---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

|  |                                                                                          
|- | -----------------------------------------------------------------------------------------
|x | QUARTERLY
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|  |                                                                                          
|  | For the quarterly period ended September 30, 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)

(Former name, former address and former fiscal year, if changed since
last report)

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 is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company
in Rule 12b-2 of the Exchange Act.

|                          |  |                      |  |                                             |  |                             
|------------------------- |  | -------------------- |  | ------------------------------------------- |  | ----------------------------
|Large accelerated filer o |  | Accelerated
 filer x |  | Non-accelerated
 filer o                    |  | Smaller
 reporting company o
|                          |  |                      |  | (Do not check if smaller reporting company) |  |                             

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).

| |     |   |    |   | 
| | --- | - | -- | - | 
| | Yes | o | No | x | 

The number of the
registrants common units outstanding as of November 12, 2008 was 11,353,808.
At that date, 6,899,968 subordinated units were also outstanding.

---



U.S. SHIPPING PARTNERS L.P.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2008
TABLE OF CONTENTS

|           |                                                                                                                                                             |          | 
|---------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | -------- | 
|           |                                                                                                                                                             | Page No.
|           |                                                                                                                                                             |         
|           |                                                                                                                                                             |          | 
|           | PART IFINANCIAL INFORMATION                                                                                                                                |          | 
|           |                                                                                                                                                             |          | 
|Item
 1.   | Financial
 Statements                                                                                                                                       | 3        | 
|           |                                                                                                                                                             |          | 
|           | Unaudited
 Condensed Consolidated Balance Sheets as of September 30, 2008 and December
 31, 2007                                                            | 3        | 
|           |                                                                                                                                                             |          | 
|           | Unaudited
 Condensed Consolidated Statements of Operations and Comprehensive Income for
 the three and nine-month periods ended September 30, 2008 and 2007 | 4        | 
|           |                                                                                                                                                             |          | 
|           | Unaudited
 Condensed Consolidated Statement of Changes in Partners Capital for the
 nine-month period ended September 30, 2008                             | 5        | 
|           |                                                                                                                                                             |          | 
|           | Unaudited
 Condensed Consolidated Statements of Cash Flows for the nine-month periods
 ended September 30, 2008 and 2007                                    | 6        | 
|           |                                                                                                                                                             |          | 
|           | Notes
 to Unaudited Condensed Consolidated Financial Statements                                                                                             | 7        | 
|           |                                                                                                                                                             |          | 
|Item
 2.   | Managements
 Discussion and Analysis of Financial Condition and Results of Operations                                                                      | 36       | 
|           |                                                                                                                                                             |          | 
|Item
 3.   | Quantitative
 and Qualitative Disclosures About Market Risk                                                                                                 | 61       | 
|           |                                                                                                                                                             |          | 
|Item
 4.   | Controls
 and Procedures                                                                                                                                    | 63       | 
|           |                                                                                                                                                             |          | 
|           | PART IIOTHER INFORMATION                                                                                                                                   |          | 
|           |                                                                                                                                                             |          | 
|Item
 1.   | Legal
 Proceedings                                                                                                                                          | 64       | 
|           |                                                                                                                                                             |          | 
|Item
 1A.  | Risk
 Factors                                                                                                                                               | 64       | 
|           |                                                                                                                                                             |          | 
|Item
 2.   | Unregistered
 Sales of Equity Securities and Use of Proceeds                                                                                                | 66       | 
|           |                                                                                                                                                             |          | 
|Item
 3.   | Defaults
 Upon Senior Securities                                                                                                                            | 66       | 
|           |                                                                                                                                                             |          | 
|Item
 4.   | Submission
 of Matters to a Vote of Security Holders                                                                                                        | 67       | 
|           |                                                                                                                                                             |          | 
|Item
 5.   | Other
 Information                                                                                                                                          | 67       | 
|           |                                                                                                                                                             |          | 
|Item
 6.   | Exhibits                                                                                                                                                    | 68       | 
|           |                                                                                                                                                             |          | 
|SIGNATURES | 69                                                                                                                                                          |         

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

---



PART
IFINANCIAL INFORMATION

|        |                     
|------- | --------------------
|ITEM 1. | Financial Statements

U.S.
Shipping Partners L.P.Unaudited Condensed Consolidated Balance Sheets
(in thousands)

|                                                         |  |                    |         |                   |   |         |  
|-------------------------------------------------------- |  | ------------------ | ------- | ----------------- | - | ------- | -
|                                                         |  | September 30, 2008 |         | December 31, 2007 |  
|                                                         |  |                    |         |                   |  
|Assets                                                   |  |                    |         |                   |   |         |  
|Current assets                                           |  |                    |         |                   |   |         |  
|Cash and equivalents                                     |  | $                  | 17,196  |                   | $ | 21,604  |  
|Current portion of restricted
cash and
 equivalents      |  |                    | 23,633  |                   |   | 113,960 |  
|Accounts receivable,
net                                 |  |                    | 7,549   |                   |   | 11,934  |  
|Prepaid expenses and other
current assets                |  |                    | 22,264  |                   |   | 10,683  |  
|                                                         |  |                    |         |                   |   |         |  
|Total current assets                                     |  |                    | 70,642  |                   |   | 158,181 |  
|Restricted cash and equivalents, net of
 current portion |  |                    |        |                   |   | 11,322  |  
|Vessels and equipment, net                               |  |                    | 627,853 |                   |   | 489,464 |  
|Deferred financing costs, net                            |  |                    | 15,742  |                   |   | 19,019  |  
|Other assets                                             |  |                    | 3,206   |                   |   | 5,042   |  
|                                                         |  |                    |         |                   |   |         |  
|Total assets                                             |  | $                  | 717,443 |                   | $ | 683,028 |  
|                                                         |  |                    |         |                   |   |         |  
|                                                         |  |                    |         |                   |   |         |  
|Liabilities and Partners
Capital                        |  |                    |         |                   |   |         |  
|Current liabilities                                      |  |                    |         |                   |   |         |  
|Current portion of long-term
debt                        |  | $                  | 431,973 |                   | $ | 3,100   |  
|Accounts payable                                         |  |                    | 7,162   |                   |   | 9,668   |  
|Due to affiliates                                        |  |                    | 2,647   |                   |   | 3,393   |  
|Deferred revenue                                         |  |                    | 6,320   |                   |   | 1,193   |  
|Accrued expenses and other
liabilities                   |  |                    | 21,648  |                   |   | 31,325  |  
|                                                         |  |                    |         |                   |   |         |  
|Total current
liabilities                                |  |                    | 469,750 |                   |   | 48,679  |  
|Long-term debt, net of current portion                   |  |                    | 126,838 |                   |   | 456,927 |  
|Deferred income taxes                                    |  |                    | 182     |                   |   | 2,145   |  
|Other liabilities                                        |  |                    | 9,764   |                   |   | 10,920  |  
|                                                         |  |                    |         |                   |   |         |  
|Total liabilities                                        |  |                    | 606,534 |                   |   | 518,671 |  
|                                                         |  |                    |         |                   |   |         |  
|                                                         |  |                    |         |                   |   |         |  
|Noncontrolling interest in Joint Venture (Note
 15)      |  |                    | 85,476  |                   |   | 33,324  |  
|                                                         |  |                    |         |                   |   |         |  
|                                                         |  |                    |         |                   |   |         |  
|Commitments and contingencies (Note 14)                  |  |                    |         |                   |   |         |  
|                                                         |  |                    |         |                   |   |         |  
|Partners Capital                                        |  |                    |         |                   |   |         |  
|Partners capital                                        |  |                    | 33,293  |                   |   | 139,263 |  
|Accumulated other comprehensive loss                     |  |                    | (7,860  | )                 |   | (8,230  | )
|                                                         |  |                    |         |                   |   |         |  
|Total partners
capital                                  |  |                    | 25,433  |                   |   | 131,033 |  
|                                                         |  |                    |         |                   |   |         |  
|Total liabilities and
partners capital                  |  | $                  | 717,443 |                   | $ | 683,028 |  
|                                                         |  |                    |         |                   |   |         |  

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

- 3 -

---



U.S. Shipping Partners L.P. 
Unaudited Condensed Consolidated Statements of
Operations and Comprehensive Income 
(in thousands, except per unit data)

|                                                              |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|------------------------------------------------------------- |  | ----------------------------------------- | ------- | ---------------------------------------- | - | ------ | - | ---- | ------- | - | - | ------- | -
|                                                              |  | For the Three Months Ended
 September 30, |         | For the Nine Months Ended
 September 30, |  
|                                                              |  |                                           |         |                                          |  
|                                                              |  | 2008                                      |         | 2007                                     |   | 2008   |   | 2007 |        
|                                                              |  |                                           |         |                                          |   |        |   |      |        
|                                                              |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|Revenues                                                      |  | $                                         | 48,588  |                                          | $ | 45,559 |   | $    | 149,911 |   | $ | 133,262 |  
|                                                              |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|                                                              |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|Operating expenses                                            |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|Vessel operating expenses                                     |  |                                           | 18,064  |                                          |   | 16,762 |   |      | 51,469  |   |   | 49,087  |  
|Voyage expenses                                               |  |                                           | 20,329  |                                          |   | 11,360 |   |      | 51,339  |   |   | 27,509  |  
|General and administrative expenses                           |  |                                           | 6,120   |                                          |   | 3,687  |   |      | 14,125  |   |   | 11,693  |  
|Depreciation and amortization                                 |  |                                           | 10,610  |                                          |   | 9,831  |   |      | 31,559  |   |   | 27,933  |  
|Impairment charges                                            |  |                                           | 72,363  |                                          |   |       |   |      | 78,075  |   |   |        |  
|Other expense (income)                                        |  |                                           | 1,070   |                                          |   |       |   |      | 1,190   |   |   | (3,486  | )
|                                                              |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|Total operating expenses, net                                 |  |                                           | 128,556 |                                          |   | 41,640 |   |      | 227,757 |   |   | 112,736 |  
|                                                              |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|Operating (loss) income                                       |  |                                           | (79,968 | )                                        |   | 3,919  |   |      | (77,846 | ) |   | 20,526  |  
|Interest expense                                              |  |                                           | 7,049   |                                          |   | 8,848  |   |      | 21,819  |   |   | 22,420  |  
|Interest income                                               |  |                                           | (235    | )                                        |   | (2,471 | ) |      | (1,930  | ) |   | (7,718  | )
|Net loss/(gain) on derivative financial instruments           |  |                                           | 9       |                                          |   | 235    |   |      | (1,019  | ) |   | (669    | )
|                                                              |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|(Loss) income before income taxes and noncontrolling
interest |  |                                           | (86,791 | )                                        |   | (2,693 | ) |      | (96,716 | ) |   | 6,493   |  
|(Benefit) provision for income taxes                          |  |                                           | (337    | )                                        |   | (364   | ) |      | (1,559  | ) |   | 258     |  
|                                                              |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|(Loss) income before noncontrolling
interest                  |  |                                           | (86,454 | )                                        |   | (2,329 | ) |      | (95,157 | ) |   | 6,235   |  
|Noncontrolling interest in Joint Venture (income) loss        |  |                                           | (1,029  | )                                        |   | 351    |   |      | (787    | ) |   | (56     | )
|                                                              |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|Net (loss) income                                             |  |                                           | (87,483 | )                                        |   | (1,978 | ) |      | (95,944 | ) |   | 6,179   |  
|Other comprehensive loss                                      |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|Fair market value adjustment for derivatives                  |  |                                           | 65      |                                          |   | (5,422 | ) |      | 370     |   |   | (1,741  | )
|                                                              |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|Comprehensive (loss) income                                   |  | $                                         | (87,418 | )                                        | $ | (7,400 | ) | $    | (95,574 | ) | $ | 4,438   |  
|                                                              |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|                                                              |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|General partners interest in net (loss) income               |  | $                                         | (1,750  | )                                        | $ | (40    | ) | $    | (1,919  | ) | $ | 124     |  
|                                                              |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|Limited partners interest in net (loss) income               |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|Net (loss) income                                             |  | $                                         | (85,733 | )                                        | $ | (1,938 | ) | $    | (94,025 | ) | $ | 6,055   |  
|Net (loss) income per unit - basic and
diluted                |  | $                                         | (4.70   | )                                        | $ | (0.11  | ) | $    | (5.15   | ) | $ | 0.33    |  
|Weighted average units outstanding - basic                    |  |                                           | 18,254  |                                          |   | 18,234 |   |      | 18,247  |   |   | 18,234  |  

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

- 4 -

---



U.S. Shipping Partners L.P. 
Unaudited Condensed Consolidated Statement of Changes in
Partners Capital 
Nine Months Ended September 30, 2008 
(in thousands)

|                                             |  |                   |        |                  |   |                                         |   |   |       |  |   |         |   |   |        |   |   |        |   |   |         |  
|-------------------------------------------- |  | ----------------- | ------ | ---------------- | - | --------------------------------------- | - | - | ----- |  | - | ------- | - | - | ------ | - | - | ------ | - | - | ------- | -
|                                             |  | Partners Capital |        |                  |   |                                         |   |   |      
|                                             |  |                   |        |                  |   |                                         |   |   |      
|                                             |  | Limited Partners  |        | General
 Partner |   | Accumulated
 Other
 Comprehensive
 Loss |   |   |       | 
|                                             |  |                   |        |                  |   |                                         |   |  
|                                             |  | Common            |        | Subordinated     |   |                                         |   |   |       | 
|                                             |  | Units             |        | $                |   | Units                                   |   | $ |       |  |   | Total   |  
|                                             |  |                   |        |                  |   |                                         |   |   |       |  |   |         |   |   |       
|Balance at December 31, 2007                 |  |                   | 11,341 |                  | $ | 157,683                                 |   |   | 6,900 |  | $ | (18,936 | ) | $ | 516    |   | $ | (8,230 | ) | $ | 131,033 |  
|                                            
|Net loss                                     |  |                   |       |                  |   | (58,439                                 | ) |   |      |  |   | (35,586 | ) |   | (1,919 | ) |   |       |   |   | (95,944 | )
|                                            
|Issuance of common units                     |  |                   | 12     |                  |   | 146                                     |   |   |      |  |   |        |   |   |       |   |   |       |   |   | 146     |  
|                                            
|Amortization of deferred equity compensation |  |                   |       |                  |   | 37                                      |   |   |      |  |   |        |   |   |       |   |   |       |   |   | 37      |  
|                                            
|Fair market value adjustment for derivatives |  |                   |       |                  |   |                                        |   |   |      |  |   |        |   |   |       |   |   | 370    |   |   | 370     |  
|                                            
|Cash distributions                           |  |                   |       |                  |   | (10,209                                 | ) |   |      |  |   |        |   |   |       |   |   |       |   |   | (10,209 | )
|                                            
|                                             |  |                   |        |                  |   |                                         |   |   |       |  |   |         |   |   |        |   |   |        |   |   |         |  
|Balance at September 30, 2008                |  |                   | 11,353 |                  | $ | 89,218                                  |   |   | 6,900 |  | $ | (54,522 | ) | $ | (1,403 | ) | $ | (7,860 | ) | $ | 25,433  |  
|                                             |  |                   |        |                  |   |                                         |   |   |       |  |   |         |   |   |        |   |   |        |   |   |         |  

