release from all claims arising before the effective date
of the Plan other than claims based upon willful misconduct, intentional fraud,
or criminal conduct as determined by a final order entered by a court of
competent jurisdiction.

43

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Our partnership agreement currently limits,
and our new organizational documents will limit, the ownership of our equity
securities 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 our general partner has adopted a requirement that at least 76%
of our partnership interests must be held by U.S. citizens. Our new
organizational documents will require that at least 77% of our common stock
must be held by U.S. citizens. These requirements may have an adverse impact on
the liquidity or market value of our equity securities, because holders will be
unable to sell equity securities to non-U.S. citizens. Any purported transfer
of equity securities in violation of these provisions will be ineffective to
transfer the equity securities or any voting, dividend or other rights in
respect of the equity securities.

Unitholders may have liability to repay
distributions that were wrongfully distributed to them.

Under
some circumstances, unitholders may have to repay amounts wrongfully returned
or distributed to them. We may not make a distribution to you if the
distribution would cause our liabilities to exceed the fair value of our
assets. Delaware law provides that for a period of three years from the date of
the impermissible distribution, limited partners who received the distribution
and who knew at the time of the distribution that it violated Delaware law will
be liable to the limited partnership for the distribution amount. Purchasers of
units who become limited partners are liable for the obligations of the
transferring limited partner to make contributions to the partnership that are
known to the purchaser at the time it became a limited partner and for unknown
obligations if the liabilities could be determined from the partnership
agreement. Liabilities to partners on account of their partnership interest and
liabilities that are non-recourse to the partnership are not counted for
purposes of determining whether a distribution is permitted.

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, 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 for which the statute of limitations has expired. 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. Effective January 1, 2009,
the Partnership has elected to be treated as a corporation which may impact the
tax treatment of the gain or loss of units sold subsequent to this election.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our
general partner leases approximately 12,700 square feet of office space for our
principal executive office in Edison, New Jersey. The lease expired on May 31,
2009 and is currently in the process of being renewed for an additional
five-year period. Additionally, commencing on January 1, 2006, we leased office
space in New York City for use by our Chairman and Chief Executive Officer at
the time and other personnel. We sublease 75% of the leased space to certain
companies affiliated with Paul Gridley, our former Chairman and Chief Executive
Officer. The lease expires on December 31, 2015. See Item 13. Certain
Relationships and Related Transactions, and Director Independence  New York
Office Sublease.

44

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ITEM 3. LEGAL PROCEEDINGS

We
are a party to routine, marine-related claims, lawsuits and labor arbitrations
arising in the ordinary course of business. All of these claims against us are
substantially mitigated by insurance, subject to deductibles ranging up to $0.2
million per claim. We provide for amounts we expect to pay.

On
August 7, 2006, Product Carriers entered into the Joint Venture to construct and
operate five product tankers. We manage and own a 40% interest in the Joint
Venture and third parties own the remaining 60% interest. In February 2009 the
Partnership received a notice from certain of the Joint Venture Investors:

| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)  | declaring that a Board
  Reduction Event (as such term is defined in the Joint Ventures Limited
  Liability Company Agreement) has occurred and purporting to remove Product
  Carriers, a wholly-owned subsidiary of the Partnership, as the Managing
  Member of the Joint Venture and designating one of the Joint Venture
  Investors as the Managing Member of the Joint Venture, and                                                                                                                                                                                                                                                               
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (ii) | declaring that a Manager
  Termination Event (as such term is defined in that certain Management and
  Operating Agreement, dated as of August 7, 2006, by and among USS Product
  Manager LLC, a wholly-owned subsidiary of the Partnership (Product
  Manager), the Joint Venture and the other parties thereto (the Management
  Agreement)) has occurred and purporting to terminate Product Managers right
  to provide management and operating services under the Management Agreement
  with respect to all vessels owned by the Joint Venture other than the Golden State (the only vessel currently
  being operated by the Joint Venture).

In
addition, the Partnership received a notice from the agent for the lenders to
the Joint Venture asserting events of default under that certain revolving
notes facility agreement with the Joint Venture have occurred and that the
lenders were intending to foreclose on the Golden
Statevessel owned by the Joint Venture that the Partnership is
managing pursuant to the Management Agreement.

In
April 2009 the Partnership commenced a lawsuit (the New York Action) against
the Joint Venture Investors seeking a judgment declaring that:

| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)   | no Board Reduction Event
  has occurred;                                                                                                                                                                                                                                                                                                                                                                                                          
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (ii)  | the purported removal of
  Product Carriers as the Managing Member of the Joint Venture and designating
  one of the Joint Venture Investors as the Managing Member of the Joint
  Venture was unauthorized and invalid and that Product Carriers remains the
  Managing Member of the Joint Venture;                                                                                                                                             
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (iii) | no Manager Termination
  Event has occurred; and                                                                                                                                                                                                                                                                                                                                                                                                  
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (iv)  | the purported termination
  of Product Managers right to provide management and operating services under
  the Management Agreement with respect to all vessels owned by the Joint
  Venture other than the vessel Golden State
  was unauthorized and invalid and that Product Manager retains the right to
  provide management and operating services under the Management Agreement with
  respect to all vessels owned by the Joint Venture.

The
Partnerships lawsuit also sought a declaration that any commencement by the
lenders to the Joint Venture (together with the Joint Venture Investors the Defendants)
of foreclosure proceedings on the Golden
State and the membership interests in the Joint Ventures subsidiary
that owns the vessel was unauthorized and invalid.

Pending
a final determination of the lawsuit, the Partnership filed a motion for a
preliminary injunction seeking to enjoin Defendants from, among other things:

| |       |                                                                                                                                                                                                               
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)   | foreclosing upon the
  vessel Golden State or the
  membership interests in the Joint Ventures subsidiary that owns the vessel;                                                                              
| |       |                                                                                                                                                                                                               
| | (ii)  | interfering with Product
  Carriers functioning as the Managing Member of the Joint Venture; and                                                                                                             
| |       |                                                                                                                                                                                                               
| | (iii) | interfering with Product
  Managers supervision of the operation of the vessel Golden State or the construction or
  operation of the other four vessels currently being constructed for the Joint
  Venture.

45

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The
Partnerships motion was scheduled to be heard on April 30, 2009. Pending such
hearing, the court, with Defendants consent, entered a temporary restraining
order which restrained Defendants from:

| |      |                                                                                                                                                                                                                                                                                         
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)  | foreclosing upon the
  vessel Golden State or the
  membership interests in the Joint Ventures subsidiary that owns the vessel
  except upon five business days prior notice, which notice could not be given
  before May 1, 2009; or                                                 
| |      |                                                                                                                                                                                                                                                                                         
| | (ii) | replacing Product Manager
  as vessel manager of the vessel Golden
  State and the other four vessels currently being constructed for
  the Joint Venture prior to May 7, 2009, with notice of replacement, if any,
  to be given at least five business days prior to such replacement.

The
Defendants counterclaimed for declaratory and injunctive relief and damages,
and cross-moved for a preliminary injunction to be heard at the same time as
our motion.

On
April 29, 2009, in connection with the Bankruptcy Filing, we removed the New
York Action to the District Court for the Southern District of New York and the
litigation was subsequently transferred to the Bankruptcy Court. Also on April
29, 2009, we filed a complaint in the Bankruptcy Court and an Order to Show Cause
and Temporary Restraining Order, bringing on a Motion Pursuant to Sections
362(a) and 105(a) of the Bankruptcy Code for an order (i) issuing a temporary
restraining order and scheduling a preliminary injunction hearing and (ii)
enforcing the automatic stay or, in the alternative, granting a preliminary
injunction (the Motion to Enforce). We asked the Bankruptcy Court for a
temporary restraining order to enjoin the Defendants from taking the actions
that were the subject of the New York Action until the Bankruptcy Court could
determine if such actions violated the automatic stay or, alternatively,
whether a preliminary injunction should be issued against the Defendants.
Pending a hearing on the Motion to Enforce we and the Defendants agreed on the
terms of the temporary restraining order temporarily prohibiting Defendants
from foreclosing on the assets of the Joint Venture or replacing us as manager
of the Joint Ventures vessels. We and the Defendants have reached an agreement
in principle to settle the litigation, subject to completion of definitive
documentation and approval by the Bankruptcy Court, that will result in our
ceasing to be managing member of the Joint Venture and manager of the Joint
Ventures vessels.

See Item 1.
BusinessNew Product Tankers for information regarding the Joint Venture.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

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

Notice and Sell-Down Procedures for Trading in Equity
Securities

On
May 22, 2009, the Bankruptcy Court entered an order (the Trading Order)
granting the Partnerships motion to (a) require beneficial owners of
substantial amounts of the Partnerships common and subordinated units and
general partner interests to provide notice of their holdings and restrict, in
specified circumstances and subject to specified terms and conditions,
acquisitions or dispositions of the Partnerships common and subordinated units
and general partner interests by Substantial Shareholders (as defined below)
(the Equity Notice and Transfer Requirements) and (b) restrict, in specified
circumstances and subject to specified terms and conditions, substantial holders
of claims against us from acquiring or disposing of such claims. The purpose of
the Trading Order is to permit us to preserve the availability of the benefit
of our accrued net operating losses and other tax attributes under Section 382
of the Internal Revenue Code of 1986, as amended (the Code).

Under
the Equity Notice and Transfer Requirements, all Substantial Shareholders
must provide the Partnership, the Bankruptcy Court and other specified persons
advance notice of their intent to buy or sell the Partnerships common or
subordinated units or general partner interest (including options to acquire
such securities, as further specified in the Trading Order) prior to
effectuating any such purchase or sale. A Substantial Shareholder under the
Trading Order is a person or entity that beneficially owns or, as a result of a
transaction, would beneficially own, at least 4.75% of our outstanding common
or subordinated units or general partner interest (including options to acquire
any such securities, as further specified in the Trading Order). The Equity
Notice and Transfer Requirements were requested by us to identify and, where
necessary, restrict potential trades of our common and subordinated units and
general partner interest that could negatively impact our ability to preserve
maximum availability of our accrued net operating losses and other tax
attributes under Section 382 of the Code. Pursuant to the Transfer Order, the
Partnership has 15 business days after notification of a transfer by a
Substantial Shareholder to file any objections with the Bankruptcy Court and
serve notice on such Substantial Shareholder. If we file any objections, the
transfer would not become effective unless approved by a final and
non-appealable order of the Bankruptcy Court. In addition, a person or entity
that is or becomes a Substantial Shareholder must file with the Bankruptcy
Court, and provide us and our counsel with, notification of such status on or
before the later of (a) five days after the effective date of the notice of
entry of the Trading Order or (b) five days after becoming a Substantial
Shareholder.

46

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Market Price of Common Units, Distributions and Related
Unitholder Matters

Under
the proposed plan of reorganization contemplated by the Plan Term Sheet, our
existing and outstanding common units, subordinated units and general
partnership interests will be cancelled without the payment of any amount to
the holders thereof. Accordingly, our outstanding common units have no value.

Prior
to October 29, 2004, our equity securities were not publicly traded. Beginning
on October 29, 2004, our common units were listed on the New York Stock
Exchange (NYSE) under the symbol USS until November 5, 2008 when our stock
was suspended from trading on the NYSE because the Partnership had fallen below
the NYSEs continued listing standard regarding average global market
capitalization over a consecutive 30 trading day period of not less than $25
million, which is the minimum threshold for listing. Effective November 6,
2008, the Partnerships common units are trading on the OTC Pink Sheets under
the symbol USSPZ.

As
of March 31, 2009, there were 11,353,808 outstanding publicly-traded common
units. As of March 31, 2009, there were 55 holders of record of our common
units, representing approximately 10,000 beneficial owners.

The
following table sets forth, for the periods indicated, the high and low sales
prices per common unit as reported on the NYSE for the period from January 1,
2007 through November 5, 2008, and the high and low bid price per common unit
as reported on the OTC Pink Sheets for the period from November 6, 2008 through
December 31, 2008, and the amount of cash distributions declared per common
unit:

|                                         |  |             |       |                        |   |                       |  |                                          |      |  |   |      | 
|---------------------------------------- |  | ----------- | ----- | ---------------------- | - | --------------------- |  | ---------------------------------------- | ---- |  | - | ---- | 
|                                         |  | Price Range |       | Cash Distributions (1) |  
|                                         |  |             |       |                        |  
|                                         |  | High        |       | Low                    |   | Common 
  Unitholders |  | Subordinated or 
  General Partner Units |     
|                                         |  |             |       |                        |   |                       |  |                                          |     
|2008                                     |  |             |       |                        |   |                       |  |                                          |      |  |   |      | 
|                                        
|Fourth Quarter Ended
  December 31, 2008 |  | $           | 1.47  |                        | $ | .05                   |  | $                                        | 0    |  | $ | 0    | 
|Third Quarter Ended September
  30, 2008 |  | $           | 4.28  |                        | $ | 1.37                  |  | $                                        | 0    |  | $ | 0    | 
|Second Quarter Ended June
  30, 2008     |  | $           | 13.14 |                        | $ | 1.73                  |  | $                                        | 0.45 |  | $ | 0    | 
|First Quarter Ended March
  31, 2008     |  | $           | 15.25 |                        | $ | 9.41                  |  | $                                        | 0.45 |  | $ | 0    | 
|                                         |  |             |       |                        |   |                       |  |                                          |      |  |   |      | 
|2007                                     |  |             |       |                        |   |                       |  |                                          |      |  |   |      | 
|                                        
|Fourth Quarter Ended
  December 31, 2007 |  | $           | 20.08 |                        | $ | 8.00                  |  | $                                        | 0.45 |  | $ | 0    | 
|Third Quarter Ended
  September 30, 2007 |  | $           | 22.45 |                        | $ | 16.25                 |  | $                                        | 0.45 |  | $ | 0.45 | 
|Second Quarter Ended June
  30, 2007     |  | $           | 21.99 |                        | $ | 17.76                 |  | $                                        | 0.45 |  | $ | 0.45 | 
|First Quarter Ended March
  31, 2007     |  | $           | 21.00 |                        | $ | 18.15                 |  | $                                        | 0.45 |  | $ | 0.45 | 

(1) 
Distributions declared and made in a quarter are in respect of operations for
the prior quarter.

Distributions
are declared and paid in a quarter based upon the prior quarters operating
results. The aggregate amount of distributions declared in respect of the years
ended December 31, 2008 and 2007 on common units, class B units (prior to their
conversion to common units), the general partner interests, and subordinated
units totaled $10.2 million and $30.2 million, respectively.

47

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Section
7704 of the Internal Revenue Code provides that publicly traded partnerships
will, as a general rule, be taxed as corporations. However, an exception,
referred to as the Qualifying Income Exception, exists with respect to
publicly traded partnerships that generate 90% or more of their gross income
for every taxable year from qualifying income. Qualifying income includes
income and gains derived from the transportation, storage and processing of
crude oil, natural gas and products thereof. Other types of qualifying income
include interest (other than from a financial business), dividends, gains from
the sale of real property and gains from the sale or other disposition of
capital assets held for the production of income that otherwise constitutes
qualifying income.

Prior
to January 1, 2009, we were taxed as a partnership, rather than a corporation,
because we were a publicly traded partnership that generated 90% or more of our
gross income for every taxable year from qualifying income. However, due to
the change in the mix of our products and the resultant decline in qualifying
income, we determined that it was unlikely that we would be able to meet this
requirement beginning in 2009 and therefore effective January 1, 2009, the Partnership
elected to be taxed as a corporation.

Under
the terms of our Partnership Agreement, we are required to distribute to
unitholders within 45 days after the end of each fiscal quarter all available
cash to our unitholders. Available cash generally means, for each fiscal
quarter, all cash on hand at the end of the quarter:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | less the amount of cash
  reserves established by our general partner to:                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                         | provide for the proper
  conduct of our business (including reserves for future capital expenditures,
  payments of interest on, and principal of, our indebtedness and for our
  anticipated credit needs);
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                         | comply with applicable
  law, any of our debt instruments or other agreements; or                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                         | provide funds for
  distributions to our unitholders and to our general partner for any one or
  more of the next four quarters;                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | plus all cash on hand on
  the date of determination of available cash for the quarter resulting from
  working capital borrowings made after the end of the quarter for which the
  determination is being made. Working capital borrowings are generally
  borrowings that will be made under our credit facility and in all cases are
  used solely for working capital purposes or to pay distributions to partners.

In
light of the liquidity pressures the Partnership started to face in late 2007,
the Partnership ceased paying a distribution on its subordinated units and
general partner units beginning with the fourth quarter of 2007 and ceased
paying a distribution on its common units beginning with the second quarter of
2008. Under the terms of our senior credit facility the Partnership is no
longer permitted to make distributions to any of its unitholders until all
outstanding borrowings under the senior credit facility are repaid.

Securities Authorized for Issuance Under Equity Compensation
Plans

|                                                           |  |                                                                                                         |   |                                                                                         |  |                                                                                                      |  |  |         | 
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------- | - | --------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- |  |  | ------- | 
|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 | 
|                                                           |  |                                                                                                         |   |                                                                                         |  |                                                                                                      | 
|Equity compensation plans approved by security holders     |  |                                                                                                         |  |                                                                                         |  |                                                                                                     |  |  | 919,737 | 
|Equity compensation plans not approved by security holders |  |                                                                                                         |  |                                                                                         |  |                                                                                                     |  |  |        | 
|                                                           |  |                                                                                                         |   |                                                                                         |  |                                                                                                      |  |  |         | 
|Total as of December 31, 2008                              |  |                                                                                                         |  |                                                                                         |  |                                                                                                     |  |  | 919,737 | 
|                                                           |  |                                                                                                         |   |                                                                                         |  |                                                                                                      |  |  |         | 

48

---



Unit Price Performance

The
following Performance Graph and related information shall not be deemed to be
filed with the Securities and Exchange Commission, nor shall such information
be incorporated by reference into any future filing under the Securities Act of
1933 or the Securities Exchange Act of 1934, each as amended, except to the
extent that we specifically incorporate it by reference into such filing.

The
following performance graph compares the performance of our common units with
the performance of the Dow Jones Industrial Average and the Alerian MLP Index
during the period from our initial public offering on October 29, 2004 through
December 31, 2008. The Alerian MLP Index is a composite of fifty energy master
limited partnerships calculated by Standard & Poors using a float-adjusted
market capitalization methodology. The graph plots the changes in value of an initial
$100 investment in our common units over the indicated time period, assuming
all dividends are reinvested.

(LINE GRAPH)

ITEM 6. SELECTED FINANCIAL DATA

The
following table sets forth selected historical financial data and operating
data of U.S. Shipping Partners L.P. and its predecessors. On November 3, 2004,
United States Shipping Master LLC (Shipping Master), which currently
indirectly owns the 2% general partner interest and directly owns an
approximately 38% limited partner interest in us and owns and controls our
general partner, contributed substantially all its assets and liabilities
constituting its business to us in connection with our initial public offering
of common units. Therefore, our historical financial and operating data presented
below are for Shipping Master for the period from January 1, 2004 through
November 3, 2004. The following table should be read in conjunction with the
consolidated financial statements, including notes thereto, in Item 8 of this
report, and Managements Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 of this report.

The
following table presents a non-GAAP financial measure, EBITDA, which we use in
our business. This measure is not calculated or presented in accordance with
United States Generally Accepted Accounting Principles (GAAP). We explain
this measure below and reconcile it to its most directly comparable financial
measure calculated and presented in accordance with GAAP under the heading
--Non-GAAP Financial Measure below.

49

---



The
following table summarizes our results of operations for the periods presented
(in thousands, except per unit and operating data):

|                                                                    |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |   |         |   |   |         |  
|------------------------------------------------------------------- |  | -------------------------------- | -------- | -------------------------------- | - | -------------------------------- | - | -------------------------------- | -------- | -------------------------------- | - | ------- | - | - | ------- | -
|                                                                    |  | U.S. Shipping Partners L.P.      |         
|                                                                    |  |                                  |         
|                                                                    |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |  
|                                                                    |  | Year Ended
  December 31,
  2008 |          | Year Ended
  December 31,
  2007 |   | Year Ended
  December 31,
  2006 |   | Year Ended
  December 31,
  2005 |          | Year Ended
  December 31,
  2004 |  
|                                                                    |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |  
|Voyage revenue                                                      |  | $                                | 196,440  |                                  | $ | 176,729                          |   | $                                | 150,133  |                                  | $ | 131,534 |   | $ | 122,355 |  
|Vessel operating expenses                                           |  |                                  | 65,611   |                                  |   | 65,656                           |   |                                  | 59,493   |                                  |   | 47,986  |   |   | 47,119  |  
|Voyage expenses                                                     |  |                                  | 69,906   |                                  |   | 35,824                           |   |                                  | 27,506   |                                  |   | 24,203  |   |   | 20,415  |  
|General and administrative expenses                                 |  |                                  | 21,762   |                                  |   | 15,533                           |   |                                  | 13,539   |                                  |   | 10,826  |   |   | 10,321  |  
|Depreciation and amortization                                       |  |                                  | 38,148   |                                  |   | 37,795                           |   |                                  | 31,305   |                                  |   | 25,704  |   |   | 23,945  |  
|Loss on sale of vessels                                             |  |                                  | 1,650    |                                  |   |                                 |   |                                  |         |                                  |   |        |   |   |        |  
|Impairment charges                                                  |  |                                  | 80,870   |                                  |   |                                 |   |                                  |         |                                  |   |        |   |   |        |  
|Other expense (income)                                              |  |                                  | 1,449    |                                  |   | (3,486                           | ) |                                  |         |                                  |   |        |   |   |        |  
|                                                                    |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |   |         |   |   |         |  
|Operating (loss) income                                             |  |                                  | (82,956  | )                                |   | 25,407                           |   |                                  | 18,290   |                                  |   | 22,815  |   |   | 20,555  |  
|Interest expense                                                    |  |                                  | 45,191   |                                  |   | 30,881                           |   |                                  | 16,634   |                                  |   | 6,407   |   |   | 9,960   |  
|Interest income                                                     |  |                                  | (2,063   | )                                |   | (9,631                           | ) |                                  | (5,413   | )                                |   | (1,031  | ) |   | (369    | )
|Loss on debt extinguishment                                         |  |                                  |         |                                  |   |                                 |   |                                  | 2,451    |                                  |   |        |   |   | 6,397   |  
|Loss (gain) on derivative financial instruments                     |  |                                  | 7,231    |                                  |   | (199                             | ) |                                  | (1,913   | )                                |   |        |   |   |        |  
|                                                                    |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |   |         |   |   |         |  
|(Loss) income before income taxes and minority
  interest           |  |                                  | (133,315 | )                                |   | 4,356                            |   |                                  | 6,531    |                                  |   | 17,439  |   |   | 4,567   |  
|(Benefit) provision for income taxes                                |  |                                  | (851     | )                                |   | (94                              | ) |                                  | 1,077    |                                  |   | (640    | ) |   | 3,119   |  
|                                                                    |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |   |         |   |   |         |  
|(Loss) income before minority interest                              |  |                                  | (132,464 | )                                |   | 4,450                            |   |                                  | 5,454    |                                  |   | 18,079  |   |   | 1,448   |  
|Noncontrolling interest in Joint Venture loss (gain)                |  |                                  | 787      |                                  |   | (366                             | ) |                                  | (421     | )                                |   |        |   |   |        |  
|                                                                    |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |   |         |   |   |         |  
|Net (loss) income                                                   |  | $                                | (133,251 | )                                | $ | 4,816                            |   | $                                | 5,875    |                                  | $ | 18,079  |   | $ | 1,448   |  
|                                                                    |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |   |         |   |   |         |  
|                                                                    |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |   |         |   |   |         |  
|Net (loss) income per unit -basic and diluted                       |  | $                                | (7.16    | )                                | $ | 0.26                             |   | $                                | 0.37     |                                  | $ | 1.28    |   | $ | 0.18    |  
|                                                                    |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |   |         |   |   |         |  
|Balance Sheet Data                                                  |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |   |         |   |   |         |  
|Vessels and equipment, net                                          |  | $                                | 704,195  |                                  | $ | 489,464                          |   | $                                | 349,897  |                                  | $ | 245,062 |   | $ | 201,923 |  
|Total assets                                                        |  | $                                | 760,435  |                                  | $ | 683,028                          |   | $                                | 605,424  |                                  | $ | 276,222 |   | $ | 248,606 |  
|Total debt                                                          |  | $                                | 610,295  |                                  | $ | 460,027                          |   | $                                | 371,042  |                                  | $ | 128,037 |   | $ | 99,625  |  
|Partners capital/members equity                                   |  | $                                | (12,308  | )                                | $ | 131,033                          |   | $                                | 167,077  |                                  | $ | 119,868 |   | $ | 122,786 |  
|                                                                   
|Cash Flow Data                                                      |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |   |         |   |   |         |  
|Net cash provided by (used in):                                     |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |   |         |   |   |         |  
|Operating activities                                                |  | $                                | 13,148   |                                  | $ | 28,039                           |   | $                                | 18,203   |                                  | $ | 30,609  |   | $ | 27,184  |  
|Investing activities                                                |  | $                                | (217,888 | )                                | $ | (80,567                          | ) | $                                | (307,840 | )                                | $ | (56,052 | ) | $ | (34,541 | )
|Financing activities                                                |  | $                                | 203,735  |                                  | $ | 71,446                           |   | $                                | 282,323  |                                  | $ | 5,185   |   | $ | 29,050  |  
|                                                                    |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |   |         |   |   |         |  
|Other Financial Data                                                |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |   |         |   |   |         |  
|EBITDA (1)                                                          |  | $                                | (52,826  | )                                | $ | 63,767                           |   | $                                | 49,478   |                                  | $ | 48,519  |   | $ | 38,103  |  
|Adjusted EBITDA (1)                                                 |  | $                                | 29,694   |                                  | $ | 63,767                           |   | $                                | 49,478   |                                  | $ | 48,519  |   | $ | 38,103  |  
|                                                                    |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |   |         |   |   |         |  
|Capital expenditures (2)                                            |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |   |         |   |   |         |  
|Maintenance                                                         |  | $                                | 9,673    |                                  | $ | 11,155                           |   | $                                | 30,396   |                                  | $ | 45,133  |   | $ |        |  
|Expansion                                                           |  |                                  | 330,841  |                                  |   | 174,775                          |   |                                  | 105,427  |                                  |   | 23,710  |   |   | 40,930  |  
|                                                                    |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |   |         |   |   |         |  
|Total Capital Expenditures                                          |  | $                                | 340,514  |                                  | $ | 185,930                          |   | $                                | 135,823  |                                  | $ | 68,843  |   | $ | 40,930  |  
|                                                                    |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |   |         |   |   |         |  
|Distributions declared per common unit in respect of the period (3) |  | $                                | 0.45     |                                  | $ | 1.80                             |   | $                                | 1.80     |                                  | $ | 1.80    |   | $ | 0.2885  |  
|                                                                   
|Operating Data (4)                                                  |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |   |         |   |   |         |  
|Number of vessels                                                   |  |                                  | 11       |                                  |   | 11                               |   |                                  | 10       |                                  |   | 9       |   |   | 8       |  
|Total barrel carrying capacity (in thousands at period end)         |  |                                  | 2,847    |                                  |   | 3,252                            |   |                                  | 3,112    |                                  |   | 2,974   |   |   | 2,735   |  
|Total vessel days (5)                                               |  |                                  | 4,130    |                                  |   | 3,834                            |   |                                  | 3,490    |                                  |   | 2,999   |   |   | 2,810   |  
|Days worked (6)                                                     |  |                                  | 3,756    |                                  |   | 3,585                            |   |                                  | 3,233    |                                  |   | 2,852   |   |   | 2,776   |  
|Drydocking days (7)                                                 |  |                                  | 135      |                                  |   | 146                              |   |                                  | 219      |                                  |   | 132     |   |   |        |  
|Net utilization (8)                                                 |  |                                  | 91       | %                                |   | 94                               | % |                                  | 93       | %                                |   | 95      | % |   | 99      | %
|Average Daily Time Charter                                          |  |                                  |          |                                  |   |                                  |   |                                  |          |                                  |   |         |   |   |         |  
|Equivalent Rate (9) (10)                                            |  | $                                | 34,687   |                                  | $ | 39,504                           |   | $                                | 37,928   |                                  | $ | 37,631  |   | $ | 35,500  |  

50

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|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)  | See
  Non-GAAP Financial Measure below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(2)  | We define
  maintenance capital expenditures as capital expenditures required to
  maintain, over the long term, the operating capacity of our fleet, and
  expansion capital expenditures as those capital expenditures that increase,
  over the long term, the operating capacity of our fleet. Examples of
  maintenance capital expenditures include costs related to drydocking a
  vessel, retrofitting an existing vessel or acquiring a new vessel to the
  extent such expenditures maintain the operating capacity of our fleet.
  Expenditures made in connection with the acquisition of the Houston and the Sea Venturewere considered maintenance
  capital expenditures as they were made to replace capacity scheduled to phase
  out under OPA 90. Generally, expenditures for construction of tank vessels in
  progress are not included as capital expenditures until such vessels are
  completed. Capital expenditures associated with constructing or acquiring a
  new vessel, which increase the operating capacity of our fleet over the long
  term, whether through increasing our aggregate barrel-carrying capacity,
  improving the operational performance of a vessel or otherwise, are
  classified as expansion capital expenditures. Drydocking expenditures are more
  extensive in nature than normal routine maintenance and, therefore, are
  capitalized and are usually amortized over thirty to sixty months. For more
  information regarding our accounting treatment of drydocking expenditures,
  please read Managements Discussion and Analysis of Financial Condition and
  Results of OperationsCritical Accounting PoliciesDepreciation and
  Amortization in Item 7 of this report.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(3)  | For 2004,
  represents distributions made in respect of the period from November 3, 2004,
  the date we closed our initial public offering, through December 31, 2004. In
  2008 we only made a distribution in respect of the first quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(4)  | For 2005,
  operating data excludes the Sea Venture,
  as the vessel was acquired on November 28, 2005 but was not placed in
  operation until June 2006 due to drydocking requirements. In 2008, operating
  data reflects the addition of one ATB that commenced service in August and a
  second ATB that commenced service in November, while one ITB was sold in
  November and a second ITB was sold in December.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(5)  | Total
  vessel days are equal to the number of calendar days in the period
  multiplied by the total number of vessels operating or in drydock during that
  period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(6)  | Days
  worked are equal to total vessel days less drydocking days and days
  off-hire. Does not include 61 days of unscheduled off-hire for the full year
  2007 that were required to repair damages the ITB Baltimoresustained during Hurricane Dean while in the
  shipyard after completing its regularly scheduled drydocking.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(7)  | Drydocking
  days are days designated for the inspection and survey of vessels, and
  resulting maintenance work, as required by the U.S. Coast Guard and the
  American Bureau of Shipping to maintain the vessels qualification to work in
  the U.S. coastwise trade. Both domestic (U.S. Coast Guard) and international
  (International Maritime Organization) regulatory bodies require that our ITB
  and ATB units be drydocked for major repair twice every five years (once
  every five years with a waiver from the U.S. Coast Guard and a mid-period
  underwater survey in lieu of drydocking), and our parcel tankers and the Houstonbe drydocked twice every five
  years. Drydocking days also include unscheduled instances where vessels may
  have to be drydocked in the event of accidents or other unforeseen damage.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(8)  | Net
  utilization is a percentage equal to the total number of days worked by a
  vessel or group of vessels during a defined period, divided by the number of
  calendar days in the period multiplied by the number of vessels operating in
  the period. Net utilization is adversely impacted by drydocking, scheduled
  and unscheduled maintenance and idle time not paid for by the customer. Does
  not include 61 days of unscheduled off-hire for the full year 2007 that were
  required to repair damages the ITB
  Baltimoresustained during Hurricane Dean while in the shipyard
  after completing its regularly scheduled drydocking.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(9)  | Average
  Daily Time Charter Equivalent, or TCE, equals the net voyage revenue earned
  by a vessel or group of vessels during a defined period, divided by the total
  number of days actually worked by that vessel or group of vessels during that
  period. Net voyage revenue is calculated by subtracting voyage expenses from
  voyage revenue. We principally use net voyage revenue, rather than voyage
  revenue, when comparing performance in different periods. We derive our
  voyage revenue from time charters, contracts of affreightment, consecutive
  voyage charters and spot charters, which are described in more detail in Item
  7. Managements Discussion and Analysis of Financial Condition and Results
  of Operations. One of the principal distinctions among these types of
  contracts is whether we 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. 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.                                                                                                                                                                                                                                                                                 
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(10) | Since
  November 6, 2003 for the Chemical Pioneer.From May 6, 2003, the date we acquired the vessel, until July 5,
  2003, the Chemical Pioneerwas
  bareboat chartered to a third party and from July 6, 2003 to November 5, 2003
  the Chemical Pioneerwas in
  drydock. The 2003 operating data excludes the bareboat charter revenue. Since
  April 28, 2004, the date of acquisition for the Charleston. Since October 13, 2005 for the Houston,the date it was placed in
  service. Since June 9, 2006 for the Sea
  Venture,the date it was placed in service. From November 28,
  2005, the date we acquired the vessel, until June 9, 2006, the Sea Venture was in drydock. Since July
  1, 2007 for the ATB Freeport,
  the date it was placed in service. Since August 2008 for the ATB Galveston, the date it was placed in
  service. Since November 2008 for the ATB
  Brownsville, the date it was placed in service. The ITB Jacksonville and the ITB Groton were sold in the fourth
  quarter of 2008. The 2008 and 2007 calculations of average time charter
  equivalent rate do not include approximately one hundred twenty six days
  worked by the ITB Philadelphia
  and the ITB Mobile and eighteen
  days worked by the ITB Philadelphia,
  respectively, for which no net voyage revenue was recorded in 2008 and 2007,
  respectively, related to incomplete grain voyages.                                                                                                                                                                                                                                                                                                                                       

Non-GAAP Financial Measure

EBITDA
and adjusted EBITDA are used as supplemental financial measures by management
and by external users of our financial statements, such as investors and our
banks, to assess:

51

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| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the financial performance of our assets without regard to
  financing methods, capital structures or historical cost basis;                                                                               
| |   |                                                                                                                                                                                                           
| |  | the ability of our assets to generate cash sufficient to pay
  interest on our indebtedness and to make distributions to our partners;                                                                    
| |   |                                                                                                                                                                                                           
| |  | our operating performance and return on invested capital as
  compared to those of other companies in the marine transportation business,
  without regard to financing methods and capital structure; and
| |   |                                                                                                                                                                                                           
| |  | our compliance with certain financial covenants included in our
  debt agreements.                                                                                                                        

EBITDA
and adjusted EBITDA should not be considered an alternative to net income,
operating income, cash flow from operating activities or any other measure of
financial performance or liquidity presented in accordance with GAAP. EBITDA
and adjusted EBITDA have limitations as an analytical tool, and it should not
be considered in isolation or as a substitute for analysis of our results as
reported under GAAP. Some of these limitations include:

| |   |                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | EBITDA and adjusted EBITDA
  do not reflect our capital expenditures or future requirements for capital
  expenditures or contractual commitments;                                                                                                        
| |   |                                                                                                                                                                                                                                                           
| |  | EBITDA and adjusted EBITDA
  do not reflect changes in, or cash requirements for, our working capital
  needs;                                                                                                                                            
| |   |                                                                                                                                                                                                                                                           
| |  | EBITDA and adjusted EBITDA
  do not reflect the significant interest expense, or the cash requirement
  necessary to service interest or principal payments, on our debts;                                                                                
| |   |                                                                                                                                                                                                                                                           
| |  | Although depreciation and
  amortization are non-cash charges, the assets being depreciated and amortized
  will often have to be replaced in the future, and EBITDA and adjusted EBITDA
  do not reflect any cash requirements for such replacements; and
| |   |                                                                                                                                                                                                                                                           
| |  | Other companies in our industry
  may calculate EBITDA and adjusted EBITDA differently than we do, limiting its
  usefulness as a comparative measure.                                                                                                    

52

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The
following table sets forth a reconciliation of EBITDA and adjusted EBITDA to
net income and net cash provided by operating activities:

|                                                                             |  |                              |          |                              |   |                              |   |                              |         |                              |   |        |   |   |        |  
|---------------------------------------------------------------------------- |  | ---------------------------- | -------- | ---------------------------- | - | ---------------------------- | - | ---------------------------- | ------- | ---------------------------- | - | ------ | - | - | ------ | -
|                                                                             |  | U.S. Shipping Partners L.P.  |         
|                                                                             |  |                              |         
|                                                                             |  | Year Ended
  Dec. 31,
  2008 |          | Year Ended
  Dec. 31,
  2007 |   | Year Ended
  Dec. 31,
  2006 |   | Year Ended
  Dec. 31,
  2005 |         | Year Ended
  Dec. 31,
  2004 |  
|                                                                             |  |                              |          |                              |   |                              |   |                              |         |                              |  
|                                                                            
|Reconciliation of EBITDA to Net income:                                  |  |                              |          |                              |   |                              |   |                              |         |                              |   |        |   |   |        |  
|                                                                            
|Net (loss) income                                                            |  | $                            | (133,251 | )                            | $ | 4,816                        |   | $                            | 5,875   |                              | $ | 18,079 |   | $ | 1,448  |  
|Depreciation and amortization                                                |  |                              | 38,148   |                              |   | 37,795                       |   |                              | 31,305  |                              |   | 25,704 |   |   | 23,945 |  
|Interest expense                                                             |  |                              | 45,191   |                              |   | 30,881                       |   |                              | 16,634  |                              |   | 6,407  |   |   | 9,960  |  
|(Benefit) provision for income taxes                                         |  |                              | (851     | )                            |   | (94                          | ) |                              | 1,077   |                              |   | (640   | ) |   | 3,119  |  
|Interest income                                                              |  |                              | (2,063   | )                            |   | (9,631                       | ) |                              | (5,413  | )                            |   | (1,031 | ) |   | (369   | )
|                                                                             |  |                              |          |                              |   |                              |   |                              |         |                              |   |        |   |   |        |  
|EBITDA                                                                       |  | $                            | (52,826  | )                            | $ | 63,767                       |   | $                            | 49,478  |                              | $ | 48,519 |   | $ | 38,103 |  
|                                                                             |  |                              |          |                              |   |                              |   |                              |         |                              |   |        |   |   |        |  
|                                                                             |  |                              |          |                              |   |                              |   |                              |         |                              |   |        |   |   |        |  
|Loss on sale of vessels                                                      |  |                              | 1,650    |                              |   |                             |   |                              |        |                              |   |       |   |   |       |  
|Impairment charges                                                           |  |                              | 80,870   |                              |   |                             |   |                              |        |                              |   |       |   |   |       |  
|                                                                             |  |                              |          |                              |   |                              |   |                              |         |                              |   |        |   |   |        |  
|Adjusted EBITDA                                                              |  | $                            | 29,694   |                              | $ | 63,767                       |   | $                            | 49,478  |                              | $ | 48,519 |   | $ | 38,103 |  
|                                                                             |  |                              |          |                              |   |                              |   |                              |         |                              |   |        |   |   |        |  
|                                                                             |  |                              |          |                              |   |                              |   |                              |         |                              |   |        |   |   |        |  
|Reconciliation of EBITDA to Net cash provided by operating
  activities: |  |                              |          |                              |   |                              |   |                              |         |                              |   |        |   |   |        |  
|Net cash provided by operating activities                                    |  | $                            | 13,148   |                              | $ | 28,039                       |   | $                            | 18,203  |                              | $ | 30,609 |   | $ | 27,184 |  
|Payment of drydocking expenditures                                           |  |                              | 9,696    |                              |   | 14,122                       |   |                              | 31,082  |                              |   | 8,930  |   |   |       |  
|Interest expense, excluding deferred financing cost amortization             |  |                              | 45,191   |                              |   | 29,159                       |   |                              | 15,464  |                              |   | 5,477  |   |   | 9,160  |  
|(Decrease) increase in working capital                                       |  |                              | (113,763 | )                            |   | (7,761                       | ) |                              | (15,068 | )                            |   | 2,646  |   |   | 8,139  |  
|Loss on debt extinguishment                                                  |  |                              |         |                              |   |                             |   |                              | (2,451  | )                            |   |       |   |   | (6,397 | )
|(Loss) gain on derivative financial instruments                              |  |                              | (7,231   | )                            |   | 199                          |   |                              | 1,913   |                              |   |       |   |   |       |  
|Income taxes paid                                                            |  |                              | 133      |                              |   | 9                            |   |                              | 335     |                              |   | 857    |   |   | 17     |  
|                                                                             |  |                              |          |                              |   |                              |   |                              |         |                              |   |        |   |   |        |  
|EBITDA                                                                       |  | $                            | (52,826  | )                            | $ | 63,767                       |   | $                            | 49,478  |                              | $ | 48,519 |   | $ | 38,103 |  
|                                                                             |  |                              |          |                              |   |                              |   |                              |         |                              |   |        |   |   |        |  
|                                                                             |  |                              |          |                              |   |                              |   |                              |         |                              |   |        |   |   |        |  
|Loss on sale of vessels                                                      |  | $                            | 1,650    |                              | $ |                             |   | $                            |        |                              | $ |       |   | $ |       |  
|Impairment charges                                                           |  |                              | 80,870   |                              |   |                             |   |                              |        |                              |   |       |   |   |       |  
|                                                                             |  |                              |          |                              |   |                              |   |                              |         |                              |   |        |   |   |        |  
|Adjusted EBITDA                                                              |  | $                            | 29,694   |                              | $ | 63,767                       |   | $                            | 49,478  |                              | $ | 48,519 |   | $ | 38,103 |  
|                                                                             |  |                              |          |                              |   |                              |   |                              |         |                              |   |        |   |   |        |  

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 U.S. Shipping Partners L.P, and should be read in
conjunction with our historical consolidated financial statements and notes
thereto included elsewhere in this report.

Overview

Proceedings Under Chapter
11 of the Bankruptcy Code

On
April 29, 2009 (the Commencement Date), U.S. Shipping Partners L.P., together
with all of its wholly-owned subsidiaries, US Shipping General Partner LLC, its
general partner (USSGP), and USS Vessel Management LLC, a wholly-owned
subsidiary of USSGP, filed voluntary petitions for reorganization relief under
Chapter 11 of Title 11 of the United States Bankruptcy Code (the Bankruptcy
Code) in the United States Bankruptcy Court for the Southern District of New
York (the Bankruptcy Court). The chapter 11 cases are being jointly
administered under the caption In re U.S. Shipping Partners L.P. et al., Case
No. 09-12711 (RDD) (the Bankruptcy Cases). We will continue to manage our
properties and operate our businesses as debtors-in-possession under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code and the orders of the Bankruptcy Court.

53

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The
bankruptcy filing was made with a pre-arranged restructuring plan with the
support of a substantial majority of our secured lenders and noteholders.
Effective April 29, 2009, we entered into a Plan Support Agreement with the
holders of (i) in excess of two-thirds of the amounts (including without
limitation in respect of the termination obligations under our interest rate
swaps) due under our Third Amended and Restated Credit Agreement, dated as of
August 7, 2006, as amended, by and among U.S. Shipping Partners, certain of our
subsidiaries, Canadian Imperial Bank of Commerce, as administrative agent, and
the lenders and other agents party thereto (the Credit Agreement and the
lenders thereunder the Senior Secured Lenders) and (ii) approximately 70% of
the amounts due in respect of our 13% Senior Secured Notes due 2014 (the
Second Lien Notes).

The
parties to the Plan Support Agreement have agreed to support a plan of
reorganization for the Partnership (the Plan) on the terms and conditions set
forth in the Plan Term Sheet attached as Exhibit A to the Plan Support
Agreement. They have also agreed not to support, directly or indirectly, any
other plan, in exchange for our agreement to implement all steps necessary to
solicit the requisite acceptances of the Plan and obtain from the Bankruptcy
Court an order confirming the Plan substantially in accordance with the terms
of the Plan Support Agreement. The Plan Support Agreement may be terminated
under certain circumstances, including in the event that the Plan and related
disclosure statement are not approved by certain deadlines, the Plan is not
consummated within a certain period of time after its filing with the
Bankruptcy Court, a party materially breaches the Plan Support Agreement, the
chapter 11 cases are converted to cases under chapter 7 of the Bankruptcy Code
or the Bankruptcy Court grants relief that is inconsistent with the Plan Support
Agreement or the Plan Term Sheet.

Under
the proposed plan of reorganization contemplated by the Plan Term Sheet:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Senior Secured Lenders
  will receive (i) new term loan notes in an aggregate principal amount equal
  to approximately $332.6 million plus an amount equal to the termination
  obligation under our interest rate swaps and (ii) fifty percent (50%) of the
  common stock of a reorganized U.S. Shipping Partners, which will be converted
  to a corporation (Reorganized USSP), before giving effect to the common
  stock to be issued pursuant to a management equity plan described below,
  provided that Senior Secured Lenders that are not U.S. Citizens for U.S.
  coastwise trade law purposes will receive a combination of common stock and warrants
  to purchase common stock. The new term loan notes will:

| |  |   |                                                                                                                                                                                                                                                                                                               
| |  | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | bear interest at a rate
  equal to, at our option, (i) LIBOR plus 5%, subject to a 2% LIBOR floor or
  (ii) alternate base rate plus 4%;                                                                                                                                                                      
| |  |   |                                                                                                                                                                                                                                                                                                               
| |  |  | mature on August 7, 2013;                                                                                                                                                                                                                                                                                     
| |  |   |                                                                                                                                                                                                                                                                                                               
| |  |  | amortize at the rate of 1%
  per year beginning in the first full year following our emergence from
  bankruptcy;                                                                                                                                                                                             
| |  |   |                                                                                                                                                                                                                                                                                                               
| |  |  | be mandatorily prepaid to
  the extent of excess cash flow (as defined in the Plan Term Sheet) once we
  have achieved a $30 million cash balance in the first year following our
  emergence from bankruptcy and a $20 million (subject to adjustment under
  certain circumstances) cash balance thereafter;
| |  |   |                                                                                                                                                                                                                                                                                                               
| |  |  | be secured by substantially
  all our assets; and                                                                                                                                                                                                                                                             
| |  |   |                                                                                                                                                                                                                                                                                                               
| |  |  | be subject to certain
  customary covenants, including without limitation an interest coverage test
  (EBITDA/net interest) and a debt to EBITDA coverage ratio, each to be
  determined.                                                                                                                     

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The holders of the Second
  Lien Notes will receive fifty percent (50%) of the common stock of Reorganized
  USSP, before giving effect to the common stock to be issued pursuant to a
  management equity plan described below, provided that holders of the Second
  Lien Notes that are not U.S. Citizens for U.S. coastwise trade law purposes
  will receive a combination of common stock and warrants to purchase common
  stock. The Second Lien Notes will be cancelled.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | In no event will persons
  who are not U.S. Citizens for U.S. coastwise trade law purposes be issued
  common stock of Reorganized USSP representing in aggregate more than 23% of
  the common stock to be outstanding on the date we emerge from bankruptcy.                                                                                                                                                                                                                   

54

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Reorganized USSP will
  adopt a management equity plan providing for the issuance to management of
  10% of the outstanding common stock of Reorganized USSP. Five percent (5%) of
  such equity will be issued to management at the time we emerge from
  bankruptcy, with 25% vesting immediately and an additional 25% vesting on the
  first, second and third anniversaries of our emergence from bankruptcy. The
  remaining five percent (5%) available under the management equity plan will
  be issuable from time to time as determined by the board of directors of
  Reorganized USSP.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | The warrants to be issued
  to the persons who are not U.S. Citizens for U.S. coastwise trade law
  purposes will have an exercise price of $0.001 per share, will expire
  December 31, 2029 and may only be exercised by persons who are U.S. Citizens
  for U.S. coastwise trade law purposes.                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Our existing and
  outstanding common units, subordinated units and general partnership
  interests will be cancelled without the payment of any amount to the holders
  thereof.                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Customary releases will be
  provided to us, our current and former officers and directors, the Senior
  Secured Lenders, the holders of the Second Lien Notes, the various agents and
  trustees under the debt agreements and the respective officers, directors,
  employees, agents, advisors and professionals of each of the foregoing,
  subject to specified exceptions.                                                                                                                                                                                                                   

The
implementation of the Plan is dependent upon a number of factors, including
final documentation, the approval of a disclosure statement by the Bankruptcy
Court, confirmation of the Plan by the Bankruptcy Court and, thereafter,
consummation of the Plan in accordance with the provisions of the Bankruptcy
Code and the Plan.

At
hearings held on April 30, 2009, the Bankruptcy Court granted the Partnerships
first day motions for various relief designed to stabilize the Companys
operations and business relationships with vendors, lenders, employees and
others and entered orders granting authority to the Partnership to, among other
things, pay pre-petition and post-petition employee wages, salaries, benefits
and other employee obligations. In addition, the Bankruptcy Court granted an
interim order allowing the Partnership to use the cash collateral of its
creditors to fund specified operations and pay specified expenses of the
Bankruptcy Cases.

Shortly
after the Bankruptcy Filing, the Partnership began notifying all known or
potential creditors of the Partnerships Bankruptcy Filing. Subject to certain
exceptions under the Bankruptcy Code, the Bankruptcy Filing then automatically
enjoins and/or stays the continuation of any judicial or administrative
proceedings or other actions against us or our property to recover on, collect
or secure a claim arising prior to the Commencement Date. Thus, for example,
creditor actions to obtain possession of property from us, or to create,
perfect or enforce any lien against our property, or to collect on or otherwise
exercise rights or remedies with respect to a pre-Commencement Date claim are
enjoined unless and until the Bankruptcy Court lifts the automatic stay to
allow the continuation of such action.

In
order to successfully exit Chapter 11 bankruptcy, the Partnership must propose,
and obtain confirmation by the Bankruptcy Court of, a plan of reorganization
that satisfies the requirements of the Bankruptcy Code. A plan of
reorganization would, among other things, resolve our pre-Commencement Date
obligations, set forth the revised capital structure of the newly reorganized
entity and provide for corporate governance subsequent to exit from bankruptcy.
The Partnership has the exclusive right for 120 days after the Commencement
Date to file a plan of reorganization and 60 additional days to obtain
necessary acceptances. Such periods may be extended by the Bankruptcy Court for
cause to up to 18 months and 20 months, respectively, after the Commencement Date.
If the Partnerships exclusivity period lapses, any party in interest may file
a plan of reorganization for us. In addition to the need for Bankruptcy Court
confirmation and satisfaction of Bankruptcy Code requirements, a plan of
reorganization must be accepted as described below by holders of impaired
claims and equity interests in order to become effective. Our Chapter 11 plan
of reorganization will have been accepted by holders of claims against and
equity interests in us if (i) at least one-half in number and two-thirds in
dollar amount of claims actually voting in each impaired class of claims have
voted to accept the plan and (ii) at least two-thirds in amount of equity
interests actually voting in each impaired class of equity interests has voted to
accept the plan. Under circumstances specified in the so-called cramdown
provisions of section 1129(b) of the Bankruptcy Code, the Bankruptcy Court may
confirm a plan even if such plan has not been accepted by all impaired classes
of claims and equity interests. A class of claims or equity interests that does
not receive or retain any property under the plan on account of such claims or
interests is deemed to have voted to reject the plan. The precise requirements
and evidentiary showing for confirming a plan notwithstanding its rejection by
one or more impaired classes of claims or equity interests depends upon a
number of factors, including the status and seniority of the claims or equity
interests in the rejecting class  i.e.,
secured claims or unsecured claims, subordinated or senior claims, preferred or
common stock. Pursuant to the Plan Support Agreement, Senior Secured Lenders
holding in excess of two-thirds of the claims under the senior credit facility
and holders of in excess of two-thirds of the amounts due in respect of the
Second Lien Notes have agreed to vote in favor of the Plan as set forth in the
Plan Term Sheet attached to the Plan Support Agreement. Although we expect to
file the Plan in the near future, there can be no assurance that the Plan will
be confirmed by the Bankruptcy Court, or that any such plan will be
consummated.

55

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Under
section 365 of the Bankruptcy Code, we may assume, assume and assign, or reject
executory contracts and unexpired leases, subject to the approval of the
Bankruptcy Court and certain other conditions. Rejection constitutes a
court-authorized breach of the lease or contract in question and, subject to
certain exceptions, relieves us of our future obligations under such lease or
contract but creates a deemed pre-petition claim for damages caused by such
breach or rejection. Parties whose contracts or leases are rejected may file
claims against us for damages. Generally, the assumption of an executory
contract or unexpired lease requires us to cure all prior defaults under such
executory contract or unexpired lease, including all pre-petition arrearages,
and to provide adequate assurance of future performance. In this regard, the
Partnership expects that liabilities subject to compromise and resolution in
the Bankruptcy Cases will arise in the future as a result of damage claims
created by our rejection of various executory contracts and unexpired leases.
Conversely, the Partnership would expect that the assumption of certain
executory contracts and unexpired leases may convert liabilities shown in
future financial statements as subject to compromise to post-petition
liabilities. Due to the uncertain nature of many of the potential claims, the
Partnership is unable to project the magnitude of such claims with any degree
of certainty.

The
Bankruptcy Court will establish a deadline for the filing of proofs of claim
under the Bankruptcy Code, requiring our creditors to submit claims for
liabilities not paid and for damages incurred. There may be differences between
the amounts at which any such liabilities are recorded in the Partnerships
financial statements and the amount claimed by our creditors. Significant
litigation may be required to resolve any such disputes or discrepancies.

The
Partnership has incurred and will continue to incur significant costs
associated with the reorganization. The amount of these costs, which are being
expensed as incurred, are expected to significantly affect the Partnerships
results of operations.

As
of the Commencement Date, we had approximately $15.5 million in unrestricted
cash and cash equivalents. The ability of the Partnership to continue as a
going concern is dependent upon, among other things, (i) the Partnerships
ability to comply with the terms and conditions of the cash collateral order
entered by the Bankruptcy Court in connection with the Bankruptcy Cases; (ii)
the ability of the Partnership to generate cash from operations; (iii) the
ability of the Partnership to obtain confirmation of and to consummate the Plan
or another plan of reorganization under the Bankruptcy Code; and (iv) the cost,
duration and outcome of the reorganization process. Uncertainty as to the
outcome of these factors raises substantial doubt about the Partnerships
ability to continue as a going concern. We are currently evaluating various
courses of action to address the operational and liquidity issues the
Partnership is facing, and formulating plans for improving operations. There
can be no assurance that any of these efforts will be successful. The
accompanying audited consolidated financial statements do not include any
adjustments that might result should the Partnership be unable to continue as a
going concern. Consistent with generally accepted accounting principles
preparing the accompanying audited consolidated financial statements on a going
concern basis contemplates the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable future.

As
a result of the Bankruptcy Filing, realization of assets and liquidation of
liabilities are subject to uncertainty. While operating as a
debtor-in-possession under the protection of chapter 11, and subject to
Bankruptcy Court approval or otherwise as permitted in the normal course of
business, we may sell or otherwise dispose of assets and liquidate or settle
liabilities for amounts other than those reflected in the consolidated
financial statements. Further, a plan of reorganization could materially change
the amounts and classifications reported in our consolidated financial
statements. Our historical consolidated financial statements do not give effect
to any adjustments to the carrying value of assets or amounts of liabilities
that might be necessary as a consequence of confirmation of a plan of
reorganization.

The
potential adverse publicity associated with the Bankruptcy Filing and the
resulting uncertainty regarding our future prospects may hinder our ongoing
business activities and our ability to operate, fund and execute our business
plan by impairing relations with existing and potential customers; negatively
impacting our ability to attract, retain and compensate key executives and
employees and to retain employees generally; limiting our ability to obtain
trade credit; and impairing present and future relationships with vendors and
service providers.

56

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Under
the priority scheme established by the Bankruptcy Code, unless creditors agree
otherwise, post-petition liabilities and pre-petition liabilities must be
satisfied in full before our unitholders are entitled to receive any
distribution or retain any property under a plan of reorganization. The
ultimate recovery, if any, to our creditors and unitholders will not be determined
until confirmation and consummation of a plan of reorganization. Under the Plan
set forth in the Plan Term Sheet, our outstanding units will be cancelled with
no payment in respect thereof, unsecured creditors will share $100,000, holders
of our Second Lien Notes will receive 50% of the common stock of Reorganized
USSP, before giving effect to management equity plan, and our Senior Secured
Lenders will receive new secured notes and 50% of the common stock of
Reorganized USSP, before giving effect to management equity plan. No assurance
can be given as to what values, if any, will be ascribed in the Bankruptcy
Cases to each of these constituencies or what types or amounts of
distributions, if any, they would receive. Accordingly, we urge that appropriate
caution be exercised with respect to existing and future investments in any of
our liabilities. The Plan provides that our unitholders will receive no
distributions.

American
Institute of Certified Public Accountants Statement of Position 90-7,
Financial Reporting by Entities in Reorganization under the Bankruptcy Code
(SOP 90-7), which is applicable to companies in Chapter 11, generally does not
change the manner in which financial statements are prepared. However, it does
require that the financial statements for periods subsequent to the filing of
the Chapter 11 petition distinguish transactions and events that are directly
associated with the reorganization from the ongoing operations of the business.
Revenues, expenses (including professional fees), realized gains and losses,
and provisions for losses that can be directly associated with the
reorganization and restructuring of the business must be reported separately as
reorganization items in the consolidated statements of operations beginning in
the quarter ending June 30, 2009. The consolidated balance sheet must
distinguish pre-petition liabilities subject to compromise from both those
pre-petition liabilities that are not subject to compromise and from
post-petition liabilities. Liabilities that may be affected by the plan must be
reported at the amounts expected to be allowed, even if they may be settled for
lesser amounts. In addition, cash provided by reorganization items must be
disclosed separately in the condensed consolidated statement of cash flows. The
Partnership adopted SOP 90-7 effective in May 2009 and will segregate those
items as outlined above for all reporting periods subsequent to such date.

Description
of Business

We
are a leading provider of long-haul marine transportation services, principally
for refined petroleum, petrochemical and commodity chemical products, in the
U.S. domestic coastwise trade. Marine transportation is a vital link in the
distribution of refined petroleum, petrochemical and commodity chemical
products in the United States. During 2008, we at various times employed some
of our ITBs to transport grain overseas for humanitarian organizations to
improve utilization of the ITB fleet.

Our
existing fleet as of December 31, 2008 consists of eleven vessels: four
integrated tug barge units (ITBs), one product tanker (Houston); three chemical parcel tankers
(Parcel Tankers) and three articulated tug barge units (ATBs), one of which
entered service in July 2007, the second in August 2008 and the third in
November 2008. We currently have one additional ATB under construction, which
is scheduled to be delivered in August 2009.

Our
primary customers are major oil and chemical companies. We do not assume
ownership of any of the products that we transport on our vessels. Our market
is largely insulated from direct foreign competition because the Merchant
Marine Act of 1920, commonly referred to as the Jones Act, restricts U.S.
point-to-point maritime shipping to vessels operating under the U.S. flag,
built in the United States, at least 75% owned and operated by U.S. citizens
and manned by U.S. crews. All of our vessels are qualified to transport cargo
between U.S. ports under the Jones Act.

Significant
Challenges of Our Changing Business Model

During
2008, our business model changed significantly. Upon our formation, we owned
six ITBs that transported petroleum products under long-term charters with
major petroleum companies. Our level of revenues and the types of product that
we transported were predictable, particularly prior to the expiration of the
Hess support agreement in September 2007, which provided us with specified
minimum charter rates for our ITBs regardless of the actual rates we achieved.
Through 2008, our ITB fleet was our largest source of revenue and earnings
before interest, taxes, depreciation and amortization (EBITDA). However, the
desire of customers for new vessels and the newbuilding programs, which have
resulted in the supply of Jones Act vessels able to transport petroleum
products not decreasing as we had expected, together with decreased demand for
waterborne transportation of petroleum products due to current economic
conditions and the age of our vessels, resulted in a significant decrease in
demand for our ITBs to transport petroleum products during 2008, and we
anticipate that there will no longer be any demand for our ITBs for the
transportation of petroleum products. While we were able to employ some of our
ITBs to transport grain overseas for humanitarian organizations to improve
utilization of our ITB fleet in 2008, this market is also becoming more
competitive as more vessels previously employed in the transportation of
petroleum products enter this market and bulk grain carriers, which are given
preference in this market but until recently had employed most of their vessels
overseas, have returned to this market as overseas demand has decreased. Three
of our four remaining ITBs are currently laid up due to lack of demand. Due to
the increasing importance of our specialty chemical transportation business and
our desire to keep our vessels operating, a substantial portion of our revenues
is now derived from the transportation of products that are not petroleum based.

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During
the third quarter of 2008, we determined that the carrying amounts of our ITBs
exceeded their fair values and recorded an impairment charge of $72.3 million.
Factors indicating the impairment of the ITBs included the deterioration in the
spot petroleum market; the likelihood that there will be no further demand for
the ITBs in the spot petroleum market due to the available capacity of
double-hulled vessels, which are the preferred vessels of the major oil
companies; the entry of the ITB New York into the spot market when its
time charter expired on December 31, 2008; increasing competition for the ITBs
in the grain market as other bulk carriers compete for these cargoes, and the
decision to sell, and the anticipated sales price of, the ITB Grotonand the ITB Jacksonville. At December 31, 2008, we
reviewed the overall business climate, age and projected utilization of our
remaining fleet and based on this review, we recorded an additional impairment
charge of $2.6 million on the Sea Venture,
a chemical parcel tanker that is scheduled for a drydocking in June 2009. As a
result of changes in demand for our vessels and deteriorating market
conditions, we sold two ITBs in the fourth quarter of 2008, and will likely
dispose of the Sea Venture and at
least one additional ITB during 2009.

Since
our ITBs were under time charters in prior years, we did not require
substantial operations to manage the day-to-day logistical and chartering
aspects of the business. Subsequent to the acquisition of the ITBs, we began to
acquire vessels that transported non petroleum products, including the Chemical Pioneer, the Charleston, the Sea Venture, the ATB
Freeportin July 2007, and the ATB
Brownsvillein November of 2008.
These parcel tankers and the ATBs differ from our ITBs in that they carry
smaller lots and are designed to carry multiple products simultaneously. We
have contracts of affreightment from chemical customers with specified minimum
volumes and a general requirement that these customers ship on our parcel
tankers any additional volumes of these products shipped to the ports specified
in the contracts that historically accounted for the capacity of these vessels.
These contracts of affreightment allow us the flexibility to employ our vessels
as we see fit and, accordingly, we manage the logistical requirements of these
vessels collectively. Additionally, our ITBs are expected to operate solely in
the spot market, and will principally carry non petroleum products, as most
petroleum customers prefer to contract new double-hulled vessels under
long-term charters. This combination of our ITBs in the spot market, the
logistical aspects of managing our chemical contracts and grain voyages, and
the significant decline in demand for commodity chemical products, which has
resulted in our customers in general only shipping the specified minimum
volumes, and in some cases, less than the specified minimum volumes, has placed
an additional operating burden on us. Our ability to effectively manage our changing
operations is critical to our future success.