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

- 5 -

---



U.S. Shipping Partners L.P. 
Unaudited Condensed Consolidated Statements of Cash
Flows 
(in thousands)

|                                                                                                       |  |                           |          |      |   |          |  
|------------------------------------------------------------------------------------------------------ |  | ------------------------- | -------- | ---- | - | -------- | -
|                                                                                                       |  | For
the Nine Months Ended |         
|                                                                                                       |  |                           |         
|                                                                                                       |  | September
30,             |         
|                                                                                                       |  |                           |         
|                                                                                                       |  | 2008                      |          | 2007 |  
|                                                                                                       |  |                           |          |      |  
|Cash flows from operating activities                                                                   |  |                           |          |      |   |          |  
|Net (loss) income                                                                                      |  | $                         | (95,944  | )    | $ | 6,179    |  
|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 |  |                           | 32,944   |      |   | 29,188   |  
|Impairment charge                                                                                      |  |                           | 78,075   |      |   |         |  
|Nonrecurring insurance surcharge                                                                       |  |                           | 1,057    |      |   |         |  
|Loss on sale of surplus equipment                                                                      |  |                           | 120      |      |   |         |  
|Equity compensation                                                                                    |  |                           | 183      |      |   | 74       |  
|Provision for accounts receivable                                                                      |  |                           | 387      |      |   | 479      |  
|Noncontrolling interest in Joint Venture
loss                                                          |  |                           | 787      |      |   | 56       |  
|Net gain on derivative financial
instruments                                                           |  |                           | (1,019   | )    |   | (669     | )
|Deferred income taxes                                                                                  |  |                           | (1,290   | )    |   | (552     | )
|Capitalized drydock costs                                                                              |  |                           | (2,632   | )    |   | (9,696   | )
|Changes in assets and liabilities:                                                                     |  |                           |          |      |   |          |  
|Accounts receivable                                                                                    |  |                           | 3,546    |      |   | (2,491   | )
|Prepaid expenses and other current assets                                                              |  |                           | (14,041  | )    |   | (3,830   | )
|Other assets                                                                                           |  |                           | 557      |      |   | (95      | )
|Accounts payable                                                                                       |  |                           | (1,328   | )    |   | 1,466    |  
|Deferred revenue                                                                                       |  |                           | 5,127    |      |   | (1,178   | )
|Accrued expenses and other liabilities                                                                 |  |                           | 1,204    |      |   | 94       |  
|                                                                                                       |  |                           |          |      |   |          |  
|Net cash provided by operating activities                                                              |  |                           | 7,733    |      |   | 19,025   |  
|                                                                                                       |  |                           |          |      |   |          |  
|                                                                                                       |  |                           |          |      |   |          |  
|Cash flows from investing activities                                                                   |  |                           |          |      |   |          |  
|Change in restricted cash and equivalents, net                                                         |  |                           | 101,649  |      |   | 55,762   |  
|Sale of surplus equipment                                                                              |  |                           | 280      |      |   |         |  
|Construction of vessels and equipment                                                                  |  |                           | (254,837 | )    |   | (110,652 | )
|Cash received upon settlement of derivative financial
instrument                                       |  |                           | 827      |      |   | 173      |  
|Purchase of interest rate cap                                                                          |  |                           |         |      |   | (1,924   | )
|Payments to Hess, net                                                                                  |  |                           |         |      |   | (447     | )
|                                                                                                       |  |                           |          |      |   |          |  
|Net cash used in investing activities                                                                  |  |                           | (152,081 | )    |   | (57,088  | )
|                                                                                                       |  |                           |          |      |   |          |  
|                                                                                                       |  |                           |          |      |   |          |  
|Cash flows from financing activities                                                                   |  |                           |          |      |   |          |  
|Proceeds from borrowings                                                                               |  |                           | 15,500   |      |   | 54,000   |  
|Proceeds from Joint Venture revolver borrowings                                                        |  |                           | 85,609   |      |   | 14,318   |  
|Contribution by noncontrolling interest equity investors in Joint
 Venture                             |  |                           | 51,365   |      |   | 9,745    |  
|Repayment of debt                                                                                      |  |                           | (2,325   | )    |   | (2,164   | )
|Deferred financing costs                                                                               |  |                           |         |      |   | (158     | )
|Distributions to partners                                                                              |  |                           | (10,209  | )    |   | (25,116  | )
|                                                                                                       |  |                           |          |      |   |          |  
|Net cash provided by financing activities                                                              |  |                           | 139,940  |      |   | 50,625   |  
|                                                                                                       |  |                           |          |      |   |          |  
|                                                                                                       |  |                           |          |      |   |          |  
|Net increase (decrease) in cash and cash equivalents                                                   |  |                           | (4,408   | )    |   | 12,562   |  
|Cash and cash equivalents at beginning of period                                                       |  |                           | 21,604   |      |   | 2,686    |  
|                                                                                                       |  |                           |          |      |   |          |  
|Cash and cash equivalents at end of period                                                             |  | $                         | 17,196   |      | $ | 15,248   |  
|                                                                                                       |  |                           |          |      |   |          |  

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

- 6 -

---



U.S. Shipping Partners L.P. 
Notes to Unaudited Condensed Consolidated Financial
Statements 
(dollars in thousands, except per unit data)

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

U.S.
Shipping Partners L.P. (the Partnership) owns and operates six integrated tug
barge units (ITBs), three chemical product, or parcel, tankers (Parcel
Tankers), one product tanker (Houston)
and two articulated tug barges (ATB). The Partnerships first ATB, the ATB Freeport, was delivered in June
2007
and entered service in July 2007. The Partnerships second ATB, the ATB Galveston, was delivered and entered
service in August 2008. In addition, the third ATB, the ATB Brownsville,
was delivered to the Partnership early November 2008 and will enter service
early December 2008. The Partnership currently has one additional ATB under
construction, which is now scheduled to be delivered in November 2009.

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. Recently, to improve utilization of the ITB fleet, the Partnership
has employed five of its ITBs to transport grain overseas for humanitarian
organizations. These transactions are not subject to the provisions of the
Jones Act, but U.S Flag vessels are given preference for these voyages.
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.

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. NASSCO is scheduled to deliver the first tanker in the first quarter
of 2009, the second tanker in the second quarter 2009, the third tanker in the
fourth quarter 2009, the fourth tanker in the second quarter 2010, the fifth
tanker in the fourth quarter 2010, one tanker in 2012, two tankers in 2013 and
the last tanker in 2014. The Partnership currently expects 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. 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, of which approximately $64,415 has already been made and the
remaining $5,585 is in escrow. Subsequent to September 30, 2008, the
Partnership contributed its remaining $5,585 equity commitment.
The Partnerships ability to
take delivery of the tanker vessels from the Joint Venture will depend on the
Partnerships ability to finance the purchase of these vessels upon their completion
which, based on the contractual purchase price, current market values and the
Partnerships  financial condition, is highly uncertain.  If the vessels
remain in the Joint Venture, the Partnership will not receive the majority of the benefits
associated with ownership of these vessels  and there is substantial doubt that the
Partnerships interest in the Joint Venture will be realized.

- 7 -

---



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 three months ended September 30, 2008. The impact of this
out of period adjustment is an additional allocation of losses to the
Partnership, recorded through the Non-controlling interest line, of $1,029 in
the three months ended September 31, 2008. Future Joint Venture losses will be
fully allocated to the Partnership. The Joint Venture is included as a
non-guarantor subsidiary in Note 15, Supplemental
Guarantor Information.

In the
opinion of management, these financial statements reflect all adjustments
necessary, consisting of normal recurring entries, for a fair presentation of
the financial results of such interim periods in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. The results of operations for interim periods are not necessarily
indicative of the results of operations to be expected for a full year. These
financial statements should be read together with the consolidated financial
statements and notes thereto included in the Partnerships Annual Report on
Form 10-K for the year ended December 31, 2007 (the Form 10-K). The December
31, 2007 condensed consolidated balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States.

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

The
Partnership is dependent on its cash flow from operations and borrowings under
its revolving credit facility 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;                                                                                                                     
| |   |                                                                                                                                                                                                                 
| |  | 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;                                                                                                                                                   
| |   |                                                                                                                                                                                                                 
| |  | the refusal of certain vendors to extend trade credit to the
 Partnership; and                                                                                                                                  
| |   |                                                                                                                                                                                                                 
| |  | the increase in the interest rate on the Partnerships borrowings
 under its senior credit agreement and additional fees and expenses resulting
 from the October 2008 amendment to its senior credit agreement.

- 8 -

---



The
Partnerships cash flow from operations has come under increasing pressure due
to the difficult current market conditions it is facing. During the first half
of 2008, all but one of the ITBs began to operate in the spot market for the
transportation of petroleum products, which has increased the volatility of the
Partnerships revenues and working capital requirements, and decreased the
predictability of its cash flows. Beginning in late March 2008 market
conditions in the spot market, where five of the six 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, fuel prices for
operating the vessels were, until recently, at record levels and are still
substantially 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, the five ITBs operating in the
spot market have, beginning in the second quarter of 2008, incurred idle
periods greater than, and charter rates below, the Partnerships expectations
at the beginning of 2008. During the first half of 2008, the Partnership also
experienced modest decreased demand for the domestic coastwise transportation
of chemical products served by its chemical transporting vessels, which the
Partnership believes was primarily due to its customers working off inventory
levels due to the decline in economic activity.

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 USS 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 five of
the six ITBs now participating in the spot market, and the sixth ITB expected
to enter the spot market beginning in 2009, the Partnership expects its working
capital requirements to increase. The Partnership has limited availability
under its revolving credit facility to finance this increase in working capital
requirements. The Partnership understands that Lehman Brothers Commercial
Paper, which is a revolving credit lender under the revolving credit portion of
the Partnerships senior credit facility, has filed for protection under the
U.S. bankruptcy laws, and there can be no assurance that this entity will
fulfill its obligations to make revolving credit loans under the senior credit
facility. Of the approximately $11.2 million currently available under the
Partnerships revolving credit facility, Lehman Brothers Commercial Papers
obligation is approximately $4.9 million. The failure of Lehman Brothers
Commercial Paper to make revolving credit loans available to the Partnership
will have a material adverse effect on the Partnerships financial condition
and liquidity.

The
Partnerships cash flows and liquidity have come under increasing pressure due
to the current difficult market conditions, which resulted in the Partnership
not being in compliance with certain financial covenants relating to leverage
(debt to EBITDA) and fixed charge and interest coverage under its Third Amended
and Restated Credit Facility (Senior Credit Facility) at September 30, 2008.
The senior lenders have waived this non-compliance, and any non-compliance with
the financial covenants at December 31, 2008, through January 31, 2009.
However, after January 31, 2009, absent an additional waiver from the senior
lenders or an amendment of the senior credit agreement, the Partnership will be
in default of these financial covenants. The October 2008 amendment to the
Senior Credit Facility requires the Partnership to have a specified minimum
cumulative EBITDA on the last day of each of October, November and December
2008 and January 2009, and there can be no assurance that the Partnership will
meet this requirement.

- 9 -

---



If the
Partnership is not in compliance with its financial covenants, or is otherwise
in default under the Senior Credit Facility, the lenders have a number of
remedies, including declaring all outstanding borrowings to be immediately due
and payable and refusing to make funds available under the revolving credit
facility. In addition, such defaults could cause cross defaults under certain of the
Partnerships other
debt agreements. If all such outstanding indebtedness were declared to be
immediately due and payable, the Partnership would not have the financial
resources to repay immediately in full all outstanding borrowings under its
various debt agreements. As such, the Partnership would be required to either
amend the Senior Credit Facility or replace it with an alternate credit
facility, which given current market conditions, would be difficult. In
addition, the lenders under the Senior Credit Facility could prohibit the
Partnership from paying interest on the senior notes. Even if the Partnership
is not prohibited from paying interest on the senior notes by the lenders under
the Senior Credit Facility, the Partnerships ability to pay such interest will
depend on the amount of availability under its revolving credit facility, cash
generated from operations prior to the time such interest payment is due and
its other working capital requirements.

In response
to these challenges, the Partnership has retained Greenhill & Co., LLC and
Jefferies & Company, Inc. to assist it in exploring strategic alternatives,
including either the possible sale of the business or the sale of new equity,
and other ways to increase liquidity and strengthen its financial resources.

In light of
these liquidity pressures, the Partnership did not pay a distribution on the
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 the
units in respect of the second and third quarters of 2008. The October 2008
amendment to the Senior Credit Facility prohibits the Partnership from paying
any distributions on any of its common units until the borrowings under the
Senior Credit Facility are repaid in full.

Consistent
with generally accepted accounting principles, the condensed consolidated
financial statements included herein have been prepared on the basis that the
Partnership will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. Although the lenders under the Senior Credit Agreement waived
non-compliance with certain financial covenant defaults through January 31,
2009,  and there can be no assurance
that the lenders will grant the Partnership an additional waiver at that date and, given current
market conditions, the Partnership believes it would be difficult to secure
alternate financing. The Partnerships lenders right to demand immediate
payment of all outstanding indebtedness on January 31, 2009, coupled with the
Partnerships inability to repay this indebtedness immediately, leads to a substantial
doubt about the Partnerships ability to continue as a going concern.

|   |                              
|-- | -----------------------------
|3. | 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. 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 11 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:

- 10 -

---



| |    |                                                                                                                                    
| | -- | -----------------------------------------------------------------------------------------------------------------------------------
| | 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 under FAS 159 for any financial instruments
as of September 30, 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 the Partnerships 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. The
Partnership 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. The Partnership is 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, the
Partnership 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 the Partnerships financial statements as it is
disclosure-only in nature.

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 is 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. The Partnership does not expect the
adoption of FAS 162 to impact its financial statements.

- 11 -

---



|   |                             
|-- | ----------------------------
|4. | Net (Loss) / Income per Unit

Basic net
(loss) income per unit is determined by dividing the net (loss) income, after
deducting the amount of net (loss) income allocated to the general partners
interest, by the weighted average number of units outstanding during the
period. Diluted net (loss) income per unit is calculated in the same manner as
basic net (loss) income per unit, except that the weighted average number of
outstanding units is increased to include the dilutive effect of outstanding
unit options and phantom units. Outstanding restricted stock units, unit
options and phantom units are excluded from the calculation of diluted net (loss)
income per unit because their inclusion would have an anti-dilutive effect.

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

|                                                                            |  |                                           |  |                                          |  |        |  |        | 
|--------------------------------------------------------------------------- |  | ----------------------------------------- |  | ---------------------------------------- |  | ------ |  | ------ | 
|                                                                            |  | For the Three Months Ended
 September 30, |  | For the Nine Months Ended
 September 30, | 
|                                                                            |  |                                           |  |                                          | 
|                                                                            |  | 2008                                      |  | 2007                                     |  | 2008   |  | 2007   | 
|                                                                            |  |                                           |  |                                          |  |        |  |        | 
|                                                                            |  |                                           |  |                                          |  |        |  |        | 
|Weighted average units
outstanding for basic net (loss) income per
 unit    |  | 18,254                                    |  | 18,234                                   |  | 18,247 |  | 18,234 | 
|Dilutive effect of
restricted units                                         |  |                                          |  |                                         |  |       |  | 1      | 
|                                                                            |  |                                           |  |                                          |  |        |  |        | 
|Weighted average units
outstanding for dilutive net (loss) income per
 unit |  | 18,254                                    |  | 18,234                                   |  | 18,247 |  | 18,235 | 
|                                                                            |  |                                           |  |                                          |  |        |  |        | 

Excluded
from the calculation of dilutive net loss per unit for the nine months ended
September 30, 2008 are 5,469 restricted units that, if included, would have an
anti-dilutive effect. There were no dilutive securities outstanding during the
three months ended September 30, 2008.

|   |                                
|-- | -------------------------------
|5. | 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 September 30, 2008 and
December 31, 2007, the ATB Escrow balance was $18,048 and $85,453,
respectively, and the Joint Venture Escrow balance was $5,585 and $39,829,
respectively. Additionally, amounts drawn on the ATB Escrow account for items
expected to be paid in the third quarter of 2008 were $7,565, and are included
in cash and equivalents on the Unaudited Condensed Consolidated Balance Sheets
at September 30, 2008 as they were no longer legally restricted as to use at September
30, 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 of $23,633 and $113,960 at September 30, 2008
and December 31, 2007 respectively. At December 31, 2007, the remainder of the
restricted cash balance of $11,322 was classified as noncurrent restricted cash
and equivalents.

- 12 -

---



|   |                      
|-- | ---------------------
|6. | Vessels and Equipment

Vessels
and equipment consist of the following:

|                                                                              |  |                    |         |                   |   |         | 
|----------------------------------------------------------------------------- |  | ------------------ | ------- | ----------------- | - | ------- | 
|                                                                              |  | September 30, 2008 |         | December 31, 2007 |  
|                                                                              |  |                    |         |                   |  
|Vessels                                                                       |  | $                  | 365,426 |                   | $ | 348,368 | 
|Office furniture, equipment
and other                                         |  |                    | 448     |                   |   | 448     | 
|                                                                              |  |                    |         |                   |   |         | 
|                                                                              |  |                    | 365,874 |                   |   | 348,816 | 
|Less: Accumulated
depreciation                                                |  |                    | 125,064 |                   |   | 106,810 | 
|                                                                              |  |                    |         |                   |   |         | 
|                                                                              |  |                    | 240,810 |                   |   | 242,006 | 
|Construction in
progress-ATBs                                                |  |                    | 116,960 |                   |   | 111,321 | 
|Construction in
progress-tankers                                              |  |                    | 264,464 |                   |   | 101,141 | 
|Capitalized drydock
expenditures, net of
 amortization of $35,481 and $22,172 |  |                    | 5,619   |                   |   | 34,996  | 
|                                                                              |  |                    |         |                   |   |         | 
|Total vessels and
equipment, net                                              |  | $                  | 627,853 |                   | $ | 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: the Sea Venture to 2013,
its mandatory retirement from transportation of petroleum products as required
by OPA 90; 10 years for the Chemical Pioneer,
the Charleston and the Houston; and 30 years for the ATB Freeport and
the ATB Galveston 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
and September 30, 2010 for the ITB Baltimore,
ITB New York, ITB Mobile and ITB Philadelphia. 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.

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 the quarter ended September
30, 2008, the Partnership began activities to sell the ITB Grotonand ITB
Jacksonville to a third party, before taking into
consideration the estimated costs of disposition, for an estimated sales price
per vessel of $5,435 net of commissions. These ITBs are enroute to their
potential buyer after discharging their latest grain cargoes. Because the
potential for these vessels to return to the petroleum market is unlikely, the
Partnership has decided to sell these ITBs and has recorded an impairment loss
totaling $20,400. In the current period, the Partnership determined that the
carrying amounts of the other ITBs also exceeded their fair values. Factors
indicating the impairment of the other ITBs 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 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 Yorkinto the spot market when its current time charter expires 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.
As a result, the following impairment charges and resulting carrying values
compared to the carrying values at December 31, 2007 are as follows:

- 13 -

---



|                 |  |                                      |        |                                   |   |        | 
|---------------- |  | ------------------------------------ | ------ | --------------------------------- | - | ------ | 
|Vessel           |  | Impairment
Charge
September 30, 2008 |        | Carrying
Value
September 30, 2008 |  
|                 |  |                                      |        |                                   |  
|ITB Groton       |  | $                                    | 10,364 |                                   | $ | 4,056  | 
|ITB Jacksonville |  |                                      | 10,036 |                                   |   | 3,944  | 
|ITB Baltimore    |  |                                      | 11,618 |                                   |   | 6,301  | 
|ITB New York     |  |                                      | 11,492 |                                   |   | 4,399  | 
|ITB Mobile       |  |                                      | 14,234 |                                   |   | 6,301  | 
|ITB Philadelphia |  |                                      | 14,514 |                                   |   | 6,301  | 
|                 |  |                                      |        |                                   |   |        | 
|Total            |  | $                                    | 72,258 |                                   | $ | 31,302 | 
|                 |  |                                      |        |                                   |   |        | 

In addition
to the ITBs, the Partnership assessed the net book values of the remaining
vessels, Sea Venture, Charleston, Chemical
Pioneer, ATB Freeport and ATB
Galveston. There are no indications that the carrying values of
these vessels are not recoverable and, as a result, the carrying values for the
chemical vessels are not impaired and therefore have not been adjusted as of
September 30, 2008.

At
September 30, 2008, Vessels include the ATB
Galveston, which was placed in service in August 2008 at a total
cost of $66,553, plus capitalized interest of $6,827. At December 31, 2007,
costs associated with the construction of the ATB
Galveston of $45,779, plus capitalized interest of $3,665, were
included in Construction-in-process-ATBs.

Both
domestic and international regulatory bodies require that the Partnerships
vessels be drydocked for major repair and maintenance at least twice every five
years. To date, the Partnerships 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 drydock while in domestic trade. 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 and ATB Galveston, the remaining newbuild
ATBs and Joint Venture product tankers 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 Chemical
Pioneer, the Charleston and the Houstonare scheduled for drydocking in
the fourth quarter of 2008, and the ITB New
Yorkand ITB Jacksonville
completed UWILD surveys during the quarter ended September 30, 2008.

There were
no drydocks in progress at September 30, 2008 or December 31, 2007. 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
are substantially covered by insurance, with the exception of the insurance
policy deductible of $125, which is the total loss previously recognized due to
the damage sustained by the ITB Baltimore.
The Partnership does not carry off-hire insurance for the revenues lost while
repairs are performed. At September 30, 2008 and December 31, 2007, the
Partnership has recognized approximately $619 and $745 as a receivable for the
insurance proceeds based upon the estimated repair costs, respectively.
Capitalized drydock expenditures of $447 and $2,433 were accrued at September
30, 2008 and December 31, 2007, respectively. During the nine months ended September
30, 2008, the Partnership reduced previously recorded estimates of drydock
costs by $155. During the
quarter ended September 30, 2008 the Partnership finalized an insurance claim
related to the ITB Philadelphia.
The results of this insurance claim reduced this vessels drydock cost by $332.

- 14 -

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Depreciation
of vessels and equipment for the three months ended September 30, 2008 and
September 30, 2007 was $6,213 and $6,270, respectively. Amortization of
drydocking expenditures was $4,398 and $3,562 for the three months ended
September 30, 2008 and 2007, respectively.

Depreciation
of vessels and equipment for the nine months ended September 30, 2008 and
September 30, 2007 was $18,254 and $17,452, respectively. Amortization of
drydocking expenditures was $13,309 and $10,481 for the nine months ended
September 30, 2008 and September 30, 2007, respectively.

At
September 30, 2008 and December 31, 2007, Construction in progress-ATBs
includes capitalized interest of $9,165 and $7,793, respectively, and accrued
invoices of $602 and $1,237, respectively. At September 30, 2008 and December
31, 2007, Construction in progress-tankers of the Joint Venture includes
capitalized interest of $19,798 and $11,266, respectively, and accrued
liabilities of $6,833 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 and entered service in August 2008. The ATB Galveston
was completed at a total
cost of $66,553 (excluding capitalized interest, which totaled $6,827). 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 during
November 2008 and will enter service in December 2008. The ATB Brownsvillewas
completed at a total
cost of $67,500 (excluding capitalized interest, which totaled $5,501 at
September 30, 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 November 2009 at a cost of approximately
$69,800 (excluding capitalized interest, which totaled $3,663 at September 30,
2008). The cost increase over the originally budgeted amount of $66,000 was
principally due to contractually provided cost increases related to increases
in major components, customer requested modifications (which also delayed the
scheduled delivery date from August 2009 to November 2009) and change orders.
As of September 30, 2008, the Partnership had in escrow approximately $18,048,
plus $7,565 of funds drawn from the escrow account in anticipation of payments
due in the fourth quarter of 2008. Approximately $6,550 will be needed to
complete construction of the final ATB and such amount will be derived from the
Partnerships operating cash flows and borrowings under its revolving credit
facility.

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 $5,720, 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 quarter ended
September 30, 2008, the Partnership accrued additional expenses related to
owner furnished equipment in the amount of $105, and the Partnership may be
required to make additional payments for certain owner furnished equipment but
it has no further financial obligations with regard to either the tug or the
barge.

On October
25, 2007, the Joint Venture and NASSCO contractually accelerated the delivery
dates for the first five tankers that NASSCO is constructing for the Joint
Venture. The revised planned delivery schedule is for the first tanker to be
delivered in the first quarter of 2009, the second tanker in the second quarter
2009, the third tanker in the fourth quarter 2009, the fourth tanker in the
second quarter 2010, and the fifth tanker is to be delivered in the fourth
quarter 2010. Because Product Carriers and the Joint Venture have declined NASSCOs
request to accelerate the
delivery of tankers six through nine, NASSCO has the right to use their
additional capacity to construct vessels for other third parties. However, the
Partnership believes any such use of additional capacity should not materially
affect the delivery dates of vessels six through nine. The Joint Venture
Investors option to elect to have the Joint Venture finance the construction
of the last four product tankers under Product Carriers contract with NAASCO
expired unexercised.

- 15 -

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|   |                         
|-- | ------------------------
|7. | 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 senior secured notes and entered into an amended and
restated 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. Effective June 29, 2007, the Partnership amended certain
financial covenants in its senior credit facility, for which it paid an
amendment fee of $158. This fee is being amortized over the remaining term of
the loan. For the three and nine months ended September 30, 2008, deferred
financing costs of the Partnership (excluding those of the Joint Venture) of
$463 and $1,389, respectively, were amortized and included in interest expense
in the accompanying Unaudited Condensed Consolidated Statements of Operations
and Comprehensive Income, compared to $433 and $1,256 for the three and nine
months ended September 30, 2007, respectively. A pro rata portion of the 2008
and 2007 amortization of deferred financing costs is included in construction
in progress-ATBs as part of the capitalized interest portion of the
Partnerships ongoing project to construct ATBs. For the three and nine months
ended September 30, 2008 deferred financing costs of $634 and $1,888,
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, compared to $634 and $1,882 respectively, for the
three and nine months ended September 30, 2007.

On
October 20, 2008, the Partnership and its lenders amended the Partnerships
senior credit facility. See Note 16, Subsequent Events, for additional discussion regarding the
amendment.

|   |                                       
|-- | --------------------------------------
|8. | Accrued Expenses and Other Liabilities

Accrued
expenses and other liabilities consisted of the following at September 30, 2008
and December 31, 2007:

|                        |  |                    |        |                   |   |        | 
|----------------------- |  | ------------------ | ------ | ----------------- | - | ------ | 
|                        |  | September 30, 2008 |        | December 31, 2007 |  
|                        |  |                    |        |                   |  
|Construction of vessels |  | $                  | 6,812  |                   | $ | 16,977 | 
|Interest                |  |                    | 2,124  |                   |   | 5,218  | 
|Insurance claims        |  |                    | 3,429  |                   |   | 2,520  | 
|Fuel charges            |  |                    | 606    |                   |   | 2,080  | 
|Taxes payable           |  |                    | 1,420  |                   |   | 1,947  | 
|Grain voyage expenses   |  |                    | 3,307  |                   |   |       | 
|Other                   |  |                    | 3,950  |                   |   | 2,583  | 
|                        |  |                    |        |                   |   |        | 
|                        |  | $                  | 21,648 |                   | $ | 31,325 | 
|                        |  |                    |        |                   |   |        | 

- 16 -

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|   |     
|-- | ----
|9. | Debt

The
Partnerships outstanding debt consisted of the following at September 30, 2008
and December 31, 2007:

|                                                                                                                                                              |  |                    |         |                   |   |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ----------------- | - | ------- | 
|                                                                                                                                                              |  | September 30, 2008 |         | December 31, 2007 |  
|                                                                                                                                                              |  |                    |         |                   |  
|Third Amended and Restated Credit Facility - Term, bearing interest at
 LIBOR plus 3.5% (7.3% at September 30, 2008 and 8.3% at December 31, 2007)            |  | $                  | 303,473 |                   | $ | 305,797 | 
|Third Amended and Restated Credit Facility - Revolving Notes bearing
 interest at LIBOR plus 3.5% (7.3% at September 30, 2008 and 8.3% at December
 31, 2007) |  |                    | 28,500  |                   |   | 13,000  | 
|13% Senior Secured Notes due 2014                                                                                                                             |  |                    | 100,000 |                   |   | 100,000 | 
|Revolving Notes Facility - Joint Venture, bearing interest at LIBOR
 plus 4.5% (7.0% at September 30, 2008 and 9.3% December 31, 2007)                        |  |                    | 126,838 |                   |   | 41,230  | 
|                                                                                                                                                              |  |                    |         |                   |   |         | 
|Total                                                                                                                                                         |  |                    | 558,811 |                   |   | 460,027 | 
|Less: Current portion of long-term debt                                                                                                                       |  |                    | 431,973 |                   |   | 3,100   | 
|                                                                                                                                                              |  |                    |         |                   |   |         | 
|Long-term debt                                                                                                                                                |  | $                  | 126,838 |                   | $ | 456,927 | 
|                                                                                                                                                              |  |                    |         |                   |   |         | 

On October
20, 2008, the Partnership and its lenders amended the Partnerships senior
credit facility. See Note 16, Subsequent Events, for additional discussion regarding the amendment.

The
Partnerships cash flows and liquidity have come under increasing pressure due
to the current difficult market conditions, which resulted in the Partnership
not being in compliance with certain financial covenants relating to leverage
(debt to EBITDA) and fixed charge and interest coverage under its Third Amended
and Restated Credit Facility (Senior Credit Facility) at September 30, 2008.
The senior lenders have waived this non-compliance, and any non-compliance with
the financial covenants at December 31, 2008, through January 31, 2009.
However, after January 31, 2009, absent an additional waiver from the senior
lenders or an amendment of the senior credit agreement, the Partnership will be
in default of these financial covenants. The October 2008 amendment to the
Senior Credit Facility requires the Partnership to have a specified minimum
cumulative EBITDA on the last day of each of October, November and December
2008 and January 31, 2009, and there can be no assurance that the Partnership
will meet this requirement. See Note 2, Liquidity.

If the
Partnership is not in compliance with its financial covenants, or is otherwise
in default under the Senior Credit Facility, the lenders have a number of
remedies, including declaring all outstanding borrowings to be immediately due
and payable and refusing to make funds available under the revolving credit
facility. In addition, such defaults could cause cross defaults under our other
debt agreements. If all such outstanding indebtedness were declared to be
immediately due and payable, the Partnership would not have the financial
resources to repay immediately in full all outstanding borrowings under its
various debt agreements. As such, the Partnership would be required to either
amend the Senior Credit Facility or replace it with an alternate credit
facility, which given current market conditions, would be difficult. In
addition, the lenders under the Senior Credit Facility could prohibit the
Partnership from paying interest on the senior notes. Even if the Partnership
is not prohibited from paying interest on the senior notes by the lenders under
the Senior Credit Facility, the Partnerships ability to pay such interest will
depend on the amount of availability under its revolving credit facility, cash
generated from operations prior to the time such interest payment is due and
its other working capital requirements.

As
the Partnerships Senior Credit Facility is now callable at January 31, 2009,
the Partnership has classified it as current at September 30, 2008.
Furthermore, as the 13% Senior Secured Notes contain cross-default provisions
in its indenture that accelerate its payment if there is a payment default or
acceleration of the Senior Secured Facility, it has also been classified as
current at September 30, 2008.

- 17 -

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On
September 30, 2008, the debt associated with our Third Amended and Restated
Credit facility was quoted at an average price of $0.79 to the dollar, which results in an
implied market value of $262,258. In addition, our 13% Senior Secured Notes
were priced at $0.60 to the dollar, yielding an implied market value of $60,000.

Capitalized
interest for the three months ended September 30, 2008 and September 30, 2007
was $3,164 and $3,815, respectively. Capitalized interest for the nine months
ended September 30, 2008 and September 30, 2007 was $8,694 and $13,543,
respectively.

|    |      
|--- | -----
|10. | Taxes

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.

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 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.

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., that 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.

The
Partnership provides deferred income taxes for the tax effects of differences
between the financial reporting and tax basis of assets and liabilities of its
subsidiaries taxed as corporations, 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 September 30, 2008 will not be realized and, accordingly, provided
valuation allowances against these deferred tax assets. There were no such
allowances as of December 31, 2007. At September 30, 2008 and December 31,
2007, the Partnership had deferred tax assets net of valuation allowances of
$37 and $713, respectively. At September 30, 2008 and December 31, 2007, the
Partnership had deferred tax liabilities of $182 and $2,145, respectively.

At
September 30, 2008 and December 31, 2007, the Partnership had $919 and $729 of
unrecognized tax benefits, respectively, excluding interest and penalties. At
September 30, 2008 and December 31, 2007, the Partnership had approximately
$165 and $99, respectively, of accrued interest and penalties related to
uncertain tax positions. In the three month periods ended September 30, 2008
and 2007, the Partnerships Unaudited Condensed Consolidated Statement of
Operations included $67 and $89 of unrecognized tax benefits, respectively. In
the nine month periods ended September 30, 2008 and 2007, the Partnerships
Unaudited Condensed Consolidated Statement of Operations included $254 and $317
of unrecognized tax benefits, respectively. There were no other increases or
decreases in unrecognized tax benefits during the period related to the lapse
of any statute of limitations, settlements with taxing authorities, or changes
in the Partnerships assessment of whether it was more likely than not to
prevail based on the technical merits of any tax position taken in prior
periods. The tax years 2002-2007 remain open to examination by the major taxing
jurisdictions in which the Partnership is subject to tax.