With
the addition of two ATBs in 2008 and all of our remaining four ITBs now participating
in the spot market, we expect our working capital requirements to increase.
Participation in the spot market requires us to carry higher amounts of working
capital, as under spot charters fuel costs are our responsibility and are paid
at the time fuel is delivered, and not realized economically until payment is
made to us by the customer. Payment generally occurs at the completion of a
voyage, compared to time charters, where payment is generally made by the
customer at the beginning of a fixed period of time, such as a month. In
addition, grain voyages, where we are paid following delivery of the grain to
its final destination, tend to be substantially longer in duration than refined
petroleum product voyages. Certain of our vendors have been unwilling to extend
trade credit to us, instead requiring payment up front due to our limited
liquidity.

During
2008, we were able to employ ITBs that might otherwise have been idle in the
overseas transportation of grain for humanitarian organizations. These voyages
have different characteristics than our transportation of refined petroleum products,
including longer voyages, voyages overseas and different revenue and expense
recognition policies. These different characteristics, together with the fact
that through September 13, 2007 the Hess support agreement provided us with the
specified minimum charter rates for our ITBs, the sale of the ITB Jacksonville and the ITB Groton in the fourth quarter of 2008,
the addition of two ATBs in the second half of 2008 and the deteriorating
economy make a comparison of our present results with our prior results less meaningful.
In addition, we do not have any long-term contracts to transport grain and
there can be no assurance that we will be able to continue to obtain these
grain voyages, which have been difficult to obtain to date in 2009.

Prior
to January 1, 2009, we were taxed as a partnership, rather than a corporation,
because we were a publicly traded partnership that generated 90% or more of our
gross income for every taxable year from qualifying income. Qualifying income
includes revenues derived from the transportation, storage and processing of
crude oil, natural gas and products thereof. Other types of qualifying income
include interest (other than from a financial business), dividends, gains from
the sale of real property and gains from the sale or other disposition of
capital assets held for the production of income that otherwise constitutes
qualifying income. However, due to the change in the mix of our products and
the resultant decline in qualifying income, we determined that it was unlikely
that we would be able to meet this requirement beginning in 2009 and,
therefore, effective January 1, 2009, the Partnership elected to be taxed as a
corporation.

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Liquidity

We
are dependent on our cash flow from operations to meet our operating, debt
service and working capital requirements. Our cash flow from operations
fluctuates from quarter to quarter based on, among other things:

| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the level of consumption of refined petroleum, petrochemical and
  commodity chemical products in the markets in which we operate;                     
| |   |                                                                                                                                                        
| |  | the level of demand for overseas transportation of grain for
  humanitarian organizations;                                                             
| |   |                                                                                                                                                        
| |  | the prices we obtain for our services;                                                                                                                 
| |   |                                                                                                                                                        
| |  | the level of demand for
  our vessels;                                                                                                                 
| |   |                                                                                                                                                        
| |  | the level of our operating
  costs, including payments to our general partner;                                                                         
| |   |                                                                                                                                                        
| |  | delays in the delivery of newbuilds and the resulting delay in
  receipt of revenue from those vessels;                                                
| |   |                                                                                                                                                        
| |  | the effect of governmental regulations and maritime
  self-regulatory organization standards on the conduct of our business;                           
| |   |                                                                                                                                                        
| |  | the level of unscheduled off-hire days and the timing of, and
  number of days required for, scheduled drydockings of our vessels;                     
| |   |                                                                                                                                                        
| |  | prevailing economic and competitive conditions;                                                                                                        
| |   |                                                                                                                                                        
| |  | the level of capital expenditures we are required to make,
  including for drydockings for repairs, newbuildings and compliance with new
  regulations;
| |   |                                                                                                                                                        
| |  | the restrictions contained in our debt instruments and our debt
  service requirements;                                                                
| |   |                                                                                                                                                        
| |  | fluctuations in our working capital needs; and                                                                                                         
| |   |                                                                                                                                                        
| |  | the refusal of certain of our vendors to extend trade credit to
  us.                                                                                  

Prior
to December 31, 2008, our cash flow from operations was also affected by our
ability to make working capital borrowings and the increase in the interest
rate on our borrowings under our senior credit facility and additional fees and
expenses resulting from the October 2008 amendment to our senior credit
facility.

Our
cash flow from operations has come under increasing pressure due to the
difficult current market conditions we are facing. During the first half of
2008, all but one of our ITBs began to operate in the spot market for the
transportation of petroleum products which has increased the volatility of our
revenues and working capital requirements, and decreased the predictability of
our cash flows. Beginning in late March 2008, market conditions in the spot
market, where all four of our remaining ITBs currently operate, deteriorated
substantially due to overall declining economic activity and decreased demand
for the domestic coastwise transportation of petroleum products. Additionally,
refinery utilization has declined considerably, fuel prices for operating our
vessels were at record levels during the second and third quarters of 2008 and
are still higher than historical levels, and newbuilds have increased capacity
serving the Jones Act market at a faster rate than demand and the decrease in
capacity due to the required phase-outs under the Oil Pollution Act of 1990
(OPA 90).

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Due
to these market shifts, as well as the age of our ITBs, our ITBs operating in
the spot market have, beginning in the second quarter of 2008, incurred idle
periods greater than, and charter rates below, our expectations at the
beginning of 2008. Beginning in the second quarter of 2008, our ITBs
participating in the spot market in 2008 were principally employed in the
transportation of grain for various US humanitarian organizations. Three of our
four ITBs are currently laid up due to lack of demand for their services.
During the first half of 2008, we also experienced modest decreased demand for
the domestic coastwise transportation of chemical products served by our
chemical transporting vessels which we believe was primarily due to our
customers working off inventory levels due to the decline in economic activity.
Beginning again in the fourth quarter of 2008 and continuing into 2009, we have
experienced a more significant decrease in demand for the domestic coastwise
transportation of chemical products served by our chemical transporting vessels
due to declining worldwide economic activity. The Sea Venture is currently laid up due to lack of demand for
its services. As a result of changes in demand for our vessels and
deteriorating market conditions, we sold two ITBs in the fourth quarter of
2008, and will likely dispose of the Sea
Venture and at least one additional ITB during 2009.

Additionally,
participation in the spot petroleum and grain markets requires the Partnership
to carry higher amounts of working capital, as under spot charters fuel costs
are the Partnerships responsibility and are paid at the time fuel is
delivered, and not realized economically until payment is made to us by the
customer. Additionally, payment generally occurs at the completion of a voyage,
compared to time charters, where payment is generally made by the customer at
the beginning of a fixed period of time, such as a month. In addition, grain
voyages, where the Partnership is paid following delivery of the grain to its
final destination, tend to be substantially longer in duration than refined
petroleum product voyages. With the addition of two ATBs in 2008 and all of our
ITBs now participating in the spot market effective in January 2009, the
Partnership expects its working capital requirements to increase.

As
a result, our cash flows and liquidity have come under increasing pressure due
to the current difficult market conditions. We have no debtor-in-possession
revolving credit facility while we are in bankruptcy proceedings, and we do not
expect to have a revolving credit facility when we emerge from bankruptcy, to
finance this increase in working capital requirements and, therefore, must
finance our working capital requirements solely from cash flow from operations.
In order to assure that we have sufficient cash to operate our business, we
agreed with our lenders to not make the December 31, 2008 and March 31, 2009
principal and interest payments due under our senior credit facility and also
to not make the February 15, 2009 interest payment due on our Second Lien Notes
to the holders of approximately 91% of the outstanding notes who waived such
interest payment and filed for bankruptcy protection in order to restructure
our debt. Not making these payments provided us with approximately $21.0
million of cash to finance our operations and working capital needs. Our
inability to finance our operations and working capital needs will have a
material adverse effect on our business.

In
light of these liquidity pressures, we did not pay a distribution on our
subordinated units and general partner units in respect of the fourth quarter
of 2007 and first quarter of 2008, and did not pay a distribution on any of our
units in respect of the second, third and fourth quarters of 2008 and the first
quarter of 2009. The October 2008 amendment to our senior credit facility
prohibits us from paying any distributions on any of our units until the
borrowings under our senior credit facility are repaid in full. Furthermore,
our ability to make distributions under our Second Lien Notes indenture is
limited because we are below the specified fixed charge covenant of 1.75:1.

Please
see Item 1A. Risk Factors in this Annual Report on Form 10-K for a detailed
discussion of our liquidity requirements and the events that could impact our
liquidity.

Industry
Capacity and Utilization

With
the announced newbuilding programs by us and our competitors, we expect that
these new vessels will become fully utilized on delivery and replace
substantially all the capacity taken out of the market due to OPA 90. The level
of newbuilds, combined with the decline in demand for marine transportation due
to the decrease in economic activity, has resulted in an over-supply of vessel
capacity in the near term. As a result, we believe the domestic supply of tank
vessels may increase in the near term. Any additional newbuildings or
retrofittings of existing tank vessels will result in additional capacity that
the market will not be able to absorb at the anticipated demand levels.
Further, several of the major oil companies have imposed a limit on the age of
the vessels that they will utilize, and our ITBs have reached these age limits.
Accordingly, we expect that there will no longer be any demand for our ITBs for
the transportation of petroleum products.

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Future
Growth

In
2006, we entered into contracts to construct four additional ATB units, each of
which is specified to have a carrying capacity of approximately 156,000 barrels
at 98% of capacity. However, in June 2008 we exercised our option to cancel the
fourth ATB. The first of these ATB units, the ATB
Galveston,was completed at a total cost of $66.6 million (excluding
capitalized interest of $6.8 million) and entered service in August 2008. The
cost increase over the originally budgeted amount of $65.0 million was
principally due to contractually provided cost increases related to increases
in major components and change orders. The second ATB, ATB Brownsville,
was completed at a total cost of $67.9 million (excluding capitalized interest
of $6.4 million) and entered service in late November 2008. The cost increase
over the originally budgeted amount of $65.5 million was principally due to
contractually provided cost increases related to increases in major components
and change orders.
The Partnership expects that the
final ATB will be completed in August 2009 at a cost of approximately $71.3 million
(excluding capitalized interest which totaled $5.1 million at December 31, 2008). The cost
increase over the originally budgeted amount of $66.0 million is principally due to
contractually provided cost increases related to increases in major components, customer
requested modifications and change orders. At December 31, 2008, the Partnership had
restricted cash and funds in escrow totaling approximately $8.0 million of which $5.7
million was used to pay costs incurred in 2009 to complete the ATB Brownsville and
this final ATB and $2.3 million was used to pay costs incurred prior to December 31, 2008
to construct these vessels. The Partnership expects that it will need to fund
approximately $8.3 million of construction costs to complete the final ATB from its
operating cash flows.

For a discussion of our obligations
under our construction contracts, please see the section titled, Contractual
Commitments and Contingencies below.

In
March 2006, we, through our subsidiary USS Product Carriers LLC (Product
Carriers), entered into a contract with NASSCO for the construction of nine
49,000 deadweight tons (dwt) double-hulled tankers. In August 2006, Product
Carriers entered into a joint venture, USS Products Investor LLC (the Joint
Venture), to finance the construction of the first five tankers with third
party investors led by affiliates of The Blackstone Group (the Joint Venture
Investors). The first tanker, the Golden
State, was completed at a total cost of $122.2 million (excluding
capitalized interest of $11.3 million), and entered service in January 2009 on
time charter with a major oil company through mid-January 2016. We and the
Joint Venture Investors and the lenders to the Joint Venture have reached an
agreement in principle to settle the litigation surrounding the actions taken
by the Joint Venture Investors and lenders, subject to completion of definitive
documentation and Bankruptcy Court approval, that will result in our ceasing to
be the managing member of the Joint Venture and manager of the Joint Ventures
vessels. As a result, our growth strategy and our OPA 90 compliance strategy
for replacement of our ITB fleet has been adversely affected, which could have
a material adverse effect on our business, results of operations and financial
condition.

Because
the Joint Venture did not exercise its option to have the Joint Venture finance
the remaining four tankers and due to Product Carriers inability to obtain the
necessary financing to construct these four tankers due to its financial
condition and current market conditions, the Partnership has been advised by
NASSCO that it is exercising its rights under the construction contract with
Product Carriers to use commercially reasonable efforts to sell and assign
Product Carriers rights under the construction contract to have four product
tankers constructed. Product Carriers is obligated to reimburse NASSCO for any
damages incurred by NASSCO as a result of these tankers not being constructed,
or if they are transferred to a third party at a loss to NASSCO, up to a
maximum of $10 million (plus costs and expenses incurred by NASSCO) for each
such tanker, with such amounts being funded solely out of monies received by
Product Carriers in respect of its equity investment in the first five vessels
constructed by the Joint Venture. As a result, we believe there is uncertainty
that we will realize any substantial return on or of our $70 million equity
investment in the Joint Venture.

For
a discussion of our obligations under our construction contracts, please see
the section titled, Contractual Commitments and Contingencies below. For a
discussion of the dispute between us and the Joint Venture Investors and
lenders to the Joint Venture, please see Item 3. Legal Proceedings.

Impairment
in Value of the Fleet

We
review the net book value of vessels for potential impairment whenever events
or changes in circumstances indicate that the carrying amount of a vessel may
not be fully recoverable. During the quarter ended September 30, 2008, the
Partnership began activities to sell the ITB
Grotonand ITB Jacksonville
to a third party for an estimated sales price per vessel of $5.4 million, net
of commissions but before taking into consideration the estimated costs of
disposition, and, as a result, recorded an impairment loss totaling $20.4
million. In the fourth quarter of 2008, we recognized a loss on the sale of
these vessels of $1.6 million due to a decrease in the sales price of the ITB Groton.

Furthermore,
in the third quarter of 2008, we determined that the carrying amounts of the
other ITBs also exceeded their fair values and wrote down the carrying value of
the remaining four ITBs by $51.9 million. Factors indicating the impairment of
the other ITBs included the fact that the spot petroleum market has further
deteriorated; the likelihood that there will be no further demand for the ITBs
in the spot petroleum market, should that market recover, due to the available
capacity of double-hulled vessels which are preferred vessels by the major oil
companies; the entry of the ITB New Yorkinto
the spot market when its current time charter expired on December 31, 2008;
increasing competition for the ITBs in the grain market as other bulk carriers
compete for these cargoes, and the decision to sell, and the anticipated sales
price of the ITB Groton and the ITB Jacksonville.

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In
the fourth quarter of 2008, we also reviewed the net book value of the
remaining vessels for potential impairment given deteriorating market
conditions. We determined that the future usage of the Sea Venture was uncertain given the change in the
business climate and the significant cost of a required drydocking for this
vessel in June 2009, and therefore we wrote down the carrying value of the Sea Ventureto its estimated scrapping
proceeds of $0.6 million, resulting in an impairment loss of $2.6 million
recorded in December 2008. No further impairment charges were deemed necessary
and recorded for our other vessels.

During
the quarter ended March 31, 2008, the Partnership determined that the fourth
ATB unit referenced above was impaired, as the Partnership did not obtain
financing for its construction and assessed the fair value of the construction
in progress of this ATB unit at zero, which resulted in a non-cash impairment
charge of $5.7 million, which includes $3.8 million previously paid for
construction of the barge portion of this ATB unit, $1.4 million for deposits
on certain owner furnished equipment and $0.5 million of capitalized interest
cost. During the year ended December 31, 2008, the Partnership accrued
additional expenses related to owner furnished equipment in the amount of $0.3
million. We have no further financial obligations with regard to either the tug
or the barge.

Revenue
Generating Transactions

We
generate revenue by charging customers for the transportation and distribution
of their products utilizing our vessels. These services are generally provided
under the following four basic types of contractual relationships:

| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | time charters which are contracts to charter a vessel for a
  fixed period of time, generally one year or more, at a set daily rate;                                                           
| |   |                                                                                                                                                                                                
| |  | contracts of affreightment, which are contracts to provide
  transportation services for products over a specific trade route, generally
  for one or more years, at a negotiated rate per ton;
| |   |                                                                                                                                                                                                
| |  | consecutive voyage charters, which are charters for a specified
  period of time at a negotiated rate per ton; and                                                                             
| |   |                                                                                                                                                                                                
| |  | spot charters which are charters for shorter intervals, usually
  a single round-trip, that are made on either a current market rate or lump
  sum contractual basis.                          

The
principal difference between contracts of affreightment and consecutive voyage
charters is that in contracts of affreightment the customer is obligated to
transport a specified minimum amount of product on our vessel during the
contract period, while in a consecutive voyage charter the customer is
obligated to fill the contracted portion of the vessel with its product every
time the vessel calls at its facility during the contract period and, if the
customer does not have product ready to ship, it must pay us for idle time
and/or deadfreight.

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

|                          |  |                          |  |                             |  |                                |  |                 
|------------------------- |  | ------------------------ |  | --------------------------- |  | ------------------------------ |  | ----------------
|                          |  | Time Charter             |  | Contract of
  Affreightment |  | Consecutive
  Voyage
  Charter |  | Spot Charter    
|                          |  |                          |  |                             |  |                                |  |                 
|                          |  |                         
|Typical contract length   |  | One year or more         |  | One year or more            |  | Multiple voyages               |  | Single voyage   
|Rate basis                |  | Daily                    |  | Per ton                     |  | Per ton                        |  | Per ton/lump sum
|Voyage expenses           |  | Customer pays            |  | We pay (1)                  |  | We pay (1)                     |  | We pay          
|Vessel operating expenses |  | We pay                   |  | We pay                      |  | We pay                         |  | We pay          
|Idle time                 |  | Customer pays as long as |  | Customer does not           |  | Customer pays if               |  | Customer pays if
|                          |  | vessel is available for  |  | pay                         |  | cargo not ready                |  | cargo not ready 
|                          |  | operations               |  |                             |  |                                |  |                 

| |     |                                                                                                                                                                                   
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Our contracts of
  affreightment and consecutive voyage charters generally contain escalation
  clauses whereby a portion of fuel cost increases are passed on to our
  customers.

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For
the years ended December 31, 2008, 2007 and 2006 we derived approximately 53%,
79% and 89%, respectively, of our revenue under time charters, consecutive
voyage charters and contracts of affreightment, and approximately 47%, 21% and
11%, respectively, of our revenue from spot charters. Beginning in the second
quarter of 2008, all but one of our ITBs was employed in the spot market, and
beginning January 1, 2009 all of our ITBs are employed in the spot market. The
percentage of our revenue derived from the spot market will vary from period to
period depending on how many of our ITBs are actually employed and the rates we
are able to obtain for them.

The
following table sets forth the markets in which our vessels were operating
during each calendar quarter of 2008 and 2007:

|                 |                               |                               |                              |                              |                                   |                                   |                                  |                                 
|---------------- | ----------------------------- | ----------------------------- | ---------------------------- | ---------------------------- | --------------------------------- | --------------------------------- | -------------------------------- | --------------------------------
|Vessel           | Quarter EndingMarch
  31,2008 | Quarter EndingMarch
  31,2007 | Quarter EndingJune
  30,2008 | Quarter EndingJune
  30,2007 | Quarter EndingSeptember
  30,2008 | Quarter EndingSeptember
  30,2007 | Quarter EndingDecember
  31,2008 | Quarter EndingDecember
  31,2007
|                 |                               |                               |                              |                              |                                   |                                   |                                  |                                 
|Baltimore (1)    | TC                            | TC                            | TC/Spot                      | TC/Spot                      | Spot                              | DD                                | Spot                             | DD/TC                           
|Groton (2)       | TC                            | TC                            | Spot                         | TC                           | Spot                              | TC                                | Spot/Sold                        | TC                              
|Jacksonville (3) | TC                            | Spot                          | Spot                         | Spot                         | Spot                              | Spot                              | Spot/Sold                        | Spot/TC                         
|Mobile (4)       | TC                            | TC                            | TC                           | TC                           | Spot                              | TC                                | Spot                             | TC                              
|New York (5)     | COA                           | Spot                          | COA/Spot                     | Spot                         | TC                                | COA/Spot                          | TC                               | COA                             
|Philadelphia (6) | Spot                          | COA                           | Spot                         | COA                          | Spot                              | DD/COA                            | Spot                             | DD/Spot                         
|Houston          | TC                            | TC                            | TC                           | TC                           | TC                                | TC                                | TC/DD                            | TC                              
|Sea Venture      | COA/Spot                      | COA/Spot                      | COA/Spot                     | COA/Spot                     | COA/Spot                          | COA/Spot                          | COA/Spot                         | COA/Spot                        
|Freeport         | COA/Spot                      | n/a                           | COA/Spot                     | n/a                          | COA/Spot                          | COA/Spot                          | COA/Spot                         | COA/Spot                        
|Chemical Pioneer | COA/Spot                      | COA/Spot                      | COA/Spot                     | COA/Spot                     | COA/Spot                          | COA/Spot                          | COA/Spot/DD                      | COA/Spot                        
|Charleston       | COA/Spot                      | COA/Spot                      | COA/Spot                     | COA/Spot                     | COA/Spot                          | COA/Spot                          | COA/DD                           | COA/Spot                        
|Galveston        | n/a                           | n/a                           | n/a                          | n/a                          | TC                                | n/a                               | TC                               | n/a                             
|Brownsville      | n/a                           | n/a                           | n/a                          | n/a                          | n/a                               | n/a                               | Spot                             | n/a                             

|                                                                                                          
|----------------------------------------------------------------------------------------------------------
|TC= Time
  Charter     COA = Contract of
  Affreightment/Consecutive Voyage DD=Dry Dock Sold = Sold Vessel
|                                                                                                          
|(1)ITB Baltimore entered spot market on
  5/19/08 upon its first grain voyage.                           
|(2) ITB Groton entered spot market on
  4/28/08. Sold on 12/29/08                                         
|(3) ITB Jacksonvillere-entered the spot
  market on 4/7/08 upon its first grain voyage. Sold on 11/25/08 
|(4) ITB Mobiles current time charter was
  transferred to the ITB New York
  on 7/4/08.                  
|(5) ITB New Yorkbegan a time charter
  transferred from the ITB Mobile
  on 7/4/08.                       
|(6)ITB Philadelphiaentered spot market on
  12/14/07 upon its first grain voyage.                        

Financing Arrangements

On
August 7, 2006, we completed debt and equity financings for which we received
gross proceeds of approximately $429.1 million (excluding proceeds received by
the Joint Venture). The proceeds were used as follows:

| |       |                                                                                                                     
| | ----- | --------------------------------------------------------------------------------------------------------------------
| | (i)   | to fund $182.6 million
  into an escrow account to be used solely for the construction of at least
  three new ATBs;
| |       |                                                                                                                     
| | (ii)  | to fund up to $70.0
  million of capital contributions into the Joint Venture;                                      
| |       |                                                                                                                     
| | (iii) | to refinance $152.1
  million of indebtedness outstanding under our credit facility;                                
| |       |                                                                                                                     
| | (iv)  | to pay fees and expenses
  of approximately $14.4 million incurred in connection with these
  transactions; and     
| |       |                                                                                                                     
| | (v)   | for general corporate
  purposes.                                                                                   

On
August 7, 2006, we issued $100.0 million aggregate principal amount of Second
Lien Notes. Interest is payable on the Second Lien Notes on February 15 and
August 15 of each year, beginning February 15, 2007. The Second Lien Notes were
to mature on August 15, 2014. We were permitted to redeem all or part of the
Second Lien Notes on or after February 15, 2011. Prior to such date, we were
permitted to redeem all or a portion of the Second Lien Notes by paying a
make-whole premium. In addition, prior to August 15, 2009, we were permitted to
redeem up to 35% of the aggregate principal amount of the Second Lien Notes
with the proceeds of certain equity offerings at a price of 113% of the
principal amount of the Second Lien Notes redeemed. The Second Lien Notes are
guaranteed by all of our existing domestic subsidiaries, other than U.S.
Shipping Finance Corp., the co-issuer of the Second Lien Notes, USS Product
Carriers LLC, which owns our investment in the Joint Venture, and the Joint
Venture. The Second Lien Notes and guarantees are secured on a second priority
basis by liens on our vessels and an escrow account the funds from which will
be used to finance the construction of at least three new ATB units. In the
event that our creditors exercise remedies with respect to our and our
guarantors pledged assets, the proceeds of the liquidation of those assets
will first be applied to repay obligations secured by first priority liens
under our senior credit facility and other first priority obligations in full
before any payments are made with respect to the Second Lien Notes.

Concurrent
with the sale of the Second Lien Notes, we issued to third party investors
1,310,375 common units and 3,123,205 class B units at a unit price of $18.34
and $17.12, respectively, for approximately $77.5 million of gross proceeds.
Initially, these class B units were subordinated to our common units, but
senior to our existing subordinated units. However, on February 2, 2007, our
unit holders approved the conversion of these 3,123,205 Class B units into the
same number of common units.

63

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Concurrent
with the sale of the Second Lien Notes and the consummation of the equity
offering, we amended and restated our senior credit facility with Canadian
Imperial Bank of Commerce, as administrative agent, to provide us with a:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $310.0 million senior secured term facility, of which $250.0
  million was drawn at closing that was used to refinance existing indebtedness
  and/or to finance the acquisition or construction of additional vessels, and
  a $60.0 million delayed draw term loan, all of which has been drawn.                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | $40.0 million senior
  secured revolving working capital credit facility to be used for ongoing
  working capital needs, letters of credit, distributions and general
  partnership purposes, including future acquisitions and expansions, all of
  which was drawn at December 31, 2008 except for $4.9 million that Lehman
  Brothers Commercial Paper refused to fund because it has filed for protection
  under the U.S. bankruptcy laws.

Our
obligations under the senior credit facility are secured by a first priority
security interest, subject to permitted liens, on all our assets (other than
the assets of the Joint Venture and Product Carriers, which are not considered
subsidiaries under the senior credit facility).

Borrowings
under our revolving credit facility were due and payable on the earlier of
August 6, 2011 or the date the term facility was repaid. The term loan matured
August 6, 2012, and was required to be amortized quarterly. We could prepay all
loans under our senior credit facility at any time without premium or penalty
(other than customary LIBOR breakage costs).

From
October 24, 2008 until we filed for bankruptcy, outstanding loans bore interest
at a rate equal to, at our option, either: (1) in the case of Eurodollar loans,
the sum of the LIBOR rate for loans in an amount substantially equal to the
amount of the borrowing and for the period of borrowing selected by us (subject
to a floor of 3.25%) plus a margin of 5.25% or (2) in the case of base rate
loans, the higher of (a) the administrative agents prime or base rate or (b)
one-half percent plus the latest overnight federal funds rate plus in each case
a margin of 4.25%. The Partnership paid an additional 1.5% per annum in
interest on outstanding borrowings through January 31, 2009, which additional
interest was paid-in-kind (PIK interest), and effective February 1, 2009 the
PIK interest increased to 4.5%.

Through
October 23, 2008, outstanding loans bore interest at a rate equal to, at our
option, either: (1) in the case of Eurodollar loans, the sum of the LIBOR rate
for loans in an amount substantially equal to the amount of the borrowing and
for the period of borrowing selected by us plus a margin of 3.5% or (2) in the
case of base rate loans, the higher of (a) the administrative agents prime or
base rate or (b) one-half percent plus the latest overnight federal funds rate
plus in each case a margin of 2.5%.

Our
senior credit facility prevented us from declaring dividends or distributions
until all borrowings under the senior credit facility are paid in full. In
addition, the senior credit facility contained covenants requiring us to adhere
to certain financial covenants and limiting the ability of our operating company
and its subsidiaries to, among other things:

| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | incur or guarantee
  indebtedness;                                                       
| |   |                                                                                          
| |  | change ownership or structure, including consolidations,
  liquidations and dissolutions;
| |   |                                                                                          
| |  | make distributions or
  repurchase or redeem units;                                      
| |   |                                                                                          
| |  | make capital expenditures
  in excess of specified levels;                               
| |   |                                                                                          
| |  | make certain negative pledges and grant certain liens;                                   
| |   |                                                                                          
| |  | sell, transfer, assign or
  convey assets;                                               
| |   |                                                                                          
| |  | make certain loans and investments;                                                      
| |   |                                                                                          
| |  | enter into a new line of
  business;                                                     
| |   |                                                                                          
| |  | transact business with affiliates;                                                       
| |   |                                                                                          
| |  | amend, modify or terminate
  specified contracts;                                        

64

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| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | permit the obligations (other than certain specified
  obligations) of Product Carriers and the Joint Venture being recourse to us;       
| |   |                                                                                                                                           
| |  | enter into agreements restricting loans or distributions made by
  our operating companys subsidiaries to us or our operating company; or
| |   |                                                                                                                                           
| |  | participate in certain hedging and derivative activities.                                                                                 

If
an event of default existed under the credit agreement, the lenders were
permitted to accelerate the maturity of all outstanding loans, as well as
exercise other rights and remedies, including foreclosing on substantially all
our assets which we pledged as collateral to secure our obligations under the
debt agreements. Each of the following was an event of default under our senior
credit facility:

| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | failure to pay any principal, interest, fees, expenses or other
  amounts when due;                                                    
| |   |                                                                                                                                        
| |  | any loan document or lien
  securing the credit facility ceases to be effective;                                                       
| |   |                                                                                                                                        
| |  | breach of certain
  financial covenants;                                                                                               
| |   |                                                                                                                                        
| |  | failure to observe any other
  agreement, security instrument, obligation or covenant beyond specified cure
  periods in certain cases;
| |   |                                                                                                                                        
| |  | default under other
  indebtedness of any of our subsidiaries in excess of $1.0 million;                                               
| |   |                                                                                                                                        
| |  | bankruptcy or insolvency
  events involving us, our general partner or any of our subsidiaries;                                        
| |   |                                                                                                                                        
| |  | failure of any representation or warranty to be materially correct;                                                                    
| |   |                                                                                                                                        
| |  | a change of control, which
  includes the following events:                                                                            

| |    |                                                                                                                                                                                                                                                                                                                          
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1) | any transaction that results in Sterling
  Investment Partners L.P., management and their affiliates beneficially owning
  less than 51% of the total voting power entitled to vote for the election of
  directors of our general partner and thereafter a substantial number of
  members of our management team leave;
| |    |                                                                                                                                                                                                                                                                                                                          
| | 2) | US Shipping General
  Partner LLC ceases to be our sole general partner;                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                          
| | 3) | we or our general partner
  liquidate or dissolve;                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                          
| | 4) | we sell or otherwise
  dispose of all or substantially all our assets; and                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                          
| | 5) | we cease to own 100% of
  our subsidiaries free of any liens;                                                                                                                                                                                                                                                            

| |   |                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a material adverse effect
  occurs relating to us or our business;                                                                                                            
| |   |                                                                                                                                                                               
| |  | our general partner defaults under the partnership agreement and
  such default could reasonably be anticipated to have a material adverse
  effect on us or our business; and
| |   |                                                                                                                                                                               
| |  | judgments against us or any of our subsidiaries in excess of
  certain allowances.                                                                                            

In
connection with the issuance of the Second Lien Notes and the related financing
transactions, we incurred fees of approximately $14.4 million which were
allocated to the associated transactions. Additionally, as a result of the
refinancing of the credit facility, we expensed $2.5 million of previously
capitalized deferred financing costs.

At
December 31, 2008, we were in default under the senior credit facility as a
result of our failure to make the December 31, 2008 principal and interest
payments due under the senior credit facility. Subsequent to December 31, 2008,
we agreed with our lenders to not make the March 31, 2009 principal and
interest payments due under the senior credit facility and ceased to be in
compliance with certain financial covenants. From December 30, 2008 through the
date of our bankruptcy filing, we were operating under a series of forbearance
agreements with our lenders pursuant to which the lenders agreed to forbear
from taking any action or exercising any right or remedy permitted to be taken
or exercised under the senior credit facility and related loan documents as a
result of the foregoing events of default until the earliest to occur of:

| |     |                                                                                                             
| | --- | ------------------------------------------------------------------------------------------------------------
| | (a) | 5:00 p.m. (Eastern time)
  on April 30, 2009;                                                               
| |     |                                                                                                             
| | (b) | the occurrence and
  continuance of any event of default other than the events of default
  described above;

65

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| |     |                                                                                                                                                                                                                                                
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (c) | our failure to comply with
  any of the provisions of the forbearance agreement; and                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                
| | (d) | the date on which we make
  an interest payment in respect of our Second Lien Notes, other than an
  interest payment on March 17, 2009 to the holders of $8.71 million of the
  Second Lien Notes that have not waived their interest payment.

In
accordance with the terms of the forbearance agreement, we engaged in good
faith negotiations with the administrative agent and the lenders regarding
restructuring and strategic alternatives, which negotiations resulted in an
agreement with a substantial majority of the Senior Secured Lenders and the
holders of the Second Lien Notes and our voluntary filing for protection under
the U.S. bankruptcy laws.

Because
the lenders could have declared all indebtedness outstanding under our senior
credit facility immediately due and payable as soon as 5:00 p.m. on April 30,
2009, the Partnership has classified such indebtedness as current at December
31, 2008. Furthermore, as the Second Lien Notes contain cross-default
provisions in the indenture governing the Second Lien Notes that allow
acceleration of the maturity if there is a payment default or acceleration of
the senior credit facility, such indebtedness has also been classified as current
at December 31, 2008.

The
Partnership did not make the $6.5 million interest payment due on February 15,
2009 in respect of its Second Lien Notes. Under the terms of the indenture
governing the Second Lien Notes, the Partnership had a grace period of 30 days
from the payment due date with respect to the interest payment before the
nonpayment became an event of default under the indenture. There is no right to
accelerate the obligations under the Second Lien Notes based on the nonpayment
unless interest remains unpaid upon expiration of the grace period. In the
event that the interest payment is not made prior to the expiration of the
30-day grace period, then the aggregate principal amount of the Second Lien
Notes, plus the unpaid interest payment and any other amounts due and owing on
the Second Lien Notes could be declared immediately due and payable by the
trustee under the indenture or by holders of 25% or more of the aggregate
principal amount of the Second Lien Notes. In February 2009, holders of $91.3
million of the Second Lien Notes, representing 91.3% of the Second Lien Notes,
delivered letters to the Partnership waiving their February 15, 2009 interest
payment on the Second Lien Notes, and all future interest payments on the
Second Lien Notes, until the earlier of six months following repayment in full
of all amounts outstanding under the senior credit facility and the Partnership
seeking bankruptcy protection. On March 17, 2009, the Partnership provided $0.6
million to the trustee to pay the interest due on the $8.7 million principal
amount of Second Lien Notes that had not waived their February 15, 2009
interest payment.

As
a result of our bankruptcy filing, all amounts due under our senior credit
facility and in respect of the Second Lien Notes became immediately due and
payable.

During
the pendency of our bankruptcy proceedings, we will make quarterly adequate
protection payments on the outstanding amounts under the senior credit
facility at a rate equal to LIBOR plus 0.5%.

In
addition, in February 2009 the Partnership received a notice from the agent for
the lenders to the Joint Venture asserting events of default under that certain
revolving notes facility agreement with the Joint Venture have occurred.
Because the lenders could have declared all amounts due under such revolving
notes facility agreement immediately due and payable if such defaults were
actually determined to have occurred, which the Partnership disputes, the
Partnership has classified such indebtedness as current at December 31, 2008.
See Item 3. Legal Proceedings.

66

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Critical Accounting Policies and Estimates

Our
discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements which have been prepared
in conformity with U.S. GAAP. In preparing these financial statements, we are
required to make certain estimates, judgments and assumptions. These estimates,
judgments and assumptions affect the reported amounts of our assets and
liabilities, including the disclosure of contingent assets and liabilities, at
the date of the financial statements and the reported amounts of our revenues
and expenses during the periods presented. We evaluate these estimates and assumptions
on an ongoing basis. We base our estimates and assumptions on historical
experience and on various other factors that we believe to be reasonable at the
time the estimates and assumptions are made. However, future events and their
effects cannot be predicted with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from these estimates and assumptions under different
circumstances or conditions, and such differences may be material to the
financial statements. We believe that, of our significant accounting policies
discussed in Note 4 to our consolidated financial statements, the following
policies might involve a higher degree of judgment.

Revenue
Recognition

For
our domestic coastwise business, we earn revenue under contracts of
affreightment, spot charters, consecutive voyage charters and time charters.
For contracts of affreightment, spot charters and consecutive voyage charters,
revenue and voyage expenses are recognized based upon the relative transit time
in each period to the total estimated transit time for each voyage. Although
contracts of affreightment, consecutive voyage charters and certain contracts
for spot charters may be effective for a period in excess of one year, revenue
is recognized on the basis of individual voyages, which are generally less than
15 days in duration. For time charters, revenue is recognized on a daily basis
over the contract period, with expenses recognized as incurred. For grain
voyages, we adopted a policy in 2007 where we do not recognize voyage freight
revenue and voyage expenses until the grain is delivered to its final
destination. This grain related policy was updated in 2008 to recognize
demurrage revenue if significant waiting time is incurred during a period
awaiting berth.

One
of our ITBs commenced a grain voyage in December 2007 that was completed in
February 2008. Total revenue for this voyage of $7.3 million was recognized in
the first quarter of 2008. Total deferred costs related to this voyage at
December 31, 2007 were $1.4 million. In late 2008, two of our ITBs commenced
grain voyages that were completed in the first quarter of 2009. Because we
incurred significant waiting time in November and December 2008 before one of
the ITBs commenced its voyage, we recognized approximately $0.6 million in net
demurrage revenues in 2008. Remaining revenues for these voyages recognized in
the first quarter of 2009 upon completion are approximately $14.1 million. At
December 31, 2008, total deferred costs recorded related to these grain voyages
are $7.1 million.

Vessels
and Depreciation

Vessels
and equipment are recorded at cost, including transaction fees where
appropriate, and depreciated to estimated salvage value using the straight-line
method as follows:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | ITB units are being
  depreciated for 24 months from September 30, 2008, the date an impairment
  charge was recorded against them, with the exception of the ITB New York, which is being depreciated
  for eight months, based on its anticipated sale in the third quarter of 2009;
  prior to the impairment charge the ITBs depreciation was based on their
  mandatory retirement date required by OPA 90;
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | 10 years for theChemical Pioneer, theCharleston and theHouston based upon their expected
  useful lives; and                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | 30 years for our ATBs and
  the Joint Venture product tankers.                                                                                                                                                                                                                                                                                                                                                   

Since
theSea Ventureis recorded at
its estimated scrapping value after recording an impairment charge at December
31, 2008, it is no longer being depreciated. Prior to the impairment charge, it
was being depreciated based on its mandatory retirement age required by OPA 90.

67

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We
capitalize expenditures incurred for drydocking and amortize these expenditures
over 24 months for our ITB units (with the exception of the ITB New Yorks capitalized drydock, which
is being depreciated over eight months) and 30 months for our parcel tankers
and theHouston and we will
capitalize expenditures incurred for drydocking and amortize these expenditures
over 60 months for the new ATB units and 60 months for any new product tankers
we build or acquire. The aggregate number of drydockings undertaken in a given
period and the nature of the work performed determine the level of drydocking
expenditures. Maintenance and repairs that do not improve or extend the useful
lives of the assets are expensed. Expensed amounts, net of insurance proceeds,
for repairs needed to the ITB Baltimore
after damage sustained as a result of Hurricane Dean totaled $0.3 million and
$0.1 million for the years ended December 31, 2008 and December 31, 2007,
respectively.

The
book values of our vessels may not represent their fair market value at any
point in time since the market prices of second-hand vessels tend to fluctuate
with changes in charter rates and the cost of newbuildings. Historically, both
charter rates and vessel values tend to be cyclical. The net book value of
vessels held and used by us is reviewed for potential impairment whenever
events or changes in circumstances indicate that the carrying amount of a
particular vessel may not be fully recoverable. In such instances, we perform
an initial test for impairment of our vessels where we compare the sum of the
forecasted undiscounted cash flows of these vessels to their carrying values.
If the forecasted undiscounted cash flows are less than the carrying amount
value of the vessels, then we must perform a second test to write-down the
carrying value of the vessels to their estimated fair values.

In
developing estimates of future cash flows, we must make assumptions about
future charter rates, vessel operating expenses and the estimated remaining
useful lives of the vessels. These assumptions are based on historical trends
as well as future expectations. Although management believes that the
assumptions used to evaluate potential impairment are reasonable and
appropriate, there may be events or changes in circumstances that could indicate
that the recoverability of the carrying amount of a vessel might not be
possible. Examples of events or changes in circumstances that could indicate
that the recoverability of a vessels carrying amount should be reassessed
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 discounted 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. The
most significant estimates relate to depreciable lives and salvage values of
vessels and actual results could differ materially from those estimates.

We
have contracted with third parties to build new ATB units and new product
tankers. Accordingly, the costs of these vessels under construction are
capitalized on our balance sheet under the caption Vessels and equipment,
net. To the extent we have charters committed for vessels, we can measure the
recoverability of these vessels by incorporating the future charters into the
assumptions that generate the expected future cash flows. Of the five vessels
currently under construction, four are subject to charters. Given the absence
of historical data, the high initial cost, the absence of charters on one of
the vessels and the fact that the delivery dates of two of these vessels are
beyond one year, it is considerably more difficult to forecast the expected
future cash flows of these vessels. If expectations of future conditions were
to change from our current assumptions, it is possible that the cost of these
vessels may not be recoverable, and that the vessels may become impaired.

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, our relationship with our customers and other
relevant known information. Historically, credit risk with respect to our trade
receivables has generally been considered minimal because of the financial
strength of, and infrequency of disputes with, our customers.

Income
Taxes

Prior
to January 1, 2009, we were taxed as a partnership, rather than a corporation,
because we were a publicly traded partnership that generated 90% or more of our
gross income for every taxable year from qualifying income. Qualifying income
includes revenues derived from the transportation, storage and processing of
crude oil, natural gas and products thereof. Other types of qualifying income
include interest (other than from a financial business), dividends, gains from
the sale of real property and gains from the sale or other disposition of
capital assets held for the production of income that otherwise constitutes
qualifying income. However, due to the change in the mix of our products and
the resultant decline in qualifying income, we determined that it was
unlikely that we would be able to meet this requirement beginning in 2009 and
therefore effective January 1, 2009, the Partnership elected to be taxed as a
corporation. As a result, we will pay federal income tax on our income at the
corporate tax rate, which is currently a maximum of 35%. We will also be
subject to state taxes in various jurisdictions.

68

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We
provide deferred taxes for the tax effects of differences between the financial
reporting and tax bases of the Partnerships assets and liabilities, which are
recorded at enacted tax rates in effect for the years in which the differences
are projected to reverse. A valuation allowance is provided, if necessary, for
deferred tax assets that are not expected to be realized. Estimates of future
taxable income are derived from internal tax planning and forecasting processes
to assess whether or not a tax asset will be realized. Currently, we expect
that not all of our deferred tax assets will be realized and accordingly, we
have provided a provision for valuation allowances against deferred tax assets.

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:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Voyage revenue. Voyage revenue includes revenue from time
  charters, contracts of affreightment, consecutive voyage charters and spot
  charters. Voyage revenue is impacted by changes in charter and utilization
  rates and by the mix of business among the types of contracts described in
  the preceding sentence.                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Voyage expenses. Voyage expenses include items such as
  fuel, port charges, pilot fees, tank cleaning costs, canal tolls, brokerage
  commissions, discharge fees, inland distribution fees and other costs which
  are unique to a particular voyage. These costs can vary significantly
  depending on the voyage trade route. Depending on the form of contract,
  either we or our customer is responsible for these expenses. If we pay voyage
  expenses, they are included in our results of operations when they are
  incurred. Typically, our freight rates are higher when we pay voyage
  expenses. A substantial portion of certain cost increases can be passed on to
  our customers.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Vessel operating expenses. We pay the vessel operating expenses
  regardless of whether we are operating under a time charter, contract of
  affreightment, consecutive voyage charter or spot charter. The most
  significant direct vessel operating expenses are crewing costs, vessel
  maintenance and repairs, and marine insurance.                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Depreciation and amortization. We incur expenses related to the
  depreciation of the historical cost of our fleet and the amortization of
  expenditures for drydockings. The aggregate number of drydockings undertaken
  in a given period and the nature of the work performed determine the level of
  drydocking expenditures. Depreciation and amortization is determined as
  follows:                                                                                                                                                                                                                                                                                                       

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Vessels are recorded at
  cost, including capitalized interest and transaction fees where appropriate,
  and depreciated to salvage value using the straight-line method as follows:
  10 years for the Chemical Pioneer,
  the Charleston and the Houston; and 30 years for the ATB Freeport, the ATB Galvestonand the ATB Brownsville based on their
  respective estimated useful lives. Prior to September 30, 2008, our ITBs were
  being depreciated to salvage value using the straight-line method to their
  respective mandatory retirement from transportation of petroleum products as
  required by OPA 90, between 2012 and 2014. At September 30, 2008, in
  connection with the write-down of the value of the ITBs, the remaining
  depreciable lives for the ITBs was accelerated to November 2008 for the ITB Groton and ITB Jacksonville, May 2009 for the ITB New
  York (based on its anticipated sale in June 2009) and September
  30, 2010 for the ITB Baltimore,
  the ITB Mobile and the ITB Philadelphia. TheSea Ventureis recorded at its
  estimated scrapping value after recording an impairment charge at December
  31, 2008; prior to that it was being depreciated to salvage value using the
  straight-line method to its mandatory retirement as required by OPA 90.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Office furniture,
  equipment and other are depreciated over the estimated useful life of three
  to ten 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 as incurred. Leasehold improvements are capitalized and depreciated
  over the shorter of their useful life or the remaining term of the lease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

69

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | To date, our ITBs have
  been able to participate in the United States Coast Guard Underwater
  Inspection In Lieu of Drydock (UWILD) Program, which allows the ITBs to be
  drydocked once every five years, with a mid-period underwater survey in lieu
  of a second drydock. Our chemical vessels must be drydocked twice every five
  years. In addition, vessels may have to be drydocked in the event of
  accidents or other unforeseen damage. We capitalize expenditures incurred for
  drydocking and amortize these expenditures over the remaining depreciable
  lives for the ITBs and 36 months for the parcel tankers and 23 months for theHouston.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | The ATBs are subject to
  the same drydock requirements as the ITBs and currently qualify for participation
  in the UWILD program. We will capitalize expenditures incurred for drydocking
  the ATBs and amortize these expenditures over 60 months.                                                                                                                                                                                                                                                                                                                                                                                                               

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | General and administrative expenses. General and administrative expenses
  consist of employment costs for shore side staff and cost of facilities, as
  well as legal, audit and other administrative costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Total vessel days. Total vessel days are equal to the number
  of calendar days in the period multiplied by the total number of vessels
  operating or in drydock during that period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Days worked. Days worked are equal to total vessel days
  less drydocking days and days off-hire.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Drydocking days. Drydocking days are days designated for
  the inspection and survey of vessels, and resulting maintenance work, as
  required by the U.S. Coast Guard and the American Bureau of Shipping to
  maintain the vessels qualification to work in the U.S. coastwise trade. Both
  domestic (U.S. Coast Guard) and international (International Maritime
  Organization) regulatory bodies require that our vessels be inspected twice
  every five years. To date, our ITBs have been able to participate in the
  UWILD Program, which allows the ITBs to be drydocked once every five years,
  with a mid-period underwater survey in lieu of a drydock while in domestic
  trade; however, under international maritime organization regulations, in
  order for it to continue to trade internationally (including grain voyages),
  it will have to undergo two drydockings in each five year period, rather than
  a drydocking and a UWILD. The ATBs also qualify for the UWILD program. Our
  parcel tankers and the Houstonmust be drydocked twice every five years.
  Drydocking days also include unscheduled instances where vessels may have to
  be drydocked in the event of accidents or other unforeseen damage.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Net utilization. Net utilization is a primary measure of
  operating performance in our business. Net utilization is a percentage equal
  to the total number of days worked by a vessel or group of vessels during a
  defined period, divided by total vessel days for that vessel or group of
  vessels. Net utilization is adversely impacted by drydocking, scheduled and
  unscheduled maintenance and idle time not paid for by the customer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Time charter equivalent. Time charter equivalent, another key
  measure of our operating performance, is equal to the net voyage revenue
  (voyage revenue less voyage expenses) earned by a vessel during a defined
  period, divided by the total number of actual days worked by that vessel
  during that period. Fluctuations in time charter equivalent result not only
  from changes in types of contracts and charter rates charged to our
  customers, but also from voyage expenses incurred as well as from external
  factors such as weather or other delays.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

70

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Results of Operations

The following table
summarizes our results of operations (dollars in thousands, except for
operating data):

|                                                                  |  |                                                        |          |      |   |         |   |   |         |  
|----------------------------------------------------------------- |  | ------------------------------------------------------ | -------- | ---- | - | ------- | - | - | ------- | -
|                                                                  |  | U.S. Shipping Partners L.P.
  Years Ended December 31, |         
|                                                                  |  |                                                        |         
|                                                                  |  | 2008                                                   |          | 2007 |   | 2006    |  
|                                                                  |  |                                                        |          |      |   |         |  
|                                                                  |  |                                                        |          |      |   |         |   |   |         |  
|Voyage revenue                                                    |  | $                                                      | 196,440  |      | $ | 176,729 |   | $ | 150,133 |  
|                                                                  |  |                                                        |          |      |   |         |   |   |         |  
|Vessel operating expenses                                         |  |                                                        | 65,611   |      |   | 65,656  |   |   | 59,493  |  
|% of voyage revenue                                               |  |                                                        | 33.4     | %    |   | 37.2    | % |   | 39.6    | %
|Voyage expenses                                                   |  |                                                        | 69,906   |      |   | 35,824  |   |   | 27,506  |  
|% of voyage revenue                                               |  |                                                        | 35.6     | %    |   | 20.3    | % |   | 18.3    | %
|General and administrative expenses                               |  |                                                        | 21,762   |      |   | 15,533  |   |   | 13,539  |  
|% of voyage revenue                                               |  |                                                        | 11.1     | %    |   | 8.8     | % |   | 9.0     | %
|Depreciation and amortization                                     |  |                                                        | 38,148   |      |   | 37,795  |   |   | 31,305  |  
|Loss on sale of vessels                                           |  |                                                        | 1,650    |      |   |        |   |   |        |  
|Impairment charges                                                |  |                                                        | 80,870   |      |   |        |   |   |        |  
|Other expense (income)                                            |  |                                                        | 1,449    |      |   | (3,486  | ) |   |        |  
|                                                                  |  |                                                        |          |      |   |         |   |   |         |  
|Total operating expenses, net                                     |  |                                                        | 279,396  |      |   | 151,322 |   |   | 131,843 |  
|                                                                  |  |                                                        |          |      |   |         |   |   |         |  
|Operating (loss) income                                           |  |                                                        | (82,956  | )    |   | 25,407  |   |   | 18,290  |  
|% of voyage revenue                                               |  |                                                        | -42.2    | %    |   | 14.4    | % |   | 12.2    | %
|Interest expense                                                  |  |                                                        | 45,191   |      |   | 30,881  |   |   | 16,634  |  
|Interest income                                                   |  |                                                        | (2,063   | )    |   | (9,631  | ) |   | (5,413  | )
|Loss on debt extinguishment                                       |  |                                                        |         |      |   |        |   |   | 2,451   |  
|Net loss / (gain) on derivative financial instruments             |  |                                                        | 7,231    |      |   | (199    | ) |   | (1,913  | )
|                                                                  |  |                                                        |          |      |   |         |   |   |         |  
|(Loss) income before income taxes and noncontrolling
  interest   |  |                                                        | (133,315 | )    |   | 4,356   |   |   | 6,531   |  
|(Benefit) provision for income taxes                              |  |                                                        | (851     | )    |   | (94     | ) |   | 1,077   |  
|                                                                  |  |                                                        |          |      |   |         |   |   |         |  
|(Loss) income before noncontrolling interest                      |  |                                                        | (132,464 | )    |   | 4,450   |   |   | 5,454   |  
|Noncontrolling interest in Joint Venture loss (gain)              |  |                                                        | 787      |      |   | (366    | ) |   | (421    | )
|                                                                  |  |                                                        |          |      |   |         |   |   |         |  
|Net (loss) income                                                 |  | $                                                      | (133,251 | )    | $ | 4,816   |   | $ | 5,875   |  
|                                                                  |  |                                                        |          |      |   |         |   |   |         |  
|                                                                  |  |                                                        |          |      |   |         |   |   |         |  
|Distributions declared per common unit in
  respect of the period |  | $                                                      | 0.45     |      | $ | 1.80    |   | $ | 1.80    |  
|                                                                  |  |                                                        |          |      |   |         |   |   |         |  
|Operating Data (1)                                                |  |                                                        |          |      |   |         |   |   |         |  
|Number of vessels                                                 |  |                                                        | 11       |      |   | 11      |   |   | 10      |  
|Total vessel days                                                 |  |                                                        | 4,130    |      |   | 3,834   |   |   | 3,490   |  
|Days worked                                                       |  |                                                        | 3,756    |      |   | 3,585   |   |   | 3,233   |  
|Drydocking days                                                   |  |                                                        | 135      |      |   | 146     |   |   | 219     |  
|Net utilization                                                   |  |                                                        | 91       | %    |   | 94      | % |   | 93      | %
|Average daily time charter equivalent rate                        |  | $                                                      | 34,687   |      | $ | 39,504  |   | $ | 37,928  |  

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Since August 1, 2008 for
  the ATB Galveston, the date it
  was placed in service. Since November 22, 2008 for the ATB Brownsville, the date it was placed in
  service. Since June 9, 2006 for the Sea
  Venture, the date it was placed in service. Since July 1, 2007
  for the Freeport, the date it
  was placed in service. The ITB
  Jacksonville and the ITB Groton
  were sold in the fourth quarter of 2008.

In
order to address reduced demand for our ITBs in the spot market for transportation
of petroleum products, during 2008 we employed all but one of our ITBs in the
foreign transportation of grain for humanitarian organizations. Unlike our
petroleum voyages, where we generally recognize revenue and expenses based upon
the relative transit time in each period to the total estimated transit time
for each voyage, for our grain voyages we recognize revenue and certain voyage
expenses when the grain has been delivered to its final destination, which may
fall into the next reporting period. However, certain grain voyage expenses are
deferred and recorded as an asset on our balance sheet during the voyage. These
different characteristics, together with the fact that through September 13,
2007 the Hess support agreement provided us with specified minimum charter
rates for our ITBs, the additions of the ATB
Freeport, theATB Galvestonand
theATB Brownsville in July 2007,
August 2008 and November 2008, respectively, as well as the sale of the ITB Jacksonville and the ITB Groton late in the fourth quarter of
2008, make a comparison of our results with prior quarters and comparable
periods in the prior year less meaningful.

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Year Ended December 31, 2008 Compared to Year Ended December
31, 2007

The
twelve month period ended December 31, 2008 is one day greater than the twelve
month period ended December 31, 2007.

Voyage
Revenue.Voyage revenue was
$196.4 million for the year ended December 31, 2008, an increase of $19.7
million, or 11%, as compared to $176.7 million for the year ended December 31,
2007. Revenues are affected by several factors, such as the mix of charter
types, the charter rates attainable in the market, fleet utilization, other
items such as fuel surcharges, and the impact related to the difference in revenue
recognition policies for grain voyages compared to our other voyages.

Revenues
earned by the ITBs in 2008 increased $11.7 million over 2007 due to no
drydocking days for the ITB fleet in 2008 versus 146 drydocking days on this
fleet in 2007 as well as the overall net favorable impact arising from the
change in charter types and mixes on the ITB fleet. In 2007, the ITB Baltimore was out of service for 67
days during the 2007 period due to a scheduled drydock followed by an extended
out-of-service period to repair damages it sustained while in the shipyard
during Hurricane Dean in 2007 and the ITB
Philadelphia was out of service for 79 days due to a scheduled
drydock largely occurring in the fourth quarter of 2007. In 2008, both the ITB Groton
and the ITB Mobile entered the spot market in the
second quarter of 2008, compared to both being on time charters in 2007.
Revenues are generally higher on a spot charter to compensate for voyage
expenses that we pay which, under a time charter, are instead paid by the
customer. Furthermore, throughout 2008 the ITB fleet completed eight grain
voyages, which includes the grain voyage the ITB
Philadelphia commenced in November 2007 and completed in January
2008. Revenues on grain voyages are impacted by the timing of grain voyages
where revenue is recognized upon discharge of grain and fulfillment of inland
distribution contracts, if any. Two grain voyages on the ITB Mobile and the ITB Philadelphia were commenced in the
fourth quarter of 2008 but were not completed until the first quarter of 2009,
resulting in approximately $14.1 million of revenues that were deferred and not
recognized at December 31, 2008 as compared to $2.7 million in grain related
revenues that were deferred and not recognized at December 31, 2007.

The
additions of the ATB Freeport,
theATB Galvestonand the ATB Brownsville, placed in service in July
2007, August 2008 and late November 2008, respectively, increased revenues by
$9.4 million, $3.9 million and $1.3 million, respectively, over the prior year.

Offsetting
these revenue increases was a $6.6 million revenue decrease from the
Partnerships chemical fleet from the prior year largely due to fourth quarter
2008 drydockings for the Charleston,
Chemical Pioneer and the Houston totaling 135 drydocking days in 2008. Furthermore,
we estimate that our decreased revenues from the chemical fleet for 2008 were
reduced by approximately $1.1 million due to Hurricanes Hannah and Ike.

Certain
charters, including contracts of affreightment and consecutive voyage charters,
generally provide for fuel escalation charges, but do not fully protect the
Partnership when the price of fuel increases. These charges generally increase
revenue, but only serve to partially offset the increase in fuel expenses.Revenues for the twelve months ended
December 31, 2008 included $16.5 million of fuel surcharges, compared to $12.3
million for the twelve months ended December 31, 2007.

Vessel
Operating Expenses. Vessel
operating expenses were $65.6 million for the year ended December 31, 2008, a
decrease of less than $0.1 million, or less than 1%, as compared to $65.7
million for the year ended December 31, 2007.

We
are responsible for vessel operating expenses regardless of the type of charter
under which we are operating. As a percentage of revenue, vessel operating
expenses decreased to 33.4% for the year ended December 31, 2008 from 37.2% for
the year ended December 31, 2007. The decrease is attributable to the increase
in revenues in 2008. During 2008, there was a $2.7 million decrease in supplies
and a $1.3 million decrease in repairs and maintenance. These decreases were
partially offset by the addition of the ATB
Freeport, theATB Galvestonand
theATB Brownsville placed in
service in July 2007, August 2008 and late November 2008, respectively, which
incurred $1.2 million, $1.8 million and $0.8 million, respectively, in
additional vessel operating expenses for the twelve months ended December 31,
2008 as well as a net increase in other vessel operating expenses of $0.2
million over the prior year.

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Voyage
Expenses. Voyage expenses
were $69.9 million, an increase of $34.1 million, or 95%, over the prior year
of $35.8 million largely due to the additions of the ATB Freeport, the ATB
Galveston and the ATB
Brownsville, placed in service in July 2007, August 2008 and late
November 2008, respectively, which contributed $3.5 million, $0.3 million and
$0.5 million, respectively, in additional voyage expenses along with increases
in fuel, port and commission costs on the remaining fleet of $20.0 million.
Approximately $16.8 million of this $20.0 million increase related to increased
fuel costs, which were partially offset by the $4.3 million of increased fuel
surcharge revenues. In addition, grain voyage related expenses, including tank
cleaning and grain discharges, increased voyage expenses by $9.8 million for
the ITB fleet in 2008.

The
significant increase in voyage expenses is also due in part to the expiration
of time charters for three of our ITBs in 2008, resulting in the Partnership
incurring voyage expenses, principally fuel costs, that the customer paid
directly under time charters. The impact of these additional voyage expenses
increased revenues as the rates we charge are higher to compensate for these
voyage expenses that were previously paid by the customer, rather than us,
under a time charter. Because we do not recognize voyage expenses related to
our grain voyages until the grain is delivered to its final destination, voyage
expenses for the period ended December 31, 2008 do not include approximately
$7.1 million of expenses deferred in connection with grain voyages commenced in
the fourth quarter of 2008 that were not completed until the first quarter of
2009, compared to approximately $1.4 million of expenses deferred in connection
with a grain voyage commenced in the fourth quarter of 2007 that was not
completed until the first quarter of 2008.

General
and Administrative Expenses.
General and administrative expenses were $21.8 million for the twelve month
period ended December 31, 2008 compared to $15.5 million for the twelve months
ended December 31, 2007, an increase of $6.2 million or 40%.

There
was an increase in professional fees, consisting of legal, accounting,
investment banking and consulting fees, of $4.1 million primarily related to
our review of strategic alternatives and obtaining a waiver and fourth
amendment of our senior credit facility. Additionally, severance fees increased
by $2.2 million related to the recognition of the contractually mandated
severance payments due our former chairman and chief executive officer as well
as our former chief financial officer, which will both be paid over the next two
years, partially offset by a decrease of $0.1 million in remaining personnel
related expenses.

Depreciation
and Amortization.
Depreciation and amortization was $38.1 million for the twelve months ended
December 31, 2008, an increase of $0.4 million, or 0.9%, compared to $37.8
million for the twelve months ended December 31, 2007. The increase is
primarily due to the additions of the ATB
Freeport, the ATB Galveston
and the ATB Brownsville, placed
in service in July 2007, August 2008 and late November 2008, respectively,
which contributed $1.6 million, $0.8 million and $0.2 million, respectively
offset by a decrease in depreciation expense of $2.2 million largely due to the
impairment charges recognized in the third quarter of 2008 and the timing of
scheduled drydocks.

Loss
on Sale of Vessels.
Loss on sale of vessels for the year ended December 31, 2008 was $1.6 million.
This loss is largely attributable to a lower sales price on the ITB Groton sold in the fourth quarter of
2008 where the final sales price was $4.0 million or $1.6 million less than the
projected sales price of $5.6 million. We did not dispose of any vessels in
2007.

Impairment
charges. Impairment
charges for the twelve months ending December 31, 2008 were $80.9 million, due
primarily to an impairment charge for the ITB fleet of $72.3 million recognized
in the third quarter of 2008. The impairment is due to a change in
circumstances that indicate the carrying amount of the vessels may not be fully
recoverable. See --Impairment in Value of the Fleet above. Included in this
impairment charge is an impairment loss of $6.0 million related to the
cancellation of a contract to construct the fourth ATB and an impairment charge
of $2.6 million recorded in the fourth quarter of 2008 related to the
anticipated scrapping of the Sea Venturein
the second quarter of 2009. We previously entered into contracts to construct
four additional ATB units similar to the ATB
Freeport. The Partnership exercised its cancellation option for the
fourth ATB unit in the second quarter of 2008 and assessed the fair value of
the construction in progress of the fourth ATB unit at zero, resulting in an
impairment charge of $6.0 million, which included $3.8 million previously paid
for construction of the barge portion of this ATB unit, $1.4 million for
deposits on certain owner furnished equipment, $0.5 million of capitalized
interest costs, and $0.3 million in accrued liabilities. We did not recognize
an impairment charge in 2007.

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Other
Expense (Income).
Other expense of $1.4 million for the twelve months ended December 31, 2008
reflects $1.3 million in supplemental insurance premiums that we were informed
would be levied by our protection and indemnity association in respect of the 2006,
2007 and 2008 policy years due to uncertainty in financial markets and
substantial claims deficits. There was also a loss of $0.1 million recorded on
the sale of equipment during the year. For the twelve months ended December 31,
2007, a $3.5 million contract settlement was paid to us, resulting in other
income for the period.

Interest
Expense. Interest expense
was $45.2 million for the year ended December 31, 2008, an increase of $14.3
million, or 46%, compared to $30.9 million for the year ended December 31,
2007. The increase is primarily attributable to higher amortization of deferred
financing fees of $13.3 million largely due to the accelerated amortization of
deferred financing fees in the fourth quarter of 2008 resulting from our new accounting
policy of accelerating the amortization of deferred financing fees up to the
date a related financing may be callable, increased interest rates as a result
of the October 2008 bank amendment and higher average outstanding debt,
partially offset by an increase in capitalized interest and a lower LIBOR rate.
The average effective interest rate for the year ended December 31, 2008 was
9.9% compared to 10% for the year ended December 31, 2007.

Interest
Income. Interest
income, consisting of interest earned on our invested balances, was $2.1
million for the year ended December 31, 2008, a decrease of $7.6 million, or
79%, compared to $9.6 million for the year ended December 31, 2008. The
decrease is primarily attributable to a decrease in invested balances in the
funds held in escrow accounts to fund the construction of our ATBs and to fund
our remaining commitment to the Joint Venture. As these funds are used,
interest income will continue to decrease. At December 31, 2008, we had fully
funded our commitment to the Joint Venture and we used all remaining funds in
the escrow related to the funding of the construction of the ATBs during the
second quarter of 2009.

Net
Loss (Gain) on Derivative Financial Instruments. During the twelve months ended December 31,
2008, we recorded a loss of $7.2 million related to derivative financial
instruments as compared to a gain of $0.2 million for the twelve months ended
December 31, 2007. In 2006, the Partnership entered into two interest rate swap
agreements that effectively converted a portion of the LIBOR-based payments of
our credit facility to a fixed rate. As a result of the October 20, 2008
amendment to the senior credit facility, we determined that these contracts
were no longer effective as a hedge and we recorded a loss of $6.9 million
related to these contracts in the fourth quarter of 2008.

In
February 2006, the Partnership entered into contracts, denominated in Euros,
for the purchase of owner-furnished items. Due to the acceleration or deferral
of certain payments scheduled for owner-furnished items relative to the ATBs
being constructed, a portion of the foreign currency contracts were ineffective
as a hedge. As a result of this ineffectiveness, we recorded a gain of $0.8 million
during the twelve months ended December 31, 2008.

Additionally,
the Joint Venture recorded a loss of $1.2 million during the twelve months
ended December 31, 2008 in connection with the interest rate cap it had entered
into in April 2007.

In
2007, a payment scheduled for owner-furnished items relative to the fifth ATB
being constructed was deferred until December 2007, which was beyond the
expiration date of the related foreign currency forward contract, resulting in
a gain of $0.2 million in 2007. For information on our foreign currency forward
contracts and the interest rate cap, see Item 7A. Quantitative and Qualitative
Disclosures about Market Risk.

Provision
(Benefit) for Income Taxes.The
benefit for income taxes was $0.9 million for the year ended December 31, 2008
compared to a benefit for income taxes of $0.1 million for the year ended
December 31, 2007. The increase in the benefit of $0.8 million recorded during
2008 is primarily due to an increase in operating losses and the fact that more
of our subsidiaries were taxed as corporations partially offset by a provision
to record valuation allowances against deferred tax assets. For the comparable
period in 2007, only the Chemical Pioneer
and ATB Freeport LLC were owned
by a corporate subsidiary subject to federal, state and local income taxes.

Noncontrolling
Interest in Joint Venture.
For the twelve months ended December 31, 2008, we recorded minority interest in
Joint Venture losses of $0.8 million compared to minority interest in Joint
Venture income of $0.4 million for the twelve months ended December 31, 2007,
relating to the 60% of the Joint Venture owned by third parties. This loss is
largely the result of a determination that the Partnership should have been
allocating losses in accordance with the expected economic returns of the Joint
Venture, rather than proportionately based on ownership interest as it has been
basing the calculation on since the inception of the Joint Venture in 2006. As
a result, an out of period adjustment for the additional allocation of losses
to the Partnership of $1.4 million was recorded during the third quarter of
2008, offsetting year to date income of $0.6 million calculated using the
former method. See Note 21 of the consolidated financial statements.

74

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Net
Loss.The net loss for
the year ended December 31, 2008 was $133.3 million, a decrease of $138.1
million compared to net income of $4.8 million for the year ended December 31,
2007. A decrease in operating income of $108.4 million, an increase of $21.9 in
net interest expense, an increase of $7.4 million in losses on derivative
financial instruments, and a decrease in income in the noncontrolling interest
in Joint Venture of $1.2 million were offset by a $0.8 million increase in the
provision for income taxes.

Year Ended December 31, 2007 Compared to Year Ended December
31, 2006

Voyage
Revenue. Voyage
revenue was $176.7 million for the year ended December 31, 2007, an increase of
$26.6 million, or 18%, as compared to $150.1 million for the year ended
December 31, 2006. The additions of the ATB
Freeport, which entered service in July 2007, and the Sea Venture, which entered service in June
2006, accounted for $8.0 million and $5.4 million of the increase,
respectively. An increase in time charter equivalent rates of approximately 4%
on the fleet and additional days worked due to the timing of scheduled drydocks
together added approximately $13.2 million of revenue. Time charter equivalent
rates were positively impacted by stronger spot market rates and increased fuel
surcharges as a result of the type of contracts in effect during the period.
Contracts of affreightment and consecutive voyage charters generally provide
for fuel surcharges that are designed to protect us against increases in fuel
prices. Fuel surcharges were $12.3 million for the year ended December 31, 2007
compared to $8.1 million for the year ended December 31, 2006.

Vessel
Operating Expenses.
Vessel operating expenses were $65.7 million for the year ended December 31,
2007, an increase of $6.2 million, or 10%, as compared to $59.5 million for the
year ended December 31, 2006. The addition of the ATB Freeportand the Sea
Venture added $5.8 million of vessel operating expenses during 2007.
As a percentage of revenue, vessel operating expenses decreased to 37.2% for
the year ended December 31, 2007 from 39.6% for the year ended December 31,
2006. The percentage decrease is partially attributable to the reduction in drydockings
days. During drydockings, while a vessel is out of service and not earning
revenue, certain vessel operating expenses continue to be incurred, such as
crew wages and insurance. There were 146 drydocking days in 2007 compared to
219 in 2006.

Voyage
Expenses. Voyage
expenses were $35.8 million for the year ended December 31, 2007, an increase
of $8.3 million, or 30%, as compared to $27.5 million for the year ended
December 31, 2006. The increase in 2007 was due to the addition of the ATB Freeportand the Sea Venture, which contributed $4.0
million in voyage expenses, combined with increased port and bunker expenses of
approximately $4.3 million as compared to 2006. As a percentage of revenues,
voyage expenses increased to 20.3% in 2007 from 18.3% in 2006. Voyage expenses,
including port charges and bunker expenses, are borne by us for all charters
other than time charters, for which the customer pays these expenses directly.
As the percentage of time charters changes, voyage expenses may increase or
decrease as a percentage of revenue. For 2007, we earned 30% of our revenue
from time charters compared to 39% for 2006.

General
and Administrative Expenses. General and administrative expenses were $15.5 million for the twelve
months ended December 31, 2007, an increase of $2.0 million, or 15%, as
compared to $13.5 million for the year ended December 31, 2006. The increase is
attributable to additional costs associated with the management and operations
of the Joint Venture, as well as increases in personnel, accounting, legal
advisory fees and consulting fees.

Depreciation
and Amortization.
Depreciation and amortization was $37.8 million for the year ended December 31,
2007, an increase of $6.5 million, or 21%, compared to $31.3 million for the
year ended December 31, 2006. Approximately $1.6 million of the increase is
attributable to the addition of the ATB
Freeport, which was completed in June 2007 and placed into service
in July 2007 at a cost of $91.4 million plus $7.8 million of capitalized
interest. The ATB Freeport is
being amortized to its estimated salvage value over its expected useful life of
30 years, which will increase depreciation and amortization expense by
approximately $3.2 million annually. Additional increases of $5.4 million
resulted primarily from the timing of scheduled drydocks. These increases were
offset by $0.5 million due to the reduction in cost basis of the ITBs related
to the completion of the Hess support agreement. The $8.6 million received from
Hess over the term of the support agreement reduced the cost basis of our ITBs
and will decrease our annual depreciation expense over the remaining life of
the ITBs.

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Other
Expense (Income) In
connection with the settlement of a contract of affreightment, we recorded
approximately $3.5 million in other income in 2007. We reached a settlement
with a major oil and chemical customer to terminate a contract of affreightment
under which the customer was obligated to purchase services for the transport
of minimum freight volumes through late 2007 from a manufacturing facility that
it sold. As a result, we received $3.5 million from the customer in exchange
for releasing the customer from its future obligations under the contract of
affreightment. Simultaneously, a new three year contract of affreightment at
market rates with reduced volumes was agreed upon with the same customer.

Interest
Expense. Interest
expense was $30.9 million for the year ended December 31, 2007, an increase of
$14.3 million, compared to $16.6 million for the year ended December 31, 2006.
The increase is attributable to a higher average outstanding debt balance
during 2007 coupled with an increase in interest rates and amortization of debt
financing fees partially offset by an increase in capitalized interest. The
average effective interest rate for the year ended December 31, 2007 was 10%
compared to 9% for the year ended December 31, 2006.

Interest
Income. Interest
income, consisting of interest earned on our invested balances, was $9.6
million for the year ended December 31, 2007, an increase of $4.2 million,
compared to $5.4 million for the year ended December 31, 2006. The increase is
primarily attributable to higher invested balances due to the funds held in
escrow accounts since August 2006 to fund the construction of our ATBs and to
fund our remaining commitment to the Joint Venture. As these funds are used,
interest income will decrease.

Loss
on Debt Extinguishment.
The refinancing of our senior credit facility in August 2006 resulted in a $2.5
million loss on debt extinguishment in 2006, representing the write-off of
deferred financing costs associated with the debt that was repaid. There was no
such transaction in 2007.

Gain
on Termination of Hedge.
In 2007, we recorded a gain of $0.2 million in connection with the foreign
currency forward contracts that we entered into for the purchase of
owner-furnished items relative to our newbuild ATB series. In May 2007, a
payment scheduled for owner-furnished items relative to the fifth ATB being
constructed was deferred until December 2007, which was beyond the expiration
date of the related foreign currency forward contract, rendering the foreign
currency contract for the item ineffective as a hedge. Due to this hedge
ineffectiveness, a gain on derivative financial instruments was recognized in
our Consolidated Statement of Operations. For information on our foreign
currency forward contracts, see Item 7A. Quantitative and Qualitative Disclosures
about Market Risk.

In
August 2006, in connection with the refinancing of our senior credit facility,
we terminated the interest rate swap agreements that we had entered into to
minimize the risk associated with the variable interest rate debt, and
reclassified a gain of $1.9 million from other comprehensive income into net
income. Prior to termination, gains or losses on these interest rate swap
agreements were reflected in other comprehensive income on our Consolidated
Statements of Operations and Comprehensive Income. Subsequent to the
termination of the interest rate swap agreements, we entered into a new
interest rate swap agreement to minimize the risk associated with the amended
senior credit facility. For information on our current interest rate swap
agreements, see Item 7A. Quantitative and Qualitative Disclosures about Market
Risk.

Provision
(Benefit) for Income Taxes. The benefit for income taxes was $0.1 million for the year ended
December 31, 2007, compared to a provision for income taxes of $1.1 million for
the year ended December 31, 2006. This benefit is attributable to reduced
pretax income generated by the Chemical
Pioneer and ATB Freeport
in 2007 compared to pretax income in 2006, and losses generated by our corporate
subsidiary that manages our Joint Venture. Partially offsetting these amounts
was an expense for entity level state taxes applicable to our subsidiaries
including those that are not otherwise taxed as corporations.

Noncontrolling
Interest in Joint Venture Losses. For each of the years ended December 31, 2007 and 2006, we recorded
minority interest in Joint Venture income of $0.4 million, relating to the 60%
of the Joint Venture owned by third parties.

Net
Income. Net income for
the year ended December 31, 2007 was $4.8 million, a decrease of $1.1 million,
or 18%, compared to net income of $5.9 million for the year ended December 31,
2006. Increases in operating income of $7.1 million and interest income of $4.2
million, combined with reductions in income tax expenses of $1.2 million and
losses on debt extinguishment of $2.5 million were offset by increases in
interest expense of $14.3 million, a decrease in gains on derivative financial
instruments of $1.7 million and all other items of $0.1 million.

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Liquidity and Capital Resources

Operating Cash Flows

Net
cash provided by operating activities was $13.1 million and $28.0 million for
the twelve months ended December 31, 2008 and 2007, respectively. The decrease
in operating cash flows of $14.9 million in the twelve months of 2008 compared
to the twelve months of 2007 is the result of the decrease in net income of
$138.1 million, partially offset by an increase of $107.5 million in non-cash
items, a favorable change in the fluctuation in operating assets and
liabilities of $11.2 million and a reduction in capitalized drydock cost of
$4.4 million

The
increase in non-cash charges of $107.5 million for the twelve months ended
December 31, 2008 compared to the twelve months ended December 31, 2007 is
largely due to the $80.9 million impairment charge related to the impairment to
the ITB fleet of $72.3 million, an impairment loss of $6.0 million related to
the cancellation of a contract to construct the fourth ATB and an impairment
charge of $2.6 million related to the anticipated sale of the Sea Venture in 2009. Also included in the increase of
non-cash charges is an increase in depreciation and amortization of $13.7
million largely due to the acceleration of deferred financing fees of $13.3
million, an increase in the net losses on derivative financial instruments of
$7.4 million, loss on the sale of the two ITBs sold in the fourth quarter of
$1.6 million, a nonrecurring insurance surcharge of $1.3 million, an increase
in the non-controlling interest in Joint Venture loss of $1.2 million, $1.0
million of pay-in-kind interest expense added to debt outstanding, an increase
in the provision for accounts receivable of $0.6 million and a loss on the sale
of surplus equipment of $0.1 million partially offset by a decrease in our
deferred tax liabilities of $0.3 million.

Our
working capital requirements improved by $11.2 million for the twelve months
ended December 31, 2008 as compared to the twelve months ended December 31,
2007. This improvement was largely due to an increase in our accrued expenses
and other liabilities of $8.7 million largely related to the Partnerships non
payment of interest under its senior credit facility in the fourth quarter of
2008 of $7.3 million. Further adding to our favorable working capital position
in 2008 versus 2007 was a decrease in accounts receivable of $7.9 million,
largely related to the timing of voyages at the end of 2008 versus 2007, offset
by $5.4 million increase in other working capital requirements. Working capital
requirements are affected by the level of our participation in the spot markets
and the timing of our grain voyages and related impact of the accounting
policies for grain voyages. Participation in the spot market requires us to
carry higher amounts of working capital, as under spot charters fuel costs are
our responsibility and are not realized economically until payment is made to
us by the customer. Additionally, recognition of grain related freight revenue
and its related recording of accounts receivable is at voyage completion with
the related payments generally received at the completion of a voyage for grain
voyages, compared to time charters, where payment is generally due at the
beginning of a fixed period of time, such as a month. Additionally, grain
voyages tend to be substantially longer than refined petroleum product voyages
thus incurring a significant amount of deferred grain expenses that are not
expensed until voyage completion.

Capitalized
drydocking expenditures decreased $4.4 million for the twelve months ended
December 31, 2008 as compared to the twelve months ended December 31, 2007
largely due to the timing, completion status and actual cash payments of
drydockings at the respective year-ends. In 2008, the Chemical Pioneer, the Houston and the Charleston underwent drydockings in the fourth quarter, with
the Charlestons drydocking being
only partially completed at December 31, 2008. Expenditures for drydockings for
the twelve months ended December 31, 2008 also included payments related to
$1.9 million of accrued expenses for drydockings, net of adjustments for
drydockings from prior periods. Drydocking expenditures for the twelve months
ended December 31, 2007 were $14.1 million, which included drydocking
expenditures related to the ITB Baltimoreand the ITB Philadelphia,which underwent
drydockings in the third and fourth quarters of 2007, respectively, as well as
payments related to the $5.4 million of accrued drydocking expenditures at
December 31, 2006.

Investing Cash Flows

Net
cash used in investing activities totaled $217.9 million for the twelve months
ended December 31, 2008, an increase of $137.3 million compared to net cash
used of $80.6 million for the twelve months ended December 31, 2007. For the
twelve months ended December 31, 2008, the Joint Venture made $232.9 million of
payments toward the construction of product tankers and the Partnership made
$103.8 million of payments toward the construction of the ATBs. Of the $336.7
million spent for the construction of tankers and ATBs, $117.7 million was
funded from our restricted cash accounts, of which $77.9 million was for the
ATBs and $39.8 million was for the Joint Ventures product tankers; the remainder,
all of which was for the tankers being constructed by the Joint Venture, was
funded by equity contributions from the other Joint Venture Investors and
borrowings under the Joint Ventures revolving credit facility.

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Additionally,
in the twelve months ended December 31, 2008, we received $0.8 million of cash
related to the Partnerships foreign currency hedges that were terminated given
that the related underlying contract payments for owner furnished equipment for
one of the ATBs were canceled and received $0.3 million related to the sale of
some surplus equipment.

For
the twelve months ended December 31, 2007, we made $112.3 million of payments
toward the construction of the ATBs and the Joint Venture made $48.9 million of
payments toward the construction of the product tankers. Of the $161.2 million
spent for the construction of ATBs and tankers, $85.7 million was funded from
our restricted cash accounts, of which $74.9 million was for the ATBs and $10.8
million was for the Joint Ventures product tankers; the remainder, all of
which was for the tankers being constructed by the Joint Venture, was funded by
equity contributions from the other Joint Venture Investors and borrowings
under the Joint Ventures revolving credit facility.

Additionally,
in the twelve months ended December 31, 2007, the Joint Venture purchased a
nine year interest rate cap with a notional amount of $100.0 million effective
April 1, 2007 for $1.9 million, including transaction fees and we received $0.2
million of cash related to the settlement of a derivative financial instrument.

The
amounts received from or paid to Hess pursuant to the Hess support agreement
were not recognized as revenue or expense but were deferred for accounting purposes
throughout the term of the support agreement and reflected as a decrease to the
purchase price of the ITBs in September 2007, which was the end of the Hess
support agreement. Prior to such adjustment, they were included in cash flows
from investing activities as advances from (payments to) Hess. If the rate for
an ITB was less than the support rate set forth in the support agreement, Hess
paid the difference between the two rates to us. If the rate for an ITB
exceeded the support rate set forth in the support agreement, we paid the
excess to Hess to reimburse Hess for any payments made to us by Hess under the
support agreement. If Hess had been fully reimbursed for all payments made
under the support agreement, we would have been obligated to pay Hess 50% of
any remaining excess. Payments to Hess, net of payments received from Hess,
under the support agreement were $3.3 million for the twelve months ended
December 31, 2007. There were no payments made to Hess under this agreement for
the twelve months ended December 31, 2008.

Financing Cash Flows

For
the twelve months ended December 31, 2008, net cash provided by financing
activity was $203.7 million. The Joint Venture received a total of $195.2
million from the Joint Venture Investors, of which $135.5 million was pursuant
the Joint Ventures credit facility and $59.7 million was equity contributions.
Amounts received from the Joint Venture Investors will increase substantially
as the Joint Venture continues to construct the product tankers, but are
limited to total equity contributions of $105.0 million and total debt of
$325.0 million, of which an aggregate of $148.3 million remains available to
the Joint Venture at December 31, 2008. Due to the recent acceleration of the
construction of the product tankers and the likelihood that the Joint Venture
will be unable to sell one or more of the completed vessels in the near term,
these limits will be reached prior to completion of all five vessels, as having
multiple vessels under construction in the Joint Venture simultaneously on an
accelerated basis will increase the Joint Ventures capital requirements.

Additionally,
in the twelve months ended December 31, 2008 we borrowed $21.8 million under
our senior credit facility, made scheduled debt payments of $2.3 million, paid
a debt amendment fee of $0.8 million and distributed $10.2 million to holders
of our common units (but not our subordinated unit holders or our general
partner) in respect to the first quarter of 2008 and the fourth quarter of
2007.

The
terms of our senior credit facility required that the vessel sale proceeds of
$5.7 million, net of disposition costs, be used to prepay outstanding debt
under our senior credit facility and, accordingly, this payment is not reflected
in our Statement of Cash Flows for the year ended December 31, 2008.

For
the year ended December 31, 2007, net cash provided by financing activity was
$71.4 million. We received $67.0 million on draws from our senior credit
facility which was used primarily to fund the completion of the ATB Freeport. Our Joint Venture receive a
total of $41.0 million from the Joint Venture Investors, of which $16.1 million
was equity contributions, and $24.9 million was pursuant the Joint Ventures
credit facility.

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In
2007, we made $2.9 million of scheduled debt payments, and we distributed $33.5
million to our partners.

Ongoing Capital Expenditures

Marine
transportation of refined petroleum, petrochemical and commodity chemical
products is a capital intensive business, requiring significant investment to
maintain an efficient fleet and to stay in regulatory compliance. Periodically,
we make expenditures to acquire or construct additional tank vessel capacity
and/or to upgrade our overall fleet efficiency.

Both
domestic (U.S. Coast Guard) and international (International Maritime
Organization) regulatory bodies require that our vessels be inspected at least
twice every five years. To date, our ITBs have been able to participate in the
UWILD Program, which allows our ITBs to be drydocked once every five years,
with a mid-period underwater survey in lieu of a drydock while in domestic
trade. If we are required to conduct a second drydock in each five year period
rather than rely on an underwater survey, we estimate that our ITBs will be out
of service for approximately 14 to 20 days and the second drydock will cost
approximately $1.0 million to $2.0 million. This longer out of service period
and increased drydock expenses as compared to the time required for and the
cost of conducting an underwater survey could adversely affect our business,
financial condition, and results of operations. Because of the age of the ITBs,
their continued participation in the UWILD Program is now conditioned on their
undergoing an enhanced survey during the UWILD at a cost of approximately $0.5
million, resulting in the vessel being off-hire, and not earning revenue, for
an additional 12 days each time a survey is conducted; however, under international
maritime organization regulations, in order for an ITB to trade internationally
(including grain voyages), it will have to undergo two drydockings in each five
year period, rather than a drydocking and a UWILD. Additionally, vessels may
have to be drydocked in the event of accidents or other unforeseen damage. Two
ITBs, ITB New Yorkand ITB Jacksonville, completed UWILD surveys
during the quarter ended September 30, 2008, and both the ITB Baltimore and ITB Mobile have UWILDs scheduled for the
third quarter of 2009.

Three
vessels underwent drydockings in the fourth quarter of 2008, the Chemical Pioneer, the Houstonand the Charleston. The Chemical
Pioneer and the Houston
completed their respective drydockings in the fourth quarter of 2008 at
estimated drydocking costs of $5.1 million and $1.9 million, respectively. At
December 31, 2008, the Charlestons
drydocking was in progress with an estimated completed drydocking cost of $4.1
million.

The
ITB Baltimore completed its regularly scheduled drydocking in
August 2007, at a cost of $5.7 million, excluding damage repair costs. However
it remained out of service until October 2007 due to the time needed to repair
the damages it sustained after leaving drydock during Hurricane Dean. The ITB Philadelphia
completed its drydock in December 2007 at a cost of $5.7 million.

For
future drydockings, we estimate that drydocking the ITBs will cost
approximately $4.5 million per vessel, the parcel tanker drydockings will cost
approximately $2.6 million to $6.0 million per vessel and the ATB drydockings
will cost between $1.0 million and $2.0 million per vessel. While drydocked,
each of our ITBs will be out of service for approximately 50 to 70 days, each
parcel tanker and the Houston will
be out of service for approximately 35 to 60 days and each ATB unit will be out
of service for approximately 25 days.

If
the U.S. Coast Guard does not allow our ITBs to continue in the UWILD Program
or if we chose to pursue international chartering opportunities that would
preclude our continued participation in the UWILD Program, we estimate that the
required second drydock will require our ITBs to be out of service for
approximately 14-20 days and will cost approximately $1.0 million to $2.0
million. At the time we drydock these vessels, the actual cost and time of
drydocking may be higher due to inflation and other factors as well as the
availability of shipyards to perform the drydock. In addition, vessels in
drydock will not generate any income, which will reduce our revenue and cash
available for distribution and to pay interest on, and principal of, debt.

Our
senior credit facility prohibits us from drydocking any of our ITBs without the
prior consent of the senior lenders. If we are not permitted to drydock our
ITBs, we will be required to take them out of service.

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Contractual Obligations and Contingencies

Our
contractual obligations at December 31, 2008 consisted of the following (in
thousands):

|                                                |  |                        |           |                    |   |           |  |           |         |                 |   |        |  |   |       | 
|----------------------------------------------- |  | ---------------------- | --------- | ------------------ | - | --------- |  | --------- | ------- | --------------- | - | ------ |  | - | ----- | 
|                                                |  | Payments Due By Period |          
|                                                |  |                        |          
|                                                |  | Total                  |           | Less than
  1 Year |   | 2-3 Years |  | 4-5 Years |         | After
  5 Years |  
|                                                |  |                        |           |                    |   |           |  |           |         |                 |  
|                                                |  |                        |           |                    |   |           |  |           |         |                 |   |        |  |   |       | 
|Debt (1)                                        |  | $                      | 610,295   |                    | $ | 610,295   |  | $         |        |                 | $ |       |  | $ |      | 
|Interest on debt (2)                            |  |                        | 283,686   |                    |   | 71,727    |  |           | 146,456 |                 |   | 57,306 |  |   | 8,197 | 
|ATB commitments (3) (4)                         |  |                        | 12,087    |                    |   | 12,087    |  |           |        |                 |   |       |  |   |      | 
|Joint Venture commitments (5)                   |  |                        | 402,000   |                    |   | 240,000   |  |           | 162,000 |                 |   |       |  |   |      | 
|Tanker Commitment (6)                           |  |                        |          |                    |   |          |  |           |        |                 |   |       |  |   |      | 
|Non-cancelable operating leases                 |  |                        | 3,345     |                    |   | 678       |  |           | 865     |                 |   | 886    |  |   | 916   | 
|                                                |  |                        |           |                    |   |           |  |           |         |                 |   |        |  |   |       | 
|Total contractual obligations                   |  | $                      | 1,311,413 |                    | $ | 934,787   |  | $         | 309,321 |                 | $ | 58,192 |  | $ | 9,113 | 
|Less: sublease rent (7)                         |  |                        | 2,307     |                    |   | 313       |  |           | 642     |                 |   | 665    |  |   | 687   | 
|                                                |  |                        |           |                    |   |           |  |           |         |                 |   |        |  |   |       | 
|Total contractual obligations and contingencies |  | $                      | 1,309,106 |                    | $ | 934,474   |  | $         | 308,679 |                 | $ | 57,527 |  | $ | 8,426 | 
|                                                |  |                        |           |                    |   |           |  |           |         |                 |   |        |  |   |       | 

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1). | Because we
  are in default under our senior credit facility, all of our borrowings under
  the senior credit facility and our Second Lien Notes have been classified as
  current liabilities and therefore we deem such amounts to be due in less than
  one year. Because of alleged defaults under the Joint Venture credit
  agreement, the Joint Ventures borrowings have been classified as current
  liabilities and therefore we deem such amounts to be due in less than one
  year. Includes PIK interest of $0.9 million due under the senior credit
  facility at December 31, 2008.                                                                                                                                                                                                                                                                                                                          
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(2). | Assumes no
  additional borrowings or prepayments. Assumes interest rates in effect on
  December 31, 2008 are in effect for entire term including impact of PIK
  interest. Includes the effect of two interest rate hedges in effect at
  December 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(3). | Includes
  only contractually committed costs at December 31, 2008. At December 31,
  2008, we had $7.6 million in an escrow account and $0.4 million of funds
  drawn from the escrow account in anticipation of payments due in the first
  quarter of 2009 to fund our obligations with respect to construction of the
  remaining ATB.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(4). | Amounts
  exclude capitalized interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(5). | Represents
  the amounts necessary to build the tankers being constructed by the Joint
  Venture under the NASSCO contract (including estimated price escalations),
  which amounts are owed by the Joint Venture and not by us. Our obligation is
  limited to our $70 million commitment, all of which has been made as of
  December 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(6). | Represents
  the amounts necessary to build the four tankers not being constructed by the
  Joint Venture under the NASSCO contract (including estimated price
  escalations). If we do not construct these vessels, which is highly likely
  due to Product Carriers inability to obtain the necessary financing to
  construct these four tankers due to its financial condition and current
  market conditions, Product Carriers is obligated to reimburse NASSCO for any
  damages incurred by NASSCO as a result of these tankers not being
  constructed, or if they are transferred to a third party at a loss to NASSCO,
  up to a maximum of $10 million (plus costs and expenses incurred by NASSCO)
  for each such tanker, with such amounts being funded solely out of monies
  received by Product Carriers in respect of its equity investment in the first
  five vessels constructed by the Joint Venture.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(7). | We sublease
  approximately 75% of our New York office space to certain companies
  affiliated with our former Chairman and Chief Executive Officer. See Item
  13. Certain Relationships and Related Party Transactions, and Director
  IndependenceNew York Office Sublease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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In
2006, the Partnership entered into a contract with Manitowoc Marine Group
(MMG) for the construction of four barges, each of which is specified to have
a carrying capacity of approximately 156,000 barrels at 98% of capacity,
although the Partnership had an option to cancel the fourth barge, which it
exercised immediately prior to its expiration on June 30, 2008. In 2006, the
Partnership entered into a contract for the construction of three tugs with
Eastern Shipbuilding Group, Inc. (Eastern), which will be joined with the
barges to complete three new ATB units. The contract with Eastern included an
option to construct and deliver an additional tug which would have been
combined with the fourth barge referenced above; however, the Partnership let
this option expire in connection with the cancellation of the contract to
construct the fourth barge. The first of these ATB units, the ATB Galveston,was completed at a total
cost of $66.6 million (excluding capitalized interest, which totaled $6.8
million) and entered service in August 2008. The cost increase over the
originally budgeted amount of $65.0 million was principally due to contractually
provided cost increases related to increases in major components and change
orders. The second ATB, ATB Brownsville, was completed at a total cost
of $67.9 million (excluding capitalized interest, which totaled $6.4 million)
and entered service in late November 2008. The cost increase over the
originally budgeted amount of $65.5 million was principally due to
contractually provided cost increases related to increases in major components
and change orders.
The Partnership expects that the
final ATB will be completed in August 2009 at a cost of approximately $71.3 million
(excluding capitalized interest which totaled $5.1 million at December 31, 2008). The cost
increase over the originally budgeted amount of $66.0 million is principally due to
contractually provided cost increases related to increases in major components, customer
requested modifications and change orders. At December 31, 2008, the Partnership had
restricted cash and funds in escrow totaling approximately $8.0 million of which $5.7
million was used to pay costs incurred in 2009 to complete the ATB Brownsville and
this final ATB and $2.3 million was used to pay costs incurred prior to December 31, 2008
to construct these vessels. The Partnership expects that it will need to fund
approximately $8.3 million of construction costs to complete the final ATB from its
operating cash flows.

During
the quarter ended March 31, 2008, we determined that the fourth ATB unit
referenced above was impaired, and assessed the fair value of the construction
in progress of this ATB at zero, which resulted in an impairment charge of $6.0
million, which includes $3.8 million previously paid for construction of the
barge portion of this ATB unit, $1.4 million for deposits on certain owner
furnished equipment, and $0.5 million of capitalized interest costs. During the
quarter ended December 31, 2008, the Partnership accrued additional expenses
related to owner furnished equipment in the amount of $0.1 million and paid
this amount in the fourth quarter of 2008. In the fourth quarter of 2008, the Partnership
recorded an additional accrual of $0.2 million related to engineering services
provided for this vessel. The Partnership has no further financial obligations
with regard to either the tug or the barge.

On
March 14, 2006, we, through our subsidiary Product Carriers, entered into a
contract with the National Steel and Shipbuilding Company (NASSCO), a
subsidiary of General Dynamics Corporation (General Dynamics), for the
construction of nine 49,000 deadweight tons (dwt) double-hulled tankers.
General Dynamics provided a performance guarantee to Product Carriers in
respect of the obligations of NASSCO under the construction contract. NASSCO
delivered the first tanker in January 2009 and the second tanker in June 2009,
and is scheduled to deliver the third tanker in December 2009, the fourth
tanker in the second quarter of 2010, the fifth tanker in the fourth quarter of
2010, one tanker in 2012, two tankers in 2013 and the last tanker in 2014. We
currently expect the cost to construct these nine tankers to aggregate
approximately $1.2 billion (including an estimate for price escalation based on
projected increases in certain published price indexes), exclusive of
capitalized interest. In addition, NASSCO and Product Carriers share in any
cost savings achieved measured against the original contract price based on the
terms of the construction contract.

On
August 7, 2006, Product Carriers entered into the Joint Venture to finance the
construction of the first five tankers. We manage and own a 40% interest in the
Joint Venture and the Joint Venture Investors own the remaining 60% interest.
However, due to our control of the Joint Venture, as well as other aspects of
the joint venture agreement, the financial statements of the Joint Venture are
consolidated with ours for financial reporting purposes. We present in our
consolidated financial statements the debt of the Joint Venture, but we have no
obligation for the liabilities of the Joint Venture in excess of our $70.0
million capital commitment, all of which has been made at December 31, 2008.
The portion of the net income or loss of the Joint Venture attributable to the
60% owners of the Joint Venture is set forth under the caption Noncontrolling
interest in Joint Venture loss (income) on the Consolidated Statements of
Operations and Comprehensive Income. We and the Joint Venture Investors and
lenders have reached an agreement in principle to settle litigation between us,
subject to completion of definitive documentation and Bankruptcy Court
approval, that will result in our ceasing to be managing member of the joint
venture and manager of the joint ventures vessels. As a result of our
relinquishing our interest in the Joint Venture to the Joint Venture Investors
and no longer controlling the board of directors of the Joint Venture, the
financial statements of the Joint Venture will no longer be consolidated with
ours for financial reporting purposes. See Item 1. Business--Our Vessels-New
Product Tankers and Item 3. Legal Proceedings for a more detailed
description of the Joint Venture and our commercial dispute with the Joint
Venture Investors and lenders.

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As
tankers are constructed, we originally had the right (except in certain limited
circumstances) to purchase completed tankers from the Joint Venture at
specified prices subject to adjustment, provided that such prices were within
the range of fair values as determined by appraisal. If we did not elect to
purchase a tanker within a specified time period, the Joint Venture could sell
the tanker to a third party; however, the Joint Venture was first obligated to
allow us to make an offer to purchase the tanker (except in certain limited
circumstances). The Joint Venture intended to use the proceeds from the sale of
the tankers to us, or to third parties if we did not exercise our purchase
options, to, among other things, repay debt and to fund future milestone
payments to NASSCO relating to the construction of the remaining tankers and
ultimately to make distributions to the Joint Ventures equity holders, first
to the third party equity investors, until they received a specified return,
then to Product Carriers until it received a specified return, and then on a
shared basis dependent on the returns generated. The financing arrangements of
the Joint Venture require continued reinvestment of proceeds received from the
sale of completed product tankers to us or to third parties to finance the
construction of subsequent product tankers. Our ability to purchase these vessels
from our Joint Venture was dependent on our ability to finance the purchase of
these vessels upon their completion which, based on the contractual purchase
price, current market values and our financial condition, was not feasible with
respect to the first two vessels, the Golden
Stateand the Pelican State,and
is unlikely to be feasible with respect to the remaining vessels. As a result
of our inability to purchase these vessels and the loss of our right to manage
the Joint Ventures vessels, we will not receive the bulk of the benefits
associated with ownership of these vessels and our growth strategy and our OPA
90 compliance strategy for replacement of our ITB fleet will be adversely
affected, which will have a material adverse effect on our business, results of
operations and financial condition. As a result of the settlement of the
litigation, our interest in the Joint Venture has no value. Because we were
unable to purchase vessels from the Joint Venture and it is unlikely, in light
of current market conditions, that the Joint Venture will be able to sell the
vessels to a third party at this time, the Joint Venture will need to obtain
debt and equity financing of approximately $253.7 million to finance the
completion of the remaining vessels. There can be no assurance the Joint
Venture will be able to obtain financing on acceptable terms or at all.

Upon
formation of the Joint Venture, Product Carriers assigned its rights and
obligations with respect to the construction of the first five tankers to the
Joint Venture Investors and we received an arrangement fee of $4.5 million.
NASSCO released Product Carriers from any obligation under the construction
contract relating to the first five tankers. Because the Joint Venture did not
exercise its option to assume the rights and obligations to construct some or
all of the remaining four tankers and due to Product Carriers inability to
obtain the necessary financing to construct these four tankers due to its
financial condition and current market conditions, the Partnership has been
advised by NASSCO that it is exercising its rights under the construction
contract with Product Carriers to use commercially reasonable efforts to sell
and assign Product Carriers rights under the construction contract to have
four product tankers constructed. Product Carriers is obligated to reimburse
NASSCO for any damages incurred by NASSCO as a result of these tankers not
being constructed, or if they are transferred to a third party at a loss to
NASSCO, up to a maximum of $10 million (plus costs and expenses incurred by
NASSCO) for each such tanker, with such amounts being funded solely out of
monies received by Product Carriers in respect of its equity investment in the
first five vessels constructed by the Joint Venture.

Because
we obtain some of our insurance through protection and indemnity associations,
we 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. In November 2008, we received a notice from our
protection and indemnity association that due to the impact of the recent
financial market turmoil combined with substantial association claims, the
association needed to increase its reserves, which they would accomplish
through levying supplementary premiums for the 2006 and 2007 policy years. The
association also issued an estimate of a supplementary premium on the 2008
policy year and ordered a general increase for the forthcoming 2009 policy
year. The supplementary premium to be levied is set at 20% and 25% of the
policy years annual premiums for the 2006 and 2007 policy years, respectively.
There is an estimate of a 20% supplementary premium for the 2008 policy year
which will be reviewed in October 2009 and adjusted according to claims
activity as well as investment income. Supplemental premiums for the 2006 and
2007 policy years are $342,000 and $487,000, respectively, and are reflected in
our financial statements at December 31, 2008 as other expense. Premiums for
the two vessels sold in 2008 became due in January 2009. Premiums for the
remaining fleet are payable in three consecutive monthly installments beginning
in March 2009 for the 2006 policy year and beginning June 2009 for the 2007
policy year. An estimated amount of $474,000 has also been recognized as other
expense at December 31, 2008 related to the additional supplemental premium for
the 2008 policy year based on the notice received from our protection and
indemnity association. The association will review this 2008 policy
supplementary premium to be levied in October 2009. Renewals for the policy
beginning in February 2009 increased by approximately 6.7% for those vessels in
service for the entire 2008 policy year. Policy years run from February 20 to
February 19.

New Accounting
Pronouncements

In
September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) Statement No. 157, Fair
Value Measurement, (FAS 157) effective for fiscal years beginning after
November 15, 2007. FAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements.
This statement does not require any new fair value measurements, but simplifies
and codifies related guidance within generally accepted accounting principles.
FAS 157 applies under other accounting pronouncements that require or permit
fair value measurements. Relative to FAS 157, the FASB issued FASB Staff
Position (FSP) 157-2, which defers the effective date of FAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a
recurring basis, until fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years. We have adopted FAS 157 as of
January 1, 2008 related to financial assets and financial liabilities. The FASB
also issued FSP 157-3 which clarifies the fair value of a financial asset when
the market for that asset is not active. We are currently evaluating the impact
of FAS 157 related to nonfinancial assets and nonfinancial liabilities on our
financial statements.

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In
February 2007, the FASB issued FAS Statement No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment of FAS
Statement No. 115, (FAS 159) effective as of the beginning of fiscal years
beginning after November 15, 2007. FAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value at
specified election dates. A business entity shall report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date. The fair value option:

| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | May be
  applied instrument by instrument, with a few exceptions, such as investments
  otherwise accounted for by the equity method
| |   |                                                                                                                                     
| |  | Is
  irrevocable (unless a new election date occurs)                                                                                
| |   |                                                                                                                                     
| |  | Is applied
  only to entire instruments and not to portions of instruments.                                                         

We
have not elected fair value treatment for any financial instruments as of
December 31, 2008.

In
December 2007, the FASB issued FAS Statement No. 160, Noncontrolling Interests
in Consolidated Financial Statements  an amendment of ARB No. 51 effective as
of the beginning of fiscal years beginning after December 15, 2008. This
pronouncement, among other requirements, requires entities with noncontrolling
interests to classify noncontrolling interests as components of equity. This
pronouncement requires entities to be viewed for reporting purposes from an
economic unit perspective rather than a controlling interest perspective. This
pronouncement will impact our financial statement presentation for the 60%
noncontrolling interest of our Joint Venture.

In
December 2007, the FASB issued FAS Statement No. 141 (revised 2007), Business
Combinations (FAS 141(R)), which replaces FAS 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
acquisition method of accounting but FAS 141(R) changed the method of applying
the acquisition 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 annual period
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 Income Taxes 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). Early adoption is not allowed. We will
evaluate the impact of this pronouncement on any future acquisitions.

In
March 2008, the Emerging Issues Task Force reached a consensus on EITF 07-4,
Application of the Two-Class Method under FASB Statement No. 128, Earnings per
Share, to Master Limited Partnerships. EITF 07-4 requires master limited
partnerships with incentive distribution rights (IDRs), to measure earnings
per unit as it relates to IDRs consistent with the two-class method of
measuring earnings per unit. This issue is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. We are evaluating the impact of this pronouncement.

In
March 2008, the FASB issued FAS Statement No. 161, Disclosures about
Derivative Instruments and Hedging Activities-an amendment of FASB Statement No.
133, (FAS 161). FAS 161 expands the current disclosure requirements of FAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, (FAS
133) such that entities must now provide enhanced disclosures on a quarterly
basis regarding how and why the entity uses derivatives; how derivatives and
related hedged items are accounted for under FAS 133 and how derivatives and
related hedged items affect the entitys financial position, performance and
cash flow. Pursuant to the transition provisions of the Statement, we will
adopt FAS 161 in fiscal year 2009 and will present the required disclosures in
the prescribed format on a prospective basis. This Statement will not impact
our financial statements as it is disclosure-only in nature.

In
April 2008, the FASB issued FSP FAS 142-3, Determination
of the Useful Life of Intangible Assets. FSP FAS 142-3 amends the
factors that should be considered in developing a renewal or extension
assumptions used for purposes of determining the useful life of a recognized
intangible asset under FASB Statement No. 142, Goodwill
and Other Intangible Assets. FSP FAS 142-3 is intended to improve
the consistency between the useful life of a recognized intangible asset under
SFAS No. 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141(R) and other U.S. generally accepted
accounting principles. FSP FAS 142-3 is effective for fiscal years beginning
after December 15, 2008. Early application is not permitted. We do not believe
the impact of adopting FSP FAS 142-3 will have a material effect on our
financial position or results of operations.

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In
June 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No.
07-5, Determining Whether an Instrument (or
Embedded Feature) is Indexed to an Entitys Own Stock. This issue is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
application is not permitted. Paragraph 11(a) of SFAS No. 133, Accounting for Derivatives and Hedging Activities,
specified that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to a companys own stock and (b) classified
in stockholders equity in the statement of financial position would not be
considered a derivative financial instrument. EITF Issue No. 07-5 provides a
new two-step model to be applied in determining whether a financial instrument
or an embedded feature is indexed to an issuers own stock and thus able to
qualify for the SFAS No. 133 paragraph 11(a) scope exception. The adoption of
this statement will not have a material impact on our consolidated financial
position, results of operations and cash flows.

In
April 2008, the FASB issued FAS Statement No. 162, The Hierarchy of Generally
Accepted Accounting Principles, (FAS 162). FAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement was effective 60 days
following the SECs approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. FAS 162 establishes that the GAAP
hierarchy should be directed to entities because it is the entity (not its
auditor) that is responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP. The adoption of FAS 162
did not have an impact on us.

ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

Our
market risk is affected primarily by changes in interest rates. We are exposed
to the impact of interest rate changes primarily through our variable-rate
borrowings under our credit facility. Significant increases in interest rates
could adversely affect our profit margins, results of operations and our
ability to service our indebtedness. Based on our average variable interest
rate and based on our outstanding debt balance for that portion of our debt
outstanding that is not subject to the effects of our hedge contracts in place,
a 1% change in our variable interest rates would have increased our interest
expense by approximately $1.0 million for the year ended December 31, 2008.

We utilized interest rate swaps to reduce our exposure to market risk from
changes in interest rates. The principal objective of such contracts is to
minimize the risks and/or costs associated with our variable rate debt. These
derivative instruments are designated as hedges and, accordingly, the gains and
losses from changes in derivative fair values are recognized as comprehensive
income as required by FAS Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, (FAS 133), as amended. Gains and losses
are recognized in the statement of operations in the same period that the
underlying cash flow impacts the statement of operations. We are exposed to
credit-related losses in the event of nonperformance by counterparties to these
financial instruments. The counterparty to one of the interest rate swap
covering $97.8 million notional amount of our debt is Lehman Brothers Special
Financing, Inc., which has filed for protection under the U.S. bankruptcy laws.
We do not hold or issue interest rate swaps for trading purposes.

We
had two interest rate swap agreements as of December 31, 2008. The intent of
these agreements is to reduce interest rate risk by swapping an unknown
variable interest rate, three month LIBOR, reset quarterly, for a fixed rate.
As of December 31, 2008 the fair market values of our two interest rate swaps
were a loss of $9.2 million and a loss $6.4 million.

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The
following is a summary of the economic terms of these agreements at December
31, 2008 (dollars in thousands):

|                       |  |   |            |  
|---------------------- |  | - | ---------- | -
|Notional amount        |  | $ | 121,875    |  
|Fixed rate paid        |  |   | 5.355      | %
|Variable rate received |  |   | 1.459      | %
|Effective date         |  |   | 8/15/2006  |  
|Expiration date        |  |   | 8/6/2012   |  
|Fair Value             |  | $ | (9,167     | )
|                       |  |   |            |  
|Notional amount        |  | $ | 97,750     |  
|Fixed rate paid        |  |   | 4.899      | %
|Variable rate received |  |   | 1.459      | %
|Effective date         |  |   | 12/12/2006 |  
|Expiration date        |  |   | 8/6/2012   |  
|Fair Value             |  | $ | (6,396     | )

Immediately
following our filing for bankruptcy, the counterparties to these interest rate
swap agreements elected to early terminate the interest rate swap agreements.

Joint Venture
Hedging

On
February 27, 2007, the Joint Venture purchased a $100.0 million notional amount
nine year interest rate cap effective April 1, 2007 for $1.9 million, including
transaction fees. This interest rate cap of the three month U.S. Dollar LIBOR
of 6% is part of a hedging strategy in place at the Joint Venture to protect
the value of its vessels and the chartering contracts thereon. Upon the
completion of the construction of each vessel, the Joint Venture expects to
sell the vessel together with any chartering contract that may be in place on
such vessel. Since the long-term chartering contracts entered into by the Joint
Venture will result in a fixed stream of cash flows over a multi-year period,
the value that the Joint Venture may be able to obtain upon the sale of the
combined vessel and chartering contract is subject to volatility based upon how
interest rates fluctuate. The Joint Venture is utilizing the interest rate cap
to reduce the potential negative impacts to the Joint Ventures cash flows that
could result in movements in interest rates between the date a chartering
contract is entered into for the first product tanker and the anticipated sale
date of such combined vessel and chartering contract. The Joint Venture does
not plan to hold or issue derivative financial instruments for trading
purposes, but has not performed the activities necessary to qualify the
contract for hedge accounting treatment under FAS 133, as amended. The fair
market value of the interest rate cap at December 31, 2008 was $0.8 million.
Changes in the fair value of those instruments are reported in earnings.

The
following is a summary of the economic terms of this agreement at December 31,
2008 (dollars in thousands):

|                  |  |   |          |  
|----------------- |  | - | -------- | -
|Notional amount   |  | $ | 100,000  |  
|Interest rate cap |  |   | 6.00     | %
|Effective date    |  |   | 4/1/2007 |  
|Expiration date   |  |   | 4/1/2016 |  
|Fair Value        |  | $ | 775      |  

ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

The
financial statements set forth on pages F-1 to F-57 of this report are
incorporated herein by reference.

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

None.

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ITEM 9A. CONTROLS AND PROCEDURES-

Evaluation of
Disclosure Controls and Procedures

In
accordance with Securities 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 effective as of December 31, 2008 to provide reasonable
assurance that information required to be disclosed in the reports that we file
or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commissions rules and forms and such information is accumulated and
communicated to management as appropriate to make timely decisions regarding
required disclosures.

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 December 31, 2008 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.

Managements Report
on Internal Control Over Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial reporting
is a process designed under the supervision of our Chief Executive Officer and
Chief Financial Officer to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of our financial
statements for external purposes in accordance with generally accepted
accounting principles.

As
of December 31, 2008, management assessed the effectiveness of our internal
control over financial reporting based on the framework in Internal
ControlIntegrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on that assessment, management
concluded that our internal control over financial reporting was effective as
of December 31, 2008, based on those criteria. This annual report does not
include an attestation report of our independent registered public accounting
firm regarding internal control over financial reporting. Managements report
was not subject to attestation by the our independent registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only managements report in this annual
report.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE

US
Shipping General Partner LLC, as the general partner of U.S. Shipping Partners
L.P., manages our operations and activities. Our general partner is not elected
by our unitholders and will not be subject to re-election on a regular basis in
the future. Unitholders will not be entitled to elect the directors of our
general partner or directly or indirectly participate in our management or
operation.

Because
we are a limited partnership, the listing standards of the New York Stock
Exchange did not require our general partner to have a majority of independent
directors or a nominating/corporate governance or compensation committee.

We
are managed and operated by the directors and officers of our general partner.
All of our operating personnel are employees of an affiliate of our general
partner. Mr. Miller, our vice president-chartering, devotes a majority of his
time to managing our business and affairs and those of the Joint Venture. Our
remaining officers will spend all of their business time managing our business
and affairs and those of the Joint Venture.

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The
following table shows information regarding the directors and executive
officers of our general partner. Directors are elected for one-year terms.

|                        |  |  |     |  |  |                                                  
|----------------------- |  |  | --- |  |  | -------------------------------------------------
|Name                    |  |  | Age |  |  | Position with US Shipping General Partner
  LLC  
|                        |  |  |     |  |  |                                                  
|                       
|Ronald L.
  OKelley    |  |  | 63  |  |  | President,
  Chief Executive Officer and Director
|Joseph P.
  Gehegan     |  |  | 63  |  |  | Chief
  Operating Officer and Director           
|Jeffrey M.
  Miller     |  |  | 54  |  |  | Vice
  President - Chartering                    
|Jan T.
  Ziobro         |  |  | 52  |  |  | Vice
  President - New Construction              
|Dennis J.
  Fiore       |  |  | 57  |  |  | Vice
  President - Chief Financial Officer       
|Bryan S.
  Ganz         |  |  | 50  |  |  | Director                                         
|William M.
  Kearns, Jr |  |  | 73  |  |  | Director                                         
|Gerald
  Luterman       |  |  | 65  |  |  | Director                                         

Our
directors hold office until the earlier of their death, resignation, removal or
disqualification or until their successors have been elected and qualified.
Officers serve at the discretion of the board of directors. There are no family
relationships among any of our directors or executive officers.

Ronald
L. OKelley was appointed president and chief
executive officer of our general partner in August 2008. He joined the board of
directors of our general partner in October 2004. Mr. OKelley was chairman and
chief executive officer of Atlantic Coast Venture Investments Inc., a private
investment company, until August 2008. Mr. OKelley served as executive vice
president, chief financial officer and treasurer of State Street Corporation
from 1995 to 2002, as chief financial officer at Douglas Aircraft Company from
1991 to 1995 and as chief financial officer at Rolls Royce Inc. from 1983 to
1991. He served in senior financial positions at Citicorp from 1975 to 1983 and
at Texas Instruments Incorporated from 1969 to 1975. Mr. OKelley is a director
of Selective Insurance Group, Inc. Mr. OKelley serves as an advisor to the
Donald Jones Center for Entrepreneurship at the Tepper School of Business and
is a member of the National Association of Corporate Directors and the
Corporate Directors Group. Mr. OKelley is a graduate of Duke University and has
an MBA from the Tepper School of Business.

Joseph
P. Gehegan has been chief operating officer and a
director of our general partner since its formation, served as president of our
general partner from its formation until August 2008 and has served as
president and chief operating officer of United States Shipping Master LLC
since September 2002, which he joined in connection with our acquisition of six
ITBs from Hess. Mr. Gehegan was employed in various capacities for Hess from
1979 to 2002, most recently serving as vice president of marine operations and
commercial ship utilization. From 1972 to 1979, Mr. Gehegan was employed in
various capacities by Amoco, most recently as vice president of marine
operations. Mr. Gehegan is a graduate of the U.S. Merchant Marine Academy and
immediately following graduation worked aboard Jones Act merchant ships as an
officer for three years.

Jeffrey
M. Miller has served as vice president-chartering of
our general partner since its formation and has served as vice
president-chartering of United States Shipping Master LLC since September 2002.
Prior to joining United States Shipping Master LLC, Mr. Miller was employed in
various capacities for Marine Transport Lines, Inc. from 1985 to 2002, most
recently serving as Vice President of Chartering. Mr. Miller is a graduate of
the U.S. Merchant Marine Academy and worked aboard Jones Act merchant vessels
in various positions for ten years. Mr. Miller serves in various capacities
with the three entities owned by Paul Gridley, the former chairman and chief
executive officer of our general partner, that own and operate two barges of
less than 6,000 dwt that transport non-petroleum products.

Jan
T. Ziobrowas appointed vice president-new
construction of our general partner on April 25, 2007. Prior to that, he was
employed for over 17 years in various capacities with Overseas Shipholding
Group, Inc. (OSG), including 11 years in OSGs New Construction Group as
Senior Naval Architect. During this time he was involved in construction
projects of over 20 vessels for the account of OSG in both Japan and South
Korea. Mr. Ziobro holds a Bachelor of Science degree in Naval Architecture and
Marine Engineering from the University of Michigan. He is a member of the
Society of Naval Architects and Marine Engineers and an associate member of the
Association of Ship Brokers and Agents.

87

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Dennis
J. Fiore joined our general partner in April 2009 as
vice president--chief financial officer. From June 2008 to April 2009 he was a
consultant to our general partner and served as interim corporate controller
and, from February 2009 acting chief financial officer. From 2005 to 2008 he
was a partner with Tatum LLC, a national CFO consulting firm. He served as CFO
of Akrion, Inc, a semiconductor equipment supplier, from 1999 to 2005. Prior to
that he served as CFO for Sybron Chemicals (1997 to 1998) and InterMetro
Industries (1994 to 1997), and as Corporate Controller for Chemical Leaman Corp
from 1990 to 1993. From 1978 to 1990 Mr. Fiore was with Honeywell, Inc.s
process control business. He started his career there as a senior accountant;
rose to Division Controller in 1985; then became VP & GM of the field
instruments business in 1988. He started his career as an auditor with Arthur
Andersen in 1974. Mr. Fiore holds a B.A. in liberal arts from LaSalle
University; an M.B.A. from Rutgers University; and was licensed as a C.P.A. in
Pennsylvania in 1977.

Bryan
S. Ganzjoined the board of directors of our general
partner in February 2005. Mr. Ganz has been chairman of GPX International Tire
Company since June 2008, and was its co-president and co-chief executive
officer from its formation in 2005 until June 2008. Prior to the formation of
GPX, Mr. Ganz served as president and chief executive officer of Galaxy Tire
& Wheel, Inc., a manufacturing company, since 2001 and served as chief
operating officer from 1992 to 2000. Mr. Ganz founded Paramount Capital Group,
an investment advisory firm, in 1983 and served as president until 1990. Mr.
Ganz is a graduate of Columbia School of Law and Georgetown University.

William
M. Kearns, Jr. has been a member of the board of
directors of our general partner since its formation in 2004 and has been a
director of United States Shipping Master LLC since September 2002. Mr. Kearns
has been President of W.M. Kearns & Co., Inc., a private investment
company, since 1994, chairman and co-chief executive officer of Keefe Managers,
LLC, a money management firm, since 2002, and vice chairman, Keefe Managers,
Inc., a money management firm, from 1998 to 2002. Mr. Kearns was a managing
director of Lehman Brothers, an investment bank, and its predecessor firms from
1962 to 1994. Mr. Kearns is a director of Transistor Devices, Inc., a senior
advisor to Proudfoot Consulting, PLC, Advisory Board of Private Client
Resources and a trustee of EQ Advisors Trust (AXA Equitable Life Insurance
Company), and AXA Enterprise Funds Trust (AXA Financial).

Gerald
Luterman has been a member of the board of directors
of our general partner since May 2006. Mr. Luterman was executive vice
president and chief financial officer of KeySpan Corporation from August 1999
to September 2007. He retired when the company was acquired by National Grid of
the United Kingdom. Prior to this time, Mr. Luterman had more than 30 years
experience with companies including American Express, Booz Allen & Hamilton
and Arrow Electronics. Mr. Luterman is a director of NRG Energy, Ramsey
Industries and Lutheran Medical Center. Mr. Luterman qualified as a Canadian
Chartered Accountant and holds a Bachelor of Commerce degree from McGill
University and an MBA from Harvard Business School.

Code of Business Conduct and Ethics

The
board of directors of US Shipping General Partner LLC, our general partner, has
adopted a code of business conduct and ethics for all employees, including our
principal executive officer and principal financial and accounting officer. If
any amendments are made to the code or if our general partner grants any
waiver, including any implicit waiver, from a provision of the code to any of
our executive officers, 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 our general partner has adopted corporate governance
guidelines in accordance with the New York Stock Exchange listing requirements.

Availability of Corporate Governance
Documents

Copies
of our annual report, board committee charters, code of business conduct and
ethics and corporate governance guidelines are available, without charge, on
our website at www.usslp.com and in print upon written request to the chief
financial officer, US Shipping General Partner LLC, P.O. Box 2945, Edison, NJ
08818.

Reimbursement of Certain Expenses to our
General Partner

Our
general partner does not receive any management fee or other compensation for
its management of U.S. Shipping Partners L.P. Our general partner and its
affiliates are reimbursed for expenses incurred on our behalf, including
 crew wages and benefits, general and administrative expenses, and the
compensation of employees of affiliates of our general partner that perform
services on our behalf. These expenses include all expenses necessary or
appropriate to the conduct of the business of, and allocable to, U.S. Shipping
Partners L.P. Our partnership agreement provides that our general partner
determine in good faith the expenses that are allocable to U.S. Shipping
Partners L.P. For the years ended December 31, 2008, 2007 and 2006, these
reimbursed expenses totaled approximately $63.3 million, $54.3 million and
$46.4 million, respectively.

88

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Compliance with Section 16(a) of the
Securities Exchange Act

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 4s were required by
those persons, we believe that during the year ending December 31, 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 that Mr. Kearns reported one purchase
of common units three business days late.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

As
is commonly the case for publicly-traded limited partnerships, we and our
subsidiaries do not have any employees. We are managed by our general partner.
Our executive officers are also the executive officers of our general partner
and are employees of our general partner. Our officers, except for Mr. Miller,
our vice presidentchartering, spend all of their business time managing our
business affairs and those of the joint venture we formed to construct up to
nine petroleum tankers (the Joint Venture). Mr. Miller devotes a majority of
his time to managing our business affairs and those of the Joint Venture.

In
this compensation discussion and analysis, we discuss our compensation
objectives, our decisions and the rational behind these decisions relating to
2008 compensation for our executive officers.

Objectives of Our
Compensation Program

Our
primary business objectives are to:

| |   |                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Operate our
  fleet safely and efficiently to meet the most stringent customer and industry
  standards and remain a preferred supplier to major oil and chemical
  companies.                                          
| |   |                                                                                                                                                                                                                         
| |  | Contract as
  much of our capacity as possible with major oil and chemical companies for
  periods of one year or more in an effort to maintain steady cash flows from
  creditworthy customers through business cycles.

For additional
information regarding our business strategies, please see Item 1.
BusinessBusiness Strategies.

The
objective of our compensation program is to compensate executive officers in a
manner that:

| |       |                                                                             
| | ----- | ----------------------------------------------------------------------------
| | (i)   | links
  compensation to the achievement of our business and strategic goals;
| |       |                                                                             
| | (ii)  | aligns their
  interests with those of our unitholders;                     
| |       |                                                                             
| | (iii) | recognizes
  individual contributions; and                                  
| |       |                                                                             
| | (iv)  | attracts,
  motivates and retains highly-talented executives.               

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What our
Compensation Program is Designed to Reward

Our
compensation program is designed to reward performance that contributes to the
achievement of our business objectives and business strategies on both a
short-term and long-term basis. In addition, we reward qualities that we
believe help achieve our business objectives and business strategies such as
teamwork, individual performance in light of general economic and industry
specific conditions, the ability to manage our existing vessels, the ability to
address the OPA 90 phase out requirements and level of responsibility. In
designing our executive compensation program, we have recognized that our
executives have a much greater portion of their overall compensation at-risk
than do our other employees; consequently, we have tried to establish the
at-risk portions of our executives total compensation at levels that
recognize their much increased level of responsibility and their ability to
influence business results.

Our
compensation program is comprised of four elements:

| |       |                                                                                                                                                                                                                                                                                                     
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)   | base salary, which is intended to provide an
  annual salary at a level consistent with competitive market practice, to
  reflect each executive officers position and level of responsibility and to
  recognize each executive officers education, experience and unique value to
  our success;
| |       |                                                                                                                                                                                                                                                                                                     
| | (ii)  | annual bonuses, which are designed to help
  motivate management to achieve key operational objectives by rewarding
  achievement of these objectives;                                                                                                                                              
| |       |                                                                                                                                                                                                                                                                                                     
| | (iii) | equity-linked awards, which are designed to
  align executives interests with the interests of our unitholders, thereby
  encouraging actions to maximize short-term and long-term unitholder value;
  and                                                                                         
| |       |                                                                                                                                                                                                                                                                                                     
| | (iv)  | benefits, such as matching 401(k) plan
  contributions, which we have determined are necessary in order to provide a
  competitive remuneration package.                                                                                                                                            

The
relative proportion of total compensation paid or awarded to our executive
officers for each individual component of compensation (salary and annual
bonuses) varies for each executive officer based on the executives level in
the organization. The level correlates with the executives ability to impact
business results through the executives performance and leadership role. Our
president and chief executive officer, chief operating officer, and vice
president-chartering have a greater impact on achievement of the business
strategy and overall business performance. Therefore, a higher proportion of
their total compensation may be through annual bonuses.