- 18 -

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|    |        
|--- | -------
|11. | 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
September 30, 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 September 30, 2008 include:

|                                                                                                                |   |                                                                     
|--------------------------------------------------------------------------------------------------------------- | - | --------------------------------------------------------------------
|                                                                                                                |  | An interest
 rate cap with a fair market asset value of $2,142.     
|                                                                                                                |  
|The
 financial liabilities carried at fair value measured via Level 3 inputs as of
 September 30, 2008 include:
|                                                                                                                |  
|                                                                                                                |  | An interest
 rate swap with a fair market liability value of $5,533.
|                                                                                                                |   |                                                                     
|                                                                                                                |  | An interest
 rate swap with a fair market liability value of $3,147.

- 19 -

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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
credit facility to a fixed rate of 8.9%. The fair value of this hedge was a
loss of $5,533 at September 30, 2008 and a loss of $6,643 at December 31, 2007
and is reflected in other comprehensive income in the accompanying financial
statements as this contract has been designated as a cash flow hedge.

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 credit facility to a fixed rate of 8.4%. The fair value of this
hedge was a loss of $3,147 at September 30, 2008 and a loss of $3,449 at
December 31, 2007, and is reflected in other comprehensive income in the
accompanying financial statements, as this contract has been designated as a
cash flow hedge. The counterparty to this interest rate swap is Lehman Brothers
Special Financing, Inc., which the Partnership understands has filed for
protection under the U.S. bankruptcy laws. There can be no assurance that this
entity will honor its obligations under the interest rate swap, although
currently the Partnership is obligated to make, rather than entitled to
receive, payments under the terms of the swap agreement. The failure of the
counterparty to honor its obligations under the interest rate swap may have an
adverse impact on the Partnerships financial condition and liquidity.

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 $112 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 September 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 September 30, 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.

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 September 30, 2008 and December 31, 2007 was
a receivable of $2,142 and $1,950, respectively, and is recorded in Other Assets
on the Unaudited Condensed Consolidated Balance Sheets. The change in the fair
value of the instrument was a loss of $154 and a gain of $192 for the three and
nine months ended September 30, 2008, respectively, and is recorded as a (loss)
gain on derivative financial instruments in the accompanying Unaudited
Condensed Consolidated Statements of Operations and Comprehensive Income,
compared to a loss of $235 for the three months ending September 30, 2007 and a
gain of $496 for the nine months ended September 30, 2007.

- 20 -

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|    |                  
|--- | -----------------
|12. | 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.

Distributions

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.

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.

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.

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 its credit facility in future periods.

Restricted Units / Deferred Equity Compensation

On April 1,
2008, the Partnership issued to each of the non-employee directors of its
general partner who are 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.

- 21 -

---



|    |                           
|--- | --------------------------
|13. | Related Party Transactions

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 $15,495 and $13,743 for the three months ended
September 30, 2008 and September 30, 2007, respectively, and $44,285 and
$40,451 for the nine months ended September 30, 2008 and September 30, 2007,
respectively.

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 three months ended September 30, 2008
and 2007, the Partnership paid $109 and $104, respectively, in connection with
the lease and received $82 and $78, respectively, from its related parties. For
the nine months ended September 30, 2008 and 2007, the Partnership paid $325
and $343, respectively, in connection with the lease and received $243 and
$257, respectively, from its related parties. The former Chairman resigned as
of October 23, 2008.

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 will receive 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 will be performed
by employees of US Shipping General Partner LLC, the Partnerships general
partner. Certain members of the Partnerships management are expected to devote
significant time to the management and operation of the Joint Venture. For the
three months ended September 30, 2008 and 2007, the Partnership recorded $366 and
$119, respectively, in income related to this management agreement; however
these amounts were eliminated in consolidation. For the nine months ended
September 30, 2008 and 2007, the Partnership recorded $992 and $180,
respectively, in income related to this management agreement; however these
amounts were eliminated in consolidation.

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 three and nine months
ended September 30, 2008 Product Manager recognized $366 and $992,
respectively, in fees for these site supervision activities, which were
eliminated in consolidation.

- 22 -

---



Third Party Joint Venture Investors

As
a result of the formation the Joint Venture, the Partnership considers the
third party investors in the Joint Venture led by affiliates of The Blackstone
Group (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 three months ended September 30, 2008 and
2007, the Joint Venture has paid interest of $2,439 and $1,572, respectively,
to the Joint Venture Investors. For the nine months ended September 30, 2008
and 2007, the Joint Venture has paid interest of $6,261 and $4,026,
respectively, to the Joint Venture Investors.

Director Compensation

On
February 6, 2008, the Board of Directors of the general partner approved 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 are fully vested;                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                   
| |  | that directors M. William Macey and Douglas 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; and
| |   |                                                                                                                                                                                                                                                                                                   
| |  | that William
 Kearns be paid an additional annual retainer of $12 for serving as lead
 director of the Board.                                                                                                                                                                                     

Mr. Macey
is a co-founder and managing partner of Sterling Investment Partners, L.P. and
Sterling Investment Partners II, L.P. Mr. Newhouse is a co-founder and managing
partner of Sterling Investment Partners, L.P. and Sterling Investment Partners
II, L.P. 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. Shipping Master owns 100% of the
Partnerships general partner and the Partnerships 6,899,968 subordinated
units outstanding. Messrs. Macey and Newhouse resigned as directors of the
Partnerships general partner in October 2008.

Effective
October 1, 2008, the compensation committee of the board of directors revised
the compensation being paid to its non-management directors. See Note 16, Subsequent Events, for
additional discussion regarding the change in compensation.

|    |                              
|--- | -----------------------------
|14. | Commitments and Contingencies

Claims and Litigation

At
September 30, 2008 and December 31, 2007, the Partnership has a liability for
total claims exposure, both insured and uninsured, of $3,429 and $2,520,
respectively, and a corresponding receivable from the insurance carrier of
$4,422 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
Partnership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 there under.
Legal costs associated with such claims are expensed as incurred.

- 23 -

---



ATB Commitments

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 and entered service in August 2008. The ATB Galveston was completed at a total
cost of $66,553 (excluding capitalized interest, which totaled $6,827). 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 during
November 2008 and will enter service in December 2008. The ATB Brownsville
was completed at a total cost of $67,500 (excluding capitalized interest, which
totaled $5,501 at September 30, 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 November 2009 at a
cost of approximately $69,800 (excluding capitalized interest, which totaled
$3,663 at September 30, 2008). The cost increase over the originally budgeted
amount of $66,000 was principally due to contractually provided cost increases
related to increases in major components, customer requested modifications
(which also delayed the scheduled delivery date from August 2009 to November
2009) and change orders. As of September 30, 2008, the Partnership had in
escrow approximately $18,048, plus $7,565 of funds drawn from the escrow
account in anticipation of payments due in the fourth quarter of 2008.
Approximately $6,550 will be needed to complete construction of the final ATB
and such amount will be derived from the Partnerships operating cash flows and
borrowings under its revolving credit facility.

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 $5,720, 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 costs. During the quarter ended
September 30, 2008, the Partnership accrued additional expenses related to
owner furnished equipment in the amount of $105, and the Partnership may be required
to make additional payments for certain owner furnished equipment but it has no
further financial obligations with regard to either the tug or the barge.

Joint Venture Commitments

On August
7, 2006 the Partnership entered into the Joint Venture to finance the
construction of the first five petroleum tankers. 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 approximately $64,415 was paid through September 30, 2008.
The Partnerships remaining commitment of $5,585 is secured by a letter of
credit for the benefit of the Joint Venture and the Partnership has segregated
an equivalent amount of cash into an escrow account to meet such obligations.
Subsequent to September 30, 2008, the Partnership contributed its remaining
$5,585 equity commitment to the Joint Venture. In addition, the Joint Venture
entered into a revolving notes facility agreement pursuant to which the Joint
Venture Investors have made available $325,000 of revolving credit loans to
finance construction of the tankers, of which $126,838 has been borrowed at
September 30, 2008.

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 three months ended September 30, 2008. The impact of this
out of period adjustment is an additional allocation of losses to the
Partnership, recorded through the Non-controlling interest line, of $1,029 in
the three months ended September 30, 2008. Future Joint Venture losses will be
fully allocated to the Partnership.

- 24 -

---



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. The
Partnership currently expects 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. 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 Investors 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 is obligated to obtain alternative financing for their construction or
to transfer the shipyard slots. Given current market conditions and our
financial condition, it is unlikely that Product Carriers will be able to
obtain the necessary financing. If Product Carriers is unable to obtain the
financing for these four tankers, it 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 believes that
there is substantial uncertainty that the Partnership
will realize any return on or of its $70 million equity
investment in the Joint Venture.

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 and subject to a final true-up following expiration of the
support agreement. 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 to 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
is recognized in the carrying values of the ITBs at September 30, 2008.

|    |                                   
|--- | ----------------------------------
|15. | 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. (the Parent) and
U.S. Shipping Finance Corp. (Subsidiary Issuer, together with the Parent, the
Issuers of the Partnerships $100,000 13% Senior Secured Notes due 2014 (the
Notes)), the Partnerships subsidiary guarantors of such Notes and the
Partnerships subsidiary non-guarantors of such Notes comprised of Product
Carriers and the Joint Venture and its subsidiaries. All of the Partnerships
wholly-owned subsidiaries other than the non-guarantor subsidiaries guarantee
the 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 non-guarantor subsidiaries consist of
Product Carriers, the Joint Venture and subsidiaries of the Joint Venture.

- 25 -

---



The
Partnerships Joint Venture and its subsidiaries, are contractually restricted
from distributing assets to the Partnership 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.

U.S. Shipping Partners L.P. 
Unaudited Consolidating Balance Sheet 
As of September 30, 2008 
(in thousands)

|                                                         |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|-------------------------------------------------------- |  | -------- | ------- | -------------------- | - | ----------------------- | - | ------------------------------- | ------- | ----------- | - | ------- |  | - | -------- | - | - | ------- | -
|                                                         |  | Parent * |         | Subsidiary
 Issuer * |   | Guarantor
 Subsidiaries |   | Non-
 Guarantor
 Subsidiaries** |         | Adjustments |   | Total   | 
|                                                         |  |          |         |                      |   |                         |   |                                 |         |             |   |         | 
|Assets                                                   |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|Current assets                                           |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|Cash and equivalents                                     |  | $        |        |                      | $ |                        |   | $                               | 17,181  |             | $ | 15      |  | $ |         |   | $ | 17,196  |  
|Current portion of restricted cash and
equivalents       |  |          |        |                      |   |                        |   |                                 | 23,633  |             |   |        |  |   |         |   |   | 23,633  |  
|Accounts receivable, net                                 |  |          |        |                      |   |                        |   |                                 | 7,549   |             |   |        |  |   |         |   |   | 7,549   |  
|Prepaid expenses and other current assets                |  |          |        |                      |   |                        |   |                                 | 21,988  |             |   | 276     |  |   |         |   |   | 22,264  |  
|                                                         |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|Total current assets                                     |  |          |        |                      |   |                        |   |                                 | 70,351  |             |   | 291     |  |   |         |   |   | 70,642  |  
|Investment in subsidiaries,
 net                         |  |          | 195,179 |                      |   |                        |   |                                 |        |             |   |        |  |   | (195,179 | ) |   |        |  
|Intercompany receivable                                  |  |          | 262,709 |                      |   | 66,964                  |   |                                 |        |             |   |        |  |   | (329,673 | ) |   |        |  
|Restricted cash and
 equivalents, net of current portion |  |          |        |                      |   |                        |   |                                 |        |             |   |        |  |   |         |   |   |        |  
|Vessels and equipment, net                               |  |          |        |                      |   |                        |   |                                 | 363,389 |             |   | 264,464 |  |   |         |   |   | 627,853 |  
|Deferred financing costs,
 net                           |  |          | 8,198   |                      |   | 3,638                   |   |                                 |        |             |   | 7,544   |  |   | (3,638   | ) |   | 15,742  |  
|Other assets                                             |  |          |        |                      |   |                        |   |                                 | 1,064   |             |   | 2,142   |  |   |         |   |   | 3,206   |  
|                                                         |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|Total assets                                             |  | $        | 466,086 |                      | $ | 70,602                  |   | $                               | 434,804 |             | $ | 274,441 |  | $ | (528,490 | ) | $ | 717,443 |  
|                                                         |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|                                                         |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|Liabilities
 and Partners Capital                       |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|Current liabilities                                      |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|Current portion of long-term debt                        |  | $        | 431,973 |                      | $ |                        |   | $                               |        |             | $ |        |  | $ |         |   | $ | 431,973 |  
|Accounts payable                                         |  |          |        |                      |   |                        |   |                                 | 7,162   |             |   |        |  |   |         |   |   | 7,162   |  
|Due to affiliates                                        |  |          |        |                      |   |                        |   |                                 | 2,399   |             |   | 248     |  |   |         |   |   | 2,647   |  
|Deferred revenue                                         |  |          |        |                      |   |                        |   |                                 | 6,320   |             |   |        |  |   |         |   |   | 6,320   |  
|Accrued expenses and other liabilities                   |  |          |        |                      |   |                        |   |                                 | 14,226  |             |   | 7,422   |  |   |         |   |   | 21,648  |  
|                                                         |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|Total current liabilities                                |  |          | 431,973 |                      |   |                        |   |                                 | 30,107  |             |   | 7,670   |  |   |         |   |   | 469,750 |  
|Intercompany payable                                     |  |          |        |                      |   |                        |   |                                 | 262,709 |             |   |        |  |   | (262,709 | ) |   |        |  
|Long-term debt, net of current portion                   |  |          |        |                      |   | 100,000                 |   |                                 |        |             |   | 126,838 |  |   | (100,000 | ) |   | 126,838 |  
|Deferred income taxes                                    |  |          |        |                      |   |                        |   |                                 | 182     |             |   |        |  |   |         |   |   | 182     |  
|Other liabilities                                        |  |          | 8,680   |                      |   |                        |   |                                 | 1,084   |             |   |        |  |   |         |   |   | 9,764   |  
|                                                         |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|Total liabilities                                        |  |          | 440,653 |                      |   | 100,000                 |   |                                 | 294,082 |             |   | 134,508 |  |   | (362,709 | ) |   | 606,534 |  
|                                                         |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|                                                         |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|Noncontrolling interest in Joint Venture                 |  |          |        |                      |   |                        |   |                                 |        |             |   | 85,476  |  |   |         |   |   | 85,476  |  
|                                                         |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|                                                         |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|Commitments and contingencies                            |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|                                                         |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|Partners Capital                                        |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|Partners capital                                        |  |          | 33,293  |                      |   | (29,398                 | ) |                                 | 140,722 |             |   | 54,457  |  |   | (165,781 | ) |   | 33,293  |  
|Accumulated other comprehensive loss                     |  |          | (7,860  | )                    |   |                        |   |                                 |        |             |   |        |  |   |         |   |   | (7,860  | )
|                                                         |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|Total partners capital                                  |  |          | 25,433  |                      |   | (29,398                 | ) |                                 | 140,722 |             |   | 54,457  |  |   | (165,781 | ) |   | 25,433  |  
|                                                         |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  
|Total liabilities and partners
capital                  |  | $        | 466,086 |                      | $ | 70,602                  |   | $                               | 434,804 |             | $ | 274,441 |  | $ | (528,490 | ) | $ | 717,443 |  
|                                                         |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  |   |          |   |   |         |  

*   Both the Parent and the Subsidiary Issuer are co-issuers of $100,000 in 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.

- 26 -

---



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 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.