The
compensation committee of the board of directors of our general partner
oversees our compensation program. The compensation committee periodically
compares our executive compensation components with market information. The
purpose of this comparison is to ensure that our total compensation package
operates effectively, remains both reasonable and competitive within our
industry and is generally comparable to the compensation offered by companies
of similar size and scope as us. The compensation committee also keeps abreast
of current trends, developments and emerging issues in executive compensation
and, if appropriate, will obtain advice and assistance from outside
compensation advisors.

Components
of Compensation

Base
Salary. Our policy is to position each executives
base salary at levels that are comparable to salaries provided to other
executives in our industry, with consideration for the industrys standards,
the size and scope of our operations, individual performance factors and the
scope of an individuals responsibilities. We consider these factors
subjectively in the aggregate and none of the factors is accorded a specific
weight, and we are not precluded from considering other factors as we consider
relevant. Although we had the assistance of an independent consultant in
setting base salaries, we did not engage in any benchmarking of these salaries against
those of other companies, as we do not believe there is another company that is
directly comparable with us.

Based
on the advice of the independent consultant engaged by the committee and our
desire to have a larger portion of 2008 compensation be in the form of
incentive compensation, as well as our financial condition, the compensation
committee determined to keep 2008 base salary at the 2006 levels. On August 22,
2007 in connection with Albert Bergeron assuming the additional duties of chief
administrative officer, his salary was increased from $261,000 per year to
$310,000 per year.

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Annual
Bonuses. In connection with our initial public
offering in 2004, our general partner adopted the US Shipping General Partner
LLC Annual Incentive Compensation Plan. The annual incentive plan is designed
to enhance the performance of our key employees by rewarding them with cash
awards for achieving annual financial and operational performance objectives.
The compensation committee in its discretion may determine individual
participants and payments, if any, for each fiscal year. A participants
designated level of participation, or target bonus, will be determined under
criteria established or approved by the compensation committee for that fiscal
year or designated performance period. Levels of participation may vary
according to a participants position and the relative impact such participant
can have on our and/or our affiliates operations. The amount of target bonus a
participant may receive for any fiscal year, if any, will depend upon the
performance level achieved for that fiscal year. Awards typically will be
determined after the end of the fiscal year or designated performance period.
Awards will be paid in cash annually, unless otherwise determined by the
compensation committee. The compensation committee will have the discretion to
reduce (but not to increase) some or all of the amount of any award that
otherwise would be payable by reason of the satisfaction of the applicable
performance targets; provided, however, that the exercise of such discretion
with respect to one participant may not be used to increase the amount of any
award otherwise payable to another participant. The termination of a
participants employment for any reason prior to payout of an award under the
annual incentive plan will result in the participants forfeiture of any such
award, unless and to the extent waived by the compensation committee. The board
of directors of our general partner may amend or terminate the annual incentive
plan at any time. We will reimburse our general partner for payments and costs
incurred under the plan.

As
a result of the significant changes in our business resulting from our
increased chemical fleet and our OPA 90 compliance strategy, it has been
difficult to identify stable benchmarks from which to set targets and issue
awards under the Annual Incentive Compensation Plan.

In
2006, we awarded cash bonuses at the end of the year based upon the compensation
committees judgment of the success achieved by us, and managements role in
such success. The bonuses were awarded based on management addressing our OPA
90 phase out requirements by entering into the Joint Venture to construct up to
nine petroleum tankers and entering into construction contracts for four
additional ATBs as well as obtaining the financing for the construction of the
first three of these vessels. However, the committee, recognizing the effect of
the delay and increased cost in constructing the first ATB, reduced the bonuses
that otherwise would have been paid in 2006 and, to provide additional
incentive to management, created an additional bonus to be paid if our first
ATB was delivered and placed in operation by May 15, 2007. Because the first
ATB was not placed into operation until July 2007, this additional bonus was
not paid.

In
2007, the compensation committee established performance goals on which bonuses
were to be based under the US Shipping General Partner LLC Annual Incentive
Compensation Plan, subject to the overall discretion of the committee to adjust
the bonuses based on the Partnerships performance and extenuating
circumstances, if any. These performance goals were established with the
assistance of Cavanagh & Associates, who was retained by the compensation
committee to advise it. The performance goals included both overall
organizational goals and individual goals tailored to each executives duties
and responsibilities. Sixty percent of such bonuses were based upon
organizational goals, specifically Distributable Cash Flow target levels set by
the compensation committee. Distributable Cash Flow is a non-GAAP financial
measure which determines how much cash we are able to distribute to our
unitholders. If the targeted goals for an executive were achieved, he would
receive a bonus equal to 75% of his base salary for 2007. The maximum amounts
payable to each executive under the bonus plan for 2007 was 100% of base
salary. If the targeted goals for an executive were not achieved, but certain
thresholds were met, the executive could receive a bonus at the discretion of
the compensation committee. We exceeded the maximum Distributable Cash Flow
goals and the executives met varying portions of their personal goals. Based solely
upon the formulas, and before our exercise of discretion, the bonus computation
for each of Messrs. Gridley, Gehegan, Miller, Bergeron and Ziobro would have
been $392,000, $342,000, $251,000, $265,000 and $81,000, respectively. However,
in light of the liquidity issues facing us and our decision not to pay a
distribution on the subordinated units for the fourth quarter of 2007, the
compensation committee determined that it was appropriate to reduce the bonuses
of Messrs. Gridley, Gehegan and Bergeron to $96,000, $92,000 and $114,000,
respectively, which amounts were the same as the cash bonuses paid to these
individuals for 2006.

For
2008, the compensation committee determined that in light of the challenges
facing the Partnership, it would not be feasible to establish meaningful
quantitative goals and, therefore, bonuses for 2008 would be determined by the
committee based upon the Partnerships performance in 2008 and its financial
condition and prospects at the time of determination. The 2008 bonuses paid out
in 2009 for Messrs. Gehegan, Miller and Ziobro were $155,000, $102,000, and
$92,000, respectively. In addition, Mr. OKelley, who became our President and
Chief Executive Officer in August 2008, received a bonus of $70,000. The bonus
represents approximately 40% of each individuals base salary except for Mr.
OKelleys, which represents approximately 42% of the salary he earned during
2008.

Because
of the Partnerships bankruptcy filing, no goals have been established for 2009.
Pursuant to the proposed plan of reorganization, an incentive compensation plan
for the reorganized companys management will be adopted; however, the terms of
that plan have not yet been established.

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Equity-Linked
Awards

Long-term
Incentive Plan. In connection with our initial public
offering, our general partner adopted the U.S. Shipping Partners L.P. Long-Term
Incentive Plan for employees, consultants and directors of US Shipping General
Partner LLC and employees and consultants of its affiliates who perform
services for US Shipping General Partner LLC and its subsidiaries. The
long-term incentive plan provides for: restricted units, phantom units, unit
options, unit appreciation rights and other unit-based awards. The long-term
incentive plan currently permits the issuance of an aggregate of 689,997 common
units. The plan is administered by the compensation committee of the board of
directors of our general partner.

The
general partners board of directors in its discretion may terminate, suspend
or discontinue the long-term incentive plan at any time with respect to any
award that has not yet been granted. The board of directors also has the right
to alter or amend the long-term incentive plan or any part of the plan from
time to time, including increasing the number of units that may be granted,
subject to the requirements of the exchange upon which the common units are
listed at that time. However, no change in any outstanding grant may be made
that would materially reduce the benefits of the participant without the
consent of the participant.

To
date, the compensation committee has not granted any awards under the long-term
incentive plan to management, although each non-employee director who is not an
employee of Sterling Investment Partners was awarded 2,000 restricted units in
April 2007 and 3,065 units in April 2008 as partial director compensation. See
Director Compensation below for more information on these grants.

Our
long-term incentive plan will be replaced by a new plan, not yet developed, in
connection with our reorganization.

Management
Incentive Interest in Our General Partner. In
connection with our initial public offering, certain executive officers of our
general partner were granted the right to receive in aggregate 10%
(subsequently reduced to 4.3% as a result of Messrs. Bergeron, Colletti and
Gridley ceasing to be executive officers) of the distributions received by our
general partner attributable to (i) the incentive distribution rights and (ii)
that portion of its 2% general partner interest attributable to distributions
on our common units and subordinated units in excess of the minimum quarterly
distribution of $0.45. The executive officers will only receive these amounts
upon conversion of the class A subordinated units into common units, but upon
such conversion they will also be entitled to receive a catch up payment
equal to the cumulative amount they would have received had such payments
commenced in November 2004. The executive officers will receive a pro rata
share of such amounts to the extent that less than all the class A subordinated
units convert into common units. Through December 31, 2008, no amounts had been
earned under this plan. As a result of our bankruptcy filing, no payments will
be made in respect of these rights.

Benefits.
We provide benefits or perquisites that we believe are standard in industry.
These benefits consist of a group medical and dental insurance program for employees
and their qualified dependents, group life insurance for employees and their
spouses, accidental death and dismemberment and long-term disability coverage
for employees and a 401(k) employee savings plan. Our executive officers do not
participate in a supplemental employment retirement benefit of any kind.

The
401(k) plan permits eligible employees to make voluntary, pre-tax contributions
to the plan up to a specified percentage of compensation, subject to applicable
tax limitations. Our general partner may make a discretionary matching
contribution to the plan for each eligible employee equal to 5% of an
employees pre-tax annual compensation, subject to applicable tax limitations.
Eligible employees who elect to participate in the plan are generally vested in
any matching contribution after commencement of their employment with us. The
plan is intended to be tax-qualified under Section 401(a) of the Internal
Revenue Code so that contributions to the plan, and income earned on plan
contributions, are not taxable to employees until withdrawn from the plan, and
so that contributions, if any, will be deductible when made. We made the
maximum matching contributions to the plan for the years ended December 31,
2006, 2007 and 2008.

How Elements of Our Compensation Program are
Related to Each Other

We
view the various components of compensation as related but distinct and
emphasize pay for performance with a significant portion of total
compensation reflecting a risk aspect tied to long- and short-term financial
and strategic goals. Prior to 2008 our compensation philosophy was 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.
Because our common units no longer have any value, we must use cash bonuses to
reward performance. 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. Our compensation committee has not adopted any
formal or informal policies or guidelines 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.

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Other Compensation Related Matters

Equity
Ownership. Although we encourage our executive
officers to retain ownership in the Partnership, we do not have a policy
requiring maintenance of a specified equity ownership level. Our policies
prohibit our executive officers from using puts, calls or options to hedge the
economic risk of their ownership.

In
the aggregate, as of December 31, 2008, our executive officers beneficially
owned an aggregate of 577,024 limited partner units, or approximately 3.2% of
our total outstanding units, including the 568,959 class B subordinated units
owned by United States Shipping Master which are attributable to our executive
officers, as well as an aggregate approximately 8.2% indirect ownership
interest in the general partner and an aggregate 4.3% interest in the
distributions received by our general partner attributable to (i) the incentive
distribution rights and (ii) that portion of its 2% general partner interest
attributable to distributions on our common units and subordinated units in
excess of the minimum quarterly distribution of $0.45.

Amounts
received by our executive officers in respect of the common units beneficially
owned by them are as follows:

|                     |  |                |        |                      |   |                |  |                      |        |                |   |                      |  |   |        |  |   |   | 
|-------------------- |  | -------------- | ------ | -------------------- | - | -------------- |  | -------------------- | ------ | -------------- | - | -------------------- |  | - | ------ |  | - | - | 
|                     |  | 2006           |        | 2007                 |   | 2008           | 
|                     |  |                |        |                      |   |                | 
|Executive
  Officers |  | Common
  Units |        | Subordinated
  Units |   | Common
  Units |  | Subordinated
  Units |        | Common
  Units |   | Subordinated
  Units | 
|                     |  |                |        |                      |   |                |  |                      |        |                |   |                      | 
|Joseph Gehegan       |  | $              | 30,078 |                      | $ | 483,680        |  | $                    | 39,312 |                | $ | 362,760              |  | $ | 19,656 |  | $ |  | 
|Ronald OKelley2     |  |                | 1,800  |                      |   |               |  |                      | 4,500  |                |   |                     |  |   | 4,500  |  |   |  | 
|Jeffrey Miller       |  |                | 9,518  |                      |   | 540,446        |  |                      | 16,470 |                |   | 405,335              |  |   | 8,235  |  |   |  | 
|Dennis Fiore1        |  |                |       |                      |   |               |  |                      |       |                |   |                     |  |   |       |  |   |  | 
|Jan Ziobro           |  |                |       |                      |   |               |  |                      |       |                |   |                     |  |   |       |  |   |  | 
|                     |  |                |        |                      |   |                |  |                      |        |                |   |                      |  |   |        |  |   |   | 
|                     |  | $              | 41,396 |                      | $ | 1,024,126      |  | $                    | 60,282 |                | $ | 768,095              |  | $ | 32,391 |  | $ |  | 
|                     |  |                |        |                      |   |                |  |                      |        |                |   |                      |  |   |        |  |   |   | 

|                                                                                              
|----------------------------------------------------------------------------------------------
|1. Mr. Fiore became an
  executive officer in April 2009.                                     
|                                                                                              
|2. Amounts were received
  prior to Mr. OKelley becoming an executive officer in August 2008.

Recovery
of Prior Awards. Except as provided by applicable laws
and regulations, the Partnership does 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.

Section
162(m). Under Section 162(m) of the Internal Revenue
Code, a limitation was placed on tax deductions of any publicly-held
corporation for individual compensation to certain executives of such
corporation exceeding $1,000,000 in any taxable year, unless the compensation
is performance-based. With respect to the deduction limitations under Section
162(m) of the Code, we are a limited partnership and therefore do not meet the
definition of a corporation under Section 162(m). Nonetheless, the salaries
and bonus compensation for each of our executive officers is substantially less
than the Section 162(m) threshold of $1,000,000.

Section
409A. If an executive is entitled to nonqualified
deferred compensation benefits that are subject to Section 409A, and such
benefits do not comply with Section 409A, then the benefits are taxable in the
first year they are not subject to a substantial risk of forfeiture. In such
case, the service provider is subject to regular federal income tax, interest
and an additional federal income tax of 20% of the benefit includible in
income. Although our long-term incentive plan provides for the grant of unit
options, Section 409A and authoritative guidance thereunder provides that unit
options can generally only be granted to employees of the entity granting the
option and certain affiliates without being required to comply with Section
409A as nonqualified deferred compensation.

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Compensation Committee Report

We
have 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, we recommend to the board of directors that the
compensation discussion and analysis be included in this Form 10-K.

Compensation
Committee:
          William M. Kearns,
Jr. (Chairman) 
          Bryan Ganz

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.

None
of the members of the compensation committee have served as an officer or
employee of us or our general partner. Furthermore, except for compensation
arrangements discussed in this Form 10-K, we have not participated in any
contracts, loans, fees, awards or financial interests, direct or indirect, with
any committee member, nor are we aware of any means, directly or indirectly, by
which a committee member could receive a material benefit from us.

Summary Compensation Table

The
following table sets forth certain information with respect to compensation of
our named executive officers:

|                                  |  |      |      |        |   |         |  |                |         |                 |   |                                        |  |                                                                             |   |                           |   |       |  |   |   |  |   |        |  |   |         | 
|--------------------------------- |  | ---- | ---- | ------ | - | ------- |  | -------------- | ------- | --------------- | - | -------------------------------------- |  | --------------------------------------------------------------------------- | - | ------------------------- | - | ----- |  | - | - |  | - | ------ |  | - | ------- | 
|Summary Compensation Table        | 
|                                  | 
|Name and
  Principal Position     |  | Year |      | Salary |   | Bonus   |  | Stock
  Awards |         | Option
  Awards |   | Non-Equity Incentive Plan Compensation |  | Change in Pension Value and Non- Qualified Deferred Compensation
  Earnings |   | All Other Compensation(4) |   | Total | 
|                                  |  |      |      |        |   |         |  |                |         |                 |   |                                        |  |                                                                             |   |                           |   |       | 
|Paul B. Gridley (1)               |  |      | 2008 |        | $ | 337,891 |  | $              |        |                 | $ |                                       |  | $                                                                           |  |                           | $ |      |  | $ |  |  | $ |       |  | $ | 337,891 | 
|Former Chairman and CEO           |  |      | 2007 |        | $ | 417,000 |  | $              | 96,000  |                 | $ |                                       |  | $                                                                           |  |                           | $ |      |  | $ |  |  | $ |       |  | $ | 513,000 | 
|                                  |  |      | 2006 |        | $ | 417,000 |  | $              | 96,000  | (2)             | $ |                                       |  | $                                                                           |  |                           | $ |      |  | $ |  |  | $ |       |  | $ | 513,000 | 
|                                  |  |      |      |        |   |         |  |                |         |                 |   |                                        |  |                                                                             |   |                           |   |       |  |   |   |  |   |        |  |   |         | 
|Ronald OKelley (3)               |  |      | 2008 |        | $ | 165,998 |  | $              | 70,000  |                 | $ |                                       |  | $                                                                           |  |                           | $ |      |  | $ |  |  | $ | 5,213  |  | $ | 241,211 | 
|President and CEO                 |  |      |      |        |   |         |  |                |         |                 |   |                                        |  |                                                                             |   |                           |   |       |  |   |   |  |   |        |  |   |         | 
|                                  |  |      |      |        |   |         |  |                |         |                 |   |                                        |  |                                                                             |   |                           |   |       |  |   |   |  |   |        |  |   |         | 
|Joseph P. Gehegan                 |  |      | 2008 |        | $ | 389,000 |  | $              | 155,000 |                 | $ |                                       |  | $                                                                           |  |                           | $ |      |  | $ |  |  | $ | 11,500 |  | $ | 555,500 | 
|Chief Operating Officer           |  |      | 2007 |        | $ | 389,000 |  | $              | 92,000  |                 | $ |                                       |  | $                                                                           |  |                           | $ |      |  | $ |  |  | $ | 11,000 |  | $ | 492,000 | 
|                                  |  |      | 2006 |        | $ | 389,000 |  | $              | 92,000  | (2)             | $ |                                       |  | $                                                                           |  |                           | $ |      |  | $ |  |  | $ | 10,500 |  | $ | 491,500 | 
|                                  |  |      |      |        |   |         |  |                |         |                 |   |                                        |  |                                                                             |   |                           |   |       |  |   |   |  |   |        |  |   |         | 
|Jeffrey M. Miller                 |  |      | 2008 |        | $ | 257,000 |  | $              | 102,000 |                 | $ |                                       |  | $                                                                           |  |                           | $ |      |  | $ |  |  | $ | 11,500 |  | $ | 370,500 | 
|Vice President - Chartering       |  |      | 2007 |        | $ | 257,000 |  | $              | 251,000 |                 | $ |                                       |  | $                                                                           |  |                           | $ |      |  | $ |  |  | $ | 11,000 |  | $ | 519,000 | 
|                                  |  |      | 2006 |        | $ | 257,000 |  | $              | 114,000 | (2)             | $ |                                       |  | $                                                                           |  |                           | $ |      |  | $ |  |  | $ | 10,500 |  | $ | 381,500 | 
|                                  |  |      |      |        |   |         |  |                |         |                 |   |                                        |  |                                                                             |   |                           |   |       |  |   |   |  |   |        |  |   |         | 
|Albert E. Bergeron (5)            |  |      | 2008 |        | $ | 310,000 |  | $              |        |                 | $ |                                       |  | $                                                                           |  |                           | $ |      |  | $ |  |  | $ | 11,500 |  | $ | 321,500 | 
|Former Vice President - CFO       |  |      | 2007 |        | $ | 278,841 |  | $              | 114,000 |                 | $ |                                       |  | $                                                                           |  |                           | $ |      |  | $ |  |  | $ | 11,000 |  | $ | 403,841 | 
|                                  |  |      | 2006 |        | $ | 261,000 |  | $              | 114,000 | (2)             | $ |                                       |  | $                                                                           |  |                           | $ |      |  | $ |  |  | $ | 10,500 |  | $ | 385,500 | 
|                                  |  |      |      |        |   |         |  |                |         |                 |   |                                        |  |                                                                             |   |                           |   |       |  |   |   |  |   |        |  |   |         | 
|Jan T. Ziobro (6)                 |  |      | 2008 |        | $ | 230,000 |  | $              | 92,000  |                 | $ |                                       |  | $                                                                           |  |                           | $ |      |  | $ |  |  | $ | 11,500 |  | $ | 333,500 | 
|Vice President - New Construction |  |      | 2007 |        | $ | 156,872 |  | $              | 81,000  |                 | $ |                                       |  | $                                                                           |  |                           | $ |      |  | $ |  |  | $ | 5,927  |  | $ | 243,799 | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Mr. Gridley
  left our employ on October 23, 2008. As a result of Mr. Gridleys termination
  of employment, he is contractually entitled to receive under the terms of his
  employment agreement entered into in connection with the Partnerships
  initial public offering in November 2004 severance in the amount of
  $1,251,000, payable in equal semi-monthly installments for a period of two
  years, provided that if a change of control of the Partnership occurs prior
  to October 22, 2009, he will be entitled to an additional $625,500, and such
  amount, together with certain portions of the unpaid portion of the
  $1,251,000, will be immediately due and payable. Mr. Gridley received
  $117,000 under this severance arrangement during 2008. As a result of our
  bankruptcy filing, we are no longer making severance payments to Mr. Gridley.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (2) | Does not
  include for each of Messrs. Gridley, Gehegan, Miller and Bergeron, an
  additional $96,000, $92,000, $38,000 and $38,000 that would have been payable
  if our first articulated tug barge had been delivered and placed in operation
  by May 15, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

94

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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (3) | Mr. OKelley
  joined us on August 8, 2008 at an annual salary of $417,000. In addition, we
  pay $8,500 per month for an apartment we leased in New York City for Mr.
  OKelleys use while he is present at our corporate offices in New Jersey.                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (4) | Consists of
  matching contributions under a 401(k) plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (5) | Mr. Bergeron
  left our employ on December 30, 2008. Pursuant to the terms of Mr. Bergerons
  employment agreement, which was entered into in connection with the
  Partnerships initial public offering in November 2004, he is contractually
  entitled to receive severance in the amount of $930,000, payable in equal
  semi-monthly installments over a period of two years, provided that if a
  change of control of the Partnership (as defined in the employment agreement)
  occurs prior to December 30, 2009, he will be entitled to an additional
  $465,000. As a result of our bankruptcy filing, we are no longer making
  severance payments to Mr. Bergeron.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (6) | Mr. Ziobro
  joined us in April 2007 at an annual salary of $230,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

Mr. Fiore
became our chief financial officer and an executive officer in April 2009 at an
annual salary of $300,000.

Employment Agreements

In
connection with our initial public offering, USS Vessel Management, LLC, a
subsidiary of our general partner, entered into amended and restated employment
agreements with each of Messrs. Gridley, Gehegan, Miller and Bergeron, who were
executive officers at the time. In 2007, USS Vessel Management entered into an
employment agreement with Mr. Ziobro in connection with his joining us as vice
presidentnew construction. Neither Mr. OKelley nor Mr. Fiore, who became our
vice president--chief financial officer in April 2009, has an employment
agreement with us. Mr. Gridley left our employ in October 2008. Mr. Bergeron
left our employ in December 2008. Each of Messrs. Fiore, Gehegan, OKelley and
Ziobro are required to devote all of his business time to managing our business
(including the business of our Joint Venture). Mr. Miller is required to devote
a majority of his time to managing our business (including the business of our
Joint Venture).

Under
their respective employment agreements, Messrs. Gehegan, Miller and Ziobro each
is currently entitled to receive annual salaries of $389,000, $257,000 and
$230,000, respectively. Each of the employment agreements provides for bonuses
to be paid at the discretion of the board of directors. In addition, Mr. Ziobro
is entitled to be paid the cash equivalent of the 975 shares of Overseas
Shipholding Group, Inc. (OSG) he forfeited as a result of terminating his
employment with OSG. He will receive, on each date that the shares would have
vested and forfeiture obligation would have lapsed with respect to the
forfeited OSG shares, an amount equal to the product determined by multiplying
(i) the number of OSG shares which became vested on such date by (ii) the
closing price of OSG stock on the date Mr. Ziobro commenced employment with us.
The cash payments due to Mr. Ziobro under this arrangement are $23,036, $17,045
and $7,940 due in January 2009, 2010 and 2011, respectively. At the time their
employment terminated, Messrs. Gridleys and Bergerons annual salaries were
$417,000 and $310,000, respectively.

The
employment agreements for each of Messrs. Gehegan and Miller expire in October
2009, and the employment agreement for Mr. Ziobro expires in April 2010. Each
of the employment agreements will thereafter automatically renew for successive
one-year terms unless either party to such employment agreement furnishes the
other 60 days prior written notice of its intent not to renew the agreement.

The
employment agreements with each Messrs. Gehegan, Miller and Ziobro provide, and
the agreements with Messrs. Bergeron and Gridley provided, that in the event we
terminate the employment of any of them without justifiable cause, as defined in
the employment agreement, or we elect not to renew the employment agreement at
the end of its term, or if any of them terminate their employment for good
reason, as defined in the employment agreement, he will be entitled to:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | monthly payments equal to one-twelfth of
  his then annual salary and target bonus for a period of two years (one year
  in the case of Mr. Ziobro) (such period the severance period); and                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | continue to
  participate, at our expense (to the same extent we bear such expense at the
  time of termination), in our health insurance and disability insurance
  programs, to the extent permitted under such programs, until the earlier of
  the end of the severance period or the date the executive begins employment
  with another entity which provides substantially similar benefits.

95

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If
during negotiations regarding or within two years following a change in control
of our general partner or U.S. Shipping Partners L.P. the employment of any of
Messrs. Gridley, Gehegan, Miller, Bergeron or Ziobro is terminated without
justifiable cause, as defined in the employment agreement, or we elect not to
renew the employment agreement at the end of its term, or if any of them
terminate their employment for good reason, as defined in the employment
agreement, we will pay severance equal to three times (two times in the case of
Mr. Ziobro) his then annual salary and target bonus. See Potential Payments
Upon Termination or Change in Control below.

Justifiable
cause refers to the occurrence of one or more of the following specified
events:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the executives repeated failure or refusal
  to attempt to perform his duties pursuant to, or executives breach of, the
  employment agreement where such conduct or breach has not ceased or been remedied
  within 15 days following written warning;                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | the executives performance of any act or
  his failure to act, for which if such executive were prosecuted and
  convicted, a crime or offense involving our money or property, or which would
  constitute a felony in the jurisdiction involved, would have occurred;                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | the executives performance of any act or
  his failure to act which constitutes, in the reasonable good faith
  determination of the board of directors, dishonesty, fraud or a breach of a
  fiduciary trust, including without limitation misappropriation of funds;                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | any intentional unauthorized disclosure by
  the executive to any person, firm or corporation other than any of our
  affiliates and their respective directors, managers, officers and employees,
  of any confidential information or trade secret related to us or our
  affiliates;                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | any attempt by the executive to secure any
  personal profit (other than through his ownership of units of United States
  Shipping Master LLC and the Partnership) in connection with our business and
  the business of our affiliates (for example, without limitation, using our
  assets to pursue other interests, diverting any business opportunity
  belonging to us or our affiliates to himself or to a third party, insider
  trading or taking bribes or kickbacks);
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | the executives engagement in a fraudulent
  act to the material damage of us or our affiliates;                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | the executives illegal use of controlled
  substances;                                                                                                                                                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | the executives engagement in conduct or
  activities materially damaging to the property, business or reputation of us
  or our affiliates, as determined in reasonable good faith by the board of
  directors (except this provision did not apply in the case of Mr. Gridley);                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | any act or omission by the executive
  involving malfeasance or gross negligence in the performance of the
  executives duties to the material detriment of us or our affiliates, as
  determined in reasonable good faith by the board of directors; or                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | the entry of any order of a court that
  remains in effect and is not discharged for a period of at least sixty (60)
  days, which enjoins or otherwise limits or restricts the performance by the
  executive under the employment agreement, relating to any contract, agreement
  or commitment made by or applicable to the executive in favor of any former
  employer or any other person.                                                                                 

Good reason
means

| |   |                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | any material diminution of executives
  duties;                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                       
| |  | any change in executives reporting
  relationship that removes the executive from reporting to our president (our
  chief executive officer in the case of Mr. Gehegan and the board of directors
  of United States Shipping Master LLC in the case of Mr. Gridley);
| |   |                                                                                                                                                                                                                                                                       
| |  | any change in executives or another
  persons duties that provides such other person with substantially all the
  duties currently provided to executive; or                                                                                                        
| |   |                                                                                                                                                                                                                                                                       
| |  | requiring executive to generally
  work at a location not within a 50 mile radius of Metro Park, New Jersey
  (Manhattan, New York in the case of Mr. Gridley).                                                                                                       

96

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Each of the
employment agreements referred to above includes a noncompetition provision
applicable:

| |   |                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | for a period of two years from the date of
  termination if the executives employment is terminated for justifiable cause
  or disability (three years in the case of Mr. Gridley);                                                                                                        
| |   |                                                                                                                                                                                                                                                                                             
| |  | for a period of two years following the
  executives voluntary termination of his employment other than for good
  reason or his election not to renew his employment agreement (three years in
  the case of Mr. Gridley); or                                                             
| |   |                                                                                                                                                                                                                                                                                             
| |  | for the severance period, if we terminate
  the executives employment other than for justifiable cause or disability or
  the executive terminates his employment for good reason or if his employment
  is terminated as a result of our election not to renew his employment
  agreement.

However,
if we fail to pay severance or expense amounts to the executive as required by
the employment agreement, the noncompetition provision will no longer apply.

The
employment agreement of Mr. Miller provides, and the employment agreement of
Mr. Gridley prior to its termination provided, that their current engagement in
the transportation of chemical products in two tank barges of less than 20,000
deadweight tons, other than transportation of petroleum or petroleum products,
is not a violation of the non-compete provisions of the employment agreement as
long as either (1) he engages in such business on a continuous basis or (2) if
he does not engage in such business on a continuous basis, we are not engaged
in such business at the time he decides to reenter such business. Pursuant to
these provisions, Messrs. Gridley and Miller currently own and operate two
Jones Act barges that transport caustic soda and calcium chloride under
contracts with third parties. In addition, Messrs. Gridley and Miller are
permitted under their employment agreements to acquire and operate additional
tank barges of less than 15,000 deadweight tons in the transportation of
chemical products, other than transportation of petroleum or petroleum
products, provided that if at any time more than 50% of the income to be
generated by such barge in a six-month period is expected to be qualifying
income, then they must offer us the opportunity to acquire such tank barge.

As a result of Mr. Gridleys termination
of employment on October 23, 2008, he is contractually entitled to receive
under the terms of a severance agreement (which reflected his rights under his
employment agreement) severance in the amount of $1,251,000, payable in equal
semi-monthly installments for a period of two years, provided that if a change
of control of the Partnership occurs prior to October 22, 2009, he will be
entitled to an additional $625,500, and such amount, together with certain
portions of the unpaid portion of the $1,251,000, will be immediately due and
payable. In connection with the termination of Mr. Gridleys employment, his
non-compete period was reduced from three years to two years. As a result of
our bankruptcy filing, we are no longer making severance payments to Mr.
Gridley.

As
a result of Mr. Bergerons termination of employment on December 30, 2008, he
is contractually entitled to receive severance in the amount of $930,000,
payable in equal semi-monthly installments over a period of two years, provided
that if a change of control of the Partnership (as defined in the employment
agreement) occurs prior to December 30, 2009, he will be entitled to an
additional $465,000. As a result of our bankruptcy filing, we are no longer
making severance payments to Mr. Bergeron.

Grants of Plan-Based Awards Table

This
table has been omitted because no plan-based awards were made in 2008. See 
Compensation Discussion and Analysis.

Outstanding Equity Awards at Fiscal Year-End

This
table has been omitted because there were no outstanding equity awards at
December 31, 2008.

Option Exercises and Stock Vested Table

This
table has been omitted because there were no options exercised or common units
vested during 2008.

97

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Pension Benefits

The
general partner of the Partnership sponsors a 401(k) plan that is available to all
U.S. employees, but does not maintain a pension or defined benefit program. The
Partnership does not have a nonqualified deferred compensation plan or program
for its officers or employees.

Potential Payments upon Termination or
Change-in-Control

The
following table sets forth potential amounts payable to our current executive
officers upon termination of employment under various circumstances, and as if
terminated on December 31, 2008.

|                                                         |     |                    |   |                             |   |                                                                                                   |  |                               |           |                                                                |   |           |  |   |           | 
|-------------------------------------------------------- | --- | ------------------ | - | --------------------------- | - | ------------------------------------------------------------------------------------------------- |  | ----------------------------- | --------- | -------------------------------------------------------------- | - | --------- |  | - | --------- | 
|Potential Payments upon Termination or Change-in-Control |    
|                                                         |    
|Name                                                     |     | By Reason of Death |   | By Reason of Disability (3) |   | Termination By Partnership Without Justifiable Cause or By
  Non- renewal of Employment Agreement |  | By Executive With Good Reason |           | Of Employment Within Two Years Following a Change in
  Control |  
|                                                         |     |                    |   |                             |   |                                                                                                   |  |                               |           |                                                                |  
|                                                         |     |                    |   |                             |   |                                                                                                   |  |                               |           |                                                                |   |           |  |   |           | 
|Joseph P. Gehegan                                        |     |                    |   |                             |   |                                                                                                   |  |                               |           |                                                                |   |           |  |   |           | 
|Salary and Bonus                                         | (1) | $                  |  |                             | $ | 680,750                                                                                           |  | $                             | 1,361,500 |                                                                | $ | 1,361,500 |  | $ | 2,042,250 | 
|Health Benefits                                          | (2) | $                  |  |                             | $ |                                                                                                  |  | $                             | 565       |                                                                | $ | 565       |  | $ | 565       | 
|                                                         |     |                    |   |                             |   |                                                                                                   |  |                               |           |                                                                |   |           |  |   |           | 
|                                                         |     | $                  |  |                             | $ | 680,750                                                                                           |  | $                             | 1,362,065 |                                                                | $ | 1,362,065 |  | $ | 2,042,815 | 
|Jeffrey M. Miller                                        |     |                    |   |                             |   |                                                                                                   |  |                               |           |                                                                |   |           |  |   |           | 
|Salary and Bonus                                         | (1) | $                  |  |                             | $ | 449,750                                                                                           |  | $                             | 899,500   |                                                                | $ | 899,500   |  | $ | 1,349,250 | 
|Health Benefits                                          | (2) | $                  |  |                             | $ |                                                                                                  |  | $                             | 565       |                                                                | $ | 565       |  | $ | 565       | 
|                                                         |     |                    |   |                             |   |                                                                                                   |  |                               |           |                                                                |   |           |  |   |           | 
|                                                         |     | $                  |  |                             | $ | 449,750                                                                                           |  | $                             | 900,065   |                                                                | $ | 900,065   |  | $ | 1,349,815 | 
|Jan T. Ziobro                                            |     |                    |   |                             |   |                                                                                                   |  |                               |           |                                                                |   |           |  |   |           | 
|Salary and Bonus                                         | (1) | $                  |  |                             | $ | 368,000                                                                                           |  | $                             | 368,000   |                                                                | $ | 368,000   |  | $ | 736,000   | 
|Health Benefits                                          | (2) | $                  |  |                             | $ |                                                                                                  |  | $                             | 516       |                                                                | $ | 516       |  | $ | 516       | 
|                                                         |     |                    |   |                             |   |                                                                                                   |  |                               |           |                                                                |   |           |  |   |           | 
|                                                         |     | $                  |  |                             | $ | 368,000                                                                                           |  | $                             | 368,516   |                                                                | $ | 368,516   |  | $ | 736,516   | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Based on a
  target bonus of 50% of base salary except for Mr. Ziobro whose target bonus
  is at 40% of base pay. Pursuant to the terms of the employment agreements, if
  the Compensation Committee of the Board of Directors does not set a target
  bonus for the year, the executives bonus target is 50% of base salary except
  for Mr. Ziobro whose target bonus is at 40% of base pay.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (2) | Assumes we
  pay benefits for entire severance period. Our obligation to pay these
  benefits will terminate if executive begins employment with another entity
  that provides substantially similar benefits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (3) | Pursuant to
  their employment agreements, each executive is entitled to receive his
  compensation (including bonus, if any) until he begins to receive benefits
  under the long-term disability insurance plan provided by us. In the event
  that payments received from such long-term disability insurance plan do not
  equal the disabled executives rate of salary at the time of disability, then
  for a period of 12 months we are obligated to pay the executive the
  difference between the policy benefit and the disabled executives rate of
  salary, subject to applicable tax withholding. The calculated amounts assume
  salary and, in accordance with the terms of their employment agreements, a
  target bonus of 50% of 2008 base salary for the salary continuation period,
  as well as no reduction as a result of payments made under the long-term
  disability insurance plan. Such payments, if made under the long-term
  disability insurance plan, may reduce Messrs. Gehegan, Miller and Ziobros
  disability payments by us up to $120,000.

Messrs.
OKelley and Fiore have no contractual right to any payments upon termination
of employment.

98

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Compensation of Directors

On
February 6, 2008, the board of directors of the general partner adopted the
following:

| |   |                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | That each
  non-employee director (other than Messrs. Macey and Newhouse) be issued 3,065
  common units of the Partnership on April 1, 2008, which units will be fully
  vested;                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                               
| |  | that
  directors M. William Macey, Jr. and Douglas L. Newhouse be paid fees
  equivalent to the fees paid to the other non-employee directors for their
  Board and committee services, for their services as members of the board of
  directors and for their service on various committees of the Board of
  Directors; and
| |   |                                                                                                                                                                                                                                                                                                                               
| |  | that William
  M. Kearns, Jr. be paid an additional annual retainer of $12,000 for serving
  as lead director of the board of directors.                                                                                                                                                                                      

Effective
October 1, 2008, the compensation committee of the board of directors of our
general partner revised the compensation being paid to non-management directors
for their service as directors to a fixed fee of $20,000 per quarter with no
additional fees for meetings attended, plus reimbursement of out-of-pocket
expenses. Prior to this change, each of our non-management directors received a
quarterly cash retainer fee of $13,000 in consideration of their services as
director of our general partner, plus a cash fee of $1,000 for each board
meeting that they participated in. Furthermore, the chairman of the audit committee
received a $10,000 annual retainer, and each of the other members of the audit
committee received a $5,000 annual retainer. Beginning in 2008, we paid the
lead outside director a $12,000 annual retainer. In addition, in 2007 and 2008
we issued common units to each of the non-management, non-Sterling investors
having a value of $38,000 in 2007 and $36,000 in 2008.

The
following table sets forth the compensation paid to our non-employee directors
during the year ended December 31, 2008.

|                          |  |                                 |         |                      |   |         |  |   |         | 
|------------------------- |  | ------------------------------- | ------- | -------------------- | - | ------- |  | - | ------- | 
|Name                      |  | Fees Earned
  or Paid in
  Cash |         | Stock
  Received (1) |   | Total   | 
|                          |  |                                 |         |                      |   |         | 
|                          |  |                                 |         |                      |   |         |  |   |         | 
|Bryan Ganz                |  | $                               | 80,817  |                      | $ | 36,412  |  | $ | 117,229 | 
|William Kearns            |  |                                 | 107,150 |                      |   | 36,412  |  |   | 143,562 | 
|Gerald Luterman           |  |                                 | 86,150  |                      |   | 36,412  |  |   | 122,562 | 
|M. William Macey, Jr. (2) |  |                                 | 54,500  |                      |   |        |  |   | 54,500  | 
|Douglas Newhouse (2)      |  |                                 | 62,500  |                      |   |        |  |   | 62,500  | 
|Ronald OKelley (3)       |  |                                 | 79,483  |                      |   | 36,412  |  |   | 115,895 | 
|                          |  |                                 |         |                      |   |         |  |   |         | 
|                          |  | $                               | 470,600 |                      | $ | 145,648 |  | $ | 616,248 | 
|                          |  |                                 |         |                      |   |         |  |   |         | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Represents
  the grant date value, computed in accordance with Statement of Financial
  Accounting Standards No. 123R, of 3,065 restricted common units granted on
  April 1, 2008 under our Long-Term Incentive Plan. These restricted units
  vested immediately.                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | (2) | Beginning in
  January 2008, Messrs. Macey and Newhouse began to receive directors fees in
  an amount equal to the amount paid in cash to our other non-management
  directors, consisting of an annual retainer of $50,000, a $1,000 per meeting
  fee (beginning April 2008) and, in the case of Mr. Newhouse, a $1,000 per
  meeting fee relating to his service on our compensation committee (beginning
  April 2008). Their fees were paid to Sterling Investment Advisors. Messrs.
  Macey and Newhouse resigned as directors in October 2008.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | (3) | Mr. OKelley
  ceased to receive director fees when he became our president and chief
  executive officer in August 2008.                                                                                                                                                                                                                                                                                                                                                                                                                              

Reimbursement of Expenses of Our General
Partner and its Affiliates

We
do not pay our general partner a management fee, but we do reimburse our general
partner for all expenses incurred on our behalf, including the costs of
employee, officer and director compensation and benefits, as well as all other
expenses necessary or appropriate to the conduct of our business. Our
partnership agreement provides that our general partner will determine the
expenses that are allocable to us in any reasonable manner determined by our
general partner in its sole discretion. See Item 13. Certain Relationships and
Related Transactions, and Director Independence  Distributions and Payments to
Our General Partner and Its Affiliates.

99

---



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

The
following table sets forth the beneficial ownership of common units of U.S.
Shipping Partners L.P. of (i) beneficial owners of 5% or more of such units,
(ii) each director and named executive officer of US Shipping General Partner
LLC and (iii) all directors and executive officers as a group, as of March 31,
2009. Unless otherwise indicated, the address of all persons and entities
listed below is c/o U.S. Shipping Partners L.P., 399 Thornall Street, 8th
Floor, Edison, New Jersey 08818.

|                                                                                                                                           |  |                |         |                              |  |                      |   |                                    |           |                                                       |  |     |   |  |      |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | ------- | ---------------------------- |  | -------------------- | - | ---------------------------------- | --------- | ----------------------------------------------------- |  | --- | - |  | ---- | -
|Name of Beneficial Owner                                                                                                                   |  | Common
  Units |         | Percentage of
  Common Units |  | Subordinated
  Units |   | Percentage of
  Subordinated Units |           | Percentage of
  Total Common and
  Subordinated Units | 
|                                                                                                                                           |  |                |         |                              |  |                      |   |                                    |           |                                                       | 
|United States Shipping 
  Master LLC (1)                                                                                                   |  |                |        |                              |  |                     |   |                                    | 6,899,968 |                                                       |  | 100 | % |  | 37.8 | %
|Sterling/US Shipping L.P.
  c/o Sterling Investment 
  Partners L.P. 
  285 Riverside Avenue 
  Westport, CT 06880 (2)                     |  |                | 140,705 |                              |  | 1.2                  | % |                                    | 6,899,968 |                                                       |  | 100 | % |  | 38.6 | %
|Sterling Investment
  Partners Side-by-Side L.P.
  c/o Sterling Investment
  Partners L.P.
  285 Riverside Avenue
  Westport, CT 06880 (3) |  |                | 2,345   |                              |  |                      | * |                                    |          |                                                       |  |    |   |  |      | *
|Fiduciary Asset Management, LLC
  8112 Maryland Avenue
  Suite 400
  St. Louis, MO 63105 (4)                                               |  |                | 850,356 |                              |  | 7.5                  | % |                                    |          |                                                       |  |    |   |  | 4.7  | %
|Bryan Ganz                                                                                                                                 |  |                | 15,065  |                              |  |                      | * |                                    |          |                                                       |  |    |   |  |      | *
|Joseph P. Gehegan (5)                                                                                                                      |  |                |        |                              |  |                      | * |                                    |          |                                                       |  |    |   |  |      | *
|Gerald Luterman                                                                                                                            |  |                | 5,065   |                              |  |                      | * |                                    |          |                                                       |  |    |   |  |      | *
|William M. Kearns, Jr. (6)                                                                                                                 |  |                | 25,065  |                              |  |                      | * |                                    |          |                                                       |  |    |   |  |      | *
|Jeffrey M. Miller (7)                                                                                                                      |  |                |        |                              |  |                      | * |                                    |          |                                                       |  |    |   |  |      | *
|Ronald L. OKelley                                                                                                                         |  |                | 8,065   |                              |  |                      | * |                                    |          |                                                       |  |    |   |  |      | *
|Jan T. Ziobro                                                                                                                              |  |                |        |                              |  |                      | * |                                    |          |                                                       |  |    |   |  |      | *
|                                                                                                                                           |  |                |         |                              |  |                      |   |                                    |           |                                                       |  |     |   |  |      |  
|* Less than 1%                                                                                                                             |  |                |         |                              |  |                      |   |                                    |           |                                                       |  |     |   |  |      |  
|All directors and executive officers officers as a group (7)
persons                                                                       |  |                | 53,260  |                              |  | 0.5                  | % |                                    |          |                                                       |  |    |   |  |      | *

US
Shipping General Partner LLC, a wholly owned subsidiary of Shipping Master,
owns a 2% general partner interest in us. The General Partner has incentive
distribution rights which represent the right to receive an increasing
quarterly percentage of quarterly distributions in excess of specified amounts.

| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1). | United States Shipping
  Master LLC (Shipping Master) owns 100% of our general partner. Shipping
  Master is the indirect beneficial owner of the general partner interest in us
  and the incentive distribution rights owned by our general partner. Of the
  subordinated units owned by Shipping Master, 5,272,341 units are classified
  as class A subordinated units and 1,627,627 units are classified as class B
  subordinated units.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | (2). | Sterling/US Shipping L.P.,
  by virtue of its right to elect a majority of the Board of Shipping Master,
  may be deemed to beneficially own the securities owned by Shipping Master.
  Sterling/US Shipping L.P. disclaims beneficial ownership of the securities
  owned by Shipping Master other than the securities attributable to its
  membership in Shipping Master. This shall not be deemed an admission that
  Sterling/US Shipping L.P. is the beneficial owner of the securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | (3). | The general partner of
  Sterling/US Shipping L.P. serves as the general partner of Sterling
  Investment Partners Side-by-Side L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | (4). | Information is based on the
  Schedule 13G filed by Fiduciary Asset Management, LLC on February 14, 2008.
  The Schedule 13G notes that Fiduciary Asset Management is deemed the
  beneficial owner of these common units because it has shared dispositive
  power with respect to 850,356 common units.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | (5). | Under Shipping Masters
  operating agreement Mr. Gehegan owns a (a) 3.89% pecuniary interest in the
  general partner interest and incentive distribution rights indirectly owned
  by Shipping Master, and (b) 16.51% pecuniary interest in the class B
  subordinated units directly owned by Shipping Master. Mr. Gehegan will have
  the right to receive 2.7% of the distributions received by our general
  partner attributable to (i) the incentive distribution rights and (ii) that
  portion of its 2% general partner interest attributable to distributions on
  the common and subordinated units in excess of the minimum quarterly
  distribution. He will only receive these amounts on the conversion of the
  class A subordinated units into common units, but upon such conversion he
  will be entitled to receive a catch up payment equal to the cumulative
  amount he would have received had such payments commenced at the closing of
  our initial public offering. He will receive a pro rata share of such amounts
  if less than all class A subordinated units convert into common units.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | (6). | Pursuant to Shipping
  Masters operating agreement, Mr. Kearns owns a (a) 0.53% pecuniary interest
  in the general partner interest and incentive distribution rights indirectly
  owned by Shipping Master, and (b) a 0.70% pecuniary interest in the class A
  subordinated units directly owned by Shipping Master.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | (7). | Under Shipping Masters
  operating agreement, Mr. Miller owns a (a) 4.35% pecuniary interest in the
  general partner interest and incentive distribution rights indirectly owned
  by Shipping Master, and (b) 18.45% pecuniary interest in the class B
  subordinated units directly owned by Shipping Master. He will have the right
  to receive 1.6% of the distributions received by our general partner
  attributable to (i) the incentive distribution rights and (ii) that portion
  of its 2% general partner interest attributable to distributions on common
  and subordinated units in excess of the minimum quarterly distribution. He
  will only receive such amounts on the conversion of the class A units into
  common units, but upon such conversion he will be entitled to receive a
  catch up payment equal to the cumulative amount he would have received had
  such payments commenced at the closing of our initial public offering. He
  will receive a pro rata share of such amounts if less than all class A
  subordinated units convert into common units.                           

100

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

Transactions with Management and Others

Our
audit committee charter requires that any transaction between us or our general
partner and: (i) any executive officer or director, (ii) any immediate family
member of any such officer or director, (iii) any 5% or greater unitholder of
the Partnership, or (iv) any entity controlled by any of (i), (ii) or (iii) (or
in which any of (i), (ii) or (iii) owns more than 5%) must be approved by the
audit committee of our board of directors.

Distributions and Payments to Our General
Partner and Its Affiliates

United
States Shipping Master LLC, the owner of our general partner, owns 6,899,968
subordinated units representing a direct 37.8% limited partner interest in us.
In addition, our general partner owns a 2% general partner interest in us. Mr.
Kearns, one or our directors, and Messrs. Gehegan and Miller, two of our
executive officers, own an interest in Shipping Master. See Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Unitholder
Matters.

Sterling/US
Shipping L.P., by virtue of its right to elect a majority of the Board of
Directors of Shipping Master, may be deemed to beneficially own the securities
owned by Shipping Master and thus may be deemed to control our general partner.
Sterling/US Shipping L.P. and affiliates purchased 143,050 common units in the
August 7, 2006 equity financing, and received distributions in respect of those
units aggregating $0.1 million during 2008.

Our
general partner does not receive any management fee or other compensation for
its management of U.S. Shipping Partners L.P., other than pursuant to the
incentive distribution rights described above. Our general partner and its
affiliates are reimbursed for expenses incurred on our behalf, including crew
wages and benefits, general and administrative expenses, and the compensation
of employees of affiliates of our general partner that perform services on our
behalf. These expenses include all expenses necessary or appropriate to the
conduct of the business of, and allocable to, U.S. Shipping Partners L.P. Our
partnership agreement provides that our general partner determine in good faith
the expenses that are allocable to U.S. Shipping Partners L.P. For the years
ended December 31, 2008, 2007 and 2006 these reimbursed expenses totaled
approximately $63.3 million, $54.3 million, and $46.4 million, respectively.

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.

New York Office Sublease

On
September 23, 2005, we entered into a ten-year lease for office space to
accommodate our New York office, commencing on January 1, 2006. We, as the
lessee, sublease 75% of the leased space to certain companies affiliated with
our former Chairman and Chief Executive Officer. Our average annual rental
expense, net of sublease income of $0.3 million, is $0.1 million. The lease
provides for additional payments of real estate taxes, insurance and other operating
expenses applicable to the property. Total rental expense excludes such
additional expense payments as part of the minimum rentals. We have been
reimbursed 75% of the cost of acquiring the letter of credit required by the
landlord and have received a guaranty from our former Chairman in the event of
any default of the lease, including that which would require drawdown of the
letter of credit.

101

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Shipping Master Voting Arrangement

The
limited liability company agreement of Shipping Master requires its members to
vote the membership interests held by them to elect the following persons, in
addition to certain other nominees, to the board of directors of Shipping
Master: (i) up to four individuals designated by Sterling/US Shipping L.P.,
(ii) Mr. Gridley for as long as he is employed by Shipping Master as its chief
executive officer and (iii) up to two other persons nominated by the board who
are not affiliated with Sterling/US Shipping L.P. The limited liability company
agreement provides that Mr. Gridley will serve as president as long as he
remains an employee of Shipping Master or one of its subsidiaries. During the
term of the limited liability company agreement, the holders of common
membership interests of Shipping Master must vote the common membership
interests held by them in the same manner as Sterling/US Shipping L.P. votes
its preferred membership interests. In addition, the limited liability company
agreement requires that the persons serving as directors of Shipping Master be
appointed as directors of our general partner. As a result, Shipping Master and
indirectly Sterling/Sterling L.P. have the right to elect all the directors of
our general partner.

Management Incentive Interest in Our General
Partner

Our
general partner is a wholly-owned subsidiary of Shipping Master. Accordingly,
the owners of Shipping Master will receive all distributions made by us to our
general partner in respect of the general partner interests and incentive
distribution rights, subject to the rights granted to the executive officers of
our general partner described below. The executive officers of our general
partner have the right to receive approximately 4.3% of the distributions
received by our general partner attributable to (i) the incentive distribution
rights and (ii) that portion of its 2% general partner interest attributable to
distributions on our common units and subordinated units in excess of the
minimum quarterly distribution. The executive officers will only receive these
amounts upon conversion of the class A subordinated units into common units,
but upon such conversion they will be entitled to receive a catch up payment
equal to the cumulative amount they would have received had such payments
commenced in November 2004. The executive officers will receive a pro rata
share of such amounts to the extent that less than all the class A subordinated
units convert into common units.

USS Product Manager LLC

USS
Product Manager LLC (Product Manager), our wholly-owned subsidiary, manages
the construction and operation of the tankers for the Joint Venture, for which
it receives the following, subject to certain specified limitations:

| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an oversight
  fee of $1.0 million per tanker, payable ratably over the course of
  construction of such tanker;                                                                               
| |   |                                                                                                                                                                                                
| |  | a management
  fee of $1.0 million per year for each completed tanker that is operated by
  the Joint Venture;                                                                                 
| |   |                                                                                                                                                                                                
| |  | a delivery
  fee of up to $0.75 million per tanker, depending on the delivery date and
  cost of construction; and                                                                             
| |   |                                                                                                                                                                                                
| |  | a sale fee
  of up to $1.5 million per tanker upon its sale to the Partnership or a third
  party, depending on the price obtained and whether a charter meeting
  specified terms is in place.

The
management agreement between Product Manager and the Joint Venture has an
initial term of 10 years, subject to early termination under certain
circumstances. The obligations under the management agreement are being
performed by employees of US Shipping General Partner LLC, our general partner.
Certain members of the Partnerships management devote significant time to the
management and operation of the Joint Venture. For years ended December 31,
2008 and 2007, we recorded $1.4 million and $0.3 million, respectively, in
income related to this management agreement; however these amounts were
eliminated in consolidation. We have reached an agreement in principle to
settle litigation with the Joint Venture Investors and lenders to the Joint
Venture, subject to completion of definitive documentation and Bankruptcy Court
approval, that will result in us ceasing to manage the Joint Venture. See Item
3. Legal Proceedings.

In
December 2007, Product Manager agreed to assume responsibility for certain site
supervision activities previously performed by the Joint Venture in exchange
for fees that will total $1.0 million per vessel constructed, subject to
certain limitations, in addition to the oversight fees. For years ended
December 31, 2008 and December 31, 2007, Product Manager recognized $1.4
million and $0.4 million, respectively, in fees for these site supervision
activities, which were eliminated in consolidation. However, in January 2009,
the Joint Venture reassumed these responsibilities and engaged a third party to
provide these site supervision services.

102

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The Blackstone Group and Affiliates

In
connection with the formation of the Joint Venture, the Joint Venture paid fees
of $10.8 million to the Joint Venture Investors. For the years ended December
31, 2008 and 2007, the Joint Venture has paid interest of $9.3 million and $5.4
million, respectively, to the Joint Venture Investors. See Item 1.
BusinessOur Vessels--New Product Tankers for more information regarding the
Joint Venture.

Sterling Investment Partners

In
connection with the August 2006 debt and equity financings, we expensed a fee
of $0.25 million relating to advisory services provided by Sterling Investment
Partners Advisors LLC (Sterling Advisors), an affiliate of the entity that
directly controls our general partner. Additionally, in connection with the
formation of the Joint Venture, the Joint Venture paid a fee of $1.5 million to
Sterling Advisors.

Beginning
in 2008, each of Messrs. Macey and Newhouse, Sterling Investment Partners
designees on the Board of Directors of our general partner, were each paid
$54,500 and $62,500, respectively, for their services as members of the Board
of Directors and for their service on various committees of the Board, which
fees were equivalent to the cash fees paid to the other non-employee directors
for their Board and committee services. See Item 11; Executive Compensation.
On October 23, 2008, as part of the Partnership right sizing its operation,
Messrs. Macey and Newhouse resigned as directors of the general partner.

Omnibus Agreement

At
the closing of the initial public offering, we entered into an omnibus
agreement with Shipping Master, our general partner and our operating
subsidiary.

Noncompetition

Under
the omnibus agreement, Shipping Master agreed, and agreed to cause its
controlled affiliates to agree, not to engage, either directly or indirectly,
in the business of providing marine transportation services or any activities
that generate qualifying income for federal income tax purposes. Sterling
Investment Partners, L.P., non-management co-investors, the Joint Venture and
their affiliates (other than Shipping Master) are not prohibited from engaging
in activities in which they compete directly or indirectly with us or from
owning assets or engaging in businesses that compete directly or indirectly
with us.

Indemnification

Under
the omnibus agreement, Shipping Master agreed to indemnify us after the closing
of the initial public offering for a period of five years against certain
environmental and toxic tort liabilities in excess of $500,000 associated with
the operation of the assets before the closing date of our initial public
offering. Liabilities resulting from a change in law after the closing of our
initial public offering are excluded from the environmental indemnity. There is
an aggregate cap of $10 million on the amount of indemnity coverage provided by
Shipping Master for the environmental and toxic tort liabilities.

Shipping
Master will indemnify us for liabilities related to:

| |   |                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | certain
  defects in title to the assets contributed to us and failure to obtain
  certain consents and permits necessary to conduct our business that arise
  prior to November 3, 2006; and
| |   |                                                                                                                                                                                              
| |  | certain
  income tax liabilities attributable to the operation of the assets
  contributed to us prior to the time they were contributed.                                                    

103

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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.

DIRECTOR INDEPENDENCE

US
Shipping General Partner LLC, as the general partner of U.S. Shipping Partners
L.P., manages our operations and activities. Our general partner is not elected
by our unitholders and will not be subject to re-election on a regular basis in
the future. Unitholders will not be entitled to elect the directors of our general
partner or directly or indirectly participate in our management or operation.

The
Board of Directors of the general partner (the Board of Directors) has
standing Audit, Compensation, Conflicts and Nominating committees. Each
committee (other than the Conflicts committee, whose duties are governed by our
partnership agreement) has a written charter.

The
Board of Directors held 19 meetings during 2008. Each director attended at
least 75% of the aggregate of both the total number of meetings of the board of
directors of US Shipping General Partner LLC and the total number of meetings
held by all committees of such board on which he served (during the periods
that he served).

Board Committees

Audit
Committee

The
Board of Directors has a standing audit committee comprising of Messrs. Kearns,
Luterman and Ganz. Mr. OKelley, formerly the chairman of the Audit Committee,
became CEO as of August 8, 2008, at which time he was replaced on the audit
committee by Mr. Ganz, who was appointed the new committee chairman. The Board
of Directors has determined that Messrs. Kearns, Luterman and Ganz are
independent within the meaning of the listing standards of the New York Stock
Exchange. In addition, the board of directors has determined that Mr. Ganz is
an audit committee financial expert within the meaning of the regulations of
the Securities and Exchange Commission.

The
primary responsibilities of the audit committee are to assist the board of
directors of our general partner in overseeing (1) the integrity of our
financial statements, (2) our independent auditors qualifications,
independence, and performance, (3) reviewing procedures for internal auditing
and the adequacy of our internal accounting controls, and (4) our compliance
with legal and regulatory requirements. The audit committee has the sole
authority to appoint, retain, and terminate our independent auditor, 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 maters and the confidential, anonymous submission by our
employees of our concerns regarding questionable accounting or auditing
matters.

The
audit committee held eight meetings during 2008.

Compensation
Committee

The
Board of Directors has a standing compensation committee consisting of Messrs.
Kearns and Ganz. Mr. Ganz replaced Mr. OKelley on the compensation committee
upon Mr. OKelleys becoming President and CEO of the Partnership on August 8,
2008. In addition, Mr. Newhouse served as a member of the compensation
committee until he resigned on October 23, 2008. The compensation committee,
among other tasks, determines and approves the officers compensation and
benefits, and reviews from time to time the compensation and benefits of
non-employee directors.

The
compensation committee held ten meetings during 2008.

104

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Conflicts
Committee

The
Board of Directors has a standing conflicts committee consisting of Messrs.
Luterman and Kearns. Mr. OKelley ceased to be a committee member upon his
becoming President and CEO of the Partnership on August 8, 2008. The conflicts
committee reviews specific matters that the board of directors of US Shipping
General Partner LLC believes may involve conflicts of interest and takes such
other action as may be required under the terms of our partnership agreement,
including any change to the amount of estimated capital expenditures deducted
from our calculation of available cash.

The
conflicts committee held one meeting during 2008.

Nominating
Committee

Effective
February 2006, US Shipping General Partner LLC elected a nominating committee
consisting of Messrs. OKelley, Kearns and Macey. The nominating committee,
among other tasks, assists the Board in its selection of individuals to fill
any vacancies or newly created directorships on the Board. Unitholders have no
right to elect our general partner or its Board of Directors. Mr. Macey stepped
down as a member of the committee when he resigned as a director in October
2008.

The
nominating committee did not meet during 2008.

Independent Directors

The
Board has two members of management, Ronald OKelley, President and Chief
Executive Officer, and Joseph Gehegan, Chief Operating Officer, and three
non-management directors. The Board has determined that the non-management
directors meet the independence requirements of the NYSE listing standards as
set forth in the NYSE Listed Company Manual. Because we are a limited
partnership, the listing standards of the New York Stock Exchange did not
require our general partner to have a majority of independent directors or a
nominating/corporate governance or compensation committee. The independent
directors are: William Kearns, Jr., Gerald Luterman and Bryan Ganz.

Mr.
Bryan Ganz is chairman and a director of GPX International Tire Company, a
portfolio company of Sterling Investment Partners L.P. and Sterling Investment
Partners II, L.P.

The
independent directors held three meetings during 2008.

Independence Determinations

Under
the NYSEs listing standards, no director qualifies as independent unless the
Board affirmatively determines that the director has no material relationship
with U.S. Shipping Partners L.P. and no specified relationship that the NYSE
has determined precludes independence. Based upon information requested from
and provided by each director concerning their background, employment and
affiliations, including commercial, industrial, banking, consulting, legal,
accounting, charitable and familial relationships, the Board has determined
that, other than being a director of US Shipping General Partner LLC, a
unitholder of U.S. Shipping Partners L.P. and, in the case of Mr. Kearns, a
unitholder and director of United States Shipping Master LLC, each of the
independent directors named above has either no relationship with U.S. Shipping
Partners L.P., either directly or as a partner, unitholder or officer of an
organization that has a relationship with us, or has only immaterial
relationships with us and is therefore independent under the NYSEs listing
standards.

Code of Business Conduct and Ethics

The
Board of Directors has adopted a code of business conduct and ethics for all
employees, including our principal executive officer and principal financial
and accounting officer. If any amendments are made to the code or if our
general partner grants any waiver, including any implicit waiver, from a
provision of the code to any of our executive officers, 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 has adopted corporate governance guidelines in accordance
with the New York Stock Exchange listing requirements.