- 27 -

---



U.S. Shipping Partners L.P. 
Unaudited Consolidating Statement of Operations 
Three Months Ended September 30, 2008 
(in thousands)

|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |        |   |   |         |  
|-------------------------------------------------------------- |  | -------- | ------- | -------------------- | - | ----------------------- | - | ------------------------------- | ------- | ----------- | - | ------ | - | - | ------ | - | - | ------- | -
|                                                               |  | Parent * |         | Subsidiary
 Issuer * |   | Guarantor
 Subsidiaries |   | Non-
 Guarantor
 Subsidiaries** |         | Adjustments |   | Total  |  
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |  
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |        |   |   |         |  
|Revenues                                                       |  | $        |        |                      | $ |                        |   | $                               | 48,588  |             | $ |       |   | $ |       |   | $ | 48,588  |  
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |        |   |   |         |  
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |        |   |   |         |  
|Operating expenses                                             |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |        |   |   |         |  
|Vessel operating expenses                                      |  |          |        |                      |   |                        |   |                                 | 18,064  |             |   |       |   |   |       |   |   | 18,064  |  
|Voyage expenses                                                |  |          |        |                      |   |                        |   |                                 | 20,329  |             |   |       |   |   |       |   |   | 20,329  |  
|General and administrative expenses                            |  |          |        |                      |   |                        |   |                                 | 5,718   |             |   | 402    |   |   |       |   |   | 6,120   |  
|Impairment charges                                             |  |          |        |                      |   |                        |   |                                 | 72,363  |             |   |       |   |   |       |   |   | 72,363  |  
|Depreciation and amortization                                  |  |          |        |                      |   |                        |   |                                 | 10,610  |             |   |       |   |   |       |   |   | 10,610  |  
|Other expense                                                  |  |          |        |                      |   |                        |   |                                 | 1,070   |             |   |       |   |   |       |   |   | 1,070   |  
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |        |   |   |         |  
|Total operating expenses, net                                  |  |          |        |                      |   |                        |   |                                 | 128,154 |             |   | 402    |   |   |       |   |   | 128,556 |  
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |        |   |   |         |  
|Operating (loss) income                                        |  |          |        |                      |   |                        |   |                                 | (79,566 | )           |   | (402   | ) |   |       |   |   | (79,968 | )
|Interest expense                                               |  |          | 7,049   |                      |   | 3,407                   |   |                                 |        |             |   |       |   |   | (3,407 | ) |   | 7,049   |  
|Interest income                                                |  |          |        |                      |   |                        |   |                                 | (235    | )           |   |       |   |   |       |   |   | (235    | )
|Net losses (gains) on derivative financial
 instruments        |  |          | (146    | )                    |   |                        |   |                                 | 1       |             |   | 154    |   |   |       |   |   | 9       |  
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |        |   |   |         |  
|(Loss) income before income taxes and
 noncontrolling interest |  |          | (6,903  | )                    |   | (3,407                  | ) |                                 | (79,332 | )           |   | (556   | ) |   | 3,407  |   |   | (86,791 | )
|Provision for income taxes                                     |  |          |        |                      |   |                        |   |                                 | (337    | )           |   |       |   |   |       |   |   | (337    | )
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |        |   |   |         |  
|(Loss) income before noncontrolling
interest                   |  |          | (6,903  | )                    |   | (3,407                  | ) |                                 | (78,995 | )           |   | (556   | ) |   | 3,407  |   |   | (86,454 | )
|Equity in earnings of unconsolidated
 subsidiaries             |  |          | (80,580 | )                    |   |                        |   |                                 |        |             |   |       |   |   | 80,580 |   |   |        |  
|Noncontrolling interest in Joint Venture
 losses               |  |          |        |                      |   |                        |   |                                 |        |             |   | (1,029 | ) |   |       |   |   | (1,029  | )
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |        |   |   |         |  
|Net (loss) income                                              |  | $        | (87,483 | )                    | $ | (3,407                  | ) | $                               | (78,995 | )           | $ | (1,585 | ) | $ | 83,987 |   | $ | (87,483 | )
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |        |   |   |         |  

* Both the
Parent and the Subsidiary Issuer are co-issuers of $100,000 in Notes.
Accordingly, the interest expense in respect of the Notes has been presented as
an expense of both entities in the above consolidating statement of operations.

- 28 -

---



U.S. Shipping Partners L.P. 
Unaudited Consolidating Statement of Operations 
Nine Months Ended September 30, 2008 
(in thousands)

|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |         |   |   |         |  
|-------------------------------------------------------------- |  | -------- | ------- | -------------------- | - | ----------------------- | - | ------------------------------- | ------- | ----------- | - | ------ | - | - | ------- | - | - | ------- | -
|                                                               |  | Parent * |         | Subsidiary
 Issuer * |   | Guarantor
 Subsidiaries |   | Non-
 Guarantor
 Subsidiaries** |         | Adjustments |   | Total  |  
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |  
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |         |   |   |         |  
|Revenues                                                       |  | $        |        |                      | $ |                        |   | $                               | 149,911 |             | $ |       |   | $ |        |   | $ | 149,911 |  
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |         |   |   |         |  
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |         |   |   |         |  
|Operating expenses                                             |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |         |   |   |         |  
|Vessel operating expenses                                      |  |          |        |                      |   |                        |   |                                 | 51,469  |             |   |       |   |   |        |   |   | 51,469  |  
|Voyage expenses                                                |  |          |        |                      |   |                        |   |                                 | 51,339  |             |   |       |   |   |        |   |   | 51,339  |  
|General and administrative expenses                            |  |          | 183     |                      |   |                        |   |                                 | 12,742  |             |   | 1,200  |   |   |        |   |   | 14,125  |  
|Impairment charges                                             |  |          |        |                      |   |                        |   |                                 | 78,075  |             |   |       |   |   |        |   |   | 78,075  |  
|Depreciation and amortization                                  |  |          |        |                      |   |                        |   |                                 | 31,559  |             |   |       |   |   |        |   |   | 31,559  |  
|Other expense                                                  |  |          |        |                      |   |                        |   |                                 | 1,190   |             |   |       |   |   |        |   |   | 1,190   |  
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |         |   |   |         |  
|Total operating expenses, net                                  |  |          | 183     |                      |   |                        |   |                                 | 226,374 |             |   | 1,200  |   |   |        |   |   | 227,757 |  
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |         |   |   |         |  
|Operating (loss) income                                        |  |          | (183    | )                    |   |                        |   |                                 | (76,463 | )           |   | (1,200 | ) |   |        |   |   | (77,846 | )
|Interest expense                                               |  |          | 21,819  |                      |   | 10,221                  |   |                                 |        |             |   |       |   |   | (10,221 | ) |   | 21,819  |  
|Interest income                                                |  |          |        |                      |   |                        |   |                                 | (1,930  | )           |   |       |   |   |        |   |   | (1,930  | )
|Net (gains) losses on derivative financial
 instruments        |  |          | (827    | )                    |   |                        |   |                                 |        |             |   | (192   | ) |   |        |   |   | (1,019  | )
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |         |   |   |         |  
|(Loss) income before income taxes and
 noncontrolling interest |  |          | (21,175 | )                    |   | (10,221                 | ) |                                 | (74,533 | )           |   | (1,008 | ) |   | 10,221  |   |   | (96,716 | )
|Provision for income taxes                                     |  |          |        |                      |   |                        |   |                                 | (1,559  | )           |   |       |   |   |        |   |   | (1,559  | )
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |         |   |   |         |  
|(Loss) income before noncontrolling
 interest                  |  |          | (21,175 | )                    |   | (10,221                 | ) |                                 | (72,974 | )           |   | (1,008 | ) |   | 10,221  |   |   | (95,157 | )
|Equity in earnings of unconsolidated
 subsidiaries             |  |          | (74,769 | )                    |   |                        |   |                                 |        |             |   |       |   |   | 74,769  |   |   |        |  
|Noncontrolling interest in Joint Venture
 losses               |  |          |        |                      |   |                        |   |                                 |        |             |   | (787   | ) |   |        |   |   | (787    | )
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |         |   |   |         |  
|Net (loss) income                                              |  | $        | (95,944 | )                    | $ | (10,221                 | ) | $                               | (72,974 | )           | $ | (1,795 | ) | $ | 84,990  |   | $ | (95,944 | )
|                                                               |  |          |         |                      |   |                         |   |                                 |         |             |   |        |   |   |         |   |   |         |  

* Both the
Parent and the Subsidiary Issuer are co-issuers of $100,000 in Notes.
Accordingly, the interest expense in respect of the Notes has been presented as
an expense of both entities in the above consolidating statement of operations.

- 29 -

---



U.S. Shipping Partners L.P.
Unaudited Consolidating Statement of Operations
Three Months Ended September 30, 2007
(in thousands)

|                                                        |  |          |        |                      |   |                         |   |                                 |        |             |   |       |   |   |        |   |   |        |  
|------------------------------------------------------- |  | -------- | ------ | -------------------- | - | ----------------------- | - | ------------------------------- | ------ | ----------- | - | ----- | - | - | ------ | - | - | ------ | -
|                                                        |  | Parent * |        | Subsidiary
 Issuer * |   | Guarantor
 Subsidiaries |   | Non-
 Guarantor
 Subsidiaries** |        | Adjustments |   | Total |  
|                                                        |  |          |        |                      |   |                         |   |                                 |        |             |   |       |  
|                                                        |  |          |        |                      |   |                         |   |                                 |        |             |   |       |   |   |        |   |   |        |  
|Revenues                                                |  | $        |       |                      | $ |                        |   | $                               | 45,559 |             | $ |      |   | $ |       |   | $ | 45,559 |  
|                                                        |  |          |        |                      |   |                         |   |                                 |        |             |   |       |   |   |        |   |   |        |  
|                                                        |  |          |        |                      |   |                         |   |                                 |        |             |   |       |   |   |        |   |   |        |  
|Operating expenses                                      |  |          |        |                      |   |                         |   |                                 |        |             |   |       |   |   |        |   |   |        |  
|Vessel operating expenses                               |  |          |       |                      |   |                        |   |                                 | 16,762 |             |   |      |   |   |       |   |   | 16,762 |  
|Voyage expenses                                         |  |          |       |                      |   |                        |   |                                 | 11,360 |             |   |      |   |   |       |   |   | 11,360 |  
|General and administrative expenses                     |  |          | 37     |                      |   |                        |   |                                 | 3,264  |             |   | 386   |   |   |       |   |   | 3,687  |  
|Depreciation and amortization                           |  |          |       |                      |   |                        |   |                                 | 9,831  |             |   |      |   |   |       |   |   | 9,831  |  
|                                                        |  |          |        |                      |   |                         |   |                                 |        |             |   |       |   |   |        |   |   |        |  
|Total operating expenses, net                           |  |          | 37     |                      |   |                        |   |                                 | 41,217 |             |   | 386   |   |   |       |   |   | 41,640 |  
|                                                        |  |          |        |                      |   |                         |   |                                 |        |             |   |       |   |   |        |   |   |        |  
|Operating (loss) income                                 |  |          | (37    | )                    |   |                        |   |                                 | 4,342  |             |   | (386  | ) |   |       |   |   | 3,919  |  
|Interest expense                                        |  |          | 8,848  |                      |   | 3,407                   |   |                                 |       |             |   |      |   |   | (3,407 | ) |   | 8,848  |  
|Interest income                                         |  |          |       |                      |   |                        |   |                                 | (2,471 | )           |   |      |   |   |       |   |   | (2,471 | )
|Loss on derivative financial instruments                |  |          |       |                      |   |                        |   |                                 |       |             |   | 235   |   |   |       |   |   | 235    |  
|                                                        |  |          |        |                      |   |                         |   |                                 |        |             |   |       |   |   |        |   |   |        |  
|(Loss) income before income taxes and minority
interest |  |          | (8,885 | )                    |   | (3,407                  | ) |                                 | 6,813  |             |   | (621  | ) |   | 3,407  |   |   | (2,693 | )
|Benefit for income taxes                                |  |          |       |                      |   |                        |   |                                 | (364   | )           |   |      |   |   |       |   |   | (364   | )
|                                                        |  |          |        |                      |   |                         |   |                                 |        |             |   |       |   |   |        |   |   |        |  
|(Loss) income before minority interest                  |  |          | (8,885 | )                    |   | (3,407                  | ) |                                 | 7,177  |             |   | (621  | ) |   | 3,407  |   |   | (2,329 | )
|Equity in earnings of unconsolidated affiliates         |  |          | 6,907  |                      |   |                        |   |                                 |       |             |   |      |   |   | (6,907 | ) |   |       |  
|Minority interest in Joint Venture loss                 |  |          |       |                      |   |                        |   |                                 |       |             |   | 351   |   |   |       |   |   | 351    |  
|                                                        |  |          |        |                      |   |                         |   |                                 |        |             |   |       |   |   |        |   |   |        |  
|Net (loss) income                                       |  | $        | (1,978 | )                    | $ | (3,407                  | ) | $                               | 7,177  |             | $ | (270  | ) | $ | (3,500 | ) | $ | (1,978 | )
|                                                        |  |          |        |                      |   |                         |   |                                 |        |             |   |       |   |   |        |   |   |        |  

* Both the Parent and the
Subsidiary Issuer are co-issuers of $100,000 in Notes. Accordingly, the
interest expense in respect of the Notes has been presented as an expense of
both entities in the above consolidating statement of operations.

** Consists of the Joint
Venture and the Partnerships wholly-owned subsidiary that owns its investment
in the Joint Venture.

- 30 -

---



U.S. Shipping Partners L.P.
Unaudited Consolidating Statement of Operations
Nine Months Ended September 30, 2007
(in thousands)

|                                                        |  |          |         |                      |   |                         |   |                                 |         |             |   |       |   |   |         |   |   |         |  
|------------------------------------------------------- |  | -------- | ------- | -------------------- | - | ----------------------- | - | ------------------------------- | ------- | ----------- | - | ----- | - | - | ------- | - | - | ------- | -
|                                                        |  | Parent * |         | Subsidiary
 Issuer * |   | Guarantor
 Subsidiaries |   | Non-
 Guarantor
 Subsidiaries** |         | Adjustments |   | Total |  
|                                                        |  |          |         |                      |   |                         |   |                                 |         |             |   |       |  
|                                                        |  |          |         |                      |   |                         |   |                                 |         |             |   |       |  
|Revenues                                                |  | $        |        |                      | $ |                        |   | $                               | 133,262 |             | $ |      |   | $ |        |   | $ | 133,262 |  
|                                                        |  |          |         |                      |   |                         |   |                                 |         |             |   |       |   |   |         |   |   |         |  
|                                                        |  |          |         |                      |   |                         |   |                                 |         |             |   |       |   |   |         |   |   |         |  
|Operating expenses                                      |  |          |         |                      |   |                         |   |                                 |         |             |   |       |   |   |         |   |   |         |  
|Vessel operating expenses                               |  |          |        |                      |   |                        |   |                                 | 49,087  |             |   |      |   |   |        |   |   | 49,087  |  
|Voyage expenses                                         |  |          |        |                      |   |                        |   |                                 | 27,509  |             |   |      |   |   |        |   |   | 27,509  |  
|General and administrative expenses                     |  |          | 74      |                      |   |                        |   |                                 | 11,100  |             |   | 519   |   |   |        |   |   | 11,693  |  
|Depreciation and amortization                           |  |          |        |                      |   |                        |   |                                 | 27,933  |             |   |      |   |   |        |   |   | 27,933  |  
|Other expense (income)                                  |  |          |        |                      |   |                        |   |                                 | (3,486  | )           |   |      |   |   |        |   |   | (3,486  | )
|                                                        |  |          |         |                      |   |                         |   |                                 |         |             |   |       |   |   |         |   |   |         |  
|Total operating expenses, net                           |  |          | 74      |                      |   |                        |   |                                 | 112,143 |             |   | 519   |   |   |        |   |   | 112,736 |  
|                                                        |  |          |         |                      |   |                         |   |                                 |         |             |   |       |   |   |         |   |   |         |  
|Operating (loss) income                                 |  |          | (74     | )                    |   |                        |   |                                 | 21,119  |             |   | (519  | ) |   |        |   |   | 20,526  |  
|Interest expense                                        |  |          | 22,419  |                      |   | 10,228                  |   |                                 |        |             |   | 1     |   |   | (10,228 | ) |   | 22,420  |  
|Interest income                                         |  |          |        |                      |   |                        |   |                                 | (7,713  | )           |   | (5    | ) |   |        |   |   | (7,718  | )
|Gain on derivative financial instruments                |  |          | (173    | )                    |   |                        |   |                                 |        |             |   | (496  | ) |   |        |   |   | (669    | )
|                                                        |  |          |         |                      |   |                         |   |                                 |         |             |   |       |   |   |         |   |   |         |  
|(Loss) income before income taxes and minority
interest |  |          | (22,320 | )                    |   | (10,228                 | ) |                                 | 28,832  |             |   | (19   | ) |   | 10,228  |   |   | 6,493   |  
|Provision for income taxes                              |  |          |        |                      |   |                        |   |                                 | 258     |             |   |      |   |   |        |   |   | 258     |  
|                                                        |  |          |         |                      |   |                         |   |                                 |         |             |   |       |   |   |         |   |   |         |  
|(Loss) income before minority interest                  |  |          | (22,320 | )                    |   | (10,228                 | ) |                                 | 28,574  |             |   | (19   | ) |   | 10,228  |   |   | 6,235   |  
|Equity in earnings of unconsolidated affiliates         |  |          | 28,499  |                      |   |                        |   |                                 |        |             |   |      |   |   | (28,499 | ) |   |        |  
|Minority interest in Joint Venture income               |  |          |        |                      |   |                        |   |                                 |        |             |   | (56   | ) |   |        |   |   | (56     | )
|                                                        |  |          |         |                      |   |                         |   |                                 |         |             |   |       |   |   |         |   |   |         |  
|Net income (loss)                                       |  | $        | 6,179   |                      | $ | (10,228                 | ) | $                               | 28,574  |             | $ | (75   | ) | $ | (18,271 | ) | $ | 6,179   |  
|                                                        |  |          |         |                      |   |                         |   |                                 |         |             |   |       |   |   |         |   |   |         |  

* Both the Parent and the
Subsidiary Issuer are co-issuers of $100,000 in Notes. Accordingly, the
interest expense in respect of the Notes has been presented as an expense of
both entities in the above consolidating statement of operations.

** Consists of the Joint
Venture and the Partnerships wholly-owned subsidiary that owns its investment
in the Joint Venture.

- 31 -

---



U.S. Shipping Partners L.P.
Unaudited Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2008
(in thousands)

|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |          |   |   |         |   |   |          |  
|------------------------------------------------------------------------------------------------------ |  | -------- | ------- | -------------------- | - | ----------------------- | - | ------------------------------- | ------- | ----------- | - | -------- | - | - | ------- | - | - | -------- | -
|                                                                                                       |  | Parent * |         | Subsidiary
 Issuer * |   | Guarantor
 Subsidiaries |   | Non-
 Guarantor
 Subsidiaries** |         | Adjustments |   | Total    |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |          |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |          |  
|Cash flows from operating activities                                                                   |  |          |         |                      |   |                         |   |                                 |         |             |   |          |   |   |         |   |   |          |  
|Net (loss) income                                                                                      |  | $        | (95,944 | )                    | $ | (10,221                 | ) | $                               | (72,974 | )           | $ | (1,795   | ) | $ | 84,990  |   | $ | (95,944  | )
|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 |  |          | 1,388   |                      |   | 471                     |   |                                 | 31,556  |             |   |         |   |   | (471    | ) |   | 32,944   |  
|Impairment Charge                                                                                      |  |          |        |                      |   |                        |   |                                 | 78,075  |             |   |         |   |   |        |   |   | 78,075   |  
|Nonrecurring insurance surcharge                                                                       |  |          |        |                      |   |                        |   |                                 | 1,057   |             |   |         |   |   |        |   |   | 1,057    |  
|Loss on sale of surplus equipment                                                                      |  |          |        |                      |   |                        |   |                                 | 120     |             |   |         |   |   |        |   |   | 120      |  
|Equity compensation                                                                                    |  |          | 183     |                      |   |                        |   |                                 |        |             |   |         |   |   |        |   |   | 183      |  
|Provision for accounts receivable                                                                      |  |          |        |                      |   |                        |   |                                 | 387     |             |   |         |   |   |        |   |   | 387      |  
|Noncontrolling interest in Joint Venture
loss                                                          |  |          |        |                      |   |                        |   |                                 |        |             |   | 787      |   |   |        |   |   | 787      |  
|Gain on derivative financial instruments                                                               |  |          | (827    | )                    |   |                        |   |                                 |        |             |   | (192     | ) |   |        |   |   | (1,019   | )
|Deferred income taxes                                                                                  |  |          |        |                      |   |                        |   |                                 | (1,290  | )           |   |         |   |   |        |   |   | (1,290   | )
|Capitalized drydock costs                                                                              |  |          |        |                      |   |                        |   |                                 | (2,632  | )           |   |         |   |   |        |   |   | (2,632   | )
|Equity in earnings of unconsolidated
subsidiaries                                                      |  |          | 74,769  |                      |   |                        |   |                                 |        |             |   |         |   |   | (74,769 | ) |   |         |  
|Changes in assets and liabilities:                                                                     |  |          |         |                      |   |                         |   |                                 |         |             |   |          |   |   |         |   |   |          |  
|Accounts receivable                                                                                    |  |          |        |                      |   |                        |   |                                 | 3,546   |             |   |         |   |   |        |   |   | 3,546    |  
|Prepaid expenses and other current assets                                                              |  |          |        |                      |   |                        |   |                                 | (14,041 | )           |   |         |   |   |        |   |   | (14,041  | )
|Other assets                                                                                           |  |          |        |                      |   |                        |   |                                 | 857     |             |   | (300     | ) |   |        |   |   | 557      |  
|Accounts payable                                                                                       |  |          |        |                      |   |                        |   |                                 | (1,328  | )           |   |         |   |   |        |   |   | (1,328   | )
|Deferred revenue                                                                                       |  |          |        |                      |   |                        |   |                                 | 5,127   |             |   |         |   |   |        |   |   | 5,127    |  
|Accrued expenses and other liabilities                                                                 |  |          |        |                      |   |                        |   |                                 | 5,828   |             |   | (4,624   | ) |   |        |   |   | 1,204    |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |          |   |   |         |   |   |          |  
|Net
 cash (used in) provided by operating activities                                                   |  |          | (20,431 | )                    |   | (9,750                  | ) |                                 | 34,288  |             |   | (6,124   | ) |   | 9,750   |   |   | 7,733    |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |          |   |   |         |   |   |          |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |          |   |   |         |   |   |          |  
|Cash flows from investing activities                                                                   |  |          |         |                      |   |                         |   |                                 |         |             |   |          |   |   |         |   |   |          |  
|Change in restricted cash and equivalents, net                                                         |  |          |        |                      |   |                        |   |                                 | 101,649 |             |   |         |   |   |        |   |   | 101,649  |  
|Sale of surplus equipment                                                                              |  |          |        |                      |   |                        |   |                                 | 280     |             |   |         |   |   |        |   |   | 280      |  
|Construction of vessels and equipment                                                                  |  |          |        |                      |   |                        |   |                                 | (89,750 | )           |   | (165,087 | ) |   |        |   |   | (254,837 | )
|Gain on derivative financial instruments                                                               |  |          |        |                      |   |                        |   |                                 | 827     |             |   |         |   |   |        |   |   | 827      |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |          |   |   |         |   |   |          |  
|Net
 cash provided by (used in) investing activities                                                   |  |          |        |                      |   |                        |   |                                 | 13,006  |             |   | (165,087 | ) |   |        |   |   | (152,081 | )
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |          |   |   |         |   |   |          |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |          |   |   |         |   |   |          |  
|Cash flows from financing activities                                                                   |  |          |         |                      |   |                         |   |                                 |         |             |   |          |   |   |         |   |   |          |  
|Proceeds from borrowings                                                                               |  |          | 15,500  |                      |   |                        |   |                                 |        |             |   |         |   |   |        |   |   | 15,500   |  
|Proceeds from Joint Venture revolver borrowings                                                        |  |          |        |                      |   |                        |   |                                 |        |             |   | 85,609   |   |   |        |   |   | 85,609   |  
|Contribution by noncontrolling interest equity investors in Joint
 Venture                             |  |          |        |                      |   |                        |   |                                 |        |             |   | 85,609   |   |   | (34,244 | ) |   | 51,365   |  
|Repayment of debt                                                                                      |  |          | (2,325  | )                    |   |                        |   |                                 |        |             |   |         |   |   |        |   |   | (2,325   | )
|Intercompany receivable / payable                                                                      |  |          | 17,465  |                      |   | 9,750                   |   |                                 | (51,709 | )           |   |         |   |   | 24,494  |   |   |         |  
|Distributions to partners                                                                              |  |          | (10,209 | )                    |   |                        |   |                                 |        |             |   |         |   |   |        |   |   | (10,209  | )
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |          |   |   |         |   |   |          |  
|Net
 cash provided by (used in) financing activities                                                   |  | $        | 20,431  |                      | $ | 9,750                   |   | $                               | (51,709 | )           | $ | 171,218  |   | $ | (9,750  | ) | $ | 139,940  |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |          |   |   |         |   |   |          |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |          |   |   |         |   |   |          |  
|Net increase (decrease) in cash and cash equivalents                                                   |  |          |        |                      |   |                        |   |                                 | (4,415  | )           |   | 7        |   |   |        |   |   | (4,408   | )
|Cash and cash equivalents at beginning of period                                                       |  |          |        |                      |   |                        |   |                                 | 21,596  |             |   | 8        |   |   |        |   |   | 21,604   |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |          |   |   |         |   |   |          |  
|Cash and cash equivalents at end of period                                                             |  | $        |        |                      | $ |                        |   | $                               | 17,181  |             | $ | 15       |   | $ |        |   | $ | 17,196   |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |          |   |   |         |   |   |          |  

* 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.

- 32 -

---



U.S. Shipping Partners L.P.
Unaudited Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2007
(in thousands)

|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |         |   |   |         |   |   |          |  
|------------------------------------------------------------------------------------------------------ |  | -------- | ------- | -------------------- | - | ----------------------- | - | ------------------------------- | ------- | ----------- | - | ------- | - | - | ------- | - | - | -------- | -
|                                                                                                       |  | Parent * |         | Subsidiary
 Issuer * |   | Guarantor
 Subsidiaries |   | Non-
 Guarantor
 Subsidiaries** |         | Adjustments |   | Total   |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |         |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |         |   |   |         |   |   |          |  
|Cash flows from operating activities                                                                   |  |          |         |                      |   |                         |   |                                 |         |             |   |         |   |   |         |   |   |          |  
|Net income (loss)                                                                                      |  |          | 6,179   |                      |   | (10,228                 | ) |                                 | 28,574  |             |   | (75     | ) |   | (18,271 | ) | $ | 6,179    |  
|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 |  |          | 1,256   |                      |   | 478                     |   |                                 | 27,932  |             |   |        |   |   | (478    | ) |   | 29,188   |  
|Provision for accounts receivable                                                                      |  |          |        |                      |   |                        |   |                                 | 479     |             |   |        |   |   |        |   |   | 479      |  
|Deferred income taxes                                                                                  |  |          |        |                      |   |                        |   |                                 | (552    | )           |   |        |   |   |        |   |   | (552     | )
|Equity compensation                                                                                    |  |          | 74      |                      |   |                        |   |                                 |        |             |   |        |   |   |        |   |   | 74       |  
|Minority interest in Joint Venture income                                                              |  |          |        |                      |   |                        |   |                                 |        |             |   | 56      |   |   |        |   |   | 56       |  
|Gain on derivative financial instruments                                                               |  |          | (173    | )                    |   |                        |   |                                 |        |             |   | (496    | ) |   |        |   |   | (669     | )
|Capitalized drydock costs                                                                              |  |          |        |                      |   |                        |   |                                 | (9,696  | )           |   |        |   |   |        |   |   | (9,696   | )
|Equity in earnings of unconsolidated
subsidiaries                                                      |  |          | (28,499 | )                    |   |                        |   |                                 |        |             |   |        |   |   | 28,499  |   |   |         |  
|Changes in assets and liabilities:                                                                     |  |          |         |                      |   |                         |   |                                 |         |             |   |         |   |   |         |   |   |          |  
|Accounts receivable                                                                                    |  |          |        |                      |   |                        |   |                                 | (2,491  | )           |   |        |   |   |        |   |   | (2,491   | )
|Prepaid expenses and other current assets                                                              |  |          |        |                      |   |                        |   |                                 | (3,849  | )           |   | 19      |   |   |        |   |   | (3,830   | )
|Other assets                                                                                           |  |          |        |                      |   |                        |   |                                 | (95     | )           |   |        |   |   |        |   |   | (95      | )
|Accounts payable                                                                                       |  |          |        |                      |   |                        |   |                                 | 1,466   |             |   |        |   |   |        |   |   | 1,466    |  
|Deferred revenue                                                                                       |  |          |        |                      |   |                        |   |                                 | (1,178  | )           |   |        |   |   |        |   |   | (1,178   | )
|Accrued expenses and other liabilities                                                                 |  |          |        |                      |   |                        |   |                                 | 34      |             |   | 60      |   |   |        |   |   | 94       |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |         |   |   |         |   |   |          |  
|Net
 cash (used in) provided by operating activities                                                   |  |          | (21,163 | )                    |   | (9,750                  | ) |                                 | 40,624  |             |   | (436    | ) |   | 9,750   |   |   | 19,025   |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |         |   |   |         |   |   |          |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |         |   |   |         |   |   |          |  
|Cash flows from investing activities                                                                   |  |          |         |                      |   |                         |   |                                 |         |             |   |         |   |   |         |   |   |          |  
|Change in restricted cash and equivalents, net                                                         |  |          |        |                      |   |                        |   |                                 | 55,762  |             |   |        |   |   |        |   |   | 55,762   |  
|Cash received upon settlement of derivative financial
instruments                                      |  |          | 173     |                      |   |                        |   |                                 |        |             |   |        |   |   |        |   |   | 173      |  
|Payments to Hess, net                                                                                  |  |          |        |                      |   |                        |   |                                 | (447    | )           |   |        |   |   |        |   |   | (447     | )
|Purchase of interest rate cap                                                                          |  |          |        |                      |   |                        |   |                                 |        |             |   | (1,924  | ) |   |        |   |   | (1,924   | )
|Construction of vessels and equipment                                                                  |  |          |        |                      |   |                        |   |                                 | (82,459 | )           |   | (28,193 | ) |   |        |   |   | (110,652 | )
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |         |   |   |         |   |   |          |  
|Net
 cash provided by (used in) investing activities                                                   |  |          | 173     |                      |   |                        |   |                                 | (27,144 | )           |   | (30,117 | ) |   |        |   |   | (57,088  | )
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |         |   |   |         |   |   |          |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |         |   |   |         |   |   |          |  
|Cash flows from financing activities                                                                   |  |          |         |                      |   |                         |   |                                 |         |             |   |         |   |   |         |   |   |          |  
|Proceeds from borrowings                                                                               |  |          | 54,000  |                      |   |                        |   |                                 |        |             |   |        |   |   |        |   |   | 54,000   |  
|Contribution by minority interest equity investors in Joint
Venture                                    |  |          |        |                      |   |                        |   |                                 |        |             |   | 16,241  |   |   | (6,496  | ) |   | 9,745    |  
|Proceeds from Joint Venture revolver borrowings                                                        |  |          |        |                      |   |                        |   |                                 |        |             |   | 14,318  |   |   |        |   |   | 14,318   |  
|Repayment of debt                                                                                      |  |          | (2,164  | )                    |   |                        |   |                                 |        |             |   |        |   |   |        |   |   | (2,164   | )
|Deferred financing costs                                                                               |  |          | (158    | )                    |   |                        |   |                                 |        |             |   |        |   |   |        |   |   | (158     | )
|Intercompany receivable / payable                                                                      |  |          | (5,572  | )                    |   | 9,750                   |   |                                 | (924    | )           |   |        |   |   | (3,254  | ) |   |         |  
|Distributions to partners/members                                                                      |  |          | (25,116 | )                    |   |                        |   |                                 |        |             |   |        |   |   |        |   |   | (25,116  | )
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |         |   |   |         |   |   |          |  
|Net
 cash provided by (used in) financing activities                                                   |  | $        | 20,990  |                      | $ | 9,750                   |   | $                               | (924    | )           | $ | 30,559  |   | $ | (9,750  | ) | $ | 50,625   |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |         |   |   |         |   |   |          |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |         |   |   |         |   |   |          |  
|Net increase in cash and cash equivalents                                                              |  |          |        |                      |   |                        |   |                                 | 12,556  |             |   | 6       |   |   |        |   |   | 12,562   |  
|Cash and cash equivalents at beginning of period                                                       |  |          |        |                      |   |                        |   |                                 | 2,686   |             |   |        |   |   |        |   |   | 2,686    |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |         |   |   |         |   |   |          |  
|Cash and cash equivalents at end of period                                                             |  | $        |        |                      | $ |                        |   | $                               | 15,242  |             | $ | 6       |   | $ |        |   | $ | 15,248   |  
|                                                                                                       |  |          |         |                      |   |                         |   |                                 |         |             |   |         |   |   |         |   |   |          |  

* 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.