105

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Availability of Corporate Governance Documents

Copies
of our annual report, board committee charters, code of business conduct and
ethics and corporate governance guidelines are available, without charge, on
our website at www.usslp.com and in print upon written request to the Secretary,
US Shipping General Partner LLC, P.O. Box 2945, Edison, NJ 08818.

Executive Sessions of the Board of Directors

Messrs.
Ganz, Kearns, and Luterman, who are independent non-management directors of our
general partner, meet at regularly scheduled executive sessions without the
management directors. These meetings are chaired by Mr. Kearns as lead
director. Persons wishing to communicate with our non-management directors may
do so by writing to them at US Shipping General Partner LLC, c/o Board of
Directors, P.O. Box 2945, Edison, NJ 08818.

REPORT OF THE AUDIT COMMITTEE FOR FISCAL YEAR
2008

Management
of US Shipping General Partner LLC is responsible for U.S. Shipping Partners
L.P.s internal controls and the financial reporting process.
PricewaterhouseCoopers LLP, our independent registered public accounting firm
for the year ended December 31, 2008, is responsible for performing an
independent audit of the partnerships consolidated financial statements in
accordance with the standards of the Public Company Accounting Oversight Board
(PCAOB) and issuing a report thereon. The Audit Committee monitors and
oversees these processes and approves the selection and appointment of the
Partnerships independent registered public accounting firm and recommends the
ratification of such selection and appointment to the Board.

The
Audit Committee has reviewed and discussed U.S. Shipping Partners L.P.s
audited consolidated financial statements with management and
PricewaterhouseCoopers LLP. The Audit Committee has discussed with
PricewaterhouseCoopers LLP the matters required to be discussed by Statement on
Auditing Standards No. 61, (as amended) Communications
with Audit Committees.The
Audit Committee has received the written disclosures and the letter from
PricewaterhouseCoopers LLP, as required by the applicable requirements of the
PCAOB, and has discussed with PricewaterhouseCoopers LLP that firms
independence

Based
on the foregoing review and discussions and such other matters the Audit
Committee deemed relevant and appropriate, including discussion with outside
counsel, the audit committee recommended to the Board that the audited
consolidated financial statements of U.S. Shipping Partners L.P. be included in
U.S. Shipping Partners L.P.s Annual Report on Form 10-K for the year ended
December 31, 2008.

Members of the Audit Committee: 
Bryan Ganz 
William M. Kearns, Jr. 
Gerald Luterman

ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES

The
following table presents fees and services rendered by PricewaterhouseCoopers
LLP for the years ended December 31, 2008 and 2007.

|                   |  |                        |       |      |   |       | 
|------------------ |  | ---------------------- | ----- | ---- | - | ----- | 
|                   |  | December 31,           |      
|                   |  |                        |      
|                   |  | 2008                   |       | 2007 |  
|                   |  |                        |       |      |  
|                   |  | (dollars in thousands) |      
|Audit fees (1)     |  | $                      | 1,121 |      | $ | 931   | 
|Tax fees (2)       |  |                        | 1,205 |      |   | 636   | 
|All other fees (3) |  |                        |      |      |   | 2     | 
|                   |  |                        |       |      |   |       | 
|Total              |  | $                      | 2,326 |      | $ | 1,569 | 
|                   |  |                        |       |      |   |       | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Fees for
  audit of annual financial statements, audit of financial statements of the
  Joint Venture, reviews of the related quarterly financial statements, and
  reviews of documents filed with the SEC. Audit fees for 2007 include review
  of our S-3/A registration statement filed in January 2007 and review of our
  S-4 registration statement filed in February 2007.
| |     |                                                                                                                                                                                                                                                                                                                                                                                   
| | (2) | Fees related
  to professional services for tax compliance, tax advice and tax planning.                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                   
| | (3) | Fees for
  online research product.                                                                                                                                                                                                                                                                                                                                               

106

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

Consistent
with SEC policies regarding auditor independence, following our initial public
offering, 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
auditor of several specific types of services within the categories of
audit-related 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
covering service categories 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.

PART IV

ITEM 15. EXHIBITS, 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 |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|3.1               |  | Certificate
  of Limited Partnership of U.S. Shipping Partners L.P. (incorporated by
  reference to Exhibit 3.1 to the Partnerships Registration Statement on Form
  S-1 (Registration No. 333-118141 filed August 12, 2004)                                                                                                                                                                                                                                                                                                                                                                                                             
|                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|3.2               |  | Amended and
  Restated Agreement of Limited Partnership of U.S. Shipping Partners L.P.
  (incorporated by reference to Exhibit 3.2 to the Partnerships Quarterly
  Report on Form 10-Q for the period ended September 30, 2004)                                                                                                                                                                                                                                                                                                                                                                                                          
|                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|3.3               |  | Amendment
  No. 1 to Amended and Restated Agreement of Limited Partnership of U.S.
  Shipping Partners L.P. (incorporated by reference to Exhibit 4.1 to the
  Partnerships Quarterly Report on Form 10-Q for the period ended September
  30, 2006)                                                                                                                                                                                                                                                                                                                                                                                     
|                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|3.4               |  | Certificate
  of Formation of US Shipping General Partner LLC (incorporated by reference to
  Exhibit 3.3 to the Partnerships Registration Statement on Form S-1
  (Registration No. 333-118141 filed August 12, 2004)                                                                                                                                                                                                                                                                                                                                                                                                                   
|                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|3.5*              |  | First
  Amended and Restated Limited Liability Company Agreement of US Shipping
  General Partner LLC.(incorporated by reference to Exhibit 3.1 to the
  Partnerships Quarterly Report on Form 10-Q for the period ended June 30,
  2005)                                                                                                                                                                                                                                                                                                                                                                                                
|                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.1               |  | Indenture
  dated as of August 7, 2006 between U.S. Shipping Partners, L.P., a Delaware
  limited partnership (the Company), U.S. Shipping Finance Corp., a Delaware
  corporation (Finance Corp., and together with the Company, the Issuers),
  each entity listed on Schedule I hereto (each a Guarantor, and
  collectively, the Guarantors) and Wells Fargo Bank, N.A., a national
  banking association, as trustee (the Trustee).(incorporated by reference to
  Exhibit 4.2 to the Partnerships Quarterly Report on Form 10-Q for the period
  ended June 30, 2006)                                                  
|                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.1              |  | Contribution,
  Conveyance and Assumption Agreement by and among United States Shipping
  Master LLC, US Shipping General Partner LLC, U.S. Shipping Partners L.P.,
  U.S. Shipping Operating LLC, United States Shipping LLC, United States
  Chemical Shipping LLC, USCS Chemical Chartering LLC, USS Chartering LLC, ITB
  Baltimore LLC, ITB Groton LLC, ITB Jacksonville LLC, ITB Mobile LLC, ITB New
  York LLC, ITB Philadelphia LLC, USCS Charleston LLC, and USCS Chemical
  Pioneer LLC (incorporated by reference to Exhibit 10.1 to the Partnerships
  Quarterly Report on Form 10-Q for the period ended September 30, 2004)

107

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|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.2*  |  | U.S.
  Shipping Partners L.P. Long-Term Incentive Plan (incorporated by reference to
  Exhibit 10.2 to the Partnerships Quarterly Report on Form 10-Q for the
  period ended September 30, 2004)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.3*  |  | U.S.
  Shipping Partners L.P. Annual Incentive Plan (incorporated by reference to
  Exhibit 10.3 to the Partnerships Quarterly Report on Form 10-Q for the
  period ended September 30, 2004)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.4   |  | Omnibus
  Agreement among United States Shipping Master LLC, US Shipping General
  Partner LLC, U.S. Shipping Operating LLC and U.S. Shipping Partners L.P.
  (incorporated by reference to Exhibit 10.4 to the Partnerships Quarterly
  Report on Form 10-Q for the period ended September 30, 2004)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.5  |  | Support
  Agreement dated as of September 13, 2002 between Amerada Hess Corporation and
  USS Chartering LLC (incorporated by reference to Exhibit 10.6 to the
  Partnerships Registration Statement on Form S-1 (Registration No. 333-118141
  filed August 12, 2004)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.6*  |  | Employee
  Unit Purchase Plan (incorporated by reference to Exhibit 10.6 to the
  Partnerships Quarterly Report on Form 10-Q for the period ended September
  30, 2004)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.7   |  | Third
  Amended and Restated Credit Agreement, dated as of August 7, 2006, among U.S.
  Shipping Partners L.P., U.S. Shipping Operating LLC, ITB Baltimore LLC, ITB
  Groton LLC, ITB Jacksonville LLC, ITB Mobile LLC, ITB New York LLC, ITB
  Philadelphia LLC, USS Chartering LLC, USCS Chemical Chartering LLC, USCS
  Chemical Pioneer Inc., USCS Charleston Chartering LLC, USCS Charleston LLC,
  USCS ATB LLC, USS ATB 1 LLC, USS ATB 2 LLC, USCS Sea Venture LLC, USS M/V
  Houston LLC, USS JV Manager Inc., USS PC Holding Corp., U.S. Shipping Finance
  Corp. and USS Product Manager LLC as the Borrowers, and certain commercial
  lending institutions, as the Lenders, Canadian Imperial Bank of Commerce as
  Letter of Credit Issuer, Canadian Imperial Bank of Commerce, as the
  Administrative Agent for the Lenders, Lehman Commercial Paper Inc., as the
  Syndication Agent, KeyBank National Association, as the Collateral Agent
  (incorporated by reference to Exhibit 10.1 to the Partnerships Quarterly
  Report on Form 10-Q for the period ended September 30, 2006)
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.8   |  | First
  Amendment to Third Amended and Restated Credit Agreement, dated as of August
  28, 2006 (incorporated by reference to Exhibit 10.2 to the Partnerships
  Quarterly Report on Form 10-Q for the period ended September 30, 2006)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.9   |  | Second
  Amendment to Third Amended and Restated Credit Agreement, dated as of April
  25, 2007 (incorporated by reference to Exhibit 10.1 to the Partnerships
  Quarterly Report on Form 10-Q for the period ended March 31, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.10  |  | Third
  Amendment to Third Amended and Restated Credit Agreement, dated as of June
  29, 2007 (incorporated by reference to Exhibit 10.1 to the Partnerships
  Quarterly Report on Form 10-Q for the period ended June 30, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.11 |  | Limited
  Liability Company Agreement of USS Product Investors LLC dated August 7, 2006
  (incorporated by reference to Exhibit 10.4 to the Partnerships Quarterly
  Report on Form 10-Q for the period ended September 30, 2006)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.12* |  | Amended and
  Restated Employment Agreement for Paul B. Gridley (incorporated by reference
  to Exhibit 10.8 to the Partnerships Quarterly Report on Form 10-Q for the
  period ended September 30, 2004)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.13* |  | Amended and
  Restated Employment Agreement for Joseph P. Gehegan (incorporated by
  reference to Exhibit 10.9 to the Partnerships Quarterly Report on Form 10-Q
  for the period ended September 30, 2004)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.14* |  | Amended and
  Restated Employment Agreement for Jeffrey M. Miller (incorporated by reference
  to Exhibit 10.12 to the Partnerships Quarterly Report on Form 10-Q for the
  period ended September 30, 2004)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.15* |  | Amended and
  Restated Employment Agreement for Albert E. Bergeron (incorporated by
  reference to Exhibit 10.13 to the Partnerships Quarterly Report on Form 10-Q
  for the period ended September 30, 2004)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.16* |  | Employment
  Agreement for Jan T. Ziobro (incorporated by reference to Exhibit 10.2 to the
  Partnerships Quarterly Report on Form 10-Q for the period ended March 31,
  2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.17* |  | Employment
  Agreement for Anthony J. Guzzo (incorporated by reference to Exhibit 10.1 to
  the Partnerships Current Report on Form 8-K filed April 22, 2008)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

108

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|       |  |                                                                                                                                                                                                                                 
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.18  |  | Waiver and
  Fourth Amendment to Third Amended And Restated Credit Agreement, dated as of
  October 20, 2008 (incorporated by reference to Exhibit 4.1 to the
  Partnerships Current Report on Form 8-K filed October 24, 2008)
|       |  |                                                                                                                                                                                                                                 
|10.19* |  | Severance
  Agreement, dated as October 23, 2008, between USS Vessel Management LLC and
  Paul Gridley (incorporated by reference to Exhibit 10.1 to the Partnerships
  Current Report on Form 8-K filed October 24, 2008)     
|       |  |                                                                                                                                                                                                                                 
|10.20  |  | Forbearance
  Agreement, dated as of December 30, 2008 (incorporated by reference to
  Exhibit 10.1 to the Partnerships Current Report on Form 8-K filed January 5,
  2009)                                                    
|       |  |                                                                                                                                                                                                                                 
|10.21  |  | Extension of
  Waiver and Fourth Amendment, dated as of January 21, 2009 (incorporated by
  reference to Exhibit 10.1 to the Partnerships Current Report on Form 8-K
  filed January 30, 2009)                                 
|       |  |                                                                                                                                                                                                                                 
|10.22  |  | Extension of
  Waiver and Fourth Amendment, dated as of February 9, 2009 (incorporated by
  reference to Exhibit 10.1 to the Partnerships Current Report on Form 8-K
  filed February 12, 2009)                                
|       |  |                                                                                                                                                                                                                                 
|10.23  |  | Extension of
  Waiver and Fourth Amendment and Forbearance Agreement, dated as of February
  20, 2009 (incorporated by reference to Exhibit 10.1 to the Partnerships
  Current Report on Form 8-K filed February 27, 2009)     
|       |  |                                                                                                                                                                                                                                 
|10.24  |  | Extension of
  Waiver and Fourth Amendment and Forbearance Agreement, dated as of February
  27, 2009 (incorporated by reference to Exhibit 10.1 to the Partnerships
  Current Report on Form 8-K filed March 9, 2009)         
|       |  |                                                                                                                                                                                                                                 
|10.25  |  | Forbearance
  Agreement, dated as of March 13, 2009 (incorporated by reference to Exhibit
  10.1 to the Partnerships Current Report on Form 8-K/A filed March 20, 2009)                                                        
|       |  |                                                                                                                                                                                                                                 
|10.26  |  | Plan Support
  Agreement, dated as of April 23, 2009 and effective as of April 29, 2009
  (incorporated by reference to Exhibit 10.1 to the Partnerships Current
  Report on Form 8-K filed April 30, 2009)                    
|       |  |                                                                                                                                                                                                                                 
|21.1   |  | List of
  subsidiaries                                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                 
|31.1   |  | Certification
  of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
  Act of 2002.                                                                                                                     
|       |  |                                                                                                                                                                                                                                 
|31.2   |  | Certification
  of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
  Act of 2002.                                                                                                                     
|       |  |                                                                                                                                                                                                                                 
|32.1   |  | Certification
  of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
  Act of 2002.                                                                                                                     
|       |  |                                                                                                                                                                                                                                 
|32.2   |  | Certification
  of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
  Act of 2002.                                                                                                                     

 Confidential treatment was
granted for omitted portions.

* Management contract,
compensatory plan or arrangement

109

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INDEX TO FINANCIAL STATEMENTS

U.S. SHIPPING PARTNERS L.P.

|                                                                                                                                 |  |    
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---
|CONSOLIDATED FINANCIAL STATEMENTS                                                                                                |  |    
|Report of Independent Registered Public
  Accounting Firm                                                                        |  | F-2
|Consolidated Balance Sheets as of December 31,
  2008 and 2007                                                                   |  | F-3
|Consolidated Statements of Operations and
  Comprehensive Income for the years ended December 31, 2008, 2007 and 2006            |  | F-4
|Consolidated Statements of Changes in
  Partners Capital/Members Equity for the years ended December 31, 2008, 2007
  and 2006 |  | F-5
|Consolidated Statements of Cash Flows for
  the years ended December 31, 2008, 2007 and 2006                                     |  | F-6
|Notes to Consolidated Financial
Statements                                                                                       |  | F-7

---



Report of Independent Registered Public
Accounting Firm

To the General
Partner and Unitholders of U.S. Shipping Partners L.P.:

In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income, of changes in
partners capital and of cash flows present fairly, in all material respects,
the financial position of U.S. Shipping Partners L.P. and its subsidiaries at
December 31, 2008 and 2007, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2008 in
conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Partnerships
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

The accompanying
consolidated financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, on April 29, 2009 U.S. Shipping Partners
L.P. and its subsidiaries (excluding USS Products Investor LLC, a consolidated
joint venture discussed in Note 14), filed voluntary petitions for
reorganization relief under Chapter 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court for the Southern District of New York. This
action, which was taken primarily as a result of the issues discussed in Note 2
to the consolidated financial statements, raises substantial doubt about
the Partnerships ability to continue as a going concern. Managements plans in
regard to these matters are also described in Note 3. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

/s/
PricewaterhouseCoopers LLP
Florham Park, New Jersey 
June 22, 2009

F - 2

---



U.S. Shipping Partners L.P.Consolidated Balance Sheets
December 31, 2008 and 2007 
(in thousands)

|                                                        |  |              |         |      |   |         |  
|------------------------------------------------------- |  | ------------ | ------- | ---- | - | ------- | -
|                                                        |  | December 31, |        
|                                                        |  |              |        
|                                                        |  | 2008         |         | 2007 |  
|                                                        |  |              |         |      |  
|Assets                                                  |  |              |         |      |   |         |  
|Current
  assets                                        |  |              |         |      |   |         |  
|Cash and equivalents                                    |  | $            | 20,599  |      | $ | 21,604  |  
|Current portion of restricted cash and
equivalents      |  |              | 7,566   |      |   | 113,960 |  
|Accounts receivable, net                                |  |              | 4,905   |      |   | 11,934  |  
|Prepaid expenses and other current assets               |  |              | 19,077  |      |   | 10,683  |  
|                                                        |  |              |         |      |   |         |  
|Total current assets                                    |  |              | 52,147  |      |   | 158,181 |  
|Restricted cash and equivalents, net of current portion |  |              |        |      |   | 11,322  |  
|Vessels and equipment, net                              |  |              | 704,195 |      |   | 489,464 |  
|Deferred financing costs, net                           |  |              | 2,253   |      |   | 19,019  |  
|Other assets                                            |  |              | 1,840   |      |   | 5,042   |  
|                                                        |  |              |         |      |   |         |  
|Total assets                                            |  | $            | 760,435 |      | $ | 683,028 |  
|                                                        |  |              |         |      |   |         |  
|                                                        |  |              |         |      |   |         |  
|Liabilities and Partners Capital                       |  |              |         |      |   |         |  
|Current liabilities                                     |  |              |         |      |   |         |  
|Current portion of long-term debt                       |  | $            | 610,295 |      | $ | 3,100   |  
|Accounts payable                                        |  |              | 7,424   |      |   | 9,668   |  
|Due to affiliates                                       |  |              | 4,123   |      |   | 3,393   |  
|Deferred revenue                                        |  |              | 6,165   |      |   | 1,193   |  
|Accrued expenses and other liabilities                  |  |              | 30,193  |      |   | 31,325  |  
|                                                        |  |              |         |      |   |         |  
|Total current liabilities                               |  |              | 658,200 |      |   | 48,679  |  
|Long-term debt, net of current portion                  |  |              |        |      |   | 456,927 |  
|Deferred income taxes                                   |  |              | 2,720   |      |   | 2,145   |  
|Other liabilities                                       |  |              | 17,969  |      |   | 10,920  |  
|                                                        |  |              |         |      |   |         |  
|Total liabilities                                       |  |              | 678,889 |      |   | 518,671 |  
|                                                        |  |              |         |      |   |         |  
|                                                        |  |              |         |      |   |         |  
|Noncontrolling interest in Joint Venture (Note 14)      |  |              | 93,854  |      |   | 33,324  |  
|                                                        |  |              |         |      |   |         |  
|                                                        |  |              |         |      |   |         |  
|Commitments and contingencies (Note 18)                 |  |              |         |      |   |         |  
|                                                        |  |              |         |      |   |         |  
|Partners Capital                                       |  |              |         |      |   |         |  
|Partners capital                                       |  |              | (4,014  | )    |   | 139,263 |  
|Accumulated other comprehensive loss                    |  |              | (8,294  | )    |   | (8,230  | )
|                                                        |  |              |         |      |   |         |  
|Total partners capital                                 |  |              | (12,308 | )    |   | 131,033 |  
|                                                        |  |              |         |      |   |         |  
|Total liabilities and partners capital                  |  | $            | 760,435 |      | $ | 683,028 |  
|                                                        |  |              |         |      |   |         |  

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

F - 3

---



U.S. Shipping Partners L.P. Consolidated Statements of Operations and Comprehensive Income

Years Ended December 31, 2008, 2007 and 2006 
(in thousands, except unit data)

|                                                              |  |                         |          |      |   |         |   |   |         |  
|------------------------------------------------------------- |  | ----------------------- | -------- | ---- | - | ------- | - | - | ------- | -
|                                                              |  | Year Ended December 31, |         
|                                                              |  |                         |         
|                                                              |  | 2008                    |          | 2007 |   | 2006    |  
|                                                              |  |                         |          |      |   |         |  
|Revenues                                                      |  | $                       | 196,440  |      | $ | 176,729 |   | $ | 150,133 |  
|                                                              |  |                         |          |      |   |         |   |   |         |  
|Operating expenses                                            |  |                         |          |      |   |         |   |   |         |  
|Vessel operating expenses                                     |  |                         | 65,611   |      |   | 65,656  |   |   | 59,493  |  
|Voyage expenses                                               |  |                         | 69,906   |      |   | 35,824  |   |   | 27,506  |  
|General and administrative expenses                           |  |                         | 21,762   |      |   | 15,533  |   |   | 13,539  |  
|Depreciation and amortization                                 |  |                         | 38,148   |      |   | 37,795  |   |   | 31,305  |  
|Loss on sale of vessels                                       |  |                         | 1,650    |      |   |        |   |   |        |  
|Impairment charges                                            |  |                         | 80,870   |      |   |        |   |   |        |  
|Other expense (income)                                        |  |                         | 1,449    |      |   | (3,486  | ) |   |        |  
|                                                              |  |                         |          |      |   |         |   |   |         |  
|Total operating expenses, net                                 |  |                         | 279,396  |      |   | 151,322 |   |   | 131,843 |  
|                                                              |  |                         |          |      |   |         |   |   |         |  
|Operating (loss) income                                       |  |                         | (82,956  | )    |   | 25,407  |   |   | 18,290  |  
|Interest expense                                              |  |                         | 45,191   |      |   | 30,881  |   |   | 16,634  |  
|Interest income                                               |  |                         | (2,063   | )    |   | (9,631  | ) |   | (5,413  | )
|Loss on debt extinguishment                                   |  |                         |         |      |   |        |   |   | 2,451   |  
|Net loss (gain) on derivative financial instruments           |  |                         | 7,231    |      |   | (199    | ) |   | (1,913  | )
|                                                              |  |                         |          |      |   |         |   |   |         |  
|(Loss) income before income taxes and
noncontrolling interest |  |                         | (133,315 | )    |   | 4,356   |   |   | 6,531   |  
|(Benefit) provision for income taxes                          |  |                         | (851     | )    |   | (94     | ) |   | 1,077   |  
|                                                              |  |                         |          |      |   |         |   |   |         |  
|(Loss) income before noncontrolling
interest                  |  |                         | (132,464 | )    |   | 4,450   |   |   | 5,454   |  
|Noncontrolling interest in Joint Venture losses (gains)       |  |                         | 787      |      |   | (366    | ) |   | (421    | )
|                                                              |  |                         |          |      |   |         |   |   |         |  
|Net (loss) income                                             |  |                         | (133,251 | )    |   | 4,816   |   |   | 5,875   |  
|Other comprehensive loss                                      |  |                         |          |      |   |         |   |   |         |  
|Fair market value adjustment for derivatives                  |  |                         | (64      | )    |   | (7,484  | ) |   | (2,615  | )
|                                                              |  |                         |          |      |   |         |   |   |         |  
|Comprehensive (loss) income                                   |  | $                       | (133,315 | )    | $ | (2,668  | ) | $ | 3,260   |  
|                                                              |  |                         |          |      |   |         |   |   |         |  
|                                                              |  |                         |          |      |   |         |   |   |         |  
|General partners interest in net (loss) income               |  | $                       | (2,665   | )    | $ | 96      |   | $ | 118     |  
|Limited partners interest in net income                      |  |                         |          |      |   |         |   |   |         |  
|Net (loss) income                                             |  | $                       | (130,586 | )    | $ | 4,720   |   | $ | 5,757   |  
|Net (loss) income per unit - basic and
diluted                |  | $                       | (7.16    | )    | $ | 0.26    |   | $ | 0.37    |  
|Weighted average units outstanding -
basic                    |  |                         | 18,251   |      |   | 18,234  |   |   | 15,586  |  
|Weighted average units outstanding -
diluted                  |  |                         | 18,251   |      |   | 18,236  |   |   | 15,586  |  

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

F - 4

---



U.S. Shipping Partners L.P. Consolidated Statements of Changes in Partners Capital
Years Ended December 31, 2008, 2007 and 2006 
(in thousands)

|                                              |  |                     |        |                                                   |   |              |   |         |          |          |   |         |   |         |       |        |   |         |   |   |        |   |   |        |   |   |          |  
|--------------------------------------------- |  | ------------------- | ------ | ------------------------------------------------- | - | ------------ | - | ------- | -------- | -------- | - | ------- | - | ------- | ----- | ------ | - | ------- | - | - | ------ | - | - | ------ | - | - | -------- | -
|                                              |  |                     |        | Accumulated
  
  Other 
  Comprehensive 
  Income |   |              |  
|                                              |  | Partners
  Capital |        |                                                   |   |             
|                                              |  | Limited
  Partners  |        |                                                   |   |              |   |        
|                                              |  | Common              |        | Class
  B                                         |   | Subordinated |   | General |          |          |   |        
|                                              |  | U
  nit s           |        | $                                                 |   | Unit
  s     |   | $       |          | Unit
  s |   | $       |   | Partner |       | (Loss) |   | Total   |  
|                                              |  |                     |        |                                                   |   |              |   |         |          |          |   |         |   |         |       |        |   |         |  
|Balance at December 31,2005                   |  |                     | 6,900  |                                                   |   | 115,651      |   |         |         |          |   |        |   |         | 6,900 |        |   | 2,256   |   |   | 92     |   |   | 1,869  |   |   | 119,868  |  
|Net income                                    |  |                     |       |                                                   |   | 2,908        |   |         |         |          |   | (102    | ) |         |      |        |   | 2,951   |   |   | 118    |   |   |       |   |   | 5,875    |  
|Proceeds from equity issuance                 |  |                     | 1,310  |                                                   |   | 24,033       |   |         | 3,12
  3 |          |   | 53,469  |   |         |      |        |   |        |   |   | 1,582  |   |   |       |   |   | 79,084   |  
|Equity issuance costs                         |  |                     |       |                                                   |   | (847         | ) |         |         |          |   | (1,883  | ) |         |      |        |   |        |   |   | (55    | ) |   |       |   |   | (2,785   | )
|Costs associated with issuance of             |  |                     |        |                                                   |   |              |   |         |          |          |   |         |   |         |       |        |   |         |   |   |        |   |   |        |   |   |          |  
|Joint Venture equity, net                     |  |                     |       |                                                   |   | (1,293       | ) |         |         |          |   | (492    | ) |         |      |        |   | (1,087  | ) |   | (59    | ) |   |       |   |   | (2,931   | )
|Realized gain on termination of hedge         |  |                     |       |                                                   |   |             |   |         |         |          |   |        |   |         |      |        |   |        |   |   |       |   |   | (1,913 | ) |   | (1,913   | )
|Fair market value adjustment for derivatives  |  |                     |       |                                                   |   |             |   |         |         |          |   |        |   |         |      |        |   |        |   |   |       |   |   | (702   | ) |   | (702     | )
|Cash distributions                            |  |                     |       |                                                   |   | (13,599      | ) |         |         |          |   | (2,811  | ) |         |      |        |   | (12,421 | ) |   | (588   | ) |   |       |   |   | (29,419  | )
|                                              |  |                     |        |                                                   |   |              |   |         |          |          |   |         |   |         |       |        |   |         |   |   |        |   |   |        |   |   |          |  
|Balance at December 31,2006                   |  |                     | 8,210  |                                                   |   | 126,853      |   |         | 3,123    |          |   | 48,181  |   |         | 6,900 |        |   | (8,301  | ) |   | 1,090  |   |   | (746   | ) |   | 167,077  |  
|Conversion of Class B Units into Common Units |  |                     | 3,123  |                                                   |   | 48,181       |   |         | (3,123   | )        |   | (48,181 | ) |         |      |        |   |        |   |   |       |   |   |       |   |   |         |  
|Restricted unit grants                        |  |                     | 8      |                                                   |   |             |   |         |         |          |   |        |   |         |      |        |   |        |   |   |       |   |   |       |   |   |         |  
|Net income                                    |  |                     |       |                                                   |   | 2,934        |   |         |         |          |   |        |   |         |      |        |   | 1,786   |   |   | 96     |   |   |       |   |   | 4,816    |  
|Amortization of deferred equity compensation  |  |                     |       |                                                   |   | 114          |   |         |         |          |   |        |   |         |      |        |   |        |   |   |       |   |   |       |   |   | 114      |  
|Fair market value adjustment for derivatives  |  |                     |       |                                                   |   |             |   |         |         |          |   |        |   |         |      |        |   |        |   |   |       |   |   | (7,484 | ) |   | (7,484   | )
|Cash distributions                            |  |                     |       |                                                   |   | (20,399      | ) |         |         |          |   |        |   |         |      |        |   | (12,421 | ) |   | (670   | ) |   |       |   |   | (33,490  | )
|                                              |  |                     |        |                                                   |   |              |   |         |          |          |   |         |   |         |       |        |   |         |   |   |        |   |   |        |   |   |          |  
|Balance at December 31,2007                   |  |                     | 11,341 |                                                   | $ | 157,683      |   |         |         |          | $ |        |   |         | 6,900 |        | $ | (18,936 | ) | $ | 516    |   | $ | (8,230 | ) | $ | 131,033  |  
|                                              |  |                     |        |                                                   |   |              |   |         |          |          |   |         |   |         |       |        |   |         |   |   |        |   |   |        |   |   |          |  
|Net income                                    |  |                     |       |                                                   |   | (81,230      | ) |         |         |          |   |        |   |         |      |        |   | (49,356 | ) |   | (2,665 | ) |   |       |   |   | (133,251 | )
|Restricted unit grants                        |  |                     | 12     |                                                   |   | 146          |   |         |         |          |   |        |   |         |      |        |   |        |   |   |       |   |   |       |   |   | 146      |  
|Amortization of deferred equity compensation  |  |                     |       |                                                   |   | 37           |   |         |         |          |   |        |   |         |      |        |   |        |   |   |       |   |   |       |   |   | 37       |  
|Fair market value adjustment for derivatives  |  |                     |       |                                                   |   |             |   |         |         |          |   |        |   |         |      |        |   |        |   |   |       |   |   | (64    | ) |   | (64      | )
|Cash distributions                            |  |                     |       |                                                   |   | (10,209      | ) |         |         |          |   |        |   |         |      |        |   |        |   |   |       |   |   |       |   |   | (10,209  | )
|                                              |  |                     |        |                                                   |   |              |   |         |          |          |   |         |   |         |       |        |   |         |   |   |        |   |   |        |   |   |          |  
|Balance at December 31,2008                   |  |                     | 11,353 |                                                   | $ | 66,427       |   |         |         |          | $ |        |   |         | 6,900 |        | $ | (68,292 | ) | $ | (2,149 | ) | $ | (8,294 | ) | $ | (12,308  | )
|                                              |  |                     |        |                                                   |   |              |   |         |          |          |   |         |   |         |       |        |   |         |   |   |        |   |   |        |   |   |          |  

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

F - 5

---



U.S. Shipping Partners L.P. Consolidated Statements of Cash Flows 
Years Ended December 31, 2008, 2007 and 2006 
(in thousands)

|                                                                                                                              |  |                                  |          |      |   |          |   |   |          |  
|----------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | -------- | ---- | - | -------- | - | - | -------- | -
|                                                                                                                              |  | For the Years Ended December 31, |         
|                                                                                                                              |  |                                  |         
|                                                                                                                              |  | 2008                             |          | 2007 |   | 2006     |  
|                                                                                                                              |  |                                  |          |      |   |          |  
|Cash flows from operating activities                                                                                          |  |                                  |          |      |   |          |   |   |          |  
|Net (loss) income                                                                                                             |  | $                                | (133,251 | )    | $ | 4,816    |   | $ | 5,875    |  
|Adjustments to reconcile net (loss) income to net cash provided by
  operating activities                                     |  |                                  |          |      |   |          |   |   |          |  
|Depreciation of vessels and equipment, and
amortization of drydock
  costs and deferred financing costs                       |  |                                  | 53,203   |      |   | 39,516   |   |   | 32,475   |  
|Impairment charge                                                                                                             |  |                                  | 80,870   |      |   |         |   |   |         |  
|Loss on sale of vessels                                                                                                       |  |                                  | 1,650    |      |   |         |   |   |         |  
|Interest added to debt outstanding                                                                                            |  |                                  | 945      |      |   |         |   |   |         |  
|Nonrecurring insurance charge                                                                                                 |  |                                  | 1,305    |      |   |         |   |   |         |  
|Provision for accounts receivable                                                                                             |  |                                  | 1,404    |      |   | 755      |   |   | 137      |  
|Equity compensation                                                                                                           |  |                                  | 183      |      |   | 114      |   |   |         |  
|Net (loss) gain on derivative financial
instruments                                                                           |  |                                  | 7,231    |      |   | (199     | ) |   | (1,913   | )
|Noncontrolling interest in Joint Venture
loss                                                                                 |  |                                  | 787      |      |   | (366     | ) |   | (421     | )
|Deferred income taxes                                                                                                         |  |                                  | (1,435   | )    |   | (1,141   | ) |   | 1,533    |  
|Capitalized drydock costs                                                                                                     |  |                                  | (9,696   | )    |   | (14,122  | ) |   | (31,082  | )
|Loss on debt extinguishment                                                                                                   |  |                                  |         |      |   |         |   |   | 2,451    |  
|Loss on sale of surplus equipment                                                                                             |  |                                  | 120      |      |   |         |   |   |         |  
|Changes in assets and liabilities:                                                                                            |  |                                  |          |      |   |          |   |   |          |  
|Accounts receivable                                                                                                           |  |                                  | 5,174    |      |   | (2,751   | ) |   | (2,631   | )
|Prepaid expenses and other current assets                                                                                     |  |                                  | (8,151   | )    |   | (4,797   | ) |   | (2,297   | )
|Other assets                                                                                                                  |  |                                  | 558      |      |   | 536      |   |   | (137     | )
|Accounts payable                                                                                                              |  |                                  | (4,438   | )    |   | 2,598    |   |   | 4,804    |  
|Deferred revenue                                                                                                              |  |                                  | 4,972    |      |   | 15       |   |   | 1,178    |  
|Accrued expenses and other liabilities                                                                                        |  |                                  | 11,717   |      |   | 3,065    |   |   | 8,231    |  
|                                                                                                                              |  |                                  |          |      |   |          |   |   |          |  
|Net cash provided by operating
activities                                                                                     |  |                                  | 13,148   |      |   | 28,039   |   |   | 18,203   |  
|                                                                                                                              |  |                                  |          |      |   |          |   |   |          |  
|                                                                                                                              |  |                                  |          |      |   |          |   |   |          |  
|Cash flows from investing activities                                                                                          |  |                                  |          |      |   |          |   |   |          |  
|Change in restricted cash and equivalents, net                                                                                |  |                                  | 117,716  |      |   | 85,665   |   |   | (210,947 | )
|Cash received upon settlement of derivative financial
instruments                                                             |  |                                  | 827      |      |   | 173      |   |   |         |  
|Purchase of interest rate cap                                                                                                 |  |                                  |         |      |   | (1,924   | ) |   |         |  
|Sale of surplus equipment                                                                                                     |  |                                  | 280      |      |   |         |   |   |         |  
|(Payments to) advances from Hess, net                                                                                         |  |                                  |         |      |   | (3,298   | ) |   | (484     | )
|Construction of vessels and equipment                                                                                         |  |                                  | (336,711 | )    |   | (161,183 | ) |   | (117,092 | )
|Proceeds from Senesco settlement                                                                                              |  |                                  |         |      |   |         |   |   | 21,000   |  
|Purchase of office furniture, equipment and other                                                                             |  |                                  |         |      |   |         |   |   | (317     | )
|                                                                                                                              |  |                                  |          |      |   |          |   |   |          |  
|Net cash used in investing activities                                                                                         |  |                                  | (217,888 | )    |   | (80,567  | ) |   | (307,840 | )
|                                                                                                                              |  |                                  |          |      |   |          |   |   |          |  
|                                                                                                                              |  |                                  |          |      |   |          |   |   |          |  
|Cash flows from financing activities                                                                                          |  |                                  |          |      |   |          |   |   |          |  
|Proceeds from borrowings                                                                                                      |  |                                  | 21,848   |      |   | 54,000   |   |   |         |  
|Proceeds from Joint Venture revolver borrowings                                                                               |  |                                  | 135,492  |      |   | 24,923   |   |   | 16,307   |  
|Contribution by noncontrolling interest equity investors in Joint
  Venture                                                   |  |                                  | 59,743   |      |   | 16,109   |   |   | 29,148   |  
|Proceeds from revolver borrowings                                                                                             |  |                                  |         |      |   | 13,000   |   |   | 25,000   |  
|Deferred financing costs                                                                                                      |  |                                  | (814     | )    |   | (158     | ) |   | (24,546  | )
|Repayment of debt                                                                                                             |  |                                  | (2,325   | )    |   | (2,938   | ) |   | (129,302 | )
|Distributions to partners                                                                                                     |  |                                  | (10,209  | )    |   | (33,490  | ) |   | (29,419  | )
|Proceeds from issuance of debt                                                                                                |  |                                  |         |      |   |         |   |   | 356,000  |  
|Gross proceeds from issuance of common units                                                                                  |  |                                  |         |      |   |         |   |   | 79,084   |  
|Repayment of revolver borrowings                                                                                              |  |                                  |         |      |   |         |   |   | (25,000  | )
|Partnership equity offering expenses                                                                                          |  |                                  |         |      |   |         |   |   | (2,785   | )
|Joint Venture equity offering expenses                                                                                        |  |                                  |         |      |   |         |   |   | (14,077  | )
|Proceeds from hedge termination                                                                                               |  |                                  |         |      |   |         |   |   | 1,913    |  
|                                                                                                                              |  |                                  |          |      |   |          |   |   |          |  
|Net cash provided by financing
activities                                                                                     |  |                                  | 203,735  |      |   | 71,446   |   |   | 282,323  |  
|                                                                                                                              |  |                                  |          |      |   |          |   |   |          |  
|                                                                                                                              |  |                                  |          |      |   |          |   |   |          |  
|Net (decrease) increase in cash and cash equivalents                                                                          |  |                                  | (1,005   | )    |   | 18,918   |   |   | (7,314   | )
|Cash and cash equivalents at beginning of year                                                                                |  |                                  | 21,604   |      |   | 2,686    |   |   | 10,000   |  
|                                                                                                                              |  |                                  |          |      |   |          |   |   |          |  
|Cash and cash equivalents at end of year                                                                                      |  | $                                | 20,599   |      | $ | 21,604   |   | $ | 2,686    |  
|                                                                                                                              |  |                                  |          |      |   |          |   |   |          |  
|                                                                                                                              |  |                                  |          |      |   |          |   |   |          |  
|Supplemental disclosure of cash flow information                                                                              |  |                                  |          |      |   |          |   |   |          |  
|Cash paid during the year for:                                                                                                |  |                                  |          |      |   |          |   |   |          |  
|Interest                                                                                                                      |  | $                                | 33,787   |      | $ | 39,301   |   | $ | 14,552   |  
|Income taxes                                                                                                                  |  | $                                | 133      |      | $ |         |   | $ | 335      |  
|Supplemental disclosure of non-cash investing and
  financing activities                                                      |  |                                  |          |      |   |          |   |   |          |  
|Vessel sale proceeds, net of disposition costs, directly provided to
  our Senior Credit Facility as a mandatory debt payment |  | $                                | 5,692    |      | $ |         |   | $ |         |  

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

F - 6

---



U.S. Shipping Partners L.P. Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

|   |                     
|-- | --------------------
|1. | Nature of Operations

U.S.
Shipping Partners L.P. (the Partnership) began the 2008 year owning and
operating six integrated tug barge units (ITBs), three chemical product, or
parcel, tankers (Parcel Tankers), one product tanker (Houston) and one
articulated tug barge (ATB). During the fourth quarter of 2008, the
Partnership sold two ITBs, the ITB Groton
and the ITB Jacksonville, due to
decreased demand for these vessels. The Partnerships second ATB, the ATB Galveston, was delivered and entered
service in August 2008 and the third ATB, the ATB
Brownsville, was delivered and entered service in November 2008.

As
of December 31, 2008, our fleet consists of eleven tank vessels: four ITBs; one
product tanker; three chemical parcel tankers; and three ATBs. We currently
have one additional ATB under construction, which is scheduled to be delivered
in August 2009.

Our
primary customers are major oil and chemical companies. We do not assume
ownership of any of the products that we transport on our vessels. The
Partnership is engaged in transportation services between ports in the United
States, principally for refined petroleum products, petrochemical and commodity
chemical products. The vessels operate under the regulatory provisions of the
Jones Act. To improve utilization of the ITB fleet, the Partnership employed
five of its initial ITBs to transport grain overseas for humanitarian
organizations. Recognition principles of revenue and certain expenses for these
voyages under GAAP differ from the recognition principles applicable to our
transportation of petroleum, petrochemical and commodity chemical products.
With respect to the transportation of refined petroleum, petrochemical and
commodity chemical products, under GAAP we generally recognize revenue based
upon the relative transit time in each period to the total estimated transit
time for each voyage. With respect to our grain voyages, we only recognize
revenue and certain voyage expenses when the grain is delivered to its final
destination. See Note 4Summary of Significant Accounting PrinciplesRevenue
Recognition.

In
March 2006, the Partnership, through its subsidiary, USS Product Carriers LLC
(Product Carriers), entered into a contract with the National Steel and
Shipbuilding Company (NASSCO), a subsidiary of General Dynamics Corporation
(General Dynamics), for the construction of nine 49,000 deadweight tons
(dwt) double-hulled tankers. On August 7, 2006, Product Carriers entered into
a joint venture, USS Products Investor LLC (the Joint Venture), to finance
the construction of the first five tankers. The Partnership manages and owns a
40% interest in the Joint Venture and third parties own the remaining 60%
interest. Due to the Partnerships control of the Joint Venture, as well as
other aspects of the joint venture agreement, the financial statements of the
Joint Venture are consolidated with the Partnerships for financial reporting
purposes. Accordingly, the debt of the Joint Venture is presented in the
Partnerships consolidated financial statements, although the Partnership has
no obligation for the liabilities of the Joint Venture in excess of its $70,000
capital commitment. As of December 31, 2008, the Partnership has fully
satisfied its $70,000 capital commitment to the Joint Venture. See Note
4Summary of Significant Accounting PrinciplesPrinciples of Consolidation,
Note 14Joint Venture and Note 23Subsequent EventsLitigation with Joint
Venture Investors.

|   |          
|-- | ---------
|2. | Liquidity

The
Partnership is dependent on its cash flow from operations to meet its operating
debt service and working capital requirements. The Partnerships cash flow from
operations fluctuates from quarter to quarter based on, among other things:

| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | the level of
  consumption of refined petroleum, petrochemical and commodity chemical
  products in the markets in which we operate;
| |   |                                                                                                                                     
| |  | the level of
  demand for overseas transportation of grain for humanitarian organizations;                                          
| |   |                                                                                                                                     
| |  | the prices
  the Partnership obtains for its services;                                                                              
| |   |                                                                                                                                     
| |  | the level of
  demand for the Partnerships vessels;                                                                                
| |   |                                                                                                                                     
| |  | the level of
  the Partnerships operating costs, including payments to its general partner;                                        

F - 7

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | delays in
  the delivery of newbuilds and the resulting delay in receipt of revenue from
  those vessels;                                                          
| |   |                                                                                                                                                                    
| |  | the effect
  of governmental regulations and maritime self-regulatory organization
  standards on the Partnerships conduct of its business;                       
| |   |                                                                                                                                                                    
| |  | the level of
  unscheduled off-hire days and the timing of, and number of days required for,
  scheduled drydockings of vessels;                                   
| |   |                                                                                                                                                                    
| |  | prevailing
  economic and competitive conditions;                                                                                                                  
| |   |                                                                                                                                                                    
| |  | the level of
  capital expenditures the Partnership is required to make, including for
  drydockings for repairs, newbuildings and compliance with new regulations;
| |   |                                                                                                                                                                    
| |  | the
  restrictions contained in the Partnerships debt instruments and its debt
  service requirements;                                                            
| |   |                                                                                                                                                                    
| |  | fluctuations
  in the Partnerships working capital needs;                                                                                                         
| |   |                                                                                                                                                                    
| |  | the
  Partnerships ability to make working capital borrowings; and                                                                                                
| |   |                                                                                                                                                                    
| |  | the refusal
  of certain vendors to extend trade credit to the Partnership.                                                                                        

Prior
to December 31, 2008, our cash flow from operations was also affected by our
ability to make working capital borrowings and the increase in the interest
rate on our borrowings under our senior credit facility and additional fees and
expenses resulting from the October 2008 amendment to our senior credit
facility.

Our
cash flow from operations has come under increasing pressure due to the
difficult current market conditions the Partnership is facing. During the first
half of 2008, all but one of our ITBs began to operate in the spot market for
the transportation of petroleum products, which has increased the volatility of
our revenues and working capital requirements, and decreased the predictability
of our cash flows. Beginning in late March 2008, market conditions in the spot
market deteriorated substantially due to overall declining economic activity
and decreased demand for the domestic coastwise transportation of petroleum
products. Additionally, refinery utilization has declined considerably, fuel
prices for operating our vessels were at record levels during the second and
third quarters of 2008 and are still higher than historical levels, and
newbuilds have increased capacity serving the Jones Act market at a faster rate
than demand and the decrease in capacity due to the required phase-outs under
the Oil Pollution Act of 1990 (OPA 90).

Due
to these market shifts, as well as the age of our ITBs, our ITBs operating in
the spot market have, beginning in the second quarter of 2008, incurred idle
periods greater than, and charter rates below, our expectations at the
beginning of 2008. Beginning in the second quarter of 2008, our ITBs
participating in the spot market were principally employed in the
transportation of grain for various US humanitarian organizations. Three of our
four ITBs are currently laid up due to lack of demand for their services.
During the first half of 2008, we also experienced modest decreased demand for
the domestic coastwise transportation of chemical products served by our
chemical transporting vessels which we believe was primarily due to our
customers working off inventory levels due to the decline in economic activity.
Beginning again in the fourth quarter of 2008 and continuing into 2009, we have
experienced a more significant decrease in demand for the domestic coastwise
transportation of chemical products served by our chemical transporting vessels
due to declining worldwide economic activity. The Sea Venture is currently laid up due to lack of demand for
its services. As a result of changes in demand for our vessels and
deteriorating market conditions, we sold two ITBs in the fourth quarter of
2008, and will likely dispose of the Sea
Venture and at least one additional ITB during 2009.

Additionally,
participation in the spot petroleum and grain markets requires the Partnership
to carry higher amounts of working capital, as under spot charters fuel costs
are the Partnerships responsibility and are paid at the time fuel is
delivered, and not realized economically until payment is made to us by the
customer. Payment generally occurs at the completion of a voyage, compared to time
charters, where payment is generally made by the customer at the beginning of a
fixed period of time, such as a month. In addition, grain voyages, where the
Partnership is paid following delivery of the grain to its final destination,
tend to be substantially longer in duration than refined petroleum product
voyages. With the addition of two ATBs in 2008 and all of our existing four
ITBs now participating in the spot market effective in January 2009, the
Partnership expects its working capital requirements to increase.

F - 8

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

As
a result, our cash flows and liquidity have come under increasing pressure due
to the current difficult market conditions, which resulted in us not being in
compliance with certain financial covenants under our Third Amended and
Restated Credit Facility (Senior Credit Facility) at September 30, 2008. The
senior lenders waived this non-compliance and any non-compliance with our
financial covenants through January 31, 2009. In order to assure that we had
sufficient cash to operate our business, we agreed with our lenders not to make
the December 31, 2008 principal and interest payments due under our Senior
Credit Facility. Prior to not making the December 31, 2008 principal and
interest payments under the Senior Credit Facility, the Partnership entered
into a forbearance agreement with  holders of more than 50% of the amounts
outstanding under the Senior Credit Facility whereby the lenders agreed to
forbear from taking any action prior to February 11, 2009 as a result of our
failure to make the December 31, 2008 principal and interest payment under the
Senior Credit Facility. The forbearance period was extended several times, and
the agreement was expanded to cover our failure to make the March 31, 2009
principal and interest payments due under the Senior Credit Facility, our
failure to be in compliance with certain of our financial covenants at
September 30, 2008 and December 31, 2008, and our failure to make the scheduled
interest payment due in respect of our 13% Senior Secured Notes due 2014 (the
Second Lien Notes) on March 17, 2009. Not making these payments provided us
with approximately $21.0 million of cash as of March 31, 2009 to finance our
operations and working capital needs. The Partnership filed for protection
under the U.S. bankruptcy laws prior to the expiration of the most recent
forbearance period. See Note 3Proceedings Under Chapter 11 of the Bankruptcy
Code.

In
light of these liquidity pressures, we did not pay a distribution on our
subordinated units and general partner units in respect of the fourth quarter
of 2007 and first quarter of 2008, and did not pay a distribution on any of our
units in respect of the second, third and fourth quarters of 2008. The October
2008 amendment to the Senior Credit Facility prohibited us from paying any
distributions on any of our units until the borrowings under the Senior Credit
Facility are repaid in full.

|   |                                                    
|-- | ---------------------------------------------------
|3. | Proceedings Under Chapter 11 of the Bankruptcy Code

On
April 29, 2009 (the Commencement Date), U.S. Shipping Partners L.P., together
with all of its wholly-owned subsidiaries, US Shipping General Partner LLC, its
general partner (USSGP), and USS Vessel Management LLC, a wholly-owned
subsidiary of USSGP, filed voluntary petitions for reorganization relief under
Chapter 11 of Title 11 of the United States Bankruptcy Code (the Bankruptcy
Code) in the United States Bankruptcy Court for the Southern District of New
York (the Bankruptcy Court) (the Bankruptcy Filing). The chapter 11 cases
are being jointly administered under the caption In re U.S. Shipping Partners
L.P. et al., Case No. 09-12711 (RDD) (the Bankruptcy Cases). We will continue
to manage our properties and operate our businesses as debtors-in-possession
under the jurisdiction of the Bankruptcy Court and in accordance with the
applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy
Court.

The
Bankruptcy Filing was made with a pre-arranged restructuring plan with the
support of a substantial majority of our secured lenders and noteholders.
Effective April 29, 2009, we entered into a Plan Support Agreement with the
holders of (i) in excess of two-thirds of the amounts (including without
limitation in respect of the termination obligations under our interest rate
swaps) due under our Senior Credit Facility (the lenders thereunder the Senior
Secured Lenders) and (ii) approximately 70% of the amounts due in respect of
our Second Lien Notes.

The
parties to the Plan Support Agreement have agreed to support a plan of
reorganization for the Partnership (the Plan) on the terms and conditions set
forth in the Plan Term Sheet attached as Exhibit A to the Plan Support
Agreement. They have also agreed not to support, directly or indirectly, any
other plan, in exchange for our agreement to implement all steps necessary to
solicit the requisite acceptances of the Plan and obtain from the Bankruptcy
Court an order confirming the Plan substantially in accordance with the terms
of the Plan Support Agreement. The Plan Support Agreement may be terminated
under certain circumstances, including in the event that the Plan and related
disclosure statement are not approved by certain deadlines, the Plan is not
consummated within a certain period of time after its filing with the
Bankruptcy Court, a party materially breaches the Plan Support Agreement, the
chapter 11 cases are converted to cases under chapter 7 of the Bankruptcy Code
or the Bankruptcy Court grants relief that is inconsistent with the Plan
Support Agreement or the Plan Term Sheet.

F - 9

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

Under
the proposed plan of reorganization contemplated by the Plan Term Sheet:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                               
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Senior
  Secured Lenders will receive (i) new term loan notes in an aggregate
  principal amount equal to approximately $332.6 million plus an amount equal
  to the termination obligation under our interest rate swaps and (ii) fifty
  percent (50%) of the common stock of a reorganized U.S. Shipping Partners,
  which will be converted to a corporation (Reorganized USSP), before giving
  effect to the common stock to be issued pursuant to a management equity plan
  described below, provided that Senior Secured Lenders that are not U.S.
  Citizens for U.S. coastwise trade law purposes will receive a combination of
  common stock and warrants to purchase common stock. The new term loan notes
  will:
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | bear
  interest at a rate equal to, at our option, (i) LIBOR plus 5%, subject to a
  2% LIBOR floor or (ii) alternate base rate plus 4%;                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | mature on
  August 7, 2013;                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | amortize at
  the rate of 1% per year beginning in the first full year following our
  emergence from bankruptcy;                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | be
  mandatorily prepaid to the extent of excess cash flow (as defined in the Plan
  Term Sheet) once we have achieved a $30 million cash balance in the first
  year following our emergence from bankruptcy and a $20 million (subject to
  adjustment under certain circumstances) cash balance thereafter;
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | be secured by
  substantially all our assets; and                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | be subject
  to certain customary covenants, including without limitation an interest
  coverage test (EBITDA/net interest) and a debt to EBITDA coverage ratio, each
  to be determined.                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                               
| |  | The holders
  of the Second Lien Notes will receive fifty percent (50%) of the common stock
  of Reorganized USSP, before giving effect to the common stock to be issued
  pursuant to a management equity plan described below, provided that holders
  of the Second Lien Notes that are not U.S. Citizens for U.S. coastwise trade
  law purposes will receive a combination of common stock and warrants to
  purchase common stock. The Second Lien Notes will be cancelled.                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                               
| |  | In no event
  will persons who are not U.S. Citizens for U.S. coastwise trade law purposes
  be issued common stock of Reorganized USSP representing in aggregate more
  than 23% of the common stock to be outstanding on the date we emerge from
  bankruptcy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                               
| |  | Reorganized
  USSP will adopt a management equity plan providing for the issuance to
  management of 10% of the outstanding common stock of Reorganized USSP. Five
  percent (5%) of such equity will be issued to management at the time we
  emerge from bankruptcy, with 25% vesting immediately and an additional 25%
  vesting on the first, second and third anniversaries of our emergence from
  bankruptcy. The remaining five percent (5%) available under the management
  equity plan will be issuable from time to time as determined by the board of
  directors of Reorganized USSP.                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                               
| |  | The warrants
  to be issued to the persons who are not U.S. Citizens for U.S. coastwise
  trade law purposes will have an exercise price of $0.001 per share, will
  expire December 31, 2029 and may only be exercised by persons who are U.S.
  Citizens for U.S. coastwise trade law purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                               
| |  | Our existing
  and outstanding common units, subordinated units and general partnership
  interests will be cancelled without the payment of any amount to the holders
  thereof.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                               
| |  | Customary
  releases will be provided to us, our current and former officers and
  directors, the Senior Secured Lenders, the holders of the Second Lien Notes,
  the various agents and trustees under the debt agreements and the respective
  officers, directors, employees, agents, advisors and professionals of each of
  the foregoing, subject to specified exceptions.                                                                                                                                                                                                                                                                                                                                                      

F - 10

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

The
implementation of the Plan is dependent upon a number of factors, including
final documentation, the approval of a disclosure statement by the Bankruptcy
Court, confirmation of the Plan by the Bankruptcy Court and consummation of the
Plan in accordance with the provisions of the Bankruptcy Code and the Plan.

American
Institute of Certified Public Accountants Statement of Position 90-7,
Financial Reporting by Entities in Reorganization under the Bankruptcy Code
(SOP 90-7), which is applicable to companies in Chapter 11, generally does not
change the manner in which financial statements are prepared. However, it does
require that the financial statements for periods subsequent to the filing of
the Chapter 11 petition distinguish transactions and events that are directly
associated with the reorganization from the ongoing operations of the business.
Revenues, expenses (including professional fees), realized gains and losses,
and provisions for losses that can be directly associated with the
reorganization and restructuring of the business must be reported separately as
reorganization items in the consolidated statements of operations beginning in
the quarter ending June 30, 2009. The consolidated balance sheet must
distinguish pre-petition liabilities subject to compromise from both those
pre-petition liabilities that are not subject to compromise and from
post-petition liabilities. Liabilities that may be affected by the plan must be
reported at the amounts expected to be allowed, even if they may be settled for
lesser amounts. In addition, cash provided by reorganization items must be
disclosed separately in the condensed consolidated statement of cash flows. The
Partnership adopted SOP 90-7 effective in May, 2009 and will segregate those
items as outlined above for all reporting periods subsequent to such date.

As
of the date we filed for protection under the U.S. bankruptcy laws, we had
approximately $15.5 million in unrestricted cash and cash equivalents. The
ability of the Partnership to continue as a going concern is dependent upon,
among other things, (i) the Partnerships ability to comply with the terms and
conditions of the cash collateral order entered by the Bankruptcy Court in
connection with the Bankruptcy Cases; (ii) the ability of the Partnership to
generate cash from operations; (iii) the ability of the Partnership to obtain
confirmation of and to consummate the Plan or another plan of reorganization
under the Bankruptcy Code; and (iv) the cost, duration and outcome of the
reorganization process. Uncertainty as to the outcome of these factors raises
substantial doubt about the Partnerships ability to continue as a going
concern. We are currently evaluating various courses of action to address the
operational and liquidity issues the Partnership is facing, and formulating
plans for improving operations. There can be no assurance that any of these
efforts will be successful. These audited consolidated financial statements do
not include any adjustments that might result should the Partnership be unable
to continue as a going concern. Consistent with generally accepted accounting
principles preparing these audited consolidated financial statements on a going
concern basis contemplates the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable future.

|   |                                             
|-- | --------------------------------------------
|4. | Summary of Significant Accounting Principles
|   |                                             
|   | Principles of Consolidation                 

These
consolidated financial statements are for the Partnership and its subsidiaries.
In addition to all the wholly-owned subsidiaries of the Partnership, due to the
Partnerships control of the Joint Venture and other aspects of the joint
venture agreement, the financial statements of the Joint Venture are
consolidated with the Partnership for financial reporting purposes. The portion
of the net loss of the Joint Venture attributable to the 60% owners of the
Joint Venture is set forth under the caption Noncontrolling interest in Joint
Venture losses on the Consolidated Statements of Operations and Comprehensive
Income. All inter-company transactions and balances have been eliminated in
consolidation.

The
Partnership has determined that it should have been allocating losses in
accordance with the expected economic returns of the Joint Venture, rather than
proportionally based on ownership interest. As a result, the Partnership has
determined that it had been erroneously allocating losses to its Joint Venture
partner via the Non-Controlling Interest line since the inception of the Joint
Venture in 2006. The Partnership does not consider this error material to the
historical financial statements and has, therefore, revised this allocation by
correcting the error during the twelve months ended December 31, 2008. The
third quarter impact of this out of period adjustment was an additional
allocation of $1,354 in losses to the Partnership, recorded through the
non-controlling interest line. Future Joint Venture losses will be fully
allocated to the Partnership. The Joint Venture is included as a non-guarantor
subsidiary in Note 22, Supplemental Guarantor Information

F - 11

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

Cash
and Cash Equivalents

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

Restricted
Cash

On
August 7, 2006, two escrow accounts were established as part of the
Partnerships debt and equity financings to fund the construction of at least
three new ATBs (the ATB Escrow) and the remaining committed equity
contributions to the Joint Venture (the Joint Venture Escrow). Amounts the
Partnership projects will be used to satisfy obligations due during the next
twelve months are classified as current restricted cash, with the remainder
classified as non-current restricted cash.

Revenue
Recognition

The
Partnership earns revenue under contracts of affreightment, spot voyage
charters, consecutive voyage charters and time charters. For contracts of
affreightment, spot voyage charters and consecutive voyage charters, revenue
and voyage expenses are recognized based upon the relative transit time in each
period to the total estimated transit time of each voyage. Recognizing expenses
as incurred for these voyages would not have a significant impact on earnings.
Although contracts of affreightment, consecutive voyage charters and certain contracts
for spot voyage charters may be effective for a period in excess of one year,
revenue is recognized on the basis of individual voyages. For these voyages,
the Partnership recognizes revenue on a discharge to discharge basis; however,
if, subsequent to discharge, the following voyage is not contracted, no revenue
is associated with the following voyage until a voyage is contracted, and
expenses incurred during that time are recognized as incurred. For time
charters, revenue is recognized on a daily basis during the contract period,
with expenses recognized as incurred. For grain voyages, the Partnership
adopted a policy in 2007 where the related voyage freight revenue and voyage
expenses are not recognized until the grain is delivered to its final destination.

In
late 2008, the Partnership entered into contracts with various humanitarian
organizations to transport grain, via two voyages on the ITB Philadelphiaand theITB Mobile, from the U.S. to the
eastern
coast of Africa. These voyages commenced in the fourth quarter of 2008 and were both
completed in 2009. Remaining revenues for these two grain voyages to be
recognized upon voyage completion is estimated to be approximately $15,921.
Total deferred costs related to these voyages at December 31, 2008 are $7,080
and are included in prepaid expenses and other current assets. Grain related
revenues of approximately $14,074 are deferred and not recognized at December
31, 2008.

In
late 2007, the Partnership also entered into contracts with various
humanitarian organizations to transport grain, via a single voyage on the ITB Philadelphia, from the U.S. to the
eastern coast of Africa. This voyage commenced in December 2007 and was
completed in February 2008. The Partnership was required to discharge and bag
all of the grain, and to transport a portion of the grain via truck to points
inland. Total revenue for this voyage upon completion was $7,298. Total
deferred costs related to this voyage at December 31, 2007 were $1,362 and were
included in prepaid expenses and other current assets. Grain related revenues
of approximately $2,735 are deferred and not recognized at December 31, 2007.

At
December 31, 2008 and December 31, 2007, the Partnership had received advance
payments of $6,165 and $1,193, respectively, for freight revenue from its
customers. This deferred revenue is classified as a liability until earned.

F - 12

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U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

Vessels
and Equipment

The
Partnership incurs expenses related to the depreciation of the historical cost
of its fleet and the amortization of expenditures for drydockings. The
aggregate number of drydockings undertaken in a given period and the nature of
the work performed determine the level of drydocking expenditures. Depreciation
and amortization is determined as follows:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Vessels are
  recorded at cost, including capitalized interest and transaction fees where
  appropriate, and depreciated to salvage value using the straight-line method
  as follows: 10 years for the Chemical
  Pioneer, the Charleston
  and the Houston; and 30 years
  for the ATB Freeport, the ATB Galvestonand the ATB Brownsville based on their
  respective estimated useful lives. Prior to September 30, 2008, our ITBs were
  being depreciated to salvage value using the straight-line method to their
  respective mandatory retirement from transportation of petroleum products as
  required by OPA 90, between 2012 and 2014. At September 30, 2008, in
  connection with the write-down of the value of the ITBs, the remaining
  depreciable lives for the ITBs was accelerated to November 2008 for the ITB Groton and ITB Jacksonville, May 2009 for
the ITB New
  York (based on its anticipated sale in June 2009) and September
  30, 2010 for the ITB Baltimore,
  ITB Mobile and ITB Philadelphia. TheSea Ventureis recorded at its
  estimated scrapping proceeds after recording an impairment charge at December
  31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Office
  furniture, equipment and other are depreciated over the estimated useful life
  of three to ten 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 as incurred. Leasehold improvements are capitalized and
  depreciated over the shorter of their useful life or the remaining term of
  the lease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Vessels are
  required by both domestic (United States Coast Guard) and international
  (International Maritime Organization) regulatory bodies to be inspected twice
  every five years. To date, our ITBs have participated in the Underwater
  Inspection In Lieu of Drydock (UWILD) Program which allows vessels to be
  drydocked once every five years with a mid-period UWILD. In April 2007, we
  were advised by the U.S. Coast Guard that it will allow continued
  participation in the UWILD Program of non-or double hulled tank barges that
  are over 15 years of age if they only trade domestically. We expect that our
  ITBs will qualify to remain in the UWILD Program. The ATBs will also qualify
  for the UWILD program, because of their age, our parcel tankers and the Houstonmust be drydocked twice every five years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   | If the
  Partnership is required to conduct a second drydock in each five year period
  rather than rely on an underwater survey, the ITBs will be out of service
  longer and drydock expenditures will be higher than the time required for and
  the cost of conducting an underwater survey, because of the age of the ITBs,
  their continued participation in the UWILD Program is now conditioned on
  their undergoing an enhanced survey during the UWILD, resulting in the vessel
  being off-hire, and not earning revenue, for an additional 12 days each time
  a survey is conducted; however; under international maritime organization
  regulations, in order for it to continue to trade internationally (including
  grain voyages), it will have to undergo two drydockings in each five year
  period, rather than a drydocking and a UWILD. In addition, vessels may have
  to be drydocked in the event of accidents or other unforeseen damage. The
  Senior Credit Facility prohibits the Partnership from drydocking any of the
  ITBs without the prior consent of the senior lenders. If the Partnership is
  not permitted to drydock the ITBs, it will be required to take them out of
  service. The Partnership capitalizes expenditures incurred for drydocking and
  amortizes these expenditures over 60 months for the ATBs, 36 months for the
  parcel tankers and over the remaining depreciable lives for the ITBs and the Houston. If our ITBs can no longer
  participate in the UWILD Program and we have to drydock such vessels twice
  every five years, we will amortize these expenditures over the remaining
  depreciable lives.

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.

F - 13

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

Construction
costs of new vessels are capitalized and included in construction in progress
until completed. Interest incurred during the construction of vessels is
capitalized based on the costs incurred.

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 $3,230 and $4,215 at December 31,
2008 and 2007, respectively, and are included in prepaid expenses and other
current assets in the consolidated balance sheets. Additionally, amounts
accrued for fuel purchases, $511 and $2,080 at December 31, 2008 and 2007,
respectively, are included in accrued expenses and other current liabilities in
the consolidated balance sheets.

Deferred
Financing Costs

Direct
costs associated with obtaining long-term financing and revolving credit
facilities are deferred and generally amortized utilizing the effective
interest method over the terms of the related financings. Any unamortized
deferred financing costs are written-off when debt is retired before the
maturity date. As a result of the Partnership not being in compliance with
certain financial covenants at September 30, 2008 and December 31, 2008 and the
senior lender waiver of this non-compliance initially expiring at January 31,
2009, the Partnership accelerated the amortization period for deferred
financing costs to January 31, 2009 following an accounting policy of accelerating
the amortization of deferred financing fees up to the date a related financing
may be callable, which was first applied by the Partnership in the fourth
quarter of 2008.

As
a result of the Partnership receiving a notice from the agent for the lenders
to the Joint Venture asserting events of default under that certain revolving
notes facility agreement with the Joint Venture have occurred, which the
Partnership disputes, the Partnership wrote off the Joint Ventures remaining
net deferred financing costs at December 31, 2008. See Note 23Subsequent
EventsLitigation with Joint Venture Investors.

Use
of Estimates

The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 the reported amounts of revenues and expenses
during the reporting period. The most significant estimates relate to
depreciable lives and salvage values of vessels, fair values of derivative
instruments and liabilities incurred for property and indemnity claims. Actual
results could differ from those estimates.

Concentration
of Credit Risk

Financial
instruments that potentially subject the Partnership to concentrations of
credit risk are primarily cash and trade accounts receivable. The Partnership
maintains its cash balances with financial institutions that are not
historically subject to significant market risk. The Partnership maintains its
cash on deposit at a financial institution in amounts that, at December 31,
2008 and December 31, 2007, exceeded insurable limits by $27,665 and $146,686,
respectively.

The
Partnerships operations are concentrated in long-haul coastwise marine
transportation services, principally for refined petroleum production in the
U.S. domestic coastwise trade. Events or changes in regulations impacting
this industry could have a material impact on the Partnerships operations.

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 $1,414 and $444 at December 31, 2008 and 2007,
respectively. The Partnership 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 years ended
December 31, 2008, 2007 and 2006, the Partnership charged to expense an
allowance for doubtful accounts of $1,404, $755 and $137, respectively, and
incurred write-offs of $433, $489 and $151, respectively.

F - 14

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

Voyage
revenues and accounts receivable for the Partnerships customers included the
following concentration:

| |                    |  |                                |    |                                    |  |      |   |      |    |      |  |    |   |  |    |  
| | ------------------ |  | ------------------------------ | -- | ---------------------------------- |  | ---- | - | ---- | -- | ---- |  | -- | - |  | -- | -
| |                    |  | Voyage Revenues
  December 31, |    | Accounts Receivable
  December 31, | 
| |                    |  |                                |    |                                    | 
| |                    |  | 2008                           |    | 2007                               |  | 2006 |   | 2008 |    | 2007 | 
| |                    |  |                                |    |                                    |  |      |   |      |    |      | 
| | World Food Program |  |                                | 20 | %                                  |  | 0    | % |      | 0  | %    |  | 25 | % |  | 0  | %
| | Shell              |  |                                | 10 | %                                  |  | 16   | % |      | 25 | %    |  | 9  | % |  | 14 | %
| | Morgan Stanley     |  |                                | 9  | %                                  |  | 9    | % |      | 5  | %    |  | 0  | % |  | 7  | %
| | Koch               |  |                                | 8  | %                                  |  | 6    | % |      | 7  | %    |  | 3  | % |  | 2  | %
| | Dow                |  |                                | 7  | %                                  |  | 7    | % |      | 4  | %    |  | 19 | % |  | 7  | %

Voyage
revenues from Hess do not include payments to or from Hess under the Hess
support agreement. See Note 16 for information about the Hess support
agreement.

Valuation
of Long-Lived Assets

The
Partnership reviews long-lived assets, including vessels and vessels currently
under construction, for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In such
instances, an impairment charge would be recognized if the estimated fair value
of the asset is less than the assets net book value. The Partnership has
significant assets under construction. These assets under construction are
subject to the same impairment requirements as other long-lived assets. The
assessment of recoverability is subject to estimates such as future charter
rates, the ultimate cost of vessel construction and future economic conditions.
During 2008, because the potential for the ITB
Grotonand ITB Jacksonville
to return to the petroleum market was unlikely, the Partnership sold them to a
third party and recorded an impairment loss on these two ITBs in the third
quarter of 2008. Furthermore, in the third quarter of 2008, we determined that
the carrying amounts of the other ITBs also exceeded their fair values. Factors
indicating the impairment of the other ITBs included the fact that the spot
petroleum market had further deteriorated; the likelihood that there would be
no further demand for the ITBs in the spot petroleum market, should that market
recover, due to the available capacity of double-hulled vessels which are
preferred vessels by the major oil companies; the entry of the ITB New Yorkinto the spot market when its
current time charter expired on December 31, 2008; increasing competition for
the ITBs in the grain market as other bulk carriers compete for these cargoes,
and the decision to sell, and the anticipated sales price of, the ITB Groton and the ITB Jacksonville.

In
the fourth quarter of 2008, we also reviewed the net book value of the remaining
vessels for potential impairment and determined that the future usage of theSea Venture was uncertain. Given the
change in the business climate and based upon the significant cost of a
scheduled drydocking for this vessel in June 2009, we wrote down the carrying
value of the Sea Ventureto its
estimated scrapping proceeds, resulting in an additional impairment loss
recorded in December 2008. After performing its review of the remaining fleet,
no further impairment charges were deemed necessary and recorded.

During
the quarter ended March 31, 2008, the Partnership determined that the fourth
ATB unit referenced in Note 8Vessels and Equipment was impaired, as the
Partnership did not obtain financing for its construction and assessed the fair
value of the construction in progress of this ATB unit at zero which resulted
in a non-cash impairment charge of $5,720, which includes $3,831 previously
paid for construction of the barge portion of this ATB unit, $1,394 for
deposits on certain owner furnished equipment and $495 of capitalized interest
cost. During the year ended December 31, 2008, the Partnership accrued
additional expenses related to owner furnished equipment and services in the
amount of $251; the Partnership has no further financial obligations with
regard to either the tug or the barge.

F - 15

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

Derivative Instruments and Hedging Activities

The
Partnership utilizes derivative financial instruments to reduce interest and
currency exchange 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 Hedging Activities, (FAS 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 balance sheet 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 the
fair value of cash flows of the asset or liability hedged.

The
Partnership designated its cash flow swaps associated with its Senior Credit
Facility as cash flow hedges in accordance with FAS 133 and has reviewed their
qualification as effective hedges quarterly to determine how gains or losses
should be reported in accordance with FAS 133. As a result of the October 20,
2008 amendment to the Senior Credit Facility, the Partnership determined these
hedges were no longer effective as  cash flow hedges and recognized the
unfavorable changes in fair values for the period October 1, 2008 through
December 31, 2008 in earnings in the fourth quarter of 2008. Both of these
hedges were early terminated by the respective counterparty as a result of the
Partnerships bankruptcy filing on April 29, 2009.

In
February 2006, the Partnership entered into contracts, denominated in Euros,
for the purchase of owner-furnished items relative to the Partnerships
newbuild ATB series. To hedge the exposure to foreign currency, the Partnership
entered into a series of foreign currency forward contracts effective through
June 5, 2009, with an average exchange rate of $1.25/Euro. These contracts were
originally designated as cash flow hedges, and through February 2008 the fair
value of these contracts was included in other comprehensive income. In March
2008, the Partnership paid amounts for the purchase of a portion of the
owner-furnished equipment six months ahead of the original forecasted
expenditure date, rendering this portion of the hedge ineffective and recorded
the net proceeds in earnings. In addition, two of the forecasted payments were
contractually extended and subsequently terminated, rendering the contracts
designated as cash flow hedges for these forecasted payments ineffective. The
Partnership sold these contracts during June 2008 and recorded its net proceeds
in earnings. In 2008, the Partnership paid amounts for the purchase of owner furnished
equipment eight months ahead of the original forecasted expenditure date
rendering this portion of the hedge ineffective. The gain or loss on the
foreign currency forward contracts currently included in comprehensive income
will be recognized in earnings at the time that the underlying hedged items (i.e., the owner-furnished items) are
recognized in earnings as a component of depreciation expense. As of December
31, 2008, all contracts for this hedge have been satisfied.

In
February 2007, the Joint Venture purchased a nine year interest rate cap as
part of a hedging strategy in place at the Joint Venture to protect the value
of its vessels and the chartering contracts thereon. Upon the completion of the
construction of each vessel, the Joint Venture expects to sell the vessel
together with any chartering contract that may be in place on such vessel.
Since the long-term chartering contracts entered into by the Joint Venture will
result in a fixed stream of cash flows over a multi-year period, the value that
the Joint Venture may be able to obtain upon the sale of the combined vessel
and chartering contract is subject to volatility based upon how interest rates
fluctuate. The interest rate cap is intended to reduce the potential negative
impacts to the Joint Ventures cash flows that could result in movements in
interest rates between the date a chartering contract was entered into for the
first product tanker in December 2006 and the anticipated sale date of such
combined vessel and chartering contract. The Joint Venture does not plan to
hold or issue derivative financial instruments for trading purposes, but has
not performed the activities necessary to qualify the contract for hedge
accounting treatment under FAS No. 133; therefore any changes in the fair value
of the instrument is recorded as a gain or loss on derivative financial
instruments in the accompanying Consolidated Statements of Operations and
Comprehensive Income.

F - 16

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

In
September 2006, the FASB issued FAS 157 effective for fiscal years beginning
after November 15, 2007. FAS 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements.
This statement does not require any new fair value measurements, but simplifies
and codifies related guidance within generally accepted accounting principles.
FAS 157 applies under other accounting pronouncements that require or permit
fair value measurements. Relative to FAS 157, the FASB issued FSP 157-1, 157-2
and FSP 157-3. FSP 157-1 amends FAS 157 to exclude FAS No. 13, Accounting for
Leases, and its related interpretive accounting pronouncements that address
leasing transactions. FSP 157-2 defers the effective date of FAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a
recurring basis, until fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years. FSP 157-3 provides guidance in
applying FAS 157 when valuing securities in markets that are not active.
Non-recurring nonfinancial assets and nonfinancial liabilities include those
measured at fair value in goodwill impairment testing, indefinite lived
intangible assets measured at fair value for impairment testing, asset
retirement obligations initially measured at fair value, and those assets and
liabilities initially measured at fair value in a business combination. The
Partnership has adopted FAS 157 as of January 1, 2008 related to financial
assets and financial liabilities. The Partnership is currently evaluating the
impact of FAS 157 related to nonfinancial assets and nonfinancial liabilities
on the Partnerships financial statements.

The
Partnership utilizes the best available information in measuring fair value.
The Partnership has determined that its interest rate cap is valued using Level
2 inputs and its interest rate swaps are valued using Level 3 inputs as of
December 31, 2008 in the fair value hierarchy as further described below:

Valuation
Hierarchy

FAS
157 establishes a valuation hierarchy for disclosure of the inputs to valuation
used to measure fair value. This hierarchy prioritizes the inputs into three
broad levels as follows:

Level
1 inputs  quoted prices (unadjusted) in active markets for identical assets or
liabilities.

Level
2 inputs  quoted prices for similar assets and liabilities in active markets
or inputs that are observable for the asset or liability, either directly or
indirectly through market corroboration, for substantially the full term of the
financial instrument.

Level
3 inputs  unobservable inputs based on the Partnerships own assumptions used
to measure assets and liabilities at fair value. A financial asset or
liabilitys classification within the hierarchy is determined based on the
lowest level input that is significant to the fair value measurement.

The
financial asset carried at fair value measured via Level 2 inputs on a
recurring basis as of December 31, 2008 includes:

| |                                                                                                               |                                                                                                   
| | ------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------
| |                                                                                                              | An interest
  rate cap associated with the Joint Venture with a fair market asset value of
  $775.
| |                                                                                                               |                                                                                                   
| | The
  financial liabilities carried at fair value measured via Level 3 inputs as
  December 31, 2008 include:
| |                                                                                                               |                                                                                                   
| |                                                                                                              | An interest
  rate swap with a fair market liability value of $9,167.                             
| |                                                                                                               |                                                                                                   
| |                                                                                                              | An interest
  rate swap with a fair market liability value of $6,396.                             

Valuation
Techniques

The
fair value of the interest rate cap is developed from market-based inputs under
the income approach using cash flows discounted at relevant market interest
rates.

The
fair value of the interest rate swaps is developed from market-based inputs
under the income approach using cash flows discounted at relevant market
interest rates as adjusted for the Partnerships credit risk as observed in the
trading value of the Partnerships senior secured debt.

F - 17

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

Taxes

As
a publicly traded partnership, the Partnership is generally not responsible for
federal and state income taxes and its profits and losses are passed directly
to its members for inclusion in their respective income tax returns. In January
2008, the Partnership made an election to treat the entity that owns the Sea Venture as a corporation for tax
purposes effective January 2, 2008. The Partnership operates the Chemical Pioneerin a corporate subsidiary
and, consequently, this subsidiary is subject to federal and state income
taxes. Additionally, during 2008 ownership of the interests in the limited
liability companies that own the ITBs, except for the ITB Philadelphia, were transferred to the
subsidiary that owns the Chemical Pioneer
and therefore these entities were also effectively subject to federal and state
income taxes. The Partnership operates the ATB
Freeportand theITB Philadelphia
as subsidiaries taxed as corporations and has a corporate subsidiary that owns
the subsidiary dedicated to managing the operations of the Partnerships Joint
Venture. The Partnership is subject to certain state franchise and other taxes.
Effective January 1, 2009, the Partnership has elected to be treated as a
corporation and will be subject to federal and state income tax.

The
Partnership provides deferred income taxes for the tax effects of differences
between the financial reporting and tax bases of its assets and liabilities
which are recorded at enacted tax rates in effect for the years in which the
differences are projected to reverse. The Partnership evaluates the
recoverability of deferred tax assets and establishes a valuation allowance
when it is more likely than not that some portion or all of deferred tax assets
will not be realized.

The
Partnership recognizes benefits on uncertain income tax positions when it is
more likely than not that the tax position will be sustained based upon
available evidence. Interest and penalties on uncertain income tax positions
are recognized in the provision for income taxes on the Consolidated Statement
of Operations and Comprehensive Income.

Fair Value of Financial Instruments

The
carrying amount of the Partnerships financial instruments included in current
assets and current liabilities (excluding its current debt) approximate their
fair value due to their short-term nature. At December 31, 2008, the fair
values of the Partnership debt is based on secondary market indicators. Since
the Partnerships debt is not actively traded, estimates are based on each
obligations characteristics, including remaining maturities that are all
classified as current, interest rate, amortization schedule and liquidity. The
estimated fair values of the Partnerships long-term debt at December 31, 2008
are as follows:

| |                                            |  |                   |         |            |   |         | 
| | ------------------------------------------ |  | ----------------- | ------- | ---------- | - | ------- | 
| |                                            |  | December 31, 2008 |        
| |                                            |  |                   |        
| |                                            |  | Carrying Amount   |         | Fair Value |  
| |                                            |  |                   |         |            |  
| | Third Amended and Restated Credit Facility |  | $                 | 333,574 |            | $ | 151,776 | 
| | 13% Senior Secured Notes due 2014          |  |                   | 100,000 |            |   | 20,000  | 
| | Revolving Notes Facility - Joint Venture   |  |                   | 176,721 |            |   | 176,721 | 

At
December 31, 2007, estimated fair values of the Partnerships long-term debt
approximated 95% of their carrying values.

Reclassification

Certain
prior period amounts included in footnote disclosures have been reclassified to
conform to current year presentation.

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s interest, as described
below, by the weighted average number of units outstanding during the period.
Diluted net income per unit is calculated in the same manner as 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 phantom units.

F - 18

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U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

The
Partnerships long-term incentive plan currently permits the issuance of an
aggregate of 681,997 units. There were no unit options or phantom units issued
or outstanding during the periods ended December 31, 2008, 2007 and 2006.

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, regardless of whether those earnings would or could be
distributed. 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 establishment of cash reserves. Unlike available
cash, net income is affected by non-cash items, such as deferred income tax
provisions.

As
described in Note 13, the general partners incentive distribution rights
entitle it to receive an increasing percentage of distributions when the
quarterly cash distribution exceeds $0.50 per unit. For purposes of EITF 03-6,
the Partnership must treat net income as if it were distributable. Therefore,
since net income did not exceed $0.50 per unit for any quarter during 2008,
2007 or 2006 the assumed distribution of net income does not result in use of
the increasing percentages to calculate the general partners interest in net
income. The distributions per common unit during the years ended December 31,
2008, 2007 and 2006 were $.45, $1.80 and $1.80, respectively. The distributions
for the subordinated and general partner units during the years ended December
31, 2008, 2007 and 2006 were $0, $1.35 and $1.80, respectively.

On
October 20, 2008, the Partnership and its lenders amended the Partnerships
Senior Credit Facility to, among other things, prohibit the Partnership from
paying any distributions on its common units until all borrowings under the
Senior Credit Facility are paid in full.

|   |                              
|-- | -----------------------------
|5. | New Accounting Pronouncements

In
September 2006, the FASB issued Statement of Financial Accounting Standards
(FAS) Statement No. 157, Fair Value Measurement, (FAS 157) effective for
fiscal years beginning after November 15, 2007. FAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. This statement does not require any new fair value
measurements, but simplifies and codifies related guidance within generally
accepted accounting principles. FAS 157 applies under other accounting
pronouncements that require or permit fair value measurements. Relative to FAS
157, the FASB issued FASB Staff Positions (FSP) 157-2, which defers the
effective date of FAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis, until fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. The
Partnership adopted FAS 157 as of January 1, 2008 related to financial assets
and financial liabilities. The FASB also issued FSP 157-3 which clarifies the
fair value of a financial asset when the market for that asset is not active.
See Note 4 and Note 15 for additional discussion on fair value measurements.
The Partnership is currently evaluating the impact of FAS 157 related to
nonfinancial assets and nonfinancial liabilities on the Partnerships financial
statements.

In
February 2007, the FASB issued FAS Statement No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment of FAS
Statement No. 115, (FAS 159) effective as of the beginning of fiscal years
beginning after November 15, 2007. FAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value at specified
election dates. A business entity shall report unrealized gains and losses on
items for which the fair value option has been elected in earnings at each
subsequent reporting date. The fair value option:

| |    |                                                                                                                                     
| | -- | ------------------------------------------------------------------------------------------------------------------------------------
| | 1. | May be
  applied instrument by instrument, with a few exceptions, such as investments
  otherwise accounted for by the equity method
| |    |                                                                                                                                     
| | 2. | Is
  irrevocable (unless a new election date occurs)                                                                                
| |    |                                                                                                                                     
| | 3. | Is applied
  only to entire instruments and not to portions of instruments.                                                         

The
Partnership has not elected fair value treatment for any financial instruments
as of December 31, 2008.

F - 19

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

In
December 2007 the FASB issued FAS Statement No. 160, Noncontrolling Interests
in Consolidated Financial Statements  an amendment of ARB No. 51 effective as
of the beginning of fiscal years beginning after December 15, 2008. This pronouncement,
among other requirements, requires entities with noncontrolling interests to
classify noncontrolling interests as components of equity. This pronouncement
requires entities to be viewed for reporting purposes from an economic unit
perspective rather than a controlling interest perspective. The Partnership
plans to adopt FAS 160 beginning in the first quarter of 2009. The Partnership
is currently evaluating the impact of FAS 160 related to financial statement
presentation for the 60% noncontrolling interest of the Partnerships Joint
Venture.

In
December 2007, the FASB issued FAS Statement No. 141 (revised 2007), Business
Combinations (FAS 141(R)) which replaces FAS 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
acquisition method of accounting but FAS 141(R) changed the method of applying
the acquisition 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 annual period
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 Income Taxes 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). Early adoption is not allowed.

In
March 2008, the Emerging Issues Task Force reached a consensus on EITF 07-4,
Application of the Two-Class Method under FASB Statement No. 128, Earnings per
Share, to Master Limited Partnerships. EITF 07-4 requires master limited
partnerships with incentive distribution rights (IDRs) to measure earnings
per unit as it relates to IDRs consistent with the two-class method of
measuring earnings per unit. This issue is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. In light of the Partnerships election to be taxed
as a corporation beginning January 1, 2009, this pronouncement will not affect
the Partnerships financial statements.

In
March 2008, the FASB issued FAS Statement No. 161, Disclosures about
Derivative Instruments and Hedging Activities-an amendment of FASB Statement
No. 133, (FAS 161). FAS 161 expands the current disclosure requirements of
FAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
(FAS 133) such that entities must now provide enhanced disclosures on a
quarterly basis regarding how and why the entity uses derivatives; how
derivatives and related hedged items are accounted for under FAS 133 and how
derivatives and related hedged items affect the entitys financial position,
performance and cash flow. Pursuant to the transition provisions of the
Statement, the Partnership will adopt FAS 161 in fiscal year 2009 and will
present the required disclosures in the prescribed format on a prospective
basis.

In
April 2008, the FASB issued FAS Statement No. 162, The Hierarchy of Generally
Accepted Accounting Principles, (FAS 162). FAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement was effective 60 days
following the SECs approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. FAS 162 establishes that the GAAP
hierarchy should be directed to entities because is the entity (not its
auditor) that is responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP. The adoption of FAS 162
did not have an impact on us.

In
April 2008, the FASB issued FSP FAS 142-3, Determination
of the Useful Life of Intangible Assets. FSP FAS 142-3 amends the
factors that should be considered in developing a renewal or extension
assumptions used for purposes of determining the useful life of a recognized
intangible asset under FASB Statement No. 142, Goodwill
and Other Intangible Assets. FSP FAS 142-3 is intended to improve
the consistency between the useful life of a recognized intangible asset under
SFAS No. 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141(R) and other U.S. generally accepted
accounting principles. FSP FAS 142-3 is effective for fiscal years beginning
after December 15, 2008. Early application is not permitted. The Partnership
has adopted FSP FAS 142-3 in January 2009 and has determined that the impact of
adopting FSP FAS 142-3 does not have a material effect on the Partnerships
financial position or results of operations.

F - 20

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

In
June 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No.
07-5, Determining Whether an Instrument (or
Embedded Feature) is Indexed to an Entitys Own Stock. This issue is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
application is not permitted. Paragraph 11(a) of SFAS No. 133, Accounting for Derivatives and Hedging Activities,
specified that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Companys own stock and (b)
classified in stockholders equity in the statement of financial position would
not be considered a derivative financial instrument. EITF Issue No. 07-5
provides a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuers own stock and thus
able to qualify for the SFAS No. 133 paragraph 11(a) scope exception. The
adoption of this statement will not have a material impact on the Companys
consolidated financial position, results of operations and cash flows.

|   |                    
|-- | -------------------
|6. | Net Income per Unit

The
units used for basic net (loss) income per unit and diluted net (loss) income
per unit are reconciled below (in thousands):

|                                                                      |  |              |        |      |  |        |  |  |        | 
|--------------------------------------------------------------------- |  | ------------ | ------ | ---- |  | ------ |  |  | ------ | 
|                                                                      |  | December 31, |       
|                                                                      |  |              |       
|                                                                      |  | 2008         |        | 2007 |  | 2006   | 
|                                                                      |  |              |        |      |  |        | 
|Weighted average units outstanding for
  basic net income per unit    |  |              | 18,251 |      |  | 18,234 |  |  | 15,586 | 
|Dilutive effect of restricted units                                   |  |              |       |      |  | 2      |  |  |       | 
|                                                                      |  |              |        |      |  |        | 
|Weighted average units outstanding for
  dilutive net income per unit |  |              | 18,251 |      |  | 18,236 |  |  | 15,586 | 
|                                                                      |  |              |        |      |  |        | 

| |       |                                                                                                                                                               
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Note: | The
  computation of diluted net loss per unit does not assume conversion, exercise
  or issuance of units that would have an anti-dilutive net loss per share

Excluded
from the calculation of dilutive net loss per unit for the year ended December
31, 2008 are 5 restricted units. During 2008, we had a net loss; as a result,
any outstanding restricted stock units, unit options and phantom units are
excluded from the calculation of diluted net (loss) per unit because their
inclusion would have an anti-dilutive effect. There were no dilutive securities
outstanding for the year ended December 31, 2008.

|   |                                
|-- | -------------------------------
|7. | Restricted Cash and Equivalents

On
August 7, 2006, two escrow accounts were established as part of the
Partnerships debt and equity financings to fund the construction of three new
ATBs (the ATB Escrow) and the Partnerships remaining committed equity
contributions to the Joint Venture (the Joint Venture Escrow). As of December
31, 2008 and December 31, 2007, the ATB Escrow balance was $7,566 and $85,453,
respectively, and the Joint Venture Escrow balance was $0 and $39,829,
respectively.

Additionally,
amounts drawn on the ATB Escrow account for items expected to be paid in early
2009 were $439, and are included in cash and equivalents on the Consolidated
Balance Sheets at December 31, 2008 as they were no longer legally restricted
as to use at December 31, 2008. Similar amounts included in cash and equivalents
totaled $13,369 at December 31, 2007. Amounts the Partnership projects will be
used to satisfy obligations due during the next twelve months are classified as
current restricted cash and equivalents. For the years ended December 31, 2008
and 2007, these amounts were $7,566 and $113,960, respectively.

F - 21

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

|   |                                                    
|-- | ---------------------------------------------------
|8. | Vessels and Equipment                              
|   |                                                    
|   | Vessels and
  equipment consisted of the following:

|                                                                              |  |              |         |      |   |         | 
|----------------------------------------------------------------------------- |  | ------------ | ------- | ---- | - | ------- | 
|                                                                              |  | December 31, |        
|                                                                              |  |              |        
|                                                                              |  | 2008         |         | 2007 |  
|                                                                              |  |              |         |      |  
|Vessels                                                                       |  | $            | 395,299 |      | $ | 348,368 | 
|Office furniture, equipment and other                                         |  |              | 448     |      |   | 448     | 
|                                                                              |  |              |         |      |   |         | 
|                                                                              |  |              | 395,747 |      |   | 348,816 | 
|Less: Accumulated depreciation                                                |  |              | 95,782  |      |   | 106,810 | 
|                                                                              |  |              |         |      |   |         | 
|                                                                              |  |              | 299,965 |      |   | 242,006 | 
|Construction-in-progress-Drydock                                              |  |              | 3,392   |      |   |        | 
|Construction-in-progress-ATBs                                                |  |              | 62,111  |      |   | 111,321 | 
|Construction-in-progress-Tankers                                              |  |              | 327,869 |      |   | 101,141 | 
|Capitalized drydock expenditures, net of amortization of $8,252 and
  $22,172 |  |              | 10,858  |      |   | 34,996  | 
|                                                                              |  |              |         |      |   |         | 
|Total vessels and equipment, net                                              |  | $            | 704,195 |      | $ | 489,464 | 
|                                                                              |  |              |         |      |   |         | 

Vessels
are recorded at cost, including capitalized interest and transaction fees where
appropriate, and depreciated to salvage value using the straight-line method as
follows: 10 years for the Chemical Pioneer,
the Charleston and the Houston; and 30 years for the ATB Freeport,the ATB Galvestonand theATB
Brownsville based on their respective
estimated useful lives. Prior to September 30, 2008, our ITBs were being
depreciated to salvage value using the straight-line method to their respective
mandatory retirement from transportation of petroleum products as required by
OPA 90, between 2012 and 2014. At September 30, 2008, in connection with the
write-down of the value of the ITBs, the remaining depreciable lives for the
ITBs were accelerated to November 2008 for the ITB
Groton and the ITB Jacksonville,
May 2009 for the ITB New York (based on its anticipated sale in
June 2009) and September 30, 2010 for the ITB
Baltimore, the ITB Mobile
and the ITB Philadelphia. TheSea Ventureis recorded at its estimated
scrapping proceeds after recording an impairment charge at December 31, 2008.
Office furniture, equipment and other are depreciated over the estimated useful
life of three to ten years. Vessel drydocks are depreciated over their
respective remaining depreciable lives. 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 as incurred. Leasehold improvements are capitalized
and depreciated over the shorter of their useful life or the remaining term of
the lease.

The
Partnership reviews the net book value of vessels for potential impairment
whenever events or changes in circumstances indicate that the carrying amount
of a vessel may not be fully recoverable. During 2008, because the potential for
the ITB Groton and ITB Jacksonville
to return to the petroleum market was unlikely, the Partnership sold them to a
third party and recorded an impairment loss totaling $20,400. The terms of our
Senior Credit Facility required that the vessel proceeds of $5,692, net of
disposition costs, be used to prepay debt outstanding under the Senior Credit
Facility.

At
that time, the Partnership also determined that the carrying amounts of the
other ITBs exceeded their fair values. Factors indicating the impairment of the
other ITBs included the fact that the spot petroleum market had further
deteriorated; the likelihood that there would be no further demand for the ITBs
in the spot petroleum market due to the available capacity of double-hulled
vessels, which are the preferred vessels of the major oil companies; the return
of the ITB New York into the spot
market when its current time charter expired on December 31, 2008; increasing
competition for the ITBs in the grain market as other bulk carriers compete for
these cargoes, the decision to sell, and the sales price of the ITB Groton
and the ITB Jacksonville.

In
the fourth quarter of 2008, we also reviewed the net book value of the
remaining vessels for potential impairment and determined that the future usage
of the Sea Venture was uncertain.
Given the change in business climate and based upon the significant cost of a
required drydocking for this vessel in June 2009, we wrote down the carrying
value of the Sea Venture to its
estimated scrapping proceeds of $600, resulting in an impairment loss of $2,641
recorded in December 2008.
We currently anticipate scrapping the Sea
Venture and selling the ITB
New York in the third quarter of
2009 unless market conditions improve.

F - 22

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

As
a result, the following impairment charges and resulting carrying values
compared to the carrying values at December 31, 2008 are as follows:

|                 |  |                     |        |                  |   |        | 
|---------------- |  | ------------------- | ------ | ---------------- | - | ------ | 
|                 |  | December 31, 2008   |       
|                 |  |                     |       
|Vessels          |  | Impairment
  Charge |        | Carrying
  Value |  
|                 |  |                     |        |                  |  
|ITB Groton       |  | $                   | 10,364 |                  | $ |       | 
|ITB Jacksonville |  |                     | 10,036 |                  |   |       | 
|ITB Baltimore    |  |                     | 11,618 |                  |   | 5,727  | 
|ITB New York     |  |                     | 11,492 |                  |   | 4,064  | 
|ITB Mobile       |  |                     | 14,234 |                  |   | 5,727  | 
|ITB Philadelphia |  |                     | 14,514 |                  |   | 5,724  | 
|Sea Venture      |  |                     | 2,641  |                  |   | 600    | 
|ATB 4            |  |                     | 5,971  |                  |   |       | 
|                 |  |                     |        |                  |   |        | 
|Total            |  | $                   | 80,870 |                  | $ | 21,842 | 
|                 |  |                     |        |                  |   |        | 

At
December 31, 2008, our vessels include the ATB
Galveston which was placed in
service in August 2008 at a total cost of $66,570, plus capitalized interest of
$6,753, and the ATB Brownsville which was placed in service in
November 2008 at a total cost of $67,912, plus capitalized interest of $6,366.
At December 31, 2007, costs associated with the construction of the ATB Galveston
of $45,779, plus capitalized interest of $3,665, and the ATB Brownsville
at a total cost of $39,290 plus capitalized interest of $2,105, were included in
Construction-in-process-ATBs.

Vessels
are required by both domestic (United States Coast Guard) and international
(International Maritime Organization) regulatory bodies to be inspected twice
every five years. To date, our ITBs have participated in the Underwater
Inspection In Lieu of Drydock (UWILD) Program which allows vessels to be
drydocked once every five years with a mid-period UWILD. In April 2007, we were
advised by the U.S. Coast Guard that it will allow continued participation in
the UWILD Program of non-or double hulled tank barges that are over 15 years of
age if they only trade domestically. The Partnership expects to continue to
participate in the UWILD Program. If the Partnership is required to conduct a
second drydock in each five year period rather than rely on an underwater survey,
the ITBs will be out of service longer and drydock expenditures will be higher
than the time required for and the cost of conducting an underwater survey,
because of the age of the ITBs, their continued participation in the UWILD
Program is now conditioned on their undergoing an enhanced survey during the
UWILD, resulting in the vessel being off-hire, and not earning revenue, for an
additional 12 days each time a survey is conducted; however, under
international maritime organization regulations, in order for it to continue to
trade internationally (including grain voyages), it will have to undergo two
drydockings in each five year period, rather than a drydocking and a UWILD.
Additionally, vessels may have to be drydocked in the event of accidents or other
unforeseen damage. The Partnerships recently constructed ATB Freeport,
ATB Galveston and ATB
Brownsville and the remaining
newbuild ATB qualify for the UWILD Program. The Senior Credit Facility
prohibits the Partnership from drydocking any of the ITBs without the prior
consent of the senior lenders. If the Partnership is not permitted to drydock
the ITBs, it will be required to take them out of service.

The
ITB Baltimore sustained damages during Hurricane Dean while in
the shipyard after completing its drydocking in mid-2007. Costs to repair the ITB Baltimore
were substantially covered by insurance, with the exception of the insurance
policy deductible of $125, which expense was recognized in 2007. The
Partnership does not carry off-hire insurance for the revenues lost while
repairs are performed. At December 31, 2007, the Partnership recognized $745 as
a receivable for the insurance proceeds based upon the estimated repair costs,
all of which was received in 2008.

There
was one drydock in progress at December 31, 2008 and none at December 31, 2007.
Capitalized drydock expenditures of $2,410 and $2,433 were accrued at December
31, 2008 and December 31, 2007, respectively. During the year ended December
31, 2008, the Partnership reduced previously recorded estimates of drydock
costs by $490, net of a finalized insurance claim for $332, related to the ITB Philadelphia.

F - 23

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

Depreciation
of vessels and equipment for the years ended December 31, 2008, 2007 and 2006
was $23,023, $23,472 and $22,209, respectively. Amortization of drydocking
expenditures was $15,064, $14,324 and $9,096 for the years ended December 31,
2008, 2007 and 2006, respectively.

At
December 31, 2008 and December 31, 2007, Construction-in-progress-ATBs
includes capitalized interest of $5,054 and $7,793, respectively, and accrued
liabilities of $2,631 and $1,237, respectively. At December 31, 2008 and
December 31, 2007, Construction-in-progress-tankers of the Joint Venture
includes capitalized interest of $23,574 and $11,266, respectively, and accrued
liabilities of $6,086 and $15,589, respectively.

In
2006, the Partnership entered into a contract with Manitowoc Marine Group
(MMG) for the construction of four barges, each of which is specified to have
a carrying capacity of approximately 156,000 barrels at 98% of capacity, although
the Partnership had an option to cancel the fourth barge, which it exercised
immediately prior to its expiration on June 30, 2008. In 2006, the Partnership
entered into a contract for the construction of three tugs with Eastern
Shipbuilding Group, Inc. (Eastern), which will be joined with the barges to
complete three new ATB units. The contract with Eastern included an option to
construct and deliver an additional tug which would have been combined with the
fourth barge referenced above; however, the Partnership let this option expire
in connection with the cancellation of the contract to construct the fourth
barge. The first of these ATB units, the ATB
Galveston,was completed at a total cost of $66,570 (excluding
capitalized interest, which totaled $6,753) and entered service in August 2008.
The cost increase over the originally budgeted amount of $65,000 was
principally due to contractually provided cost increases related to increases
in major components and change orders. The second ATB, ATB Brownsville,
was completed at a total cost of $67,912 (excluding capitalized interest, which
totaled $6,366) and entered service in November 2008. The cost increase over
the originally budgeted amount of $65,500 was principally due to contractually
provided cost increases related to increases in major components and change
orders.
The Partnership expects that the
final ATB will be completed in August 2009 at a cost of approximately $71,348 (excluding
capitalized interest which totaled $5,054 at December 31, 2008). The cost increase over
the originally budgeted amount of $66,000 is principally due to contractually provided
cost increases related to increases in major components, customer requested modifications
and change orders. At December 31, 2008, the Partnership had restricted cash and funds in
escrow totaling approximately $8,004 of which $5,741 was used to pay costs incurred in
2009 to complete the ATB Brownsville and this final ATB and $2,263 was used to pay
costs incurred prior to December 31, 2008 to construct these vessels. The Partnership
expects that it will need to fund approximately $8,285 of construction costs to complete
the final ATB from its operating cash flows.

During the quarter ended March 31, 2008, the Partnership determined that the
fourth ATB unit referenced above was impaired, as the Partnership did not
obtain financing for its construction and assessed the fair value of the
construction in progress of this ATB unit at $0, which resulted in a non-cash
impairment charge of $5,720, which includes $3,831 previously paid for
construction of the barge portion of this ATB unit, $1,394 for deposits on
certain owner furnished equipment and $495 of capitalized interest cost. During
the year ended December 31, 2008, the Partnership accrued additional expenses
related to owner furnished equipment and services in the amount of $251; the
Partnership has no further financial obligations with regard to either the tug
or the barge.

Approximately
$122,175 of construction-in-progress-tankers plus capitalized interest of
$11,299 at December 31, 2008 was transferred to a depreciable asset category
contemporaneously with the delivery of the Golden
State in January 2009. The Golden
State is on time charter with a major oil company through mid-month
January 2016.

|   |                         
|-- | ------------------------
|9. | Deferred Financing Costs

Deferred
financing costs include fees and costs incurred to obtain debt financings. On
August 7, 2006, as part of the Partnerships debt and equity financings, the
Partnership issued the Second Lien Notes and entered into the Senior Credit
Facility, while the Joint Venture entered into its own revolving credit loan
facility. In conjunction therewith, the Partnership and Joint Venture incurred
approximately $11,586 and $12,960 of deferred financing costs, respectively.
Additionally, as a result of the refinancing of the Senior Credit Facility,
approximately $2,451 of deferred financing costs that were associated with the
debt that was repaid were expensed. Effective June 29, 2007 and again on
October 20, 2008, the Partnership amended certain financial covenants in its
Senior Credit Facility, for which it paid amendment fees of $158 and $814,
respectively.

F - 24

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

Direct
costs associated with obtaining long-term financing and revolving credit
facilities are deferred and generally amortized utilizing the effective interest
method over the terms of the related financings. Any unamortized deferred
financing costs are written-off when debt is retired before the maturity date.
As a result of the Partnership not being in compliance with certain financial
covenants at September 30, 2008 and December 31, 2008 and the senior lender
waiver of this non-compliance initially expiring at January 31, 2009, the
Partnership accelerated the amortization period for deferred financing costs to
January 31, 2009, following an accounting policy of accelerating the
amortization of deferred financing fees up to the date a related financing may
be callable, which was first applied by the Partnership in the fourth quarter
of 2008, resulting in additional amortization of deferred costs of $6,296 in
this quarter. In addition, as a result of the Partnership receiving a notice
from the agent for the lenders to the Joint Venture asserting events of default
under that certain revolving notes facility agreement with the Joint Venture
have occurred, which the Partnership disputes, the Partnership wrote off $6,910
of deferred financing costs at December 31, 2008. See Note 23Subsequent
EventsLitigation with Joint Venture Investors.

For
the years ended December 31, 2008, 2007 and 2006, deferred financing costs of
the Partnership (excluding those of the Joint Venture) of $8,148, $1,722 and
$1,170, respectively, were amortized and included in interest expense in the
accompanying Consolidated Statements of Operations and Comprehensive Income,
and a portion is included in Construction-in-progress-ATBs and Vessels as part
of the capitalized interest portion of the Partnerships ongoing project to
construct ATBs. For the years ended December 31, 2008 and 2007, deferred
financing costs of $2,522 and $2,515, respectively, were amortized and included
in construction-in-progress-tankers as part of the capitalized interest portion
of the Joint Ventures ongoing project to construct tankers.

On
October 20, 2008, the Partnership and its lenders amended the Senior Credit
Facility. See Note 12, Debt for
additional discussion regarding the amendment.

|    |             
|--- | ------------
|10. | Income Taxes

The
components of the (benefit) provision for income taxes for the years ended
December 31, 2008, 2007 and 2006 are as follows:

|                                     |  |              |        |      |   |        |   |   |       |  
|------------------------------------ |  | ------------ | ------ | ---- | - | ------ | - | - | ----- | -
|                                     |  | December 31, |       
|                                     |  |              |       
|                                     |  | 2008         |        | 2007 |   | 2006   |  
|                                     |  |              |        |      |   |        |  
|Current                              |  |              |        |      |   |        |   |   |       |  
|Federal                              |  | $            |       |      | $ | 511    |   | $ | (664  | )
|State                                |  |              | 583    |      |   | 536    |   |   | 208   |  
|                                     |  |              |        |      |   |        |   |   |       |  
|                                     |  |              | 583    |      |   | 1,047  |   |   | (456  | )
|                                     |  |              |        |      |   |        |   |   |       |  
|Deferred                             |  |              |        |      |   |        |   |   |       |  
|Federal                              |  |              | (1,083 | )    |   | (899   | ) |   | 1,331 |  
|State                                |  |              | (351   | )    |   | (242   | ) |   | 202   |  
|                                     |  |              |        |      |   |        |   |   |       |  
|                                     |  |              | (1,434 | )    |   | (1,141 | ) |   | 1,533 |  
|                                     |  |              |        |      |   |        |   |   |       |  
|(Benefit) provision for income taxes |  | $            | (851   | )    | $ | (94    | ) | $ | 1,077 |  
|                                     |  |              |        |      |   |        |   |   |       |  

F - 25

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

A
reconciliation of income tax expense, as computed using the federal statutory
income tax rate of 34%, to the (benefit) provision for income taxes for the
years ended December 31, 2008, 2007 and 2006 is as follows:

|                                                     |  |              |         |      |   |        |   |   |        |  
|---------------------------------------------------- |  | ------------ | ------- | ---- | - | ------ | - | - | ------ | -
|                                                     |  | December 31, |        
|                                                     |  |              |        
|                                                     |  | 2008         |         | 2007 |   | 2006   |  
|                                                     |  |              |         |      |   |        |  
|Tax at federal statutory rate of 34%                 |  | $            | (45,327 | )    | $ | 1,481  |   | $ | 2,221  |  
|Effect of change in tax status                       |  |              | (22,236 | )    |   |       |   |   |       |  
|Change in valuation allowance                        |  |              | 54,353  |      |   |       |   |   |       |  
|Entities not subject to federal income tax           |  |              | 10,516  |      |   | (1,731 | ) |   | (1,488 | )
|State and local income taxes, net of federal benefit |  |              | 244     |      |   | 279    |   |   | 337    |  
|Other                                                |  |              | 1,599   |      |   | (123   | ) |   | 7      |  
|                                                     |  |              |         |      |   |        |   |   |        |  
|(Benefit) provision for income taxes                 |  | $            | (851    | )    | $ | (94    | ) | $ | 1,077  |  
|                                                     |  |              |         |      |   |        |   |   |        |  

Significant
components of deferred income tax liabilities and assets as of December 31,
2008 and 2007 are as follows:

|                                   |  |              |         |      |   |        |  
|---------------------------------- |  | ------------ | ------- | ---- | - | ------ | -
|                                   |  | December 31, |        
|                                   |  |              |        
|                                   |  | 2008         |         | 2007 |  
|                                   |  |              |         |      |  
|Net deferred tax assets            |  |              |         |      |   |        |  
|Net operating loss carryforward    |  | $            | 5,337   |      | $ | 787    |  
|Depreciation and amortization      |  |              | 9,049   |      |   |       |  
|Derivative liability               |  |              | 6,253   |      |   |       |  
|Debt discount                      |  |              | 35,725  |      |   |       |  
|Allowance for doubtful accounts    |  |              | 570     |      |   | 76     |  
|Other                              |  |              | 3,793   |      |   | 50     |  
|                                   |  |              |         |      |   |        |  
|Total gross deferred tax assets    |  |              | 60,727  |      |   | 913    |  
|Less valuation allowance           |  |              | (60,552 | )    |   |       |  
|                                   |  |              |         |      |   |        |  
|Net deferred tax assets            |  | $            | 175     |      | $ | 913    |  
|                                   |  |              |         |      |   |        |  
|Net deferred tax (liabilities)     |  |              |         |      |   |        |  
|Depreciation and amortization      |  |              |        |      | $ | (2,309 | )
|Prepaid expenses                   |  | $            | (175    | )    |   | (36    | )
|Net operating loss carryforward    |  |              |        |      |   |       |  
|Other                              |  |              |        |      |   |       |  
|                                   |  |              |         |      |   |        |  
|Total gross deferred tax liability |  | $            | (175    | )    | $ | (2,345 | )
|                                   |  |              |         |      |   |        |  
|                                   |  |              |         |      |   |        |  
|Net deferred tax liability         |  | $            |        |      | $ | (1,432 | )
|                                   |  |              |         |      |   |        |  

At
December 31, 2008 and 2007, the Partnerships corporate subsidiaries had state
net operating losses of $59,461, and $1,919, respectively, which will expire in
2015. Federal net operating losses totaled $56,250 at December 31, 2008.
Federal net operating losses begin to expire in the year 2027. If certain
substantial changes in the Partnerships ownership occur, there would be an
annual limitation on the amount of these carryforwards that could be utilized.

As
of January 1, 2007, the Partnership adopted the provisions of FIN 48 and
changed its policy related to the accounting for income tax contingencies. The
Partnership continues to account for income tax contingencies using a benefit
recognition model. Beginning January 1, 2007, if the Partnership considers that
a tax position is more likely than not of being sustained upon audit, based
solely on the technical merits of the position, it recognizes the unrecognized
tax benefit. The Partnership measures the benefit by determining the greatest
amount that is more than 50% likely of being realized upon settlement,
presuming that the tax position is examined by the appropriate taxing authority
that has full knowledge of all relevant information. For any tax position where
the likelihood of realizing the benefit is less than 50%, no tax benefit is
recorded.

Interest
and penalties are recorded as a component of the Provision for Income Taxes and
are classified on the balance sheet with the related tax liability.

F - 26

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

As
a result of the implementation of FIN 48, the Partnership recognized no
material adjustment in the liability for unrecognized income tax benefits. At
the adoption date of January 1, 2007, the Partnership had $391 of unrecognized
tax. At December 31, 2008 and December 31, 2007, the Partnership had $19,201
and $729 of unrecognized tax benefits, respectively, excluding interest and
penalties. At December 31, 2008 and December 31, 2007, the Partnership had
approximately $193 and $99, respectively, of accrued interest and penalties
related to uncertain tax positions. At December 31, 2008 and December 31, 2007,
the Partnerships Condensed Consolidated Statement of Operations included $94
and $57, respectively, of interest and penalties related to tax uncertainties.
The tax years 2002-2008 remain open to examination by the major taxing
jurisdictions in which the Partnership is subject to tax.

The following
table indicates the changes to the Companys uncertain tax positions for the
year ended December 31, 2008:

|                                              |  |   |        |  |                                               |  |   |     | 
|--------------------------------------------- |  | - | ------ |  | --------------------------------------------- |  | - | --- | 
|Balance at
  December 31, 2007                |  | $ | 729    |  | Balance at
  December 31, 2006                |  | $ | 391 | 
|Increase in uncertain
  tax positions in 2008 |  |   | 18,472 |  | Increase in
  uncertain tax positions in 2007 |  |   | 338 | 
|                                              |  |   |        |  |                                               |  |   |     | 
|Balance at
  December 31, 2008                |  | $ | 19,201 |  | Balance at
  December 31, 2007                |  | $ | 729 | 
|                                              |  |   |        |  |                                               |  |   |     | 

The amount of
unrecognized tax benefits that would affect the effective tax rate if
recognized is $1,740. Unrecognized tax benefits of $17,461 relate to current
year net operating losses and timing differences that would not affect the
effective tax rate if recognized.

Tax
Status

For
federal income tax purposes, the Partnership takes the position that it is a
partnership that is not subject to federal income tax (excluding certain
previously discussed subsidiaries which are subject to corporate level
taxation). This position applies only if 90% or more of gross income in each
year consists of certain identified types of qualifying income (which
includes dividends from subsidiary corporations and income from the
transportation of minerals and natural resources, including gas, oil or products
thereof). If the Partnerships qualifying income drops below 90%, it will be
treated as a corporation for federal income tax purposes. Consequently, the
Partnership is required to make certain decisions regarding whether revenue is
qualifying income. The assessment of qualifying income requires analysis of the
products transported and identification of each product as qualifying or
non-qualifying. These assessments are not always supported by historical data
on the various products transported, and may be interpreted differently by the
Internal Revenue Service. If products currently identified as qualifying were
defined as non-qualifying, the Partnership may be treated as a corporation
for federal income tax purposes. Additionally, as the Partnership seeks to
maintain high utilization rates on its ITB fleet, it may transport products
that are non qualifying, and accordingly, may be treated as a corporation for
federal income tax purposes. If the Partnership is treated as a corporation for
federal income tax purposes, it would pay federal income tax (other than
dividend income from any subsidiary that is itself subject to corporate income
tax) at the corporate tax rate, which is currently a maximum of 35%.

On
December 19, 2008, because
of its increase in nonqualifying income and the likelihood that less than 90%
of its gross income will be qualifying income, the Partnership elected to be
classified as a corporation beginning January 1, 2009.

In
August 2008, the Partnership contributed the ownership interests of one of its
subsidiaries,ITB Mobile LLC, to
one of its subsidiaries,USCS Chemical
Pioneer, Inc., which is a corporation. The tax basis of this asset
differed from the book basis at the time of the transfer; however, no net
deferred tax asset was recorded as a full valuation allowance was established
against this deferred tax asset.

In
May 2008, the Partnership contributed the ownership interests of four of its
subsidiaries,ITB Jacksonville LLC, ITB
Groton LLC, ITB Baltimore LLC, andITB New York LLC, to one of its subsidiaries,USCS Chemical Pioneer, Inc., that is a
corporation. The tax basis of the assets of these entities differed from the
book basis at the time of the transfers, resulting in the recognition of a
deferred tax asset of $2,861, which is net of a $2,873 valuation allowance
recorded as part of the valuation allowance discussed below.

F - 27

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

In
February 2008, the Partnership made an election to treat one of its
subsidiaries,ITB Philadelphia LLC,
as a corporation for tax purposes effective December 10, 2007. The tax basis of
the assets of this entity differed from the book basis at the time of the
election, resulting in the recognition of a deferred tax liability and related
tax expense of $1,431 in the three months ended March 31, 2008.

In
January 2008, the Partnership made an election to treat one of its
subsidiaries,USCS Sea Venture LLC,
as a corporation for tax purposes effective January 2, 2008. The tax basis of
the assets of this entity differed from the book basis at the time of the
election, resulting in the recognition of a deferred tax asset and related tax
benefit of $646 which is net of a valuation allowance of $117.

The
Partnership provides deferred income taxes for the tax effects of differences
between the financial reporting and tax bases of its assets and liabilities
which are recorded at enacted tax rates in effect for the years in which the
differences are projected to reverse. The Partnership evaluates the
recoverability of deferred tax assets and establishes a valuation allowance
when it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The Partnership determined that it is more likely
than not that certain deferred tax assets that existed as of December 31, 2008
will not be realized and, accordingly, provided a valuation allowance of
$60,552 against these deferred tax assets. There were no such allowances as of
December 31, 2007. At December 31, 2008 and December 31, 2007, the Partnership
had deferred tax assets net of valuation allowances of $175 and $913,
respectively. At December 31, 2008 and December 31, 2007, the Partnership had
deferred tax liabilities of $175 and $2,345, respectively.

|    |                                       
|--- | --------------------------------------
|11. | Accrued Expenses and Other Liabilities

Accrued
expenses and other liabilities consisted of the following:

|                        |  |              |        |      |   |        | 
|----------------------- |  | ------------ | ------ | ---- | - | ------ | 
|                        |  | December 31, |       
|                        |  |              |       
|                        |  | 2008         |        | 2007 |  
|                        |  |              |        |      |  
|Interest                |  | $            | 12,757 |      | $ | 5,218  | 
|Construction of vessels |  |              | 6,795  |      |   | 16,977 | 
|Insurance claims        |  |              | 3,061  |      |   | 2,520  | 
|Taxes payable           |  |              | 1,597  |      |   | 1,947  | 
|Accrued fuel charges    |  |              | 511    |      |   | 2,080  | 
|Other                   |  |              | 5,472  |      |   | 2,583  | 
|                        |  |              |        |      |   |        | 
|                        |  | $            | 30,193 |      | $ | 31,325 | 
|                        |  |              |        |      |   |        | 

F - 28

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

|    |                                                                 
|--- | ----------------------------------------------------------------
|12. | Debt                                                            
|    |                                                                 
|    | The
  Partnerships outstanding debt consisted of the following:

|                                                                                                                                                                                                                                                                                           |  |              |         |      |   |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | ---- | - | ------- | 
|                                                                                                                                                                                                                                                                                           |  | December 31, |        
|                                                                                                                                                                                                                                                                                           |  |              |        
|                                                                                                                                                                                                                                                                                           |  | 2008         |         | 2007 |  
|                                                                                                                                                                                                                                                                                           |  |              |         |      |  
|Third Amended and Restated Credit Facility - Term, bearing interest
at
  base rate plus 5.75% (7.5% at December 31, 2008) and LIBOR plus 3.5% (8.3% at
  December 31, 2007), including $858 of accrued paid-in-kind interest of 1.5%
  from October 24, 2008 to December 30, 2008          |  | $            | 298,639 |      | $ | 305,797 | 
|Third Amended and Restated Credit Facility - Revolving Notes bearing
  interest at base rate plus 5.75% (7.5% at December 31, 2008) and LIBOR plus
  3.5% (8.3% at December 31, 2007), including $87 of accrued paid-in-kind
  interest of 1.5% from October 24, 2008 to December 30, 2008 |  |              | 34,935  |      |   | 13,000  | 
|13% Senior Secured Notes due 2014                                                                                                                                                                                                                                                          |  |              | 100,000 |      |   | 100,000 | 
|Revolving Notes Facility - Joint Venture, bearing interest at LIBOR
  plus 4.5% (5.46% at December 31, 2008 and 9.3% December 31, 2007)                                                                                                                                                    |  |              | 176,721 |      |   | 41,230  | 
|                                                                                                                                                                                                                                                                                           |  |              |         |      |   |         | 
|Total                                                                                                                                                                                                                                                                                      |  |              | 610,295 |      |   | 460,027 | 
|Less: Current portion of long-term debt                                                                                                                                                                                                                                                    |  |              | 610,295 |      |   | 3,100   | 
|                                                                                                                                                                                                                                                                                           |  |              |         |      |   |         | 
|Long-term debt                                                                                                                                                                                                                                                                             |  | $            |        |      | $ | 456,927 | 
|                                                                                                                                                                                                                                                                                           |  |              |         |      |   |         | 

Capitalized
interest expense for the years ended December 31, 2008, 2007 and 2006 was
$23,183, $18,123 and $7,667, respectively.

Second
Lien Notes

On
August 7, 2006, the Partnership and its wholly-owned subsidiary, U.S. Shipping
Finance Corp., co-issued $100,000 aggregate principal amount of 13% Senior
Secured Notes due August 15, 2014 (the Second Lien Notes). Interest is
payable on the Second Lien Notes on February 15 and August 15 of each year. At
December 31, 2008 and December 31, 2007 the Partnership had accrued $4,875 and
$4,875 of interest on the Second Lien Notes, respectively.

The
Partnership may redeem all or part of the Second Lien Notes on or after
February 15, 2011. Prior to such date, the Partnership may redeem all or a
portion of the Second Lien Notes by paying a make-whole premium. In addition,
prior to August 15, 2009, the Partnership may redeem up to 35% of the aggregate
principal amount of the Second Lien Notes with the proceeds of certain equity
offerings at a price of 113% of the principal amount of the Second Lien Notes
redeemed.

The
Second Lien Notes are guaranteed by all of the Partnerships existing domestic
subsidiaries, other than U.S. Shipping Finance Corp., which acted as co-issuer
of the Second Lien Notes, and Product Carriers, which owns the Partnerships
investment in the Joint Venture (Note 14). The Second Lien Notes and guarantees
are secured on a second priority basis by liens on the Partnerships vessels
and the ATB Escrow Account. In the event that the Partnerships creditors
exercise remedies with respect to the Partnerships and its guarantors pledged
assets, the proceeds of the liquidation of those assets will first be applied
to repay obligations secured by first priority liens under the Partnerships
Senior Credit Facility and other first priority obligations in full before any
payments are made with respect to the Second Lien Notes.

Senior Credit Facility

On
August 7, 2006, concurrent with the sale of the Second Lien Notes, the
Partnership amended and restated its then existing credit facility (the Prior
Credit Facility) by entering into the Third Amended and Restated Credit Facility
(the Senior Credit Facility). The Senior Credit Facility provides for:

F - 29

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Term loans
  up to $310,000, of which the Partnership had $298,639 and $305,797
  outstanding at December 31, 2008 and December 31, 2007, respectively. A
  revolving credit facility up to $40,000 provides for the issuance of letters
  of credit for amounts totaling up to a sublimit of $15,000. As of December
  31, 2008 and 2007, net of letters of credit of $214 outstanding at both
  dates, the maximum amount available under the revolving credit facility was
  $4,938 and $26,786, respectively. The amount outstanding at December 31, 2008
  represents amounts that Lehman Brothers Commercial Paper refused to lend
  because it has filed for protection under the U.S. bankruptcy laws. The
  Partnership does not have access to this remaining balance under its
  revolving credit facility.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Effective
  with the October 20, 2008 amendment, borrowings under the Senior Credit
  Facility bear interest at the base rate plus 4.25% (7.5%) at December 31,
  2008 or LIBOR plus 5.25% with a LIBOR floor of 3.25%, plus an additional 1.5%
  per annum in interest on outstanding borrowings, which additional interest is
  paid-in-kind (PIK interest), and the PIK interest rate increased to 4.5% on
  January 31, 2009. In addition, the Partnerships commitment fee on the unused
  portion of the revolving credit facility increased to 1% per year.                                                                                                                                                                                                                                                  

The
Partnerships obligations under its Senior Credit Facility are secured by a
first priority security interest, subject to permitted liens, on all its assets
(other than the assets of the Joint Venture and Product Carriers). The
Partnership and its subsidiaries (other than the Joint Venture and Product
Carriers) are all borrowers or guarantors under its Senior Credit Facility.

The
Partnership can prepay all loans under the Senior Credit Facility at any time
without premium or penalty (other than customary LIBOR breakage costs).

The
Partnerships Senior Credit Facility prevents it from declaring dividends or
distributions until all borrowings under the facility are repaid. In addition,
the Senior Credit Facility contains covenants requiring the Partnership to
adhere to certain financial covenants and limiting the ability of the
Partnerships operating company and its subsidiaries to, among other things:

| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | incur or guarantee indebtedness;                                                                                                                                         
| |   |                                                                                                                                                                          
| |  | change ownership or structure, including
  consolidations, liquidations and dissolutions;                                                                                
| |   |                                                                                                                                                                          
| |  | make
  distributions or repurchase or redeem units;                                                                                                                      
| |   |                                                                                                                                                                          
| |  | make capital
  expenditures in excess of specified levels;                                                                                                               
| |   |                                                                                                                                                                          
| |  | make certain
  negative pledges and grant certain liens;                                                                                                                 
| |   |                                                                                                                                                                          
| |  | sell,
  transfer, assign or convey assets;                                                                                                                               
| |   |                                                                                                                                                                          
| |  | make certain loans and investments;                                                                                                                                      
| |   |                                                                                                                                                                          
| |  | enter into a
  new line of business;                                                                                                                                     
| |   |                                                                                                                                                                          
| |  | transact
  business with affiliates;                                                                                                                                     
| |   |                                                                                                                                                                          
| |  | amend,
  modify or terminate specified contracts;                                                                                                                        
| |   |                                                                                                                                                                          
| |  | permit the
  obligations (other than certain specified obligations) of Product Carriers
  and the Joint Venture being recourse to the Partnership;                       
| |   |                                                                                                                                                                          
| |  | enter into
  agreements restricting loans or distributions made by the Partnerships
  operating companys subsidiaries to the Partnership or its operating company;
  or
| |   |                                                                                                                                                                          
| |  | participate in certain hedging and
  derivative activities.                                                                                                              

If
an event of default exists under the Senior Credit Facility, the lenders are
able to accelerate the maturity of all outstanding loans, as well as exercise
other rights and remedies.