- 33 -

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|    |                  
|--- | -----------------
|16. | Subsequent Events

| |                                    
| | -----------------------------------
| | Amendment to Senior Credit Facility

On October 20,
2008, the Partnership and its lenders amended the Partnerships Senior Credit
Facility. The material changes to the Senior Credit Facility include:

| |   |                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                   
| |   |                                                                                                                                                                                                                                                                       
| |  | 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 our borrowings
 will be 8.5%.               
| |   |                                                                                                                                                                                                                                                                       
| |  | The
 Partnership will pay an additional 1.5% per annum in interest on outstanding
 borrowings, which additional interest will be paid-in-kind (PIK interest),
 and under certain circumstances the PIK interest rate will increase to 4.5%
 on January 31, 2009.    
| |   |                                                                                                                                                                                                                                                                       
| |  | 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  | 
|November 30,
 2008 |  | $                              | 6,000  | 
|December 31,
 2008 |  | $                              | 9,000  | 
|January 31,
 2009  |  | $                              | 13,000 | 

| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 agreement was eliminated.
| |   |                                                                                                                                                                                                                
| |  | The
 Partnership is not permitted to pay any distributions on its common units
 until all borrowings under the senior credit agreement are paid in full.                                                       

Director
Compensation

The
Compensation Committee of the Board of Directors of our General Partner
revised, effective October 1, 2008, 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
$37 in 2008.

- 34 -

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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 approximately $363 and $507, respectively, and
are reflected in our financial statements at September 30, 2008 as other
expense. These premiums are payable in March 2009 and June 2009, respectively.
Since the 2008 supplemental premium is of an indeterminate amount but is likely
to be at an additional premium, an estimated of $188 has also been recognized
as other expense at September 30, 2008 for the current 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 are estimated to be
increased by 12.5% which will be negotiated at the time of our renewal. Policy
years run from February 20 to February 19.

Officer
Resignation

Mr.
Gridley, the Partnerships former chief executive officer and current chairman,
resigned as director of the general partner of the Partnership. Mr. Gridley
also resigned as an employee of the general partner of the Partnership. 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, 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 the $1,251 severance amount as of September 30, 2008.

- 35 -

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|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|ITEM 2. | Managements Discussion and Analysis of
 Financial Condition and Results of Operations

Overview

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. Recently, to improve utilization of the ITB
fleet, we have employed five of our ITBs to transport grain overseas for
humanitarian organizations. These transactions are not subject to the
provisions of the Jones Act, but U.S Flag vessels are given preference for
these voyages. We do not assume ownership of any of the products that we
transport on our vessels. Our existing fleet consists of thirteen vessels: six
integrated tug barge units (ITBs), two of which we currently intend to sell
during the fourth quarter of 2008; one product tanker (Houston); three chemical parcel tankers
(Parcel Tankers) and two articulated tug barge units (ATB), one of which
entered service in July 2007 and the second in August 2008. In addition, a
third ATB was delivered to the Partnership early November 2008 and is expected
to enter service early December 2008. We currently have one additional ATB
under construction, which is scheduled to be delivered in November 2009 and,
through a joint venture, have five additional tank vessels under construction,
the first three of which are scheduled to be delivered in 2009. Our primary
customers are major oil and chemical companies.

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

Our
business model is changing in the near term. Upon our formation, our six ITBs
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. However, as a result of the expiration of the Hess support
agreement in September 2007, which provided us with specified minimum charter
rates for our ITBs, combined with 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, we anticipate that there will no
longer be any demand for our ITBs for the transportation of petroleum products.
While we expect to be able to employ some of our ITBs in the transportation of
grain for humanitarian purposes at least in the near term, 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. As a result of anticipated decreased demand for our ITBs and the
fact that our remaining ITB on time charter will enter the spot market on
January 1, 2009, we intend to sell two ITBs in the fourth quarter of 2008 and,
depending on market conditions, may sell additional ITBs in 2009. At September
30, 2008, we determined that the values of our ITBs was impaired and wrote-off
$72.3 million of the value of the ITBs.

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. As a publicly traded master limited partnership, our earnings
are generally not subject to tax, as long as 90% or more of our revenues are
from qualifying income which includes revenue derived from the transportation
of petroleum based products, among other items. Our increasing percentage of
revenue derived from the transportation of non-petroleum based products that do
not generate qualifying income has caused us to operate more of our vessels
from entities taxed as corporations, which are subject to entity level taxation
but allow us to exclude this revenue from the 90% qualifying income test (and
allow us to include dividends paid to us by these corporate entities as
qualifying income). This increases our tax burden, and requires us to closely
monitor the level of non qualifying income generated in our non corporate
entities for compliance with the aforementioned 90% rule. Due to the fact that
we are prohibited from making distributions on our units until all borrowings
under our senior credit agreement are paid in full and the substantial
additional cost of being a master limited partnership, we are examining whether it would be better to be
taxed as a corporation for federal income tax purposes effective January 1,
2009. This election could have adverse tax consequences for some or all of our
partners, and you should consult with your tax advisors. We are actively seeking
measures to optimize our capital structure and our legal entity structure to
cope with this changing business model.

- 36 -

---



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 Freeportand, beginning in early December 2008, the ATB Brownsville.
These parcel tankers and barges 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 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 prospectively, 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, and the logistical aspects of managing our
chemical contracts and grain voyages, has placed an additional operating burden
on us. Our ability to effectively manage our changing operations is critical to
our future success.

Additionally,
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 USS 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 five of our
six ITBs now participating in the spot market and the sixth ITB expected to
enter the spot market beginning in 2009, USS expects its working capital
requirements to increase. We have limited availability under our revolving
credit facility to finance this increase in working capital requirements. The
Partnership understands that Lehman Brothers Commercial Paper, which is a
revolving credit lender under the revolving credit portion of the Partnerships
senior credit facility, has filed for protection under the U.S. bankruptcy
laws, and there can be no assurance that this entity will fulfill its
obligations to make revolving credit loans under the senior credit facility. Of
the approximately $11.2 million currently available under the Partnerships
revolving credit facility, Lehman Brothers Commercial Papers obligation is
approximately $4.9 million. The failure of Lehman Brothers Commercial Paper to
make revolving credit loans available to us will have a material adverse effect
on our financial condition and results of operations.

During
2008 we have been successful in employing five of our 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, 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. Furthermore, to the extent more of our
activities involve the transportation of products that do not generate
qualifying income, it will be more difficult for us to insure that at least
90% of our revenue is qualifying income. If less than 90% of our revenue is
qualifying income, we will be taxed as a corporation rather than a partnership,
which may result in a significant reduction in the amount of cash available to
fund our operating expenses.

- 37 -

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Liquidity

We
are dependent on our cash flow from operations and borrowings under our
revolving credit facility 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;                                                                                                                                                        
| |   |                                                                                                                                                                                                    
| |  | our ability
 to make working capital borrowings;                                                                                                                                                   
| |   |                                                                                                                                                                                                    
| |  | the refusal
 of certain of our vendors to extend trade credit to us; and                                                                                                                           
| |   |                                                                                                                                                                                                    
| |  | the increase
 in the interest rate on our borrowings under our senior credit agreement and
 additional fees and expenses resulting from the October 2008 amendment to our
 senior credit agreement.

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 five of our six 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, until recently, at record levels and are still substantially
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, our five 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. 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. 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 have waived this non-compliance, and any non-compliance with our
financial covenants at December 31, 2008, through January 31, 2009. However,
after January 31, 2009, absent an additional waiver from the senior lenders or
an amendment of the senior credit agreement, we will be in default of these
financial covenants. The October 2008 amendment to the senior credit agreement
requires us to have a specified minimum cumulative EBITDA on the last day of
October, November and December 2008 and January 2009, and there can be no
assurance that we will meet this requirement.

- 38 -

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If
we are not in compliance with our financial covenants, or are otherwise in
default under the senior credit agreement, our lenders have a number of
remedies, including declaring all outstanding borrowings to be immediately due
and payable and refusing to make funds available under the revolving credit
facility. In addition, such defaults could cause cross defaults under our other
debt agreements. If all such outstanding indebtedness were declared to be
immediately due and payable, we would not have the financial resources to repay
immediately in full all outstanding borrowings under our various debt
agreements. As such, we would be required to either amend the Senior Credit
Facility or replace it with an alternate credit facility, which given current
market conditions, would be difficult. In addition, the lenders under the
Senior Credit Facility could prohibit us from paying interest on the senior
notes. Even if we are not prohibited from paying interest on the senior notes
by the lenders under the senior credit agreement, our ability to pays such
interest will depend on the amount of availability under our revolving credit
facility, cash generated from prior operations prior to the time such interest
payment is due and our other working capital requirements.

In
response to these challenges, we have retained Greenhill & Co., LLC and Jefferies
& Company, Inc. to assist us in exploring strategic alternatives, including
either the possible sale of the business or the sale of new equity, and other
ways to increase liquidity and strengthen our financial resources.

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 and third quarters of 2008. The October 2008
amendment to our senior credit agreement prohibits us from paying any
distributions on any of our units until the borrowings under our senior credit
agreement are repaid in full.

Consistent
with generally accepted accounting principles, the condensed consolidated
financial statements included herein have been prepared on the basis that the
Partnership will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. Although the lenders under the Senior Credit Agreement waived
non-compliance with certain financial covenant defaults through January 31,
2009, and there can be no assurance
that they will grant us an additional waiver at that date and, given current
market conditions, the Partnership believes it would be difficult to secure
alternate financing. The Partnerships lenders right to demand immediate
payment of all outstanding indebtedness on January 31, 2009, coupled with the
Partnerships inability to repay this indebtedness immediately, leads to a
substantial doubt about the Partnerships ability to continue as a going
concern.

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. It is
likely that some of these vessels will be placed in service prior to the
phase-out of currently operating vessels, which could result in an over-supply
of vessel capacity in the near term, particularly in light of decreased demand
due to current economic conditions. 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.

- 39 -

---



Future Growth

We have
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 and entered
service in August 2008. The ATB Galveston was completed at a total cost of
$66.6 million (excluding capitalized interest of $6.8 million). 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 and will enter service in December 2008. The ATB
Brownsville was completed at a total cost of $67.5 million (excluding
capitalized interest of $5.5 million at September 30, 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
November 2009. The funds to substantially complete the remaining ATB have been
placed in escrow. For a discussion of our obligations under our construction
contracts, please see the section titled, Contractual Commitments and
Contingencies below.

We, through
our subsidiary USS Product Carriers LLC (Product Carriers), entered into a contract
for the construction of nine 49,000 deadweight tons (dwt) double-hulled
tankers. The builder is currently scheduled to deliver the first tanker in the
first quarter of 2009, the second tanker in the second quarter of 2009, the
third tanker in the fourth quarter of 2009, the fourth tanker in the second
quarter of 2010, the fifth tanker is to be delivered in the fourth quarter
2010, one tanker in 2012, two tankers in 2013 and the last tanker in 2014.
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). Our ability to take delivery of these vessels from our
Joint Venture will depend 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, is unlikely to be feasible.
If the vessels remain in the Joint Venture, we will not receive the bulk of the
benefits associated with ownership of these vessels, 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, and it is likely that our
interest in the Joint Venture will have little if any value. The Joint Venture
Investors option to elect to have the Joint Venture finance the remaining four
tankers has expired. As a result, Product Carriers is obligated to obtain
alternative financing for their construction or to transfer the shipyard slots.
Given current market conditions and our financial condition, it is unlikely
that Product Carriers will be able to obtain the necessary financing. If
Product Carriers is unable to obtain the financing for these four tankers, it
is obligated to reimburse the builder for any damages incurred by the builder
as a result of these tankers not being constructed, or if they are transferred
to a third party at a loss to the builder, up to a maximum of $10.0 million
(plus costs and expenses incurred by the builder) 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 that there is substantial uncertainty that  we will realize any
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.

Impairment in Value of ITB 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 Groton and ITB Jacksonville to a
third party, before taking into consideration the estimated costs of
disposition, for an estimated sales price per vessel of $5.4 million, net of
commissions. These ITBs are enroute to the potential buyer after discharging
their latest grain cargoes. Because the potential for these vessels to return
to the petroleum market is unlikely, we decided to sell these ITBs and
therefore recorded an impairment loss totaling $20.4 million. In the current
period, we determined that the carrying amounts of the other ITBs also exceeded
their fair values. Factors indicating the impairment of the other ITBs
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 York into the spot market when its current time
charter expires 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. As a result, wrote down the carrying value of the remaining four
ITBs by $51.9 million.

- 40 -

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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 vessel is
 available for
 operations |  | Customer
 does
 not pay    |  | Customer
 pays if
 cargo not ready |  | Customer
 pays if
 cargo not ready

|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

For the
three months ended September 30, 2008 and 2007 we derived approximately 53% and
75%, respectively, of our revenue under time charters, consecutive voyage
charters and contracts of affreightment, and approximately 47% and 25%,
respectively, of our revenue from spot charters. For the nine months ended
September 30, 2008 and 2007 we derived approximately 58% and 76%, respectively,
of our revenue under time charters, consecutive voyage charters and contracts
of affreightment, and approximately 42% and 24%, respectively, of our revenue
from spot charters. During the fourth quarter of 2008, all but one of our ITBs
will be employed in the spot market, and beginning January 1, 2009 all of our
ITBs will be 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.

- 41 -

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

|                 |  |                                |  |                                |  |                               |  |                               |  |                                    |  |                                    |  |                                        |  |                                  
|---------------- |  | ------------------------------ |  | ------------------------------ |  | ----------------------------- |  | ----------------------------- |  | ---------------------------------- |  | ---------------------------------- |  | -------------------------------------- |  | ---------------------------------
|Vessel           |  | Quarter Ending
 March 31, 2008 |  | Quarter Ending
 March 31, 2007 |  | Quarter Ending
 June 30, 2008 |  | Quarter Ending
 June 30, 2007 |  | Quarter Ending
 September 30, 2008 |  | Quarter Ending
 September 30, 2007 |  | Quarter Ending
 December 31, 2008
 (7) |  | Quarter Ending
 December 31, 2007
|                 |  |                                |  |                                |  |                               |  |                               |  |                                    |  |                                    |  |                                        |  |                                  
|Baltimore (1)    |  | TC                             |  | TC                             |  | TC/Spot                       |  | TC/Spot                       |  | Spot                               |  | DD                                 |  | Spot                                   |  | DD/TC                            
|Groton (2)       |  | TC                             |  | TC                             |  | Spot                          |  | TC                            |  | Spot                               |  | TC                                 |  | Spot/Sell                              |  | TC                               
|Jacksonville (3) |  | TC                             |  | Spot                           |  | Spot                          |  | Spot                          |  | Spot                               |  | Spot                               |  | Spot/Sell                              |  | 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/Spot/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                                |  | COA/Spot                               |  | n/a                              

TC= Time Charter COA =
Contract of Affreightment/Consecutive Voyage DD=Dry Dock Sell= anticipated
November 2008

(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.

(3) ITB Jacksonvillere-entered the spot market on 4/7/08 upon its first grain voyage.

(4) ITB Mobile current time
charter will transfer to the ITB New York on 7/4/08.

(5) ITB New York will begin a
time charter transferred from the ITB Mobile on 7/4/08.

(6) ITB Philadelphia entered
spot market on 12/14/07 upon its first grain voyage.

(7) Fourth quarter 2008 data
reflects the anticipated market in which the vessel will operate.