F - 30

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

Amendments
to Senior Credit Facility

On
October 20, 2008, the Partnership and its lenders amended the Senior Credit
Facility. The material changes to the Senior Credit Facility included:

| |   |                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The lenders
  waived any potential defaults under the financial covenants for the quarters
  ended September 30, 2008 and December 31, 2008 through January 31, 2009
  (which date was subsequently extended to March 13, 2009).                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                        
| |  | The margin
  over LIBOR that the Partnership pays as interest on its borrowings was
  increased from 3.5% to 5.25%, and a floor on the LIBOR rate of 3.25% was
  established, meaning that the minimum cash interest rate on LIBOR based
  borrowings will be 8.5%. The margin over base rate loans was increased from
  2.5% to 4.25%.
| |   |                                                                                                                                                                                                                                                                                                                                        
| |  | The
  Partnership pays an additional 1.5% per annum in interest on outstanding
  borrowings through January 31, 2009, which additional interest is
  paid-in-kind (PIK interest); the PIK interest rate increased to 4.5% on
  January 31, 2009. Total PIK interest accrued in the fourth quarter of 2008
  was $945.                
| |   |                                                                                                                                                                                                                                                                                                                                        
| |  | A new
  financial covenant was added to the credit agreement that requires the
  Partnership to have cumulative Consolidated EBITDA (as defined in the Senior
  Credit Facility) for the period beginning September 1, 2008 and ending on the
  specified date as follows:                                                             

|                    |  |                                |             | 
|------------------- |  | ------------------------------ | ----------- | 
|Month Ending        |  | Cumulative Consolidated EBITDA
|                    |  |                               
|October 31,
  2008  |  | $                              | 4,000,000.  | 
|November 30,
  2008 |  |                                | 6,000,000.  | 
|December 31,
  2008 |  |                                | 9,000,000.  | 
|January 31,
  2009  |  |                                | 13,000,000. | 

| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The grace
  period before a payment default in respect of other indebtedness having a
  principal amount in excess of $1.0 million becomes an event of default under
  the Senior Credit Facility was eliminated.
| |   |                                                                                                                                                                                                                  
| |  | The
  Partnership is not permitted to pay any distributions on its common units
  until all borrowings under the Senior Credit Facility are paid in full.                                                        
| |   |                                                                                                                                                                                                                  
| |  | The
  Partnership paid an amendment fee of $814.                                                                                                                                                                 

The
Partnership has achieved these minimum cumulative EBITDA requirements for each
of the four periods noted above. On December 30, 2008, the Partnership entered
into a Forbearance Agreement with the lenders under our Senior Credit Facility,
which was extended several times and amended and restated on March 13, 2009,
and which terminates on April 30, 2009. Pursuant to the March 13, 2009
forbearance agreement, our lenders agreed not to take any action as a result of
the Partnerships failure to make both the December 31, 2008 and March 31, 2009
principal and interest payments under the Senior Credit Facility, our failure
to be in compliance with certain of our financial covenants at September 30,
2008 and December 31, 2008, and our failure to make the scheduled interest
payment due in respect of our Second Lien Notes on March 17, 2009. During the
term of the forbearance agreements, the Partnership agreed to engage in good
faith negotiations with the administrative agent and the lenders regarding
restructuring and strategic alternatives, including a possible sale of the
Partnership. The Partnership filed for protection under the U.S. bankruptcy
laws prior to the expiration of the most recent forbearance period. See Note
3Proceedings Under Chapter 11 of the Bankruptcy Code.

F - 31

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

As
the Partnerships Senior Credit Facility is callable, the Partnership has
classified it as current at December 31, 2008. Furthermore, as the Second Lien
Notes contain cross-default provisions in the indenture governing the Second
Lien Notes that accelerate payment of the Second Lien Notes if there is a
payment default or acceleration of the Senior Secured Facility, it has also
been classified as current at December 31, 2008.

On
December 31, 2008, the debt associated with our Senior Credit Facility was
quoted at an average price of approximately $0.455 to the dollar, which results
in an implied market value of $151,776. In addition, our Second Lien Notes were
priced at $0.20 to the dollar, yielding an implied market value of $20,000.

Effective
June 29, 2007, the Partnership amended certain financial covenants in its Senior
Credit Facility to eliminate certain projected financial covenant compliance
issues. The primary changes were to increase the amount of ATB Freeport construction expenditures
excluded from the calculation of certain covenants and to increase the leverage
ratio covenants for the fourth quarter of 2007 and each of the four quarters of
2008, for which it paid an amendment fee of $158.

Joint Venture Credit Facility

On
August 7, 2006, the Joint Venture entered into a Revolving Notes Facility
Agreement (the Revolver) pursuant to which affiliates of The Blackstone Group
and other parties (the Joint Venture Investors) made available $325,000 of
revolving credit loans, of which $176,721 and $41,230 was outstanding at
December 31, 2008 and 2007, respectively.

The
Revolver terminates on July 31, 2012, but may be terminated earlier upon the
reduction of the commitment amount to zero pursuant to the terms of the
Revolver or ninety days following the delivery date of the last vessel, as
defined. In addition, the Revolver stipulates prepayment amounts and dates that
result from a commitment reduction, the sale of a vessel, or an event of loss,
as defined. Borrowings bear interest at either the base rate of interest
(greater of the Federal Funds Rate plus 0.5% or JPMorgan Chase Bank, N.A.s
prime rate) plus 3.5% or the adjusted LIBOR rate of interest, as defined, plus
4.5%. If certain operational targets are met by August 7, 2009, the spread for
both base rate and adjusted LIBOR rate advances will be reduced by 1.0%. All
borrowings bear interest at LIBOR (0.96% and 4.8% at December 31, 2008 and
2007, respectively) plus 4.5%.

The
Joint Venture incurs a commitment fee on the unused portion of the Revolver of
1.0% per year. In addition, both the security agent and administrative agent
are due fees of 0.005% of borrowings outstanding and $300 per year,
respectively. The Revolver is secured by substantially all of the assets of the
Joint Venture and contains various restrictions and limitations that may affect
the Joint Ventures business and affairs. These include restrictions and
limitations relating to the Joint Ventures ability to incur indebtedness and
other obligations and to make investments and acquisitions. The Joint Ventures
failure to comply with any of these provisions, or to pay its obligations under
the Revolver, could result in foreclosure by the lenders of their security
interests in its assets. The Partnership has no obligation for the liabilities
of the Joint Venture under the revolver in excess of its $70,000 capital
commitment, of which $70,000 has been made at December 31, 2008.

The
Partnership received notice from the agent for the lenders to the Joint Venture
asserting that events of default under the Revolver have occurred and that the
lenders were intending to foreclose on the Golden
State vessel owned by the Joint Venture that the Partnership is
managing pursuant to the management agreement. Because of the purported
defaults, which could result in all amounts due under the Revolver immediately
due and payable if such defaults were actually determined to have occurred,
which the Partnership disputes, these amounts have been classified as current
at December 31, 2008. See Note 23Subsequent EventsLitigation with Joint
Venture Investors.

|    |                  
|--- | -----------------
|13. | Partners Capital

The
Partnerships general partner has a 2% general partner interest and 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
Partnership is required to distribute all of its available cash from basic
surplus, as defined in the Partnership
agreement. The target distribution levels entitle the general partner to
receive 15% of quarterly cash distributions in excess of $0.50 per unit until
all unitholders have received $0.575 per unit, 25% of quarterly cash
distributions in excess of $0.575 per unit until all unitholders have received
$0.70 per unit, and 50% of quarterly cash distributions in excess of $0.70 per
unit.

F - 32

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

Common Units and Class B Units Issued

Concurrent
with the sale of the Second Lien Notes and the debt refinancing in August 2006,
the Partnership issued to third party investors 1,310,375 common units and
3,123,205 class B units at a unit price of $18.34 and $17.12, respectively, for
approximately $77,500 of gross proceeds. On August 7, 2006, in order to
maintain its 2% ownership, the general partner was required to make a capital
contribution to the Partnership of approximately $1,582.

Class
B Conversion

On
February 2, 2007, the Partnership held a special meeting of unitholders and a
majority of unitholders voted in favor of automatically converting the
Partnerships 3,123,205 class B units into 3,123,205 common units.

Distributions

On
November 1, 2007, August 1, 2007, May 3, 2007 and February 6, 2007, the Board
of Directors of the general partner declared the Partnerships regular cash
distribution for each of the quarters ended September 30, 2007, June 30, 2007,
March 31, 2007 and December 31, 2006, respectively, of $0.45 per unit. The
distribution was paid on all common, subordinated and general partner units on
November 15, 2007, August 15, 2007, May 15, 2007 and February 15, 2007 to all
unitholders of record on November 9, 2007, August 10 2007, May 11, 2007 and
February 12, 2007, respectively.

On
February 7, 2008, the Board of Directors of the general partner declared the
regular cash distribution as it relates to the fourth quarter of 2007 of $0.45
per common unit. The distribution was paid on all common units on February 15,
2008 to all common unitholders of record on February 12, 2008. The aggregate
amount of the distribution was $5,100. In February 2008, the Partnership did
not declare or pay a distribution on the subordinated or general partners
units. United States Shipping Master LLC (Shipping Master), the holder of the
Partnerships subordinated units and general partner units, requested that the
Partnership not pay the fourth quarter distribution on the subordinated units
and general partner units and instead retain the cash for working capital
purposes; to increase the reserves available for payment of future
distributions on its common units; for the completion of its capital
construction program; and to strengthen coverage with respect to the
Partnerships financial covenants under the Senior Credit Facility in future
periods.

On
May 12, 2008, the Board of Directors of the general partner declared and the
Partnership announced its regular cash distribution as it relates to the first
quarter of 2008 of $0.45 per common unit, but did not declare a distribution on
its subordinated units and general partner units for the first quarter. The
distribution was paid on all common units on May 21, 2008 to all common
unitholders of record on May 16, 2008. The aggregate amount of the distribution
was $5,109.

In
July 2008, the Board of Directors of the general partner determined not to
declare a distribution in respect of the second quarter of 2008 on any of its
outstanding common units, subordinated units and general partner units.

Under
the terms of our Senior Credit Facility the Partnership is no longer permitted
to make distributions to any of its unitholders until all outstanding
borrowings under the Senior Credit Facility are repaid.

Restricted Units / Deferred Equity Compensation

On
April 2, 2007, the Partnership issued to each of the non-employee directors of
its general partner who were not employed by Sterling Investment Partners 2,000
restricted common units under the Long-Term Incentive Plan for a total grant of
8,000 units. These restricted units vested on March 31, 2008. Each directors
right to receive distributions on the restricted units vested as to 500 units
on each of April 2, 2007, July 1, 2007, October 1, 2007 and January 1, 2008.
The value of the restricted units as determined on the date of issuance was
$151. This amount was amortized over the vesting period of the units. At
December 31, 2008, unamortized deferred equity compensation was $0.

F - 33

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

On
April 1, 2008, the Partnership issued to each of the non-employee directors of
its general partner who were not employed by Sterling Investment Partners 3,065
fully vested common units under the Long-Term Incentive Plan for a total grant
of 12,260 units. The value of the restricted units as determined on the date of
issuance was $146, which has been fully recognized in earnings.

|    |              
|--- | -------------
|14. | Joint Venture

On
August 7, 2006, Product Carriers entered into the Joint Venture to finance the
construction of the first five tankers by NASSCO. The Joint Venture Investors
have committed to provide an aggregate of $105,000 of equity financing and the
Partnership has committed to provide $70,000 of equity financing to the Joint
Venture, of which $70,000 had been paid by the Partnership at December 31,
2008. In addition, the Joint Venture entered into the Revolver pursuant to
which the Joint Venture Investors have made available $325,000 of revolving
credit loans to finance construction of the first five tankers, including
$135,492 and $41,230 that were drawn during 2008 and 2007, respectively (see
Note 12). As tankers are constructed, the Partnership originally had the right
(except in certain limited circumstances) to purchase completed tankers from
the Joint Venture at specified prices subject to adjustment, provided that such
prices were within the range of fair values as determined by appraisal. If the
Partnership did not elect to purchase a tanker within a specified time period,
the Joint Venture could sell the tanker to a third party; however, the Joint
Venture was first obligated to allow the Partnership to make an offer to
purchase the tanker (except in certain limited circumstances). The Joint
Venture intended to use the proceeds from the sale of the tankers to the
Partnership (or to third parties if the Partnership did not exercise its
purchase options), to, among other things, repay debt and to fund future
milestone payments to NASSCO relating to the construction of the remaining
tankers and ultimately to make distributions to the Joint Ventures equity
holders. Distributions are made first to the third party equity investors,
until they receive a specified return, then to Product Carriers until it
receives a specified return, and then on a shared basis dependent on the
returns generated. Because we were unable to purchase the first two vessels
from the Joint Venture and it is unlikely, in light of current market
conditions, that the Joint Venture will be able to sell the vessels to a third
party at this time, the Joint Venture will need to obtain debt and equity
financing of approximately $253,000 to finance the completion of the remaining
vessels. There can be no assurance the Joint Venture will be able to obtain
financing on acceptable terms or at all.

Upon
formation of the Joint Venture, Product Carriers assigned its rights and
obligations with respect to the construction of the first five tankers to the
Joint Venture. NASSCO released Product Carriers from any obligation under the
construction contract relating to the first five tankers. The Partnership
received an arrangement fee of $4,500 which is reflected in the financial
statements as a reduction of the Partnerships fees associated with the
issuance of Joint Venture equity. The Joint Venture had the right to elect to
have rights and obligations under the NASSCO contract to construct up to four
additional tankers assigned to the Joint Venture at specified times, but the
Joint Venture did not exercise this option. Because the Joint Venture did not
exercise its option to have the rights and obligations under the NASSCO
contract to construct up to four additional tankers assigned to the Joint
Venture and due to Product Carriers inability to obtain the necessary financing
to construct these four tankers due to its financial condition and current
market conditions, the Partnership has been advised by NASSCO that it is
exercising its rights under the construction contract with Product Carriers to
use commercially reasonable efforts to sell and assign Product Carriers rights
under the construction contract to have four product tankers constructed.
Product Carriers is obligated to reimburse NASSCO for any damages incurred by
NASSCO as a result of these tankers not being constructed, or if they are
transferred to a third party at a loss to NASSCO, up to a maximum of $10,000
(plus costs and expenses incurred by NASSCO) for each such tanker, with such
amounts being funded solely out of monies received by Product Carriers in
respect of its equity investment in the first five vessels constructed by the
Joint Venture. As a result, the Partnership believed there was substantial
uncertainty that the Partnership would realize any monetary return on its
$70,000 equity investment in the Joint Venture.

F - 34

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

The
Partnership, through Product Carriers, owns a 40% equity interest in the Joint
Venture, with the Joint Venture Investors owning in aggregate a 60% equity
interest. The obligations and liabilities of the Joint Venture are intended to
be non-recourse to the Partnership, although the Joint Ventures financial
statements are consolidated with it for financial reporting purposes due to the
Partnerships control of the board of directors of the Joint Venture and other
aspects of the joint venture agreement. The Partnership does not have any
further obligation to contribute funds to the Joint Venture, other than its
commitment to provide $70,000 of equity funding, to guaranty USS Product
Manager LLCs (Product Manager), the Partnerships wholly-owned subsidiary,
obligation under the management agreement and certain indemnification
obligations. The Consolidated Statements of Operations and Comprehensive Income
include the net income (loss) attributable to the 60% owners of the Joint
Venture as Noncontrolling interest in Joint Venture losses and the
Consolidated Balance Sheets include the equity attributable to the 60% owners
of the Joint Venture as Noncontrolling Interest in Joint Venture.

The
Partnership had the right to and appointed three of the directors to the Joint
Venture, and the other equity holders had the right to and appointed two
directors, although upon the occurrence of specified events, the Partnership
would lose the right to appoint two of its three directors. There is an
independent director, who can only vote when the board is considering a
voluntary bankruptcy of the Joint Venture. In addition, in all circumstances
the taking of certain fundamental actions will require the consent of a director
appointed by the other equity holders. In February 2009 certain of the Joint
Venture Investors asserted that one of the specified events that causes the
Partnership to lose the right to appoint two of our three directors occurred
and purported to remove those two directors and to remove Product Carriers as
the managing member of the Joint Venture. See Note 23Subsequent
EventsLitigation with Joint Venture Investors.

The
Joint Venture agreement prohibits the Partnership from acquiring any vessels
engaged in the coastwise trade built since January 1, 1996 that are greater
than 30,000 dwt until all the vessels being constructed by the Joint Venture
have been sold or have entered into charters meeting specified minimum
standards.

Product
Manager manages the construction and operation of the tankers for the Joint
Venture, for which it receives the following, subject to certain specified
limitations:

| |   |                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an oversight
  fee of $1,000 per tanker, payable ratably over the course of construction of
  such tanker;                                                                               
| |   |                                                                                                                                                                                          
| |  | an annual
  management fee of $1,000 for each completed tanker that is operated by the
  Joint Venture;                                                                                  
| |   |                                                                                                                                                                                          
| |  | a delivery
  fee of up to $750 per tanker, depending on the delivery date and cost of
  construction; and                                                                                
| |   |                                                                                                                                                                                          
| |  | a sale fee
  of up to $1,500 per tanker upon its sale to the Partnership or a third party,
  depending on the price obtained and whether a charter meeting specified terms
  is in place.

For
the year ended December 31, 2008 and 2007, the Partnership earned $1,435 and
$343, respectively, in management fees from the Joint Venture, which were
eliminated in consolidation.

The
management agreement between Product Manager and the Joint Venture has an
initial term of 10 years, subject to early termination under certain
circumstances. The obligations under the management agreement are being
performed by employees of US Shipping General Partner LLC, the Partnerships
general partner. Certain members of the Partnerships management devoted
significant time to the management and operation of the Joint Venture.
Financial statement impacts of the above mentioned fees are eliminated upon
consolidation of the Joint Venture. In February 2009 certain of the Joint
Venture Investors asserted that a termination event occurred under the
management agreement and, in their purported capacity as managing member of the
Joint Venture, purported to terminate Product Managers rights under the
management agreement other than the right to manage the operations of the Golden State pending the Joint Venture
finding a replacement manager. See Note 23Subsequent EventsLitigation with
Joint Venture Investors.

In
December 2007, Product Manager agreed to assume responsibility for certain site
supervision activities previously performed by the Joint Venture in exchange
for fees that will total $1,000 per vessel constructed, subject to certain
limitations, in addition to the oversight fees. For the years ended December
31, 2008 and 2007, Product Manager recognized $1,435 and $396, respectively, in
fees for these site supervision activities, which were eliminated in
consolidation. However, in January 2009, the Joint Venture reassumed these
responsibilities and engaged a third party to provide these site supervision
services.

F - 35

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

|    |        
|--- | -------
|15. | Hedging

Use
of Fair Value Measures

In
September 2006, the FASB issued FAS 157 effective for fiscal years beginning
after November 15, 2007. FAS 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements.
This statement does not require any new fair value measurements, but simplifies
and codifies related guidance within generally accepted accounting principles.
FAS 157 applies under other accounting pronouncements that require or permit
fair value measurements. Relative to FAS 157, the FASB issued FSP 157-1, 157-2
and FSP 157-3. FSP 157-1 amends FAS 157 to exclude FAS No. 13, Accounting for
Leases, and its related interpretive accounting pronouncements that address
leasing transactions. FSP 157-2 defers the effective date of FAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a
recurring basis, until fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years. FSP 157-3 provides guidance in
applying FAS 157 when valuing securities in markets that are not active.
Non-recurring nonfinancial assets and nonfinancial liabilities include those
measured at fair value in goodwill impairment testing, indefinite lived intangible
assets measured at fair value for impairment testing, asset retirement
obligations initially measured at fair value, and those assets and liabilities
initially measured at fair value in a business combination. The Partnership has
adopted FAS 157 as of January 1, 2008 related to financial assets and financial
liabilities. The Partnership is currently evaluating the impact of FAS 157
related to nonfinancial assets and nonfinancial liabilities on the
Partnerships financial statements.

The
Partnership utilizes the best available information in measuring fair value.
The Partnership has determined that its interest rate cap is valued using Level
2 inputs and its interest rate swaps are valued using Level 3 inputs as of
December 31, 2008 in the fair value hierarchy described as follows:

Valuation
Hierarchy

FAS
157 establishes a valuation hierarchy for disclosure of the inputs to valuation
used to measure fair value. This hierarchy prioritizes the inputs into three
broad levels as follows:

Level
1 inputs  quoted prices (unadjusted) in active markets for identical assets or
liabilities.

Level
2 inputs  quoted prices for similar assets and liabilities in active markets
or inputs that are observable for the asset or liability, either directly or
indirectly through market corroboration, for substantially the full term of the
financial instrument.

Level
3 inputs  unobservable inputs based on the Partnerships own assumptions used
to measure assets and liabilities at fair value. A financial asset or
liabilitys classification within the hierarchy is determined based on the
lowest level input that is significant to the fair value measurement.

The
financial asset carried at fair value measured via Level 2 inputs on a
recurring basis as of December 31, 2008 includes:

| |                                                                                                               |                                                                      
| | ------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------
| |                                                                                                              | An interest
  rate cap with a fair market asset value of $775.       
| |                                                                                                               |                                                                      
| | The
  financial liabilities carried at fair value measured via Level 3 inputs as
  December 31, 2008 include:
| |                                                                                                               |                                                                      
| |                                                                                                              | An interest
  rate swap with a fair market liability value of $9,167.
| |                                                                                                               |                                                                      
| |                                                                                                              | An interest
  rate swap with a fair market liability value of $6,396.

F - 36

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

Valuation Techniques

The
fair value of the interest rate cap is developed from market-based inputs under
the income approach using cash flows discounted at relevant market interest
rates.

The
fair value of the interest rate swaps is developed from market-based inputs
under the income approach using cash flows discounted at relevant market
interest rates as adjusted for the Partnerships credit risk as observed in the
trading value of the Partnerships senior secured debt.

Partnership
Hedging

In
connection with the refinancing of its credit facility in 2006, the Partnership
entered into an interest rate swap with a notional amount of $125,000 that
effectively converted a portion of the floating LIBOR-based payments of its
Senior Credit Facility to a fixed rate of 8.9%. The fair value of this hedge was
a liability of $9,167, net of a credit risk adjustment of 32% at December 31,
2008 and a liability of $6,643 at December 31, 2007. This contract was
originally designated as a cash flow hedge. As a result of the October 20, 2008
amendment to the Senior Credit Facility, the Partnership determined that this
contract was no longer effective as a cash flow hedge and the change in fair
value for the period October 1, 2008 through December 31, 2008 has been
recorded in earnings as a loss of $3,634. The fair value at September 30, 2008
and December 31, 2007 is reflected in other comprehensive income in the
accompanying financial statements as this contract had been designated as a
cash flow hedge and was effective at such dates. This hedge was early
terminated by the counterparty as a result of the Partnerships bankruptcy
filing.

In
December 2006, the Partnership entered into an interest rate swap with a
notional amount of $99,750 that effectively converted a portion of the floating
LIBOR-based payments of its Senior Credit Facility to a fixed rate of 8.4%. The
fair value of this hedge was a liability of $6,396, net of a credit risk
adjustment of 32% at December 31, 2008 and a liability of $3,449 at December
31, 2007. This contract was originally designated as a cash flow hedge. As a
result of the October 20, 2008 amendment to the Senior Credit Facility, the
Partnership determined that this contract was no longer effective as a cash
flow hedge and the change in fair value for the period October 1, 2008 through
December 31, 2008 has been recorded in earnings as a loss of $3,249. The fair
value at September 30, 2008 and December 31, 2007 is reflected in other
comprehensive income in the accompanying financial statements as this contract
had been designated as a cash flow hedge and was effective at such dates. .
This hedge was early terminated by the counterparty as a result of the
Partnerships bankruptcy filing.

In
February 2006, the Partnership entered into contracts, denominated in Euros,
for the purchase of owner-furnished items costing approximately $14,439
relative to the Partnerships newbuild ATB series. To hedge the exposure to
foreign currency, the Partnership entered into a series of foreign currency
forward contracts effective through June 5, 2009, with an average exchange rate
of $1.25/Euro. These contracts were originally designated as cash flow hedges,
and through February 2008 the fair value of these contracts was included in
other comprehensive income. In March 2008, the Partnership paid amounts for the
purchase of a portion of the owner-furnished equipment six months ahead of the
original forecasted expenditure date, rendering this portion of the hedge
ineffective. The Partnership received net proceeds totaling $170 which is recorded
in earnings. In addition, two of the forecasted payments were contractually
extended and subsequently terminated, rendering the contracts designated as
cash flow hedges for these forecasted payments ineffective. The Partnership
sold these contracts during June 2008 and received net proceeds totaling $657,
which is included in earnings. In 2008, the Partnership paid amounts for the
purchase of owner furnished equipment eight months ahead of the original
forecasted expenditure date rendering this portion of the hedge ineffective.
The gain or loss on the foreign currency forward contracts currently included
in comprehensive income will be recognized in earnings at the time that the
underlying hedged items (i.e.,
the owner-furnished items) are recognized in earnings as a component of
depreciation expense. As of December 31, 2008, all contracts for this hedge
have been satisfied. The fair market value of the foreign currency forward
contracts at December 31, 2007 was a gain of $955.

F - 37

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

Joint
Venture Hedging

On
February 27, 2007, the Joint Venture purchased a nine year interest rate cap
with a notional amount of $100,000 effective April 1, 2007 for $1,924,
including transaction fees. This interest rate cap of the three month U.S.
Dollar LIBOR of 6% is part of a hedging strategy in place at the Joint Venture
to protect the value of its vessels and the chartering contracts thereon. Upon
the completion of the construction of each vessel, the Joint Venture expects to
sell the vessel together with any chartering contract that may be in place on
such vessel. Since the long-term chartering contracts entered into by the Joint
Venture will result in a fixed stream of cash flows over a multi-year period,
the value that the Joint Venture may be able to obtain upon the sale of the
combined vessel and chartering contract is subject to volatility based upon how
interest rates fluctuate. The interest rate cap is intended to reduce the
potential negative impacts to the Joint Ventures cash flows that could result
in movements in interest rates between the date a chartering contract was
entered into for the first product tanker in December 2006 and the anticipated
sale date of such combined vessel and chartering contract. The Joint Venture
does not plan to hold or issue derivative financial instruments for trading
purposes, but has not performed the activities necessary to qualify the
contract for hedge accounting treatment under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. The fair market
value of the interest rate cap at December 31, 2008 was a receivable of $775
and is recorded in Other Assets on the Consolidated Balance Sheets. A
decrease in the fair value of the instrument of $1,175 for the year ended
December 31, 2008 is recorded as a loss on derivative financial instruments in
the accompanying Consolidated Statements of Operations and Comprehensive
Income.

|    |                       
|--- | ----------------------
|16. | Hess Support Agreement

On
September 13, 2002, the Partnership entered into an agreement (the Support
Agreement) with Hess in which certain daily charter rates were agreed through
September 13, 2007 and based upon which support payments would be made by Hess
to the Partnership in respect of the ITBs. Under the terms of the Support
Agreement, Hess agreed to pay the Partnership for the amount by which the
Partnerships negotiated third-party contract rates were less than the agreed
charter rate. However, in the event that the charter rates the Partnership
received on the ITBs were in excess of the Hess support rate, then the
Partnership was obligated to pay such excess amounts to Hess until the
Partnership had repaid Hess for all prior support payments made by Hess to the
Partnership, and then the Partnership was obligated to share 50% of any
additional excess amount with Hess. The differences resulting from these rates
were calculated on a monthly basis. The net amounts received or paid by the
Partnership were considered contingent purchase price during the term of the
Support Agreement. At the conclusion of the Support Agreement in September
2007, the net amount received was treated as a purchase price adjustment to the
six ITBs acquired by the Partnership from Hess in September 2002.

The
cumulative net amount that was recorded as a reduction in the purchase price of
the six ITBs was $8,568 upon the expiration of the Support Agreement in
September 2007. The final true-up process concluded during November 2008 and
resulted in an additional purchase price increase of $406 to the six ITBs and
was considered when calculating the ITBs impairment charge recorded in the
third quarter of 2008.

|    |                           
|--- | --------------------------
|17. | Related Party Transactions

Hess
Support

Hess
is one of the Partnerships significant customers. Voyage revenues earned from
transactions with Hess (which do not include amounts under the Support
Agreement) for the years ended December 31, 2008, 2007, and 2006 were $12,810,
$15,006, and $11,035, respectively. Accounts receivable due under the Support
Agreement were $0 at December 31, 2008 and 2007.

General
Partner

General
and administrative expenses, including shore side employee expenses, certain
facility and lease costs, and wages and benefits for crew members are incurred
directly by the Partnerships general partner. These amounts are reimbursable
by the Partnership pursuant to the partnership agreement. Reimbursable amounts
expensed by the Partnership were $63,329, $54,304 and $46,388, respectively,
for the years ended December 31, 2008, 2007 and 2006.

F - 38

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

On
August 7, 2006, in order to maintain its 2% ownership relative to the new
equity units issued, the general partner was required to make a capital
contribution to the Partnership of approximately $1,582. To make this
contribution, the general partner issued the Partnership a promissory note,
which was repaid from distributions on the general partner units made on August
15, 2006.

New York Office

On
September 23, 2005, the Partnership entered into a ten-year lease for office
space for its New York City office. The Partnership subleases 75% of the leased
space to certain companies affiliated with the former Chairman of the Partnership.
The affiliated companies will pay their portion of the rent in advance of the
Partnership making the rental payment. The Partnership has provided a letter of
credit totaling $214 to secure final payments of the lease commitment. The
Partnership has been reimbursed 75% of the cost of providing the letter of
credit and has received a guaranty from its former Chairman in the event of any
default of the lease, including that which would require drawdown of the letter
of credit. For the years ended December 31, 2008 and 2007, the Partnership paid
$433 and $412, respectively, in connection with the lease and received $325 and
$309, respectively, from its related parties. The former Chairman resigned as
of October 23, 2008. Terms of the lease are further discussed in Note 18.

New
York Premise

On
December 22, 2008, the Partnership entered into a one year lease beginning
February 1, 2009 for the tenancy/residency of the Partnerships chief executive
officer. A security deposit of $17 was paid upon entering the lease. For the
year ended December 31, 2008 the Partnership paid $9 in advance for the first
months rent.

USS
Product Manager LLC

USS
Product Manager LLC (Product Manager), the Partnerships wholly-owned
subsidiary, manages the construction and operation of the tankers for the Joint
Venture, for which it receives the following, subject to certain specified
limitations:

| |   |                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an oversight
  fee of $1,000 per tanker, payable ratably over the course of construction of
  such tanker;                                                                             
| |   |                                                                                                                                                                                        
| |  | a management
  fee of $1,000 per year for each completed tanker that is operated by the
  Joint Venture;                                                                               
| |   |                                                                                                                                                                                        
| |  | a delivery fee of up to $750 per tanker,
  depending on the delivery date and cost of construction; and                                                                                
| |   |                                                                                                                                                                                        
| |  | a sale fee of up to $1,500 per tanker upon
  its sale to the Partnership or a third party, depending on the price obtained
  and whether a charter meeting specified terms is in place.

The
management agreement between Product Manager and the Joint Venture has an
initial term of 10 years, subject to early termination under certain
circumstances. The obligations under the management agreement are being
performed by employees of US Shipping General Partner LLC, the Partnerships
general partner. Certain members of the Partnerships management devote
significant time to the management and operation of the Joint Venture. For
years ended December 31, 2008 and 2007, the Partnership recorded $1,435 and
$343, respectively, in income related to this management agreement; however these
amounts were eliminated in consolidation. In February 2009 certain of the Joint
Venture Investors asserted that a termination event occurred under the
management agreement and, in their purported capacity as managing member of the
Joint Venture, purported to terminate Product Managers rights under the
management agreement other than the right to manage the operations of the Golden State pending the Joint Venture
finding a replacement manager. See Note 23Subsequent EventsLitigation with
Joint Venture Investors.

In
December 2007, Product Manager agreed to assume responsibility for certain site
supervision activities previously performed by the Joint Venture in exchange
for fees that will total $1,000 per vessel constructed, subject to certain limitations,
in addition to the oversight fees. For years ended December 31, 2008 and 2007,
Product Manger recognized $1,435 and $396, respectively, in fees for these site
supervision activities, which were eliminated in consolidation. In January
2009, the Joint Venture reassumed these responsibilities and engaged a third
party to provide these site supervision services.

F - 39

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

Third
Party Joint Venture Investors

As
a result of the formation the Joint Venture, the Partnership considers the
Joint Venture Investors to be related parties. In connection with the formation
of the Joint Venture, the Joint Venture paid fees of $10,788 to the Joint
Venture Investors. For the years ended December 31, 2008 and 2007, the Joint
Venture has paid interest of $9,289 and $5,375, respectively, to the Joint
Venture Investors. The Joint Venture Investors have alleged we are in default
under certain agreements with the Joint Venture and have attempted to take
action terminating our rights to manage the Joint Venture and to foreclose on
the Joint Ventures assets. See Note 23Subsequent EventsLitigation with Joint
Venture Investors.

Directors
Compensation

On
February 6, 2008, the Board of Directors of the general partner adopted the
following:

| |   |                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | That each
  non-employee director (other than Messrs. Macey and Newhouse) be issued 3,065
  common units of the Partnership on April 1, 2008, which units will be fully
  vested;                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                             
| |  | that directors M. William Macey, Jr. and
  Douglas L. Newhouse be paid fees equivalent to the fees paid to the other
  non-employee directors for their Board and committee services, for their
  services as members of the Board of Directors and for their service on
  various committees of the Board of Directors; and
| |   |                                                                                                                                                                                                                                                                                                                             
| |  | that William M. Kearns, Jr. be paid an
  additional annual retainer of $12 for serving as lead director of the Board
  of Directors.                                                                                                                                                                                        

Effective
October 1, 2008, the Compensation Committee of the Board of Directors of our
General Partner revised the compensation being paid to non-management directors
for their service as directors to a fixed fee of $20 per quarter with no
additional fees for meetings attended, plus reimbursement of out-of-pocket
expenses. Prior to this change, each of our non-management directors received a
quarterly cash retainer fee of $13 in consideration of their services as
director of our general partner, plus a cash fee of $1 for each board meeting
that they participated in. Furthermore, the chairman of the audit committee
received a $10 annual retainer, and each of the other members of the audit
committee received a $5 annual retainer. Beginning in 2008, we paid the lead
outside director a $12 annual retainer. In addition, in 2007 and 2008 we issued
common units to each of the non-management, non-Sterling investors having a
value of $38 in 2007 and $36 in 2008.

Sterling
Investment Partners

In
connection with the debt and equity financings in August 2006 (Note 12), the
Partnership expensed a fee of $250 relating to advisory services provided by
Sterling Investment Partners Advisors LLC (Sterling), an affiliate of the
entity that directly controls the Partnerships general partner. Additionally,
in connection with the formation of the Joint Venture, the Joint Venture paid a
fee of $1,500 to Sterling. The portion of the $1,500 related to the issuance of
the Joint Venture equity was recorded as a charge to the equity raised and the
portion related to the issuance of debt was recorded as deferred financing
costs (Note 9).

August
2006 Equity Financing

On August 7,
2006, the Partnership issued in a private placement to accredited investors
under Section 4(2) and Regulation D of the Securities Act of 1933 1,310,375
common units and 3,123,205 class B units at a price of $18.34 and $17.12,
respectively, for approximately $77,500 of gross proceeds. Sterling/US Shipping
Partners LP, which controls Shipping Master, purchased 41,174 common units and
99,531 class B units, and an affiliate of Sterling/US Shipping Partners LP
purchased 686 common units and 1,659 class B units. In addition, Mr. Gridley, the
Partnerships former chairman and chief executive officer, Mr. Gehegan, the
Partnerships chief operating officer, Mr. Bergeron, the Partnerships former
vice president-chief financial officer and Mr. Miller, the Partnerships vice
president-chartering, purchased 2,020 common units, 2,020 common units, 760
common units and 1,520 common units, respectively, and 4,820 class B units,
4,820 class B units, 1,815 class B units and 3,630 class B units, respectively.

F - 40

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

|    |                              
|--- | -----------------------------
|18. | Commitments and Contingencies

Leases

On
September 23, 2005, the Partnership entered into a ten-year lease for office
space for its New York office, commencing on January 1, 2006. The Partnership,
as the lessee, subleases 75% of the leased space to certain companies
affiliated with the former Chairman and Chief Executive Officer of the
Partnership. The total obligation of the lease over the ten-year period is
$4,150, including annual escalation; however, the Partnership is entitled to
sublease income of $3,112 from the affiliated companies. Average annual rental
expense, net of sublease income of $311, to the Partnership is $104. The lease
provides for additional payments of real estate taxes, insurance and other
operating expenses applicable to the property and the sublease provides for the
affiliated companies to pay 75% of these expenses. Total rental expense
excludes such additional expense payments as part of the minimum rentals.

At
December 31, 2008, future rental commitments under non-cancelable leases are as
follows:

|                          |  |                    |       |           |   |              |   |   |       | 
|------------------------- |  | ------------------ | ----- | --------- | - | ------------ | - | - | ----- | 
|Year ended
  December 31, |  | Operating
  Leases |       | Subleases |   | Net
  Leases |  
|                          |  |                    |       |           |   |              |  
|2009                      |  | $                  | 678   |           | $ | (313         | ) | $ | 365   | 
|2010                      |  |                    | 433   |           |   | (318         | ) |   | 115   | 
|2011                      |  |                    | 432   |           |   | (324         | ) |   | 108   | 
|2012                      |  |                    | 439   |           |   | (329         | ) |   | 110   | 
|2013                      |  |                    | 447   |           |   | (335         | ) |   | 112   | 
|Thereafter                |  |                    | 916   |           |   | (687         | ) |   | 229   | 
|                          |  |                    |       |           |   |              |   |   |       | 
|                          |  | $                  | 3,345 |           | $ | (2,306       | ) | $ | 1,039 | 
|                          |  |                    |       |           |   |              |   |   |       | 

Rent
expense for the years ended December 31, 2008, 2007, and 2006 was approximately
$650, $639, and $470, respectively. In addition to minimum rental payments
above, rent expense includes reimbursements for real estate taxes and rental of
a warehouse under a cancelable lease.

Employment
Agreements

In
2002, the general partner of the Partnership entered into employment agreements
with its five executive officers at that time. The employment agreements had an
initial term of three years and were amended and restated in 2004 in connection
with the Partnerships initial public offering. These agreements automatically
extend for successive one-year terms unless either party gives 60-days written
notice prior to the end of the term that such party desires not to renew the
employment agreement and currently expire in October 2009. In December 2007,
one of the executive officers subject to an employment agreement voluntarily
retired, and in conjunction therewith, the executive officer and the
Partnership entered into a separate agreement for future services, for which
the individual received $150. In April 2007, the general partner of the
Partnership entered into an employment agreement with Jan T. Ziobro, vice
president--new construction, expiring in April 2010, with substantially the
same terms as the agreements for the other executive officers.

The
three employment agreements in effect at December 31, 2008, provide for an
aggregate base annual salary of $876. In addition, each employee is eligible to
receive an annual bonus award as determined by the Board of Directors of the
general partner at its sole discretion. If the employees employment is
terminated without cause or if the employee resigns for a good reason, the employee
will be paid, for a period equal to the longer of (a) the remaining term of the
employees agreement or (b) one year, a monthly payment equal to one-twelfth of
the employees then annual salary plus his target bonus (50% of salary unless
otherwise specified by the compensation committee of the Board of Directors).

F - 41

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

Call
for Additional Payment from Indemnity Association

Because
we obtain some of our insurance through protection and indemnity associations,
we 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. On November 4, 2008, we received a
notice from our protection and indemnity association that due to the impact of
the recent financial market turmoil combined with substantial association
claims, the association needed to increase its reserves, which they would
accomplish through levying supplementary premiums for the 2006 and 2007 policy
years. The association also issued an estimate of a supplementary premium on
the 2008 policy year and ordered a general increase for the forthcoming 2009
policy year. The supplementary premium to be levied is set at 20% and 25% of
the policy years annual premiums for the 2006 and 2007 policy years,
respectively. There is an estimate of 20% supplementary premium for the 2008
policy year which will be reviewed in October 2009 and adjusted according to
claims activity as well as investment income. Supplemental premiums for the
2006 and 2007 policy years are $343 and $487, respectively, and are reflected in
our financial statements at December 31, 2008 as other expense. Premiums for
the two vessels sold in 2008 became due in January 2009. Premiums for the
remaining fleet are payable in three consecutive monthly installments beginning
in March 2009 for the 2006 policy year and beginning June 2009 for the 2007
policy year. An estimated amount of $475 has also been recognized as other
expense at December 31, 2008 related to the additional supplemental premium for
the 2008 policy year based on the notice received from our protection and
indemnity association. The association will review this 2008 policy
supplementary premium to be levied in October 2009. Renewals for the policy
beginning in February 2009 increased by approximately 6.7% for those vessels
who were in service for the entire 2008 policy year. Policy years run from
February 20 to February 19.

Severance Obligations

Mr.
Gridley, the Partnerships former chairman and chief executive officer,
resigned as an employee of the general partner of the Partnership in October
2008. In connection with the resignation, a subsidiary of the general partner
and Mr. Gridley entered into a severance agreement (which reflected the
severance provisions of his employment agreement, which was entered into in
connection with the Partnerships initial public offering in November 2004),
under which he is entitled to severance in the amount of $1,251, payable in
equal semi-monthly installments for a period of two years, provided that if a
change of control of the Partnership occurs prior to October 22, 2009, he will
be entitled to an additional $626, and such amount, together with certain
portions of the unpaid portion of the $1,251, will be immediately due and
payable. The Partnership has accrued severance of $1,251 of which $1,134
remains as of December 31, 2008. As a result of our bankruptcy filing, we are
no longer making severance payments to Mr. Gridley.

On
December 30, 2008, Mr. Al Bergeron, the Partnerships vice president-chief financial officer,
left the Partnership and the general partner. Pursuant to the terms of Mr.
Bergerons employment agreement, which was entered into in connection with the
Partnerships initial public offering in November 2004, he is contractually
entitled to receive severance in the amount of $930, payable in equal
semi-monthly installments over a period of two years, provided that if a change
of control of the Partnership (as defined in the employment agreement) occurs
prior to December 30, 2009, he will be entitled to an additional $465. The Partnership has accrued $930
severance amount as of December 31, 2008. As a result of our bankruptcy filing,
we are no longer making severance payments to Mr. Bergeron.

Union
Agreements

The
Partnership has collective bargaining agreements with two maritime unions, the
American Maritime Officers union, which covers the officers of the vessels, and
the Seafarers International Union, which covers all of the other seagoing
personnel, that expired in the second quarter of 2007. In September 2007, an
agreement was reached with the American Maritime Officers union. The agreement
is retroactive to May 1, 2007 and expires on April 30, 2010. A five year
agreement with the Seafarers International Union was reached in October 2007.
This agreement is retroactive to July 1, 2007 and expires in 2012. The two
agreements are consistent with industry trends and provide for annual wage and
benefit increases. These are the only collective bargaining agreements to which
the Partnership is party.

F - 42

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

Claims
and Litigation

At
December 31, 2008 and 2007, the Partnership has a liability for total claims
exposure, both insured and uninsured, of $3,061 and $2,520, respectively, and a
corresponding receivable from the insurance carrier of $3,905 and $2,999,
respectively.

The
Partnership is the subject of various claims and lawsuits in the ordinary
course of business 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
applicable insurance and would not have a material adverse effect on the
general partners financial position, results of operations or cash flows. The
Partnership is subject to deductibles with respect to its insurance coverage up
to $150 per incident and provides on a current basis for estimated payments
thereunder. Legal costs associated with such claims are expensed as incurred.

See
Note 23Subsequent EventsLitigation with Joint Venture Investors for
information with respect to our litigation with the Joint Venture Investors.

Charter Commitments

The
Partnerships time charters and consecutive voyage charters extend over various
periods of time. At December 31, 2008, minimum future charter revenue from
vessel charters including the Joint Venture vessels is as follows:

|                          |  |   |         | 
|------------------------- |  | - | ------- | 
|Year ended
  December 31, |  |   |         | 
|2009                      |  | $ | 84,730  | 
|2010                      |  |   | 120,491 | 
|2011                      |  |   | 127,016 | 
|2012                      |  |   | 88,850  | 
|2013                      |  |   | 66,271  | 
|Thereafter                |  |   | 115,221 | 
|                          |  |   |         | 
|                          |  | $ | 599,579 | 
|                          |  |   |         | 

These
amounts include committed charters on tankers and the ATBs yet to be
constructed. However, as a result of the agreement in principle to settle
litigation with the Joint Venture Investors, the financial results of the Joint
Venture will no longer be consolidated with the financial results of the
Partnership, and therefore the Partnership will not recognize any charter
revenue from the Joint Ventures vessels. Excluding charter revenues from the
Joint Ventures vessels, minimum future revenue from vessels charters is as
follows:

|                          |  |   |         | 
|------------------------- |  | - | ------- | 
|Year ended
  December 31, |  |   |         | 
|2009                      |  | $ | 56,945  | 
|2010                      |  |   | 61,530  | 
|2011                      |  |   | 37,103  | 
|2012                      |  |   | 14,963  | 
|2013                      |  |   | 5,684   | 
|Thereafter                |  |   | 4,684   | 
|                          |  |   |         | 
|                          |  | $ | 180,909 | 
|                          |  |   |         | 

F - 43

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

ATB
Commitments

The
Partnership has contracted with Manitowoc Marine Group (MMG) for the
construction of a barge. The Partnership has also contracted for the
construction of a tug with Eastern Shipbuilding Group, Inc. (Eastern), which
will be joined with the barge to complete a new ATB unit. The Partnership took
delivery of the tug in May 2009.
The Partnership expects that the
final ATB will be completed in August 2009 at a cost of approximately $71,348 (excluding
capitalized interest which totaled $5,054 at December 31, 2008). The cost increase over
the originally budgeted amount of $66,000 is principally due to contractually provided
cost increases related to increases in major components, customer requested modifications
and change orders. At December 31, 2008, the Partnership had restricted cash and funds in
escrow totaling approximately $8,004 of which $5,741 was used to pay costs incurred in
2009 to complete the ATB Brownsville and this final ATB and $2,263 was used to pay
costs incurred prior to December 31, 2008 to construct these vessels. The Partnership
expects that it will need to fund approximately $8,285 of construction costs to complete
the final ATB from its operating cash flows.

Joint Venture Tanker Commitments

The
Partnership, through its subsidiary, Product Carriers, entered into a contract
with NASSCO for the construction of nine 49,000 dwt double-hulled tankers. Upon
formation of the Joint Venture, Product Carriers assigned its rights and
obligations with respect to the construction of the first five tankers to the
Joint Venture. NASSCO released Product Carriers from any obligation under the
construction contract relating to the first five tankers. The Joint Ventures
option to elect to have rights and obligations under the NASSCO contract to
construct up to four additional tankers assigned to the Joint Venture expired
unexercised. As a result, Product Carriers was obligated to obtain alternative
financing for their construction or to transfer the shipyard slots. Because the
Joint Venture did not exercise its option to have the rights and obligations
under the NASSCO contract to construct up to four additional tankers assigned
to the Joint Venture and due to Product Carriers inability to obtain the
necessary financing to construct these four tankers due to its financial
condition and current market conditions, the Partnership has been advised by
NASSCO that it is exercising its rights under the construction contract with
Product Carriers to use commercially reasonable efforts to sell and assign
Product Carriers rights under the construction contract to have four product
tankers constructed. Product Carriers is obligated to reimburse NASSCO for any
damages incurred by NASSCO as a result of these tankers not being constructed,
or if they are transferred to a third party at a loss to NASSCO, up to a
maximum of $10,000 (plus costs and expenses incurred by NASSCO) for each such
tanker, with such amounts being funded solely out of monies received by Product
Carriers in respect of its equity investment in the first five vessels
constructed by the Joint Venture. As a result, the Partnership believed that
there was substantial uncertainty that the Partnership would realize any
monetary return on or of its $70,000 equity investment in the Joint Venture.

Letters
of Credit

The
Partnership has funding commitments that could potentially require its
performance in the event of demands by third parties or contingent events under
a $214 letter of credit at December 31, 2008. The letter of credit is extended
to secure final payments associated with the New York office lease. There have
been no claims against this letter of credit.

|    |                       
|--- | ----------------------
|19. | Employee Benefit Plans

The
Partnerships general partner maintains an employee savings plan under Section
401(k) of the Internal Revenue Code, which the Partnerships non-union shore
staff are eligible to participate in. The plan covers all office employees and
allows participants to contribute to the plan a percentage of pre-tax
compensation, but not in excess of the maximum allowed under the Internal
Revenue Code. For the years ended December 31, 2008, 2007, and 2006, the plan
provided for matching contributions by the Partnership of 5%. In 2008, 2007,
and 2006, the Partnership made matching contributions of approximately $290,
$208, and $215, respectively, to the plan.

A
significant number of the employees of a subsidiary of the general partner are
covered by union sponsored, collectively bargained multi-employer pension
plans. These expenses are directly allocated to, and reimbursed by, the
Partnership. The Partnership contributed and charged to expense $1,132, $1,040
and $882 in 2008, 2007 and 2006, respectively, for such plans. Information from
the plans administrators is not sufficient to permit the Partnership to
determine its share, if any, of unfunded vested benefits.

F - 44

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

|    |                    
|--- | -------------------
|20. | Contract Settlement

On
February 9, 2007, the Partnership and a major oil and chemical customer reached
an agreement to terminate a Contract of Affreightment under which the customer
was obligated to purchase services for the transport of minimum freight volumes
through late 2007 from a manufacturing facility that it sold. The Partnership
received $3,486 from the customer in exchange for releasing the customer from
its future obligations under the Contract of Affreightment. The $3,486 is
included in Other Expense (Income) on the Statements of Operations and
Comprehensive Income. Simultaneously, a new three year Contract of
Affreightment at market rates with reduced volumes was agreed upon with the
same customer.

|    |                                            
|--- | -------------------------------------------
|21. | Quarterly Results of Operations (Unaudited)

The
following summarizes certain quarterly results of operations:

|                                                               |  |                    |         |                  |   |            |   |          |        |   |   |        |  
|-------------------------------------------------------------- |  | ------------------ | ------- | ---------------- | - | ---------- | - | -------- | ------ | - | - | ------ | -
|                                                               |  | Three Months Ended |        
|                                                               |  |                    |        
|2008                                                           |  | December 31        |         | September 30 (1) |   | June 30(2) |   | March 31 |       
|                                                               |  |                    |         |                  |   |            |   |          |       
|Total revenues                                                 |  | $                  | 46,529  |                  | $ | 48,588     |   | $        | 49,819 |   | $ | 51,504 |  
|Operating (loss) income                                        |  | $                  | (5,110  | )                | $ | (79,968    | ) | $        | 1,603  |   | $ | 519    |  
|Net (loss) income                                              |  | $                  | (37,307 | )                | $ | (87,483    | ) | $        | (2,683 | ) | $ | (5,778 | )
|General partners interest in net (loss) income                |  | $                  | (745    | )                | $ | (1,750     | ) | $        | (54    | ) | $ | (116   | )
|Limited partners interest in net (loss) income                |  | $                  | (36,562 | )                | $ | (85,733    | ) | $        | (2,629 | ) | $ | (5,662 | )
|Net (loss) income per limited partner unit (basic and
diluted) |  | $                  | (2.01   | )                | $ | (4.70      | ) | $        | (0.14  | ) | $ | (0.31  | )
|Weighted average limited partner units outstanding (basic)     |  |                    | 18,254  |                  |   | 18,254     |   |          | 18,254 |   |   | 18,242 |  
|Weighted average limited partner units outstanding
(diluted)   |  |                    | 18,254  |                  |   | 18,254     |   |          | 18,254 |   |   | 18,242 |  

|                                                               |  |                    |        |              |   |         |   |          |        |  |   |        | 
|-------------------------------------------------------------- |  | ------------------ | ------ | ------------ | - | ------- | - | -------- | ------ |  | - | ------ | 
|                                                               |  | Three Months Ended |       
|                                                               |  |                    |       
|2007                                                           |  | December 31        |        | September 30 |   | June 30 |   | March 31 |       
|                                                               |  |                    |        |              |   |         |   |          |       
|Total revenues                                                 |  | $                  | 43,467 |              | $ | 45,559  |   | $        | 45,621 |  | $ | 42,082 | 
|Operating income                                               |  | $                  | 4,881  |              | $ | 3,919   |   | $        | 6,207  |  | $ | 10,400 | 
|Net (loss) income                                              |  | $                  | (1,363 | )            | $ | (1,978  | ) | $        | 2,408  |  | $ | 5,749  | 
|General partners interest in net (loss) income                |  | $                  | (27    | )            | $ | (40     | ) | $        | 48     |  | $ | 115    | 
|Limited partners interest in net (loss) income                |  | $                  | (1,336 | )            | $ | (1,938  | ) | $        | 2,360  |  | $ | 5,634  | 
|Net (loss) income per limited partner unit (basic and
diluted) |  | $                  | (0.07  | )            | $ | (0.11   | ) | $        | 0.13   |  | $ | 0.31   | 
|Weighted average limited partner units outstanding (basic)     |  |                    | 18,234 |              |   | 18,234  |   |          | 18,234 |  |   | 18,234 | 
|Weighted average limited partner units outstanding
(diluted)   |  |                    | 18,234 |              |   | 18,234  |   |          | 18,235 |  |   | 18,234 | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The Partnership
  determined it should have been allocating losses in accordance with the
  expected economic returns of the Joint Venture, rather than proportionally
  based on ownership interest. As a result, the Partnership determined it had
  been erroneously allocating losses to its Joint Venture partner via the
  Non-Controlling Interest line since the inception of the Joint Venture in
  2006. The Partnership does not consider this error material to the historical
  financial statements and therefore, revised this allocation by correcting the
  error during the three months ended September 30, 2008. The third quarter
  impact of this out of period adjustment was an additional allocation of
  $1,029 in losses to the Partnership, recorded through the non-controlling
  interest line. The Joint Venture is included as a non-guarantor subsidiary in
  Note 22Supplemental Guarantor Information.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (2) | During the
  second quarter of 2008, the Partnership determined that the deferred tax
  asset and related tax benefit recorded in the three months ended March 31,
  2008 should have been $646 which is net of a valuation allowance of $117. The
  revision to the deferred tax asset was recorded during the three months ended
  June 30, 2008 resulting in a decrease of $468 in the deferred tax benefit for
  the period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F - 45

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

|    |                                   
|--- | ----------------------------------
|22. | Supplemental Guarantor Information

Set
forth below is additional information regarding the financial position, results
of operations and cash flows of U.S. Shipping Partners L.P. and U.S. Shipping
Finance Corp. (together, the Issuers of the Partnerships $100,000 13% Senior
Secured Notes due 2014 (the Second Lien Notes)), the Partnerships subsidiary
guarantors of such Second Lien Notes and the Partnerships subsidiary
non-guarantors of such Second Lien Notes.

The
subsidiary co-issuer entity (U.S. Shipping Finance Corp.), which is a 100%
owned finance subsidiary of U.S. Shipping Partners L.P., commenced operations
on August 7, 2006, and the only non-guarantor subsidiaries (USS Products
Investor LLC and USS Product Carriers LLC) both commenced operations on August
7, 2006. In addition, all of the Partnerships wholly-owned subsidiaries other
than the non-guarantor subsidiaries identified above guarantee the Second Lien
Notes on a full and unconditional, joint and several basis. There are no
restrictions on the ability of U.S. Shipping Partners L.P. to obtain funds from
its wholly owned subsidiaries.

The
Joint Venture is contractually restricted from distributing assets to the
Parent entities, either by equity distribution or loan, without the consent of
the Joint Venture Investors, or alternately, upon the achievement of
operational and financial goals as established in the joint venture agreement.