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. The timing of the
 recognition of voyage revenue is impacted by the type of products that we
 carry. 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 when the grain is delivered to its final destination.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Voyage expenses.
 Voyage expenses include items such as fuel, port charges, pilot fees, tank
 cleaning costs, canal tolls, brokerage commissions and other costs which are
 unique to a particular voyage, including, in the case of certain grain
 voyages, the cost of readying the vessel to carry grain. 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. The timing of the recognition of voyage expenses is impacted
 by the type of products that we carry. With respect to the transportation of
 refined petroleum, petrochemical and commodity chemical products, we
 generally recognize voyage expenses 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 voyage expenses when the grain is
 delivered to its final destination. These expenses are deferred and accrued
 as a liability on our balance sheet.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | 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, bunkers and lube oils and
 marine insurance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

- 42 -

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| |   |                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | o | Vessels and equipment are recorded at cost, including capitalized
interest and transaction fees where appropriate, and depreciated to estimated
salvage value using the straight-line method as follows: the Sea Venture to 2013, its mandatory
retirement from transportation of petroleum products as required by OPA 90;
10 years for the Chemical Pioneer, the Charleston
and the Houston; and 30 years for the ATB Freeport and the ATB
Galveston 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 ITBs was accelerated to
November 2008 for the ITB GrotonandITB Jacksonville and
September 30, 2010 for the ITB Baltimore,
ITB New York,ITB Mobile and ITB Philadelphia.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | o | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | o | 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 while in domestic trade. 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
 generally amortize these expenditures over 60 months for the ITBs and 30
 months for the parcel tankers and the Houston;
 however, 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 30 months. We expect that our ITBs will be able to continue
 participation 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 and ATB Galveston, the
remaining newbuild
 ATBs and product tankers qualify for the UWILD Program. We will capitalize
 expenditures incurred for drydocking the ATBs and amortize these expenditures
 over 60 months.

- 43 -

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 ITBs
 and ATBs be drydocked for major repair and maintenance at least 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 and petroleum tankers being constructed by
 the Joint Venture also qualify for the UWILD program. Our parcel tankers and
 the Houston must 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 adjusted for any days related
 to grain voyages for which revenue has not yet been recognized. Fluctuations
 in time charter equivalent result not only from changes in charter rates
 charged to our customers, but also from voyage expenses incurred as well as
 from external factors such as weather or other delays.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

- 44 -

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Results of Operations

The
following table summarizes our results of operations (dollars in thousands,
except for average time charter equivalent rates and per unit data):

|                                                                |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|--------------------------------------------------------------- |  | ----------------------------------------- | ------- | ---------------------------------------- | - | ------ | - | ---- | ------- | - | - | ------- | -
|                                                                |  | For the Three Months Ended
 September 30, |         | For the Nine Months Ended
 September 30, |  
|                                                                |  |                                           |         |                                          |  
|                                                                |  | 2008                                      |         | 2007                                     |   | 2008   |   | 2007 |        
|                                                                |  |                                           |         |                                          |   |        |   |      |        
|                                                                |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|Voyage revenue                                                  |  | $                                         | 48,588  |                                          | $ | 45,559 |   | $    | 149,911 |   | $ | 133,262 |  
|                                                                |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|Vessel operating expenses                                       |  |                                           | 18,064  |                                          |   | 16,762 |   |      | 51,469  |   |   | 49,087  |  
|% of voyage revenue                                             |  |                                           | 37.2    | %                                        |   | 36.8   | % |      | 34.3    | % |   | 36.8    | %
|Voyage expenses                                                 |  |                                           | 20,329  |                                          |   | 11,360 |   |      | 51,339  |   |   | 27,509  |  
|% of voyage revenue                                             |  |                                           | 41.8    | %                                        |   | 24.9   | % |      | 34.2    | % |   | 20.6    | %
|General and administrative expenses                             |  |                                           | 6,120   |                                          |   | 3,687  |   |      | 14,125  |   |   | 11,693  |  
|% of voyage revenue                                             |  |                                           | 12.6    | %                                        |   | 8.1    | % |      | 9.4     | % |   | 8.8     | %
|Depreciation and amortization                                   |  |                                           | 10,610  |                                          |   | 9,831  |   |      | 31,559  |   |   | 27,933  |  
|Impairment charges                                              |  |                                           | 72,363  |                                          |   |       |   |      | 78,075  |   |   |        |  
|Other expenses (income)                                         |  |                                           | 1,070   |                                          |   |       |   |      | 1,190   |   |   | (3,486  | )
|                                                                |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|Total operating expenses, net                                   |  |                                           | 128,556 |                                          |   | 41,640 |   |      | 227,757 |   |   | 112,736 |  
|                                                                |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|Operating income                                                |  |                                           | (79,968 | )                                        |   | 3,919  |   |      | (77,846 | ) |   | 20,526  |  
|% of voyage revenue                                             |  |                                           | -164.6  | %                                        |   | 8.6    | % |      | -51.9   | % |   | 15.4    | %
|Interest expense                                                |  |                                           | 7,049   |                                          |   | 8,848  |   |      | 21,819  |   |   | 22,420  |  
|Interest income                                                 |  |                                           | (235    | )                                        |   | (2,471 | ) |      | (1,930  | ) |   | (7,718  | )
|Net loss/(gain) on derivative financial instruments             |  |                                           | 9       |                                          |   | 235    |   |      | (1,019  | ) |   | (669    | )
|                                                                |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|Loss (income) before income taxes and noncontrolling
 interest  |  |                                           | (86,791 | )                                        |   | (2,693 | ) |      | (96,716 | ) |   | 6,493   |  
|(Benefit) provision for income taxes                            |  |                                           | (337    | )                                        |   | (364   | ) |      | (1,559  | ) |   | 258     |  
|                                                                |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|(Loss) income before noncontrolling interest                    |  |                                           | (86,454 | )                                        |   | (2,329 | ) |      | (95,157 | ) |   | 6,235   |  
|Noncontrolling interest in Joint Venture loss (income)          |  |                                           | (1,029  | )                                        |   | 351    |   |      | (787    | ) |   | (56     | )
|                                                                |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|Net (loss) income                                               |  | $                                         | (87,483 | )                                        | $ | (1,978 | ) | $    | (95,944 | ) | $ | 6,179   |  
|                                                                |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|                                                                |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|Distributions declared per common unit in respect of the
period |  | $                                         |        |                                          | $ | 0.45   |   | $    | 0.45    |   | $ | 1.35    |  
|                                                                |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|Operating Data                                                  |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  
|Number of vessels                                               |  |                                           | 12      |                                          |   | 11     |   |      | 12      |   |   | 11      |  
|Total vessel days                                               |  |                                           | 1,051   |                                          |   | 1,012  |   |      | 3,053   |   |   | 2,822   |  
|Days worked                                                     |  |                                           | 963     |                                          |   | 897    |   |      | 2,867   |   |   | 2,686   |  
|Drydocking days                                                 |  |                                           |        |                                          |   | 61     |   |      |        |   |   | 67      |  
|Net utilization                                                 |  |                                           | 92      | %                                        |   | 89     | % |      | 94      | % |   | 95      | %
|Average daily time charter                                      |  |                                           |         |                                          |   |        |   |      |         |   |   |         |  

In order to
address reduced demand for our ITBs in the spot market for transportation of
petroleum products, we are currently employing 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 accrued as a liability 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, make a comparison of our results with prior quarters and
comparable periods in the prior year may be less meaningful.

- 45 -

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Three Months Ended
September 30, 2008 Compared to Three Months Ended September 30, 2007

Voyage Revenue. Voyage revenue was $48.6
million for the three months ended September 30, 2008, an increase of $3.0
million, or 7%, from $45.6 million for the three months ended September 30,
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.
There was a $7.2 million increase in revenues for the ITB Baltimore largely because for the same
period of 2007, this vessel did not earn any revenue due to its scheduled dry-docking
subsequently followed by an extended out-of-service period to repair damages it
sustained while in the shipyard during Hurricane Dean. Additionally, there was
a net increase in revenues of $3.1 million due to a change in charter mixes
where the ITB Groton and ITB Mobile both moved to the spot market
in the second quarter of 2008 as compared to both being on time charters in the
third quarter of 2007, partially offset by the ITB
New York which moved to a time charter at the end of the second
quarter of 2008 as compared to being in the spot market during the majority of
the third quarter of 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. Revenues on the remaining ITB fleet decreased by
$9.3 million largely due to the impact and timing of certain grain voyages
where revenue is recognized upon discharge of grain and fulfillment of inland
distribution contracts, if any. Revenues of approximately $15.8 million were
not recognized and deferred during the three months ended September 30, 2008.
The Partnerships chemical fleet (excluding the ATB Galveston, which was not in service during the entire
2007 and 2008 period) realized increased revenues of $1.1 million largely due
to higher charter rates. We estimate that our revenue from the chemical fleet
for the 2008 period was reduced by approximately $1.1 million due to Hurricanes
Hannah and Ike. Voyage revenue further increased by $0.9 million due to the
addition of the ATB Galveston
which was placed in service under a time charter in late August 2008. 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.
Revenue for the three months ended September 30, 2008 included $5.7 million of
fuel surcharges, compared to $3.6 million for the three months ended September
30, 2007.

Vessel Operating Expenses. Vessel
operating expenses were $18.1 million for the three months ended September 30,
2008, a increase of $1.3 million, or 8%, as compared to $16.8 million for the
three months ended September 30, 2007. We are responsible for vessel operating
expenses regardless of the type of charter under which we are operating. The
increase is primarily due to the addition of the ATB Galveston which increased vessel operating expenses by
$0.8 million. There was a net $0.5 million increase in expenditures on the
remaining fleets operating expenses.

Voyage Expenses. Voyage expenses were
$20.3 million for the three months ended September 30, 2008, an increase of
$9.0 million, or 79%, as compared to $11.4 million for the three months ended
September 30, 2007. Voyage expenses include items such as fuel, port charges,
pilot fees, tank cleaning costs, canal tolls, brokerage commissions and other
costs which are unique to a particular voyage. These expenses can vary
significantly depending on the voyage trade route. Depending on the form of
contract, either we or our customer are responsible for these expenses.
Typically, freight rates are higher when we pay voyage expenses.

During
the three months ended September 30, 2008, voyage expenses increased
approximately $5.9 million over the prior year due to increased fuel costs
 (including $0.3 million attributable to the delays resulting from
Hurricanes Hannah and Ike discussed above), which were only partially offset by
the $2.1 million of increased fuel surcharge revenue, and approximately $2.3
million in grain voyage related voyage expenses, largely related to discharge
costs. There was also a $0.2 million increase in voyage expenses due to the
addition of the ATB Galveston as
well as a net remaining increase of $0.6 million. A significant portion of the
increase in voyage expenses is due to the loss of two time charters for our ITBs
in 2008 resulting in the Partnership incurring voyage expenses that it
previously did not incur under time charters. The impact of these additional
voyage expenses was partially offset by increased revenues as the rates we
charge are generally higher to compensate for these voyage expenses that were
previously paid by the customer under a time charter. Because we do not
recognize certain voyage expenses related to our grain voyages until the grain
is delivered to its final destination, voyage expenses for the three months
ended September 30, 2008 do not include approximately $8.3 million of expenses
related to grain voyages commenced in the third quarter of 2008 but to be
completed in the fourth quarter 2008. Voyage expenses for the three months
ended September 30, 2008 included approximately $2.3 million of expenses
related to grain voyages commenced in the second quarter of 2008 that were
completed in the third quarter.

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General and Administrative Expenses.
General and administrative expenses were $6.1 million for the three months
ended September 30, 2008 compared to $3.7 million for the three months ended
September 30, 2007, an increase of $2.4 million or 66%. An increase in
personnel expenses of $1.3 million, reflecting the recognition of the
contractually mandated severance payment due our former chairman and chief
executive officer, which will be paid over the next two years, was coupled with
an increase in professional fees, consisting of legal, accounting and
consulting fees primarily related to our review of strategic alternatives and
obtaining a waiver and amendment of our Senior Credit Facility, of $1.3
million. There was a net $0.2 million decrease in all other general and
administrative expenses.

Depreciation and Amortization.
Depreciation and amortization was $10.6 million for the three months ended
September 30, 2008, an increase of $0.8 million, or 8%, compared to $9.8
million for the three months ended September 30, 2007. The increase is
primarily due to additional amortization of drydock expenditures of $0.8
million, principally resulting from drydocks completed in 2007, and $0.2
million attributable to the addition of the ATB
Galveston. These increases to depreciation and amortization expense
were offset by a decrease of $0.2 million resulting from an adjustment upon
expiration of the Hess support agreement in September 2007 to the values
assigned to the vessels in the original purchase of the ITBs due to net
payments made to us under the Hess Support Agreement, which were considered an
adjustment to the original purchase price.

Impairment charges. Impairment charges for
the three months ended September 30, 2008 were $72.4 million, an increase of
100% over the same period in 2007. An impairment was made to the ITB fleet of
$72.3 million due to a change in circumstances that indicates the carrying
amount of the vessels may not be fully recoverable. See Impairment in Value of
ITB Fleet above. Additionally, there was $0.1 million impairment recorded on
the exercised cancellation option on the fourth ATB unit.

Other Expense (Income). Other expense in
the three months ended September 30, 2008 of $1.1 million reflects $1.1 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.

Interest Expense. Interest expense was
$7.0 million for the three months ended September 30, 2008, a decrease of $1.8
million, or 20%, compared to $8.8 million for the three months ended September
30, 2007. The decrease is primarily attributable to a higher average
outstanding debt balance during the 2008 quarter being more than fully offset
by a decrease in interest rates and increases in capitalized interest expense
due to higher construction in progress balances. The average effective interest
rate for the quarter ended September 30, 2008 was 9.2% compared to 10% for the
quarter ended September 30, 2007.

Interest Income. Interest income,
consisting of interest earned on our invested balances, was $0.2 million for
the three months ended September 30, 2008, a decrease of $2.2 million, or 91%,
compared to $2.5 million for the three months ended September 30, 2007. 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.

Net Loss (Gain) on Derivative Financial
Instruments.
In February 2006, the Partnership entered into contracts, denominated in Euros,
for the purchase of owner-furnished items. During the three months ended
September 30, 2008 we recorded a loss related to derivative financial
instruments. 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. Due to this hedge
ineffectiveness, a gain on derivative financial instruments of $0.1 million was
recognized in our Consolidated Statement of Operations for the three months
ended September 30, 2008. The Joint Venture recorded a loss of $0.2 million
during the three months ended September 30, 2008 in connection with the
interest rate cap it had entered into in April 2007. During the quarter ended
September 30, 2007, the Joint Venture recorded a loss of $0.2 million in
connection with its interest rate cap. For information on our foreign currency
forward contracts and the interest rate cap, see Item 3. Quantitative and
Qualitative Disclosures about Market Risk.

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Provision for Income Taxes. The benefit
for income taxes was $0.3 million for the three months ended September 30, 2008
compared to a benefit for income taxes of $0.4 million for the three months
ended September 30, 2007. The benefit recorded in the third quarter of 2008 is
due to a benefit of $0.4 million primarily related to the reversal of existing
deferred tax liabilities in connection with the impairment charges recorded for
certain of our ITBs. In addition, a provision of $0.1 million related to
unrecognized tax benefits was recorded during the third quarter of 2008. For
the comparable period in 2007, only the Chemical
Pioneer was owned by a corporate subsidiary subject to federal,
state and local income taxes.

Noncontrolling Interest in Joint Venture.
For the three months ended September 30, 2008, we recorded an unfavorable $1.0
million in noncontrolling interest in Joint Venture compared to a favorable
$0.4 million for the three months ended September 30, 2007, relating to the 60%
of the Joint Venture owned by third parties. This $1.0 million unfavorable
position was  a 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 had been calculated since the inception of the Joint Venture
in 2006. An out of period adjustment for the additional allocation of losses to
the Partnership of $1.4 million was recorded in the three months ended September
30, 2008, offsetting a $0.3 million favorable allocation made in the three
months ending September 30, 2008 which was recorded using the former method of
calculation.

Net Loss. The net loss for the three
months ended September 30, 2008 was $87.5 million, an increase of $85.5 million
over the net loss of $2.0 million for the three months ended September 30,
2007. The decrease in operating income of $83.9 million, an increase in the
income in the noncontrolling interest in Joint Venture of $1.4 million, and a
decrease in net interest income of $0.4 million was offset by a decrease of
$0.2 million in losses on derivative financial instruments.

Nine Months Ended
September 30, 2008 Compared to Nine Months Ended September 30, 2007

The
nine month period ended September 30, 2008 is one day greater than the nine
month period ended September 30, 2007.

Voyage Revenue. Voyage revenue