F - 46

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

U.S. Shipping Partners L.P. 
Unaudited Consolidating Balance Sheet 
As of December 31, 2008 
(in thousands)

|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|------------------------------------------------------- |  | -------- | ------- | --------------------- | - | ------------------------ | - | --------------------------------- | ------- | ----------- |  | ------- |  | - | -------- | - | - | ------- | -
|                                                        |  | Parent * |         | Subsidiary
  Issuer * |   | Guarantor
  Subsidiaries |   | Non-
  Guarantor
  Subsidiaries** |         | Adjustments |  | Total   | 
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |  |         | 
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |  |         | 
|Assets                                                  |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|Current assets                                          |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|Cash and equivalents                                    |  | $        |        |                       | $ |                         |   | $                                 | 20,583  |             |  | 16      |  | $ |         |   | $ | 20,599  |  
|Current portion of restricted cash and
equivalents      |  |          |        |                       |   |                         |   |                                   | 7,566   |             |  |        |  |   |         |   |   | 7,566   |  
|Accounts receivable, net                                |  |          |        |                       |   |                         |   |                                   | 4,905   |             |  |        |  |   |         |   |   | 4,905   |  
|Prepaid expenses and other current assets               |  |          |        |                       |   |                         |   |                                   | 18,883  |             |  | 194     |  |   |         |   |   | 19,077  |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|Total current assets                                    |  |          |        |                       |   |                         |   |                                   | 51,937  |             |  | 210     |  |   |         |   |   | 52,147  |  
|Investment in subsidiaries, net                         |  |          | 186,797 |                       |   |                         |   |                                   |        |             |  |        |  |   | (186,797 | ) |   |        |  
|Intercompany receivable                                 |  |          | 247,780 |                       |   | 63,715                   |   |                                   |        |             |  |        |  |   | (311,495 | ) |   |        |  
|Restricted cash and equivalents, net of current portion |  |          |        |                       |   |                         |   |                                   |        |             |  |        |  |   |         |   |   |        |  
|Vessels and equipment, net                              |  |          |        |                       |   |                         |   |                                   | 376,326 |             |  | 327,869 |  |   |         |   |   | 704,195 |  
|Deferred financing costs, net                           |  |          | 2,253   |                       |   | 909                      |   |                                   |        |             |  |        |  |   | (909     | ) |   | 2,253   |  
|Other assets                                            |  |          |        |                       |   |                         |   |                                   | 1,065   |             |  | 775     |  |   |         |   |   | 1,840   |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|Total assets                                            |  | $        | 436,830 |                       | $ | 64,624                   |   | $                                 | 429,329 |             |  | 328,854 |  | $ | (499,201 | ) | $ | 760,435 |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|Liabilities and Partners Capital                       |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|Current liabilities                                     |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|Current portion of long-term debt                       |  | $        | 433,574 |                       | $ | 100,000                  |   | $                                 |        |             |  | 176,721 |  | $ | (100,000 | ) | $ | 610,295 |  
|Accounts payable                                        |  |          |        |                       |   |                         |   |                                   | 7,424   |             |  |        |  |   |         |   |   | 7,424   |  
|Due to affiliates                                       |  |          |        |                       |   |                         |   |                                   | 3,659   |             |  | 464     |  |   |         |   |   | 4,123   |  
|Deferred revenue                                        |  |          |        |                       |   |                         |   |                                   | 6,165   |             |  |        |  |   |         |   |   | 6,165   |  
|Accrued expenses and other liabilities                  |  |          |        |                       |   |                         |   |                                   | 23,419  |             |  | 6,774   |  |   |         |   |   | 30,193  |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|Total current liabilities                               |  |          | 433,574 |                       |   | 100,000                  |   |                                   | 40,667  |             |  | 183,959 |  |   | (100,000 | ) |   | 658,200 |  
|Intercompany payable                                    |  |          |        |                       |   |                         |   |                                   | 247,780 |             |  |        |  |   | (247,780 | ) |   |        |  
|Long-term debt, net of current portion                  |  |          |        |                       |   |                         |   |                                   |        |             |  |        |  |   |         |   |   |        |  
|Deferred income taxes                                   |  |          |        |                       |   |                         |   |                                   | 2,720   |             |  |        |  |   |         |   |   | 2,720   |  
|Other liabilities                                       |  |          | 15,563  |                       |   |                         |   |                                   | 2,406   |             |  |        |  |   |         |   |   | 17,969  |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|Total liabilities                                       |  |          | 449,137 |                       |   | 100,000                  |   |                                   | 293,573 |             |  | 183,959 |  |   | (347,780 | ) |   | 678,889 |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|Noncontrolling interest in Joint Venture                |  |          |        |                       |   |                         |   |                                   |        |             |  | 93,854  |  |   |         |   |   | 93,854  |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|Commitments and contingencies                           |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|Partners Capital                                       |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|Partners capital                                       |  |          | (4,014  | )                     |   | (35,376                  | ) |                                   | 135,757 |             |  | 51,040  |  |   | (151,421 | ) |   | (4,014  | )
|Accumulated other comprehensive loss                    |  |          | (8,294  | )                     |   |                         |   |                                   |        |             |  |        |  |   |         |   |   | (8,294  | )
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|Total partners capital                                 |  |          | (12,307 | )                     |   | (35,376                  | ) |                                   | 135,757 |             |  | 51,040  |  |   | (151,421 | ) |   | (12,308 | )
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  
|Total liabilities and partners
capital                 |  | $        | 436,830 |                       | $ | 64,624                   |   | $                                 | 429,329 |             |  | 328,854 |  | $ | (499,201 | ) | $ | 760,435 |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |  |         |  |   |          |   |   |         |  

|   |                                                                                                                                                                                                                                                                                                                               
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | Both the Parent and the
  Subsidiary Issuer are co-issuers of $100,000 in Second Lien Notes.
  Accordingly, such indebtedness has been presented as an obligation of both
  entities in the above consolidating balance sheet. In addition, the related
  deferred financing costs are presented as an asset of both entities.
|   |                                                                                                                                                                                                                                                                                                                               
|** | Consists of the Joint
  Venture and the Partnerships wholly-owned subsidiary that owns its
  investment in the Joint Venture.                                                                                                                                                                                                

F - 47

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

U.S. Shipping Partners L.P. 
Unaudited Consolidating Balance Sheet 
As of December 31, 2007 
(in thousands)

|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|------------------------------------------------------- |  | -------- | ------- | --------------------- | - | ------------------------ | - | --------------------------------- | ------- | ----------- | - | ------- |  | - | -------- | - | - | ------- | -
|                                                        |  | Parent * |         | Subsidiary
  Issuer * |   | Guarantor
  Subsidiaries |   | Non-
  Guarantor
  Subsidiaries** |         | Adjustments |   | Total   | 
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         | 
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         | 
|Assets                                                  |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Current assets                                          |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Cash and equivalents                                    |  | $        |        |                       | $ |                         |   | $                                 | 21,596  |             | $ | 8       |  | $ |         |   | $ | 21,604  |  
|Current portion of restricted cash and
equivalents      |  |          |        |                       |   |                         |   |                                   | 113,960 |             |   |        |  |   |         |   |   | 113,960 |  
|Accounts receivable, net                                |  |          |        |                       |   |                         |   |                                   | 11,934  |             |   |        |  |   |         |   |   | 11,934  |  
|Prepaid expenses and other current assets               |  |          |        |                       |   |                         |   |                                   | 10,489  |             |   | 194     |  |   |         |   |   | 10,683  |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Total current assets                                    |  |          |        |                       |   |                         |   |                                   | 157,979 |             |   | 202     |  |   |         |   |   | 158,181 |  
|Investment in subsidiaries, net                         |  |          | 245,914 |                       |   |                         |   |                                   |        |             |   |        |  |   | (245,914 | ) |   |        |  
|Intercompany receivable                                 |  |          | 303,466 |                       |   | 76,715                   |   |                                   |        |             |   |        |  |   | (380,181 | ) |   |        |  
|Restricted cash and equivalents, net of current portion |  |          |        |                       |   |                         |   |                                   | 11,322  |             |   |        |  |   |         |   |   | 11,322  |  
|Vessels and equipment, net                              |  |          |        |                       |   |                         |   |                                   | 388,324 |             |   | 101,140 |  |   |         |   |   | 489,464 |  
|Deferred financing costs, net                           |  |          | 9,587   |                       |   | 4,108                    |   |                                   |        |             |   | 9,432   |  |   | (4,108   | ) |   | 19,019  |  
|Other assets                                            |  |          | 955     |                       |   |                         |   |                                   | 2,137   |             |   | 1,950   |  |   |         |   |   | 5,042   |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Total assets                                            |  | $        | 559,922 |                       | $ | 80,823                   |   | $                                 | 559,762 |             | $ | 112,724 |  | $ | (630,203 | ) | $ | 683,028 |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Liabilities and Partners Capital                       |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Current liabilities                                     |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Current portion of long-term debt                       |  | $        | 3,100   |                       | $ |                         |   | $                                 |        |             | $ |        |  | $ |         |   | $ | 3,100   |  
|Accounts payable                                        |  |          |        |                       |   |                         |   |                                   | 9,668   |             |   |        |  |   |         |   |   | 9,668   |  
|Due to affiliates                                       |  |          |        |                       |   |                         |   |                                   | 3,197   |             |   | 196     |  |   |         |   |   | 3,393   |  
|Deferred revenue                                        |  |          |        |                       |   |                         |   |                                   | 1,193   |             |   |        |  |   |         |   |   | 1,193   |  
|Accrued expenses and other liabilities                  |  |          |        |                       |   |                         |   |                                   | 15,359  |             |   | 15,966  |  |   |         |   |   | 31,325  |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Total current liabilities                               |  |          | 3,100   |                       |   |                         |   |                                   | 29,417  |             |   | 16,162  |  |   |         |   |   | 48,679  |  
|Intercompany payable                                    |  |          |        |                       |   |                         |   |                                   | 303,466 |             |   |        |  |   | (303,466 | ) |   |        |  
|Long-term debt, net of current portion                  |  |          | 415,697 |                       |   | 100,000                  |   |                                   |        |             |   | 41,230  |  |   | (100,000 | ) |   | 456,927 |  
|Deferred income taxes                                   |  |          |        |                       |   |                         |   |                                   | 2,145   |             |   |        |  |   |         |   |   | 2,145   |  
|Other liabilities                                       |  |          | 10,092  |                       |   |                         |   |                                   | 828     |             |   |        |  |   |         |   |   | 10,920  |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Total liabilities                                       |  |          | 428,889 |                       |   | 100,000                  |   |                                   | 335,856 |             |   | 57,392  |  |   | (403,466 | ) |   | 518,671 |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Noncontrolling interest in Joint Venture                |  |          |        |                       |   |                         |   |                                   |        |             |   | 33,324  |  |   |         |   |   | 33,324  |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Commitments and contingencies                           |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Partners Capital                                       |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Partners capital                                       |  |          | 139,263 |                       |   | (19,177                  | ) |                                   | 223,906 |             |   | 22,008  |  |   | (226,737 | ) |   | 139,263 |  
|Accumulated other comprehensive loss                    |  |          | (8,230  | )                     |   |                         |   |                                   |        |             |   |        |  |   |         |   |   | (8,230  | )
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Total partners capital                                 |  |          | 131,033 |                       |   | (19,177                  | ) |                                   | 223,906 |             |   | 22,008  |  |   | (226,737 | ) |   | 131,033 |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Total liabilities and partners
capital                 |  | $        | 559,922 |                       | $ | 80,823                   |   | $                                 | 559,762 |             | $ | 112,724 |  | $ | (630,203 | ) | $ | 683,028 |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  

|   |                                                                                                                                                                                                                                                                                                                               
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | Both the Parent and the
  Subsidiary Issuer are co-issuers of $100,000 in Second Lien Notes.
  Accordingly, such indebtedness has been presented as an obligation of both
  entities in the above consolidating balance sheet. In addition, the related
  deferred financing costs are presented as an asset of both entities.
|   |                                                                                                                                                                                                                                                                                                                               
|** | Consists of the Joint
  Venture and the Partnerships wholly-owned subsidiary that owns its
  investment in the Joint Venture.                                                                                                                                                                                                

F - 48

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

U.S. Shipping Partners L.P. 
Unaudited Consolidating Balance Sheet 
As of December 31, 2006 
(in thousands)

|                                                        |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|------------------------------------------------------- |  | -------- | ------- | --------------------- | - | ------------------------ | - | ------------------------------- | ------- | ----------- | - | ------ |  | - | -------- | - | - | ------- | -
|                                                        |  | Parent * |         | Subsidiary
  Issuer * |   | Guarantor
  Subsidiaries |   | Non-
  Guarantor
  Subsidiaries |         | Adjustments |   | Total  | 
|                                                        |  |          |         |                       |   |                          |   |                                 |         |             |   |        | 
|                                                        |  |          |         |                       |   |                          |   |                                 |         |             |   |        | 
|Assets                                                  |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|Current assets                                          |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|Cash and equivalents                                    |  | $        |        |                       | $ |                         |   | $                               | 2,686   |             | $ |       |  | $ |         |   | $ | 2,686   |  
|Current portion of restricted cash and
equivalents      |  |          |        |                       |   |                         |   |                                 | 80,588  |             |   |       |  |   |         |   |   | 80,588  |  
|Accounts receivable, net                                |  |          |        |                       |   |                         |   |                                 | 10,520  |             |   |       |  |   |         |   |   | 10,520  |  
|Prepaid expenses and other current assets               |  |          |        |                       |   |                         |   |                                 | 5,410   |             |   | 194    |  |   |         |   |   | 5,604   |  
|                                                        |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|Total current assets                                    |  |          |        |                       |   |                         |   |                                 | 99,204  |             |   | 194    |  |   |         |   |   | 99,398  |  
|Investment in subsidiaries, net                         |  |          | 233,028 |                       |   |                         |   |                                 |        |             |   |       |  |   | (233,028 | ) |   |        |  
|Intercompany receivable                                 |  |          | 278,379 |                       |   | 89,715                   |   |                                 |        |             |   |       |  |   | (368,094 | ) |   |        |  
|Restricted cash and equivalents, net of current portion |  |          |        |                       |   |                         |   |                                 | 130,359 |             |   |       |  |   |         |   |   | 130,359 |  
|Vessels and equipment, net                              |  |          |        |                       |   |                         |   |                                 | 314,870 |             |   | 35,027 |  |   |         |   |   | 349,897 |  
|Deferred financing costs, net                           |  |          | 11,151  |                       |   | 4,744                    |   |                                 |        |             |   | 11,947 |  |   | (4,744   | ) |   | 23,098  |  
|Other assets                                            |  |          | 1,334   |                       |   |                         |   |                                 | 1,338   |             |   |       |  |   |         |   |   | 2,672   |  
|                                                        |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|Total assets                                            |  | $        | 523,892 |                       | $ | 94,459                   |   | $                               | 545,771 |             | $ | 47,168 |  | $ | (605,866 | ) | $ | 605,424 |  
|                                                        |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|                                                        |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|Liabilities and Partners Capital                       |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|Current liabilities                                     |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|Current portion of long-term debt                       |  | $        | 2,560   |                       | $ |                         |   | $                               |        |             | $ |       |  | $ |         |   | $ | 2,560   |  
|Accounts payable                                        |  |          |        |                       |   |                         |   |                                 | 11,677  |             |   |       |  |   |         |   |   | 11,677  |  
|Due to affiliates                                       |  |          |        |                       |   |                         |   |                                 | 1,604   |             |   | 236    |  |   |         |   |   | 1,840   |  
|Deferred revenue                                        |  |          |        |                       |   |                         |   |                                 | 1,178   |             |   |       |  |   |         |   |   | 1,178   |  
|Accrued expenses                                        |  |          |        |                       |   |                         |   |                                 | 17,016  |             |   | 1,386  |  |   |         |   |   | 18,402  |  
|                                                        |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|Total current liabilities                               |  |          | 2,560   |                       |   |                         |   |                                 | 31,475  |             |   | 1,622  |  |   |         |   |   | 35,657  |  
|Intercompany payable                                    |  |          |        |                       |   |                         |   |                                 | 278,379 |             |   |       |  |   | (278,379 | ) |   |        |  
|Long-term debt, net of current portion                  |  |          | 352,175 |                       |   | 100,000                  |   |                                 |        |             |   | 16,307 |  |   | (100,000 | ) |   | 368,482 |  
|Advances from Hess, net                                 |  |          |        |                       |   |                         |   |                                 | 11,866  |             |   |       |  |   |         |   |   | 11,866  |  
|Deferred income taxes                                   |  |          |        |                       |   |                         |   |                                 | 2,681   |             |   |       |  |   |         |   |   | 2,681   |  
|Other liabilities                                       |  |          | 2,080   |                       |   |                         |   |                                 |        |             |   |       |  |   |         |   |   | 2,080   |  
|                                                        |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|Total liabilities                                       |  |          | 356,815 |                       |   | 100,000                  |   |                                 | 324,401 |             |   | 17,929 |  |   | (378,379 | ) |   | 420,766 |  
|                                                        |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|                                                        |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|Minority interest in Joint Venture                      |  |          |        |                       |   |                         |   |                                 |        |             |   | 17,581 |  |   |         |   |   | 17,581  |  
|                                                        |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|                                                        |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|Commitments and contingencies                           |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|                                                        |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|Partners Capital                                       |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|Partners capital                                       |  |          | 167,823 |                       |   | (5,541                   | ) |                                 | 221,370 |             |   | 11,658 |  |   | (227,487 | ) |   | 167,823 |  
|Accumulated other comprehensive loss                    |  |          | (746    | )                     |   |                         |   |                                 |        |             |   |       |  |   |         |   |   | (746    | )
|                                                        |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|Total partners capital                                 |  |          | 167,077 |                       |   | (5,541                   | ) |                                 | 221,370 |             |   | 11,658 |  |   | (227,487 | ) |   | 167,077 |  
|                                                        |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  
|Total liabilities and partners
capital                 |  | $        | 523,892 |                       | $ | 94,459                   |   | $                               | 545,771 |             | $ | 47,168 |  | $ | (605,866 | ) | $ | 605,424 |  
|                                                        |  |          |         |                       |   |                          |   |                                 |         |             |   |        |  |   |          |   |   |         |  

|  |                                                                                                                                                                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Both the Parent and the
  Subsidiary Issuer are co-issuers of $100,000 in Second Lien Notes.
  Accordingly, such indebtedness has been presented as an obligation of both
  entities in the above consolidating balance sheet. In addition, the related
  deferred financing costs are presented as an asset of both entities.

F - 49

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

U.S. Shipping Partners L.P.
Unaudited Consolidating Statement of Operations 
Year Ended December 31, 2008 
(in thousands)

|                                                              |  |          |          |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |          |  
|------------------------------------------------------------- |  | -------- | -------- | --------------------- | - | ------------------------ | - | --------------------------------- | ------- | ----------- | - | ------- | - | - | ------- | - | - | -------- | -
|                                                              |  | Parent * |          | Subsidiary
  Issuer * |   | Guarantor
  Subsidiaries |   | Non-
  Guarantor
  Subsidiaries** |         | Adjustments |   | Total   |  
|                                                              |  |          |          |                       |   |                          |   |                                   |         |             |   |         |  
|                                                              |  |          |          |                       |   |                          |   |                                   |         |             |   |         |  
|Revenues                                                      |  | $        |         |                       | $ |                         |   | $                                 | 196,440 |             | $ |        |   | $ |        |   | $ | 196,440  |  
|                                                              |  |          |          |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |          |  
|                                                              |  |          |          |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |          |  
|Operating expenses                                            |  |          |          |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |          |  
|Vessel operating expenses                                     |  |          |         |                       |   |                         |   |                                   | 65,397  |             |   | 214     |   |   |        |   |   | 65,611   |  
|Voyage expenses                                               |  |          |         |                       |   |                         |   |                                   | 69,906  |             |   |        |   |   |        |   |   | 69,906   |  
|General and administrative expenses                           |  |          | 183      |                       |   |                         |   |                                   | 19,872  |             |   | 1,707   |   |   |        |   |   | 21,762   |  
|Loss on sale of vessels                                       |  |          |         |                       |   |                         |   |                                   | 38,148  |             |   |        |   |   |        |   |   | 38,148   |  
|Impairment charges                                            |  |          |         |                       |   |                         |   |                                   | 1,650   |             |   |        |   |   |        |   |   | 1,650    |  
|Depreciation and amortization                                 |  |          |         |                       |   |                         |   |                                   | 80,870  |             |   |        |   |   |        |   |   | 80,870   |  
|Other expense                                                 |  |          |         |                       |   |                         |   |                                   | 1,449   |             |   |        |   |   |        |   |   | 1,449    |  
|                                                              |  |          |          |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |          |  
|Total operating expenses, net                                 |  |          | 183      |                       |   |                         |   |                                   | 277,292 |             |   | 1,921   |   |   |        |   |   | 279,396  |  
|                                                              |  |          |          |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |          |  
|Operating (loss) income                                       |  |          | (183     | )                     |   |                         |   |                                   | (80,852 | )           |   | (1,921  | ) |   |        |   |   | (82,956  | )
|Interest expense                                              |  |          | 38,275   |                       |   | 16,199                   |   |                                   |        |             |   | 6,916   |   |   | (16,199 | ) |   | 45,191   |  
|Interest income                                               |  |          |         |                       |   |                         |   |                                   | (2,061  | )           |   | (2      | ) |   |        |   |   | (2,063   | )
|Net losses on derivative financial instruments                |  |          | 6,056    |                       |   |                         |   |                                   |        |             |   | 1,175   |   |   |        |   |   | 7,231    |  
|                                                              |  |          |          |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |          |  
|(Loss) income before income taxes and noncontrolling
interest |  |          | (44,514  | )                     |   | (16,199                  | ) |                                   | (78,791 | )           |   | (10,010 | ) |   | 16,199  |   |   | (133,315 | )
|Provision for income taxes                                    |  |          |         |                       |   |                         |   |                                   | (851    | )           |   |        |   |   |        |   |   | (851     | )
|                                                              |  |          |          |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |          |  
|(Loss) income before noncontrolling interest                  |  |          | (44,514  | )                     |   | (16,199                  | ) |                                   | (77,940 | )           |   | (10,010 | ) |   | 16,199  |   |   | (132,464 | )
|Equity in earnings of unconsolidated subsidiaries             |  |          | (88,737  | )                     |   |                         |   |                                   |        |             |   |        |   |   | 88,737  |   |   |         |  
|Noncontrolling interest in Joint Venture losses               |  |          |         |                       |   |                         |   |                                   |        |             |   | 787     |   |   |        |   |   | 787      |  
|                                                              |  |          |          |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |          |  
|Net income (loss)                                             |  | $        | (133,251 | )                     | $ | (16,199                  | ) | $                                 | (77,940 | )           | $ | (10,797 | ) | $ | 104,936 |   | $ | (133,251 | )
|                                                              |  |          |          |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |          |  

|   |                                                                                                                                                                                                                                                                                                                               
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | Both the Parent and the
  Subsidiary Issuer are co-issuers of $100,000 in Second Lien Notes.
  Accordingly, such indebtedness has been presented as an obligation of both
  entities in the above consolidating balance sheet. In addition, the related
  deferred financing costs are presented as an asset of both entities.
|   |                                                                                                                                                                                                                                                                                                                               
|** | Consists of the Joint
  Venture and the Partnerships wholly-owned subsidiary that owns its
  investment in the Joint Venture.                                                                                                                                                                                                

F - 50

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

U.S. Shipping Partners L.P.
Unaudited Consolidating Statement of Operations 
Year Ended December 31, 2007 
(in thousands)

|                                                              |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  
|------------------------------------------------------------- |  | -------- | ------- | --------------------- | - | ------------------------ | - | --------------------------------- | ------- | ----------- | - | ----- | - | - | ------- | - | - | ------- | -
|                                                              |  | Parent * |         | Subsidiary
  Issuer * |   | Guarantor
  Subsidiaries |   | Non-
  Guarantor
  Subsidiaries** |         | Adjustments |   | Total |  
|                                                              |  |          |         |                       |   |                          |   |                                   |         |             |   |       |  
|                                                              |  |          |         |                       |   |                          |   |                                   |         |             |   |       |  
|Revenues                                                      |  | $        |        |                       | $ |                         |   | $                                 | 176,729 |             | $ |      |   | $ |        |   | $ | 176,729 |  
|                                                              |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  
|                                                              |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  
|Operating expenses                                            |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  
|Vessel operating expenses                                     |  |          |        |                       |   |                         |   |                                   | 65,656  |             |   |      |   |   |        |   |   | 65,656  |  
|Voyage expenses                                               |  |          |        |                       |   |                         |   |                                   | 35,824  |             |   |      |   |   |        |   |   | 35,824  |  
|General and administrative expenses                           |  |          | 114     |                       |   |                         |   |                                   | 14,634  |             |   | 785   |   |   |        |   |   | 15,533  |  
|Depreciation and amortization                                 |  |          |        |                       |   |                         |   |                                   | 37,795  |             |   |      |   |   |        |   |   | 37,795  |  
|Other expense (income)                                        |  |          |        |                       |   |                         |   |                                   | (3,486  | )           |   |      |   |   |        |   |   | (3,486  | )
|                                                              |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  
|Total operating expenses, net                                 |  |          | 114     |                       |   |                         |   |                                   | 150,423 |             |   | 785   |   |   |        |   |   | 151,322 |  
|                                                              |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  
|Operating (loss) income                                       |  |          | (114    | )                     |   |                         |   |                                   | 26,306  |             |   | (785  | ) |   |        |   |   | 25,407  |  
|Interest expense                                              |  |          | 30,880  |                       |   | 13,636                   |   |                                   |        |             |   | 1     |   |   | (13,636 | ) |   | 30,881  |  
|Interest income                                               |  |          |        |                       |   |                         |   |                                   | (9,626  | )           |   | (5    | ) |   |        |   |   | (9,631  | )
|Gain on derivative financial instruments                      |  |          | (173    | )                     |   |                         |   |                                   |        |             |   | (26   | ) |   |        |   |   | (199    | )
|                                                              |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  
|(Loss) income before income taxes and
noncontrolling interest |  |          | (30,821 | )                     |   | (13,636                  | ) |                                   | 35,932  |             |   | (755  | ) |   | 13,636  |   |   | 4,356   |  
|Benefit for income taxes                                      |  |          |        |                       |   |                         |   |                                   | (94     | )           |   |      |   |   |        |   |   | (94     | )
|                                                              |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  
|(Loss) income before noncontrolling
interest                  |  |          | (30,821 | )                     |   | (13,636                  | ) |                                   | 36,026  |             |   | (755  | ) |   | 13,636  |   |   | 4,450   |  
|Equity in earnings of unconsolidated subsidiaries             |  |          | 35,637  |                       |   |                         |   |                                   |        |             |   |      |   |   | (35,637 | ) |   |        |  
|Noncontrolling interest in Joint Venture loss                 |  |          |        |                       |   |                         |   |                                   |        |             |   | 366   |   |   |        |   |   | 366     |  
|                                                              |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  
|Net income (loss)                                             |  | $        | 4,816   |                       | $ | (13,636                  | ) | $                                 | 36,026  |             | $ | (389  | ) | $ | (22,001 | ) | $ | 4,816   |  
|                                                              |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  

|   |                                                                                                                                                                                                                                                                                                                               
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | Both the Parent and the
  Subsidiary Issuer are co-issuers of $100,000 in Second Lien Notes.
  Accordingly, such indebtedness has been presented as an obligation of both
  entities in the above consolidating balance sheet. In addition, the related
  deferred financing costs are presented as an asset of both entities.
|   |                                                                                                                                                                                                                                                                                                                               
|** | Consists of the Joint
  Venture and the Partnerships wholly-owned subsidiary that owns its
  investment in the Joint Venture.                                                                                                                                                                                                

F - 51

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

U.S. Shipping Partners L.P.
Unaudited Consolidating Statement of Operations 
Year Ended December 31, 2006 
( in thousands)

|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  
|------------------------------------------------------- |  | -------- | ------- | --------------------- | - | ------------------------ | - | --------------------------------- | ------- | ----------- | - | ----- | - | - | ------- | - | - | ------- | -
|                                                        |  | Parent * |         | Subsidiary
  Issuer * |   | Guarantor
  Subsidiaries |   | Non-
  Guarantor
  Subsidiaries** |         | Adjustments |   | Total |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |       |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |       |  
|Revenues                                                |  | $        |        |                       | $ |                         |   | $                                 | 150,133 |             | $ |      |   | $ |        |   | $ | 150,133 |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  
|Operating expenses                                      |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  
|Vessel operating expenses                               |  |          |        |                       |   |                         |   |                                   | 59,493  |             |   |      |   |   |        |   |   | 59,493  |  
|Voyage expenses                                         |  |          |        |                       |   |                         |   |                                   | 27,506  |             |   |      |   |   |        |   |   | 27,506  |  
|General and administrative expenses                     |  |          | 250     |                       |   |                         |   |                                   | 12,524  |             |   | 765   |   |   |        |   |   | 13,539  |  
|Depreciation and amortization                           |  |          |        |                       |   |                         |   |                                   | 31,305  |             |   |      |   |   |        |   |   | 31,305  |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  
|Total operating expenses                                |  |          | 250     |                       |   |                         |   |                                   | 130,828 |             |   | 765   |   |   |        |   |   | 131,843 |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  
|Operating income (loss)                                 |  |          | (250    | )                     |   |                         |   |                                   | 19,305  |             |   | (765  | ) |   |        |   |   | 18,290  |  
|Interest expense                                        |  |          | 16,634  |                       |   | 5,541                    |   |                                   |        |             |   |      |   |   | (5,541  | ) |   | 16,634  |  
|Interest income                                         |  |          |        |                       |   |                         |   |                                   | (5,413  | )           |   |      |   |   |        |   |   | (5,413  | )
|Loss on debt extinguishment                             |  |          | 2,451   |                       |   |                         |   |                                   |        |             |   |      |   |   |        |   |   | 2,451   |  
|Gain on termination of hedge                            |  |          | (1,913  | )                     |   |                         |   |                                   |        |             |   |      |   |   |        |   |   | (1,913  | )
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  
|Income (loss) before income taxes and minority
interest |  |          | (17,422 | )                     |   | (5,541                   | ) |                                   | 24,718  |             |   | (765  | ) |   | 5,541   |   |   | 6,531   |  
|Provision for income taxes                              |  |          |        |                       |   |                         |   |                                   | 1,077   |             |   |      |   |   |        |   |   | 1,077   |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  
|Income (loss) before minority interest                  |  |          | (17,422 | )                     |   | (5,541                   | ) |                                   | 23,641  |             |   | (765  | ) |   | 5,541   |   |   | 5,454   |  
|Equity in earnings of unconsolidated affiliates         |  |          | 23,297  |                       |   |                         |   |                                   |        |             |   |      |   |   | (23,297 | ) |   |        |  
|Minority interest in Joint Venture losses               |  |          |        |                       |   |                         |   |                                   |        |             |   | 421   |   |   |        |   |   | 421     |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  
|Net income (loss)                                       |  | $        | 5,875   |                       | $ | (5,541                   | ) | $                                 | 23,641  |             | $ | (344  | ) | $ | (17,756 | ) | $ | 5,875   |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |       |   |   |         |   |   |         |  

|   |                                                                                                                                                                                                                                                                                                                               
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | Both the Parent and the
  Subsidiary Issuer are co-issuers of $100,000 in Second Lien Notes.
  Accordingly, such indebtedness has been presented as an obligation of both
  entities in the above consolidating balance sheet. In addition, the related
  deferred financing costs are presented as an asset of both entities.
|   |                                                                                                                                                                                                                                                                                                                               
|** | Consists of the Joint
  Venture and the Partnerships wholly-owned subsidiary that owns its
  investment in the Joint Venture.                                                                                                                                                                                                

F - 52

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

U.S. Shipping Partners L.P.
Unaudited Consolidating Statement of Cash Flows 
For the Twelve Months Ended December 31, 2008 
(in thousands)

|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |          |   |   |         |   |   |          |  
|------------------------------------------------------------------------------------------------------- |  | -------- | -------- | --------------------- | - | ------------------------ | - | --------------------------------- | -------- | ----------- | - | -------- | - | - | ------- | - | - | -------- | -
|                                                                                                        |  | Parent * |          | Subsidiary
  Issuer * |   | Guarantor
  Subsidiaries |   | Non-
  Guarantor
  Subsidiaries** |          | Adjustments |   | Total    |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |          |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |          |  
|Cash flows from operating activities                                                                    |  |          |          |                       |   |                          |   |                                   |          |             |   |          |   |   |         |   |   |          |  
|Net (loss) income                                                                                       |  | $        | (133,251 | )                     | $ | (16,199                  | ) | $                                 | (77,940  | )           | $ | (10,797  | ) | $ | 104,936 |   | $ | (133,251 | )
|Adjustments to reconcile net (loss) income to net cash (used in)
  provided by operating activities     |  |          |          |                       |   |                          |   |                                   |          |             |   |          |   |   |         |   |   |          |  
|Depreciation of vessels and equipment, and
amortization of drydock
  costs and deferred financing costs |  |          | 8,148    |                       |   | 3,199                    |   |                                   | 38,145   |             |   | 6,910    |   |   | (3,199  | ) |   | 53,203   |  
|Impairment charge                                                                                       |  |          |         |                       |   |                         |   |                                   | 80,870   |             |   |         |   |   |        |   |   | 80,870   |  
|Loss on vessels sold                                                                                    |  |          |         |                       |   |                          |   |                                   | 1,650    |             |   |          |   |   |         |   |   | 1,650    |  
|Interest added to debt outstanding                                                                      |  |          |         |                       |   |                         |   |                                   | 945      |             |   |         |   |   |        |   |   | 945      |  
|Nonrecurring insurance charge                                                                           |  |          |          |                       |   |                          |   |                                   | 1,305    |             |   |          |   |   |         |   |   | 1,305    |  
|Loss on sale of surplus equipment                                                                       |  |          |         |                       |   |                         |   |                                   | 120      |             |   |         |   |   |        |   |   | 120      |  
|Equity compensation                                                                                     |  |          | 183      |                       |   |                         |   |                                   |         |             |   |         |   |   |        |   |   | 183      |  
|Provision for accounts receivable                                                                       |  |          |         |                       |   |                         |   |                                   | 1,404    |             |   |         |   |   |        |   |   | 1,404    |  
|Noncontrolling interest in Joint Venture
loss                                                           |  |          |         |                       |   |                         |   |                                   |         |             |   | 787      |   |   |        |   |   | 787      |  
|Loss on derivative financial instruments                                                                |  |          | 6,056    |                       |   |                         |   |                                   |         |             |   | 1,175    |   |   |        |   |   | 7,231    |  
|Deferred income taxes                                                                                   |  |          |         |                       |   |                         |   |                                   | (1,435   | )           |   |         |   |   |        |   |   | (1,435   | )
|Capitalized drydock costs                                                                               |  |          |         |                       |   |                         |   |                                   | (9,696   | )           |   |         |   |   |        |   |   | (9,696   | )
|Equity in earnings of unconsolidated
subsidiaries                                                       |  |          | 88,737   |                       |   |                         |   |                                   |         |             |   |         |   |   | (88,737 | ) |   |         |  
|Changes in assets and liabilities:                                                                      |  |          |          |                       |   |                          |   |                                   |          |             |   |          |   |   |         |   |   |          |  
|Accounts receivable                                                                                     |  |          |         |                       |   |                         |   |                                   | 5,174    |             |   |         |   |   |        |   |   | 5,174    |  
|Prepaid expenses and other current assets                                                               |  |          |         |                       |   |                         |   |                                   | (8,151   | )           |   |         |   |   |        |   |   | (8,151   | )
|Other assets                                                                                            |  |          |         |                       |   |                         |   |                                   | 858      |             |   | (300     | ) |   |        |   |   | 558      |  
|Accounts payable                                                                                        |  |          |         |                       |   |                         |   |                                   | (4,438   | )           |   |         |   |   |        |   |   | (4,438   | )
|Deferred revenue                                                                                        |  |          |         |                       |   |                         |   |                                   | 4,972    |             |   |         |   |   |        |   |   | 4,972    |  
|Accrued expenses and other liabilities                                                                  |  |          |         |                       |   |                         |   |                                   | 11,598   |             |   | 119      |   |   |        |   |   | 11,717   |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |          |   |   |         |   |   |          |  
|Net cash (used in) provided by operating
activities                                                     |  |          | (30,127  | )                     |   | (13,000                  | ) |                                   | 45,381   |             |   | (2,106   | ) |   | 13,000  |   |   | 13,148   |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |          |   |   |         |   |   |          |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |          |   |   |         |   |   |          |  
|Cash flows from investing activities                                                                    |  |          |          |                       |   |                          |   |                                   |          |             |   |          |   |   |         |   |   |          |  
|Change in restricted cash and equivalents, net                                                          |  |          |         |                       |   |                         |   |                                   | 117,716  |             |   |         |   |   |        |   |   | 117,716  |  
|Sale of surplus equipment                                                                               |  |          |         |                       |   |                         |   |                                   | 280      |             |   |         |   |   |        |   |   | 280      |  
|Construction of vessels and equipment                                                                   |  |          |         |                       |   |                         |   |                                   | (103,761 | )           |   | (232,950 | ) |   |        |   |   | (336,711 | )
|Gain on derivative financial instruments                                                                |  |          | 827      |                       |   |                         |   |                                   |         |             |   |         |   |   |        |   |   | 827      |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |          |   |   |         |   |   |          |  
|Net cash provided by (used in) investing
activities                                                     |  |          | 827      |                       |   |                         |   |                                   | 14,235   |             |   | (232,950 | ) |   |        |   |   | (217,888 | )
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |          |   |   |         |   |   |          |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |          |   |   |         |   |   |          |  
|Cash flows from financing activities                                                                    |  |          |          |                       |   |                          |   |                                   |          |             |   |          |   |   |         |   |   |          |  
|Proceeds from borrowings                                                                                |  |          | 21,848   |                       |   |                         |   |                                   |         |             |   |         |   |   |        |   |   | 21,848   |  
|Proceeds from Joint Venture revolver borrowings                                                         |  |          |         |                       |   |                         |   |                                   |         |             |   | 135,492  |   |   |        |   |   | 135,492  |  
|Contribution by noncontrolling interest equity investors in Joint
  Ventur                              |  |          |         |                       |   |                         |   |                                   |         |             |   | 99,572   |   |   | (39,829 | ) |   | 59,743   |  
|Proceeds from revolving borrowings                                                                      |  |          |         |                       |   |                         |   |                                   |         |             |   |         |   |   |        |   |   |         |  
|Deferred financing costs                                                                                |  |          | (814     | )                     |   |                         |   |                                   |         |             |   |         |   |   |        |   |   | (814     | )
|Repayment of debt                                                                                       |  |          | (2,325   | )                     |   |                         |   |                                   |         |             |   |         |   |   |        |   |   | (2,325   | )
|Intercompany receivable / payable                                                                       |  |          | 20,800   |                       |   | 13,000                   |   |                                   | (60,629  | )           |   |         |   |   | 26,829  |   |   |         |  
|Distributions to partners                                                                               |  |          | (10,209  | )                     |   |                         |   |                                   |         |             |   |         |   |   |        |   |   | (10,209  | )
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |          |   |   |         |   |   |          |  
|Net cash provided by (used in) financing
activities                                                     |  | $        | 29,300   |                       | $ | 13,000                   |   | $                                 | (60,629  | )           | $ | 235,064  |   | $ | (13,000 | ) | $ | 203,735  |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |          |   |   |         |   |   |          |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |          |   |   |         |   |   |          |  
|Net increase (decrease) in cash and cash equivalents                                                    |  |          |         |                       |   |                         |   |                                   | (1,013   | )           |   | 8        |   |   |        |   |   | (1,005   | )
|Cash and cash equivalents at beginning of period                                                        |  |          |         |                       |   |                         |   |                                   | 21,596   |             |   | 8        |   |   |        |   |   | 21,604   |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |          |   |   |         |   |   |          |  
|Cash and cash equivalents at end of period                                                              |  | $        |         |                       | $ |                         |   | $                                 | 20,583   |             | $ | 16       |   | $ |        |   | $ | 20,599   |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |          |   |   |         |   |   |          |  

|   |                                                                                                                                                                                                                                                                                                                                               
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | Both the Parent and the
  Subsidiary Issuer are co-issuers of $100,000 in Second Lien Notes.
  Accordingly, such indebtedness has been presented as an obligation of both
  entities in the above consolidating balance sheet. In addition, the remaining
  net related deferred financing costs are presented as an asset of both
  entities.
|   |                                                                                                                                                                                                                                                                                                                                               
|** | Consists of the Joint
  Venture and the Partnerships wholly-owned subsidiary that owns its
  investment in the Joint Venture.                                                                                                                                                                                                                

F - 53

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

U.S. Shipping Partners L.P.
Unaudited Consolidating Statement of Cash Flows 
For the Year Ended December 31, 2007 
(in thousands)

|                                                                                                        |  |          |         |                       |   |                          |   |                                   |          |             |   |         |   |   |         |   |   |          |  
|------------------------------------------------------------------------------------------------------- |  | -------- | ------- | --------------------- | - | ------------------------ | - | --------------------------------- | -------- | ----------- | - | ------- | - | - | ------- | - | - | -------- | -
|                                                                                                        |  | Parent * |         | Subsidiary
  Issuer * |   | Guarantor
  Subsidiaries |   | Non-
  Guarantor
  Subsidiaries** |          | Adjustments |   | Total   |  
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |          |             |   |         |  
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |          |             |   |         |  
|Cash flows from operating activities                                                                    |  |          |         |                       |   |                          |   |                                   |          |             |   |         |   |   |         |   |   |          |  
|Net income (loss)                                                                                       |  | $        | 4,816   |                       | $ | (13,636                  | ) | $                                 | 36,026   |             | $ | (389    | ) | $ | (22,001 | ) | $ | 4,816    |  
|Adjustments to reconcile net income (loss) to net cash provided by
  (used in) operating activities     |  |          |         |                       |   |                          |   |                                   |          |             |   |         |   |   |         |   |   |          |  
|Depreciation of vessels and equipment, and
amortization of drydock
  costs and deferred financing costs |  |          | 1,722   |                       |   | 636                      |   |                                   | 37,794   |             |   |        |   |   | (636    | ) |   | 39,516   |  
|Provision for accounts receivable                                                                       |  |          |        |                       |   |                         |   |                                   | 755      |             |   |        |   |   |        |   |   | 755      |  
|Equity compensation                                                                                     |  |          | 114     |                       |   |                         |   |                                   |         |             |   |        |   |   |        |   |   | 114      |  
|Gain on derivative financial instruments                                                                |  |          | (173    | )                     |   |                         |   |                                   |         |             |   | (26     | ) |   |        |   |   | (199     | )
|Minority interest in Joint Venture loss                                                                 |  |          |        |                       |   |                         |   |                                   |         |             |   | (366    | ) |   |        |   |   | (366     | )
|Deferred income taxes                                                                                   |  |          |        |                       |   |                         |   |                                   | (1,141   | )           |   |        |   |   |        |   |   | (1,141   | )
|Capitalized drydock costs                                                                               |  |          |        |                       |   |                         |   |                                   | (14,122  | )           |   |        |   |   |        |   |   | (14,122  | )
|Equity in earnings of unconsolidated
subsidiaries                                                       |  |          | (35,637 | )                     |   |                         |   |                                   |         |             |   |        |   |   | 35,637  |   |   |         |  
|Changes in assets and liabilities:                                                                      |  |          |         |                       |   |                          |   |                                   |          |             |   |         |   |   |         |   |   |          |  
|Accounts receivable                                                                                     |  |          |        |                       |   |                         |   |                                   | (2,751   | )           |   |        |   |   |        |   |   | (2,751   | )
|Prepaid expenses and other current assets                                                               |  |          |        |                       |   |                         |   |                                   | (4,497   | )           |   | (300    | ) |   |        |   |   | (4,797   | )
|Other assets                                                                                            |  |          |        |                       |   |                         |   |                                   | 536      |             |   |        |   |   |        |   |   | 536      |  
|Accounts payable                                                                                        |  |          |        |                       |   |                         |   |                                   | 2,598    |             |   |        |   |   |        |   |   | 2,598    |  
|Deferred revenue                                                                                        |  |          |        |                       |   |                         |   |                                   | 15       |             |   |        |   |   |        |   |   | 15       |  
|Accrued expenses and other liabilities                                                                  |  |          |        |                       |   |                         |   |                                   | 2,865    |             |   | 200     |   |   |        |   |   | 3,065    |  
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |          |             |   |         |   |   |         |   |   |          |  
|Net cash (used in) provided by operating
activities                                                     |  |          | (29,158 | )                     |   | (13,000                  | ) |                                   | 58,078   |             |   | (881    | ) |   | 13,000  |   |   | 28,039   |  
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |          |             |   |         |   |   |         |   |   |          |  
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |          |             |   |         |   |   |         |   |   |          |  
|Cash flows from investing activities                                                                    |  |          |         |                       |   |                          |   |                                   |          |             |   |         |   |   |         |   |   |          |  
|Change in restricted cash and equivalents, net                                                          |  |          |        |                       |   |                         |   |                                   | 85,665   |             |   |        |   |   |        |   |   | 85,665   |  
|Cash received upon settlement of derivative financial
instruments                                       |  |          | 173     |                       |   |                         |   |                                   |         |             |   |        |   |   |        |   |   | 173      |  
|Purchase of interest rate cap                                                                           |  |          |        |                       |   |                         |   |                                   |         |             |   | (1,924  | ) |   |        |   |   | (1,924   | )
|Payments to Hess, net                                                                                   |  |          |        |                       |   |                         |   |                                   | (3,298   | )           |   |        |   |   |        |   |   | (3,298   | )
|Construction of vessels and equipment                                                                   |  |          |        |                       |   |                         |   |                                   | (112,225 | )           |   | (48,958 | ) |   |        |   |   | (161,183 | )
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |          |             |   |         |   |   |         |   |   |          |  
|Net cash provided by (used in) investing
activities                                                     |  |          | 173     |                       |   |                         |   |                                   | (29,858  | )           |   | (50,882 | ) |   |        |   |   | (80,567  | )
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |          |             |   |         |   |   |         |   |   |          |  
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |          |             |   |         |   |   |         |   |   |          |  
|Cash flows from financing activities                                                                    |  |          |         |                       |   |                          |   |                                   |          |             |   |         |   |   |         |   |   |          |  
|Proceeds from borrowings                                                                                |  |          | 54,000  |                       |   |                         |   |                                   |         |             |   |        |   |   |        |   |   | 54,000   |  
|Proceeds from Joint Venture revolver borrowings                                                         |  |          |        |                       |   |                         |   |                                   |         |             |   | 24,923  |   |   |        |   |   | 24,923   |  
|Contribution by minority interest equity investors in Joint
Venture                                     |  |          |        |                       |   |                         |   |                                   |         |             |   | 26,848  |   |   | (10,739 | ) |   | 16,109   |  
|Proceeds from revolving borrowings                                                                      |  |          | 13,000  |                       |   |                         |   |                                   |         |             |   |        |   |   |        |   |   | 13,000   |  
|Deferred financing costs                                                                                |  |          | (158    | )                     |   |                         |   |                                   |         |             |   |        |   |   |        |   |   | (158     | )
|Repayment of debt                                                                                       |  |          | (2,938  | )                     |   |                         |   |                                   |         |             |   |        |   |   |        |   |   | (2,938   | )
|Intercompany receivable / payable                                                                       |  |          | (1,429  | )                     |   | 13,000                   |   |                                   | (9,310   | )           |   |        |   |   | (2,261  | ) |   |         |  
|Distributions to partners                                                                               |  |          | (33,490 | )                     |   |                         |   |                                   |         |             |   |        |   |   |        |   |   | (33,490  | )
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |          |             |   |         |   |   |         |   |   |          |  
|Net cash provided by (used in) financing
activities                                                     |  | $        | 28,985  |                       | $ | 13,000                   |   | $                                 | (9,310   | )           | $ | 51,771  |   | $ | (13,000 | ) | $ | 71,446   |  
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |          |             |   |         |   |   |         |   |   |          |  
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |          |             |   |         |   |   |         |   |   |          |  
|Net increase in cash and cash equivalents                                                               |  |          |        |                       |   |                         |   |                                   | 18,910   |             |   | 8       |   |   |        |   |   | 18,918   |  
|Cash and cash equivalents at beginning of year                                                          |  |          |        |                       |   |                         |   |                                   | 2,686    |             |   |        |   |   |        |   |   | 2,686    |  
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |          |             |   |         |   |   |         |   |   |          |  
|Cash and cash equivalents at end of year                                                                |  | $        |        |                       | $ |                         |   | $                                 | 21,596   |             | $ | 8       |   | $ |        |   | $ | 21,604   |  
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |          |             |   |         |   |   |         |   |   |          |  

|   |                                                                                                                                                                                                                                                                                                                               
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | Both the Parent and the
  Subsidiary Issuer are co-issuers of $100,000 in Second Lien Notes.
  Accordingly, such indebtedness has been presented as an obligation of both
  entities in the above consolidating balance sheet. In addition, the related
  deferred financing costs are presented as an asset of both entities.
|   |                                                                                                                                                                                                                                                                                                                               
|** | Consists of the Joint
  Venture and the Partnerships wholly-owned subsidiary that owns its
  investment in the Joint Venture.                                                                                                                                                                                                

F - 54

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

U.S. Shipping Partners L.P.
Unaudited Consolidating Statement of Cash Flows 
For the Year Ended December 31, 2006 
(in thousands)

|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |         |   |   |          |   |   |          |  
|------------------------------------------------------------------------------------------------------- |  | -------- | -------- | --------------------- | - | ------------------------ | - | --------------------------------- | -------- | ----------- | - | ------- | - | - | -------- | - | - | -------- | -
|                                                                                                        |  | Parent * |          | Subsidiary
  Issuer * |   | Guarantor
  Subsidiaries |   | Non-
  Guarantor
  Subsidiaries** |          | Adjustments |   | Total   |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |         |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |         |  
|Cash flows from operating activities                                                                    |  |          |          |                       |   |                          |   |                                   |          |             |   |         |   |   |          |   |   |          |  
|Net income (loss)                                                                                       |  | $        | 5,875    |                       | $ | (5,541                   | ) | $                                 | 23,641   |             | $ | (344    | ) | $ | (17,756  | ) | $ | 5,875    |  
|Adjustments to reconcile net income (loss) to net cash provided by
  (used in) operating activities     |  |          |          |                       |   |                          |   |                                   |          |             |   |         |   |   |          |   |   |          |  
|Depreciation of vessels and equipment, and
amortization of drydock
  costs and deferred financing costs |  |          | 1,170    |                       |   | 269                      |   |                                   | 31,305   |             |   |        |   |   | (269     | ) |   | 32,475   |  
|Deferred income taxes                                                                                   |  |          |         |                       |   |                         |   |                                   | 1,533    |             |   |        |   |   |         |   |   | 1,533    |  
|Capitalized drydock costs                                                                               |  |          |         |                       |   |                         |   |                                   | (31,082  | )           |   |        |   |   |         |   |   | (31,082  | )
|Gain on derivative financial instruments                                                                |  |          | (1,913   | )                     |   |                         |   |                                   |         |             |   |        |   |   |         |   |   | (1,913   | )
|Loss on debt extinguishment                                                                             |  |          | 2,451    |                       |   |                         |   |                                   |         |             |   |        |   |   |         |   |   | 2,451    |  
|Equity in earnings of unconsolidated
affiliates                                                         |  |          | (23,297  | )                     |   |                         |   |                                   |         |             |   |        |   |   | 23,297   |   |   |         |  
|Minority interest in Joint Venture loss                                                                 |  |          |         |                       |   |                         |   |                                   |         |             |   | (421    | ) |   |         |   |   | (421     | )
|Provision for accounts receivable                                                                       |  |          |         |                       |   |                         |   |                                   | 137      |             |   |        |   |   |         |   |   | 137      |  
|Changes in assets and liabilities                                                                       |  |          |          |                       |   |                          |   |                                   |          |             |   |         |   |   |          |   |   |          |  
|Accounts receivable                                                                                     |  |          |         |                       |   |                         |   |                                   | (2,631   | )           |   |        |   |   |         |   |   | (2,631   | )
|Prepaid expenses and other current assets                                                               |  |          |         |                       |   |                         |   |                                   | (1,982   | )           |   | (315    | ) |   |         |   |   | (2,297   | )
|Other assets                                                                                            |  |          |         |                       |   |                         |   |                                   | (137     | )           |   |        |   |   |         |   |   | (137     | )
|Accounts payable                                                                                        |  |          |         |                       |   |                         |   |                                   | 4,804    |             |   |        |   |   |         |   |   | 4,804    |  
|Deferred revenue                                                                                        |  |          |         |                       |   |                         |   |                                   | 1,178    |             |   |        |   |   |         |   |   | 1,178    |  
|Accrued expenses and other liabilities                                                                  |  |          |         |                       |   |                         |   |                                   | 7,858    |             |   | 373     |   |   |         |   |   | 8,231    |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |         |   |   |          |   |   |          |  
|Net cash (used in) provided by operating
activities                                                     |  |          | (15,714  | )                     |   | (5,272                   | ) |                                   | 34,624   |             |   | (707    | ) |   | 5,272    |   |   | 18,203   |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |         |   |   |          |   |   |          |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |         |   |   |          |   |   |          |  
|Cash flows from investing activities                                                                    |  |          |          |                       |   |                          |   |                                   |          |             |   |         |   |   |          |   |   |          |  
|Proceeds from Senesco settlement                                                                        |  |          |         |                       |   |                         |   |                                   | 21,000   |             |   |        |   |   |         |   |   | 21,000   |  
|Construction of vessels and equipment                                                                   |  |          |         |                       |   |                         |   |                                   | (84,448  | )           |   | (32,644 | ) |   |         |   |   | (117,092 | )
|Purchase of office furniture, equipment and other                                                       |  |          |         |                       |   |                         |   |                                   | (317     | )           |   |        |   |   |         |   |   | (317     | )
|Change in restricted cash and equivalents, net                                                          |  |          |         |                       |   |                         |   |                                   | (210,947 | )           |   |        |   |   |         |   |   | (210,947 | )
|Payments to Hess, net                                                                                   |  |          |         |                       |   |                         |   |                                   | (484     | )           |   |        |   |   |         |   |   | (484     | )
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |         |   |   |          |   |   |          |  
|Net cash used in investing activities                                                                   |  |          |         |                       |   |                         |   |                                   | (275,196 | )           |   | (32,644 | ) |   |         |   |   | (307,840 | )
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |         |   |   |          |   |   |          |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |         |   |   |          |   |   |          |  
|Cash flows from financing activities                                                                    |  |          |          |                       |   |                          |   |                                   |          |             |   |         |   |   |          |   |   |          |  
|Proceeds from issuance of debt                                                                          |  |          | 356,000  |                       |   | 100,000                  |   |                                   |         |             |   |        |   |   | (100,000 | ) |   | 356,000  |  
|Gross proceeds from equity issuance                                                                     |  |          | 79,084   |                       |   |                         |   |                                   |         |             |   |        |   |   |         |   |   | 79,084   |  
|Proceeds from revolver borrowings                                                                       |  |          | 25,000   |                       |   |                         |   |                                   |         |             |   |        |   |   |         |   |   | 25,000   |  
|Contribution by minority interest equity investors in Joint
Venture                                     |  |          |         |                       |   |                         |   |                                   |         |             |   | 48,581  |   |   | (19,433  | ) |   | 29,148   |  
|Proceeds from Joint Venture revolver borrowings                                                         |  |          |         |                       |   |                         |   |                                   |         |             |   | 16,307  |   |   |         |   |   | 16,307   |  
|Repayment of debt                                                                                       |  |          | (129,302 | )                     |   |                         |   |                                   |         |             |   |        |   |   |         |   |   | (129,302 | )
|Repayment of revolver borrowings                                                                        |  |          | (25,000  | )                     |   |                         |   |                                   |         |             |   |        |   |   |         |   |   | (25,000  | )
|Deferred financing costs                                                                                |  |          | (11,586  | )                     |   | (5,013                   | ) |                                   |         |             |   | (12,960 | ) |   | 5,013    |   |   | (24,546  | )
|Partnership equity offering costs                                                                       |  |          | (2,785   | )                     |   |                         |   |                                   |         |             |   |        |   |   |         |   |   | (2,785   | )
|Joint Venture equity offering expenses, net                                                             |  |          | (2,931   | )                     |   |                         |   |                                   |         |             |   | (18,577 | ) |   | 7,431    |   |   | (14,077  | )
|Intercompany receivable/payable                                                                         |  |          | (245,260 | )                     |   | (89,715                  | ) |                                   | 233,258  |             |   |        |   |   | 101,717  |   |   |         |  
|Proceeds from hedge termination                                                                         |  |          | 1,913    |                       |   |                         |   |                                   |         |             |   |        |   |   |         |   |   | 1,913    |  
|Distributions to partners                                                                               |  |          | (29,419  | )                     |   |                         |   |                                   |         |             |   |        |   |   |         |   |   | (29,419  | )
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |         |   |   |          |   |   |          |  
|Net cash provided by financing
activities                                                               |  |          | 15,714   |                       |   | 5,272                    |   |                                   | 233,258  |             |   | 33,351  |   |   | (5,272   | ) |   | 282,323  |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |         |   |   |          |   |   |          |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |         |   |   |          |   |   |          |  
|Net decrease in cash and cash equivalents                                                               |  |          |         |                       |   |                         |   |                                   | (7,314   | )           |   |        |   |   |         |   |   | (7,314   | )
|Cash and cash equivalents at beginning of year                                                          |  |          |         |                       |   |                         |   |                                   | 10,000   |             |   |        |   |   |         |   |   | 10,000   |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |         |   |   |          |   |   |          |  
|Cash and cash equivalents at end of year                                                                |  | $        |         |                       | $ |                         |   | $                                 | 2,686    |             | $ |        |   | $ |         |   | $ | 2,686    |  
|                                                                                                        |  |          |          |                       |   |                          |   |                                   |          |             |   |         |   |   |          |   |   |          |  

|   |                                                                                                                                                                                                                                             
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | Both the Parent and the
  Subsidiary Issuer are co-issuers of $100,000 in Notes. Accordingly, the cash
  flows related to the Notes have been presented as cash flows of both entities
  in the above consolidating statement of cash flows.
|   |                                                                                                                                                                                                                                             
|** | Consists of the Joint
  Venture and the Partnerships wholly-owned subsidiary that owns its
  investment in the Joint Venture.                                                                                                              

F - 55

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

|    |                  
|--- | -----------------
|23. | Subsequent Events

Other
Events

The
Partnership did not make the $6,500 interest payment due on February 15, 2009
in respect of the Second Lien Notes. Under the terms of the Indenture, dated
August 7, 2006 (the Indenture), governing the Second Lien Notes, the Partnership
had a grace period of 30 days from the payment due date with respect to the
interest payment before the nonpayment became an event of default under the
Indenture. There is no right to accelerate the obligations under the Second
Lien Notes based on the nonpayment unless interest remains unpaid upon
expiration of the grace period. In the event that the interest payment is not
made prior to the expiration of the 30-day grace period, then the aggregate
principal amount of the Second Lien Notes, plus the unpaid interest payment and
any other amounts due and owing on the Second Lien Notes could be declared
immediately due and payable by the Trustee under the Indenture or by holders of
25% or more of the aggregate principal amount of the Second Lien Notes. In
February 2009, holders of $91,290 of the Second Lien Notes, representing 91.29%
of the Second Lien Notes, delivered letters to the Partnership waiving their
February 15, 2009 interest payment on the Second Lien Notes, and all future
interest payments on the Second Lien Notes, until the earlier of six months
following repayment in full of all amounts outstanding under the Senior Credit
Facility and the Partnership seeking bankruptcy protection. On March 17, 2009,
the Partnership provided $566 to the trustee to pay the interest due on the
$8,710 principal amount of the Second Lien Notes that had not waived their
February 15, 2009 interest payment.

The
rights of the holders of the Second Lien Notes with respect to the collateral
securing such Second Lien Notes are substantially limited pursuant to the terms
of the lien-ranking agreements set forth in the Indenture and in the
intercreditor agreement between, among others, the trustee for the Second Lien
Notes and the collateral agent under the Partnerships Senior Credit Facility.
Under those lien-ranking agreements, at any time that obligations under the
Senior Credit Facility that have the benefit of the first priority liens are
outstanding, any actions that may be taken in respect of the collateral,
including the ability to cause the commencement of enforcement proceedings
against the collateral and to control the conduct of such proceedings, and the
approval of amendments to and waivers of past default under the collateral
documents, will be at the direction of the lenders under the Senior Credit
Facility and holders of any other obligations secured by the first priority
liens. As a result, the trustee, on behalf of the holders of the Second Lien
Notes, will not have the ability to commence, control or direct such actions,
even if the rights of the holders of the Second Lien Notes are adversely
affected.

Failure
to make the interest payment on the Second Lien Notes within the 30-day grace
period also constituted an event of default under the Partnerships Senior
Credit Facility, which would allow the lenders thereunder to declare the
Partnerships obligations under the Senior Credit Facility immediately due and
payable and to exercise their rights and remedies under the Senior Credit Facility.
As described above, the lenders under the Senior Credit Facility agreed to
forbear exercising their remedies as a result of the Partnerships non-payment
of this interest for a specified period of time.

As
a result of our filing of the Bankruptcy Cases, the counterparties under our
interest rate swap agreements early terminated those agreements.

Litigation
with Joint Venture Investors

In
February 2009 the Partnership received a notice from certain of the Joint
Venture Investors:

| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)  | declaring
  that a Board Reduction Event (as such term is defined in the Joint Ventures
  Limited Liability Company Agreement) had occurred and purporting to remove
  Product Carriers as the Managing Member of the Joint Venture and designating
  one of the Joint Venture Investors as the Managing Member of the Joint
  Venture, and                                                                                                                                                                                                                               
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (ii) | declaring
  that a Manager Termination Event (as such term is defined in that certain
  Management and Operating Agreement, dated as of August 7, 2006, by and among
  Product Manager, the Joint Venture and the other parties thereto (the
  Management Agreement)) had occurred and purporting to terminate Product
  Managers right to provide management and operating services under the
  Management Agreement with respect to all vessels owned by the Joint Venture
  other than the Golden State
  (the only vessel then being operated by the Joint Venture).

F - 56

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

In
addition, in February 2009 the Partnership has received a notice from the agent
for the lenders to the Joint Venture (together with the Joint Venture Investors
the Defendants) asserting events of default under the Revolver have occurred
and that the lenders were intending to foreclose on the Golden Statevessel owned by the Joint
Venture that the Partnership is managing pursuant to the Management Agreement.

In
April 2009 the Partnership commenced a lawsuit (the New York Action) against
the Joint Venture Investors seeking a judgment declaring that:

| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)   | no Board
  Reduction Event has occurred;                                                                                                                                                                                                                                                                                                                                                                                                          
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (ii)  | the
  purported removal of Product Carriers as the Managing Member of the Joint
  Venture and designating one of the Joint Venture Investors as the Managing
  Member of the Joint Venture was unauthorized and invalid and that Product
  Carriers remains the Managing Member of the Joint Venture;                                                                                                                                             
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (iii) | no Manager
  Termination Event has occurred; and                                                                                                                                                                                                                                                                                                                                                                                                  
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (iv)  | the
  purported termination of Product Managers right to provide management and
  operating services under the Management Agreement with respect to all vessels
  owned by the Joint Venture other than the vessel Golden State was unauthorized and invalid and that Product
  Manager retains the right to provide management and operating services under
  the Management Agreement with respect to all vessels owned by the Joint
  Venture.

The
Partnerships lawsuit also sought a declaration that any commencement by the
lenders to the Joint Venture of foreclosure proceedings on the Golden State and the membership interests
in the Joint Ventures subsidiary that owns the vessel was unauthorized and
invalid.

Pending
a final determination of the lawsuit, the Partnership filed a motion for a
preliminary injunction seeking to enjoin Defendants from, among other things:

| |       |                                                                                                                                                                                                               
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)   | foreclosing
  upon the vessel Golden State or
  the membership interests in the Joint Ventures subsidiary that owns the vessel;                                                                              
| |       |                                                                                                                                                                                                               
| | (ii)  | interfering
  with Product Carriers functioning as the Managing Member of the Joint
  Venture; and                                                                                                           
| |       |                                                                                                                                                                                                               
| | (iii) | interfering
  with Product Managers supervision of the operation of the vessel Golden State or the construction or
  operation of the other four vessels currently being constructed for the Joint
  Venture.

The
Partnerships motion was scheduled to be heard on April 30, 2009. Pending such
hearing, the court, with Defendants consent, entered a temporary restraining
order which restrained Defendants from:

| |      |                                                                                                                                                                                                                                                                                         
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)  | foreclosing
  upon the vessel Golden State or
  the membership interests in the Joint Ventures subsidiary that owns the
  vessel except upon five business days prior notice, which notice could not be
  given before May 1, 2009; or                                                 
| |      |                                                                                                                                                                                                                                                                                         
| | (ii) | replacing
  Product Manager as vessel manager of the vessel Golden State and the other four vessels currently being
  constructed for the Joint Venture prior to May 7, 2009, with notice of
  replacement, if any, to be given at least five business days prior to such
  replacement.

The
Defendants counterclaimed for declaratory and injunctive relief and damages,
and cross-moved for a preliminary injunction to be heard at the same time as
our motion.

F - 57

---



U.S. Shipping Partners L.P. 
Notes to Consolidated Financial Statements 
Years Ended December 31, 2008, 2007 and 2006 
(dollars in thousands, except unit data)

On
April 29, 2009, in connection with our Bankruptcy Filing, we removed the New
York Action to the District Court for the Southern District of New York and the
litigation was subsequently transferred to the Bankruptcy Court. Also on April
29, 2009, we filed a complaint in the Bankruptcy Court and an Order to Show
Cause and Temporary Restraining Order, bringing on a Motion Pursuant to
Sections 362(a) and 105(a) of the Bankruptcy Code for an order (i) issuing a
temporary restraining order and scheduling a preliminary injunction hearing and
(ii) enforcing the automatic stay, or in the alternative, granting a preliminary
injunction (the Motion to Enforce). We asked the Bankruptcy Court for a
temporary restraining order to enjoin the Defendants from taking the actions
that were the subject of the New York Action until the Bankruptcy Court could
determine if such actions violated the automatic stay or, alternatively,
whether a preliminary injunction should be issued against the Defendants.
Pending a hearing on the Motion to Enforce we and the Defendants agreed on the
terms of the temporary restraining order temporarily prohibiting Defendants
from foreclosing on the assets of the Joint Venture or replacing us as manager
of the Joint Ventures vessels. We and the Defendants have reached an agreement
in principle to settle the litigation, subject to completion of definitive documentation
and Bankruptcy Court approval, that will result in our ceasing to be managing
member of the Joint Venture and manager of the Joint Ventures vessels.

NASSCO
Election to Market Construction Slots

The
Partnership has been advised by NASSCO, the shipyard building the product
tankers, that it is exercising its rights under the construction contract with
Product Carriers to use commercially reasonable efforts to sell and assign
Product Carriers rights under the construction contract to have four product
tankers constructed. The Joint Venture had the option, which it did not
exercise, to require Product Carriers to assign to the Joint Venture the right
to have these four product tankers constructed. These four product tankers are in
addition to the five product tankers being constructed for the Joint Venture by
NASSCO.

F - 58

---



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.

|                      |                               |                                        
|--------------------- | ----------------------------- | ---------------------------------------
|Date: June
  22, 2009 |                               |                                        
|                      | U.S.
  SHIPPING PARTNERS L.P.
|                      | By:                           | US Shipping
  General Partner LLC,     
|                      |                               | its general
  partner                  
|                      |                               |                                        
|                      |                               |                                        
|                      | By:                           | /s/ Ronald
  L. OKelley               
|                      |                               |                                        
|                      |                               | Ronald L.
  OKelley                   
|                      |                               | President
  and Chief Executive Officer

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated on the dates indicated.

|                             |  |                                               |  |              
|---------------------------- |  | --------------------------------------------- |  | -------------
|Signature                    |  | Title                                         |  | Date         
|                             |  |                                               |  |              
|                             |  |                                               |  |              
|/s/ Ronald
  L. OKelley     |  | President, Chief Executive Officer (principal |  | June 22, 2009
|Ronald L.
  OKelley         |  | executive officer) and director               |  |              
|                             |  |                                               |  |              
|/s/ Joseph
  P. Gehegan      |  | Chief Operating Officer and director          |  | June 22, 2009
|Joseph P.
  Gehegan          |  |                                               |  |              
|                             |  |                                               |  |              
|/s/ Dennis
  J. Fiore        |  | Vice President--Chief Financial Officer       |  | June 22, 2009
|Dennis J.
  Fiore            |  | (principal financial and accounting officer)  |  |              
|                             |  |                                               |  |              
|/s/ Bryan
  Ganz             |  | Director                                      |  | June 22, 2009
|                             |  |                                               |  |              
|Bryan Ganz                   |  |                                               |  |              
|                             |  |                                               |  |              
|/s/ William
  M. Kearns, Jr. |  | Director                                      |  | June 22, 2009
|                             |  |                                               |  |              
|William M.
  Kearns, Jr.     |  |                                               |  |              
|                             |  |                                               |  |              
|/s/ Gerald
  Luterman        |  | Director                                      |  | June 22, 2009
|                             |  |                                               |  |              
|Gerald
  Luterman            |  |                                               |  |              

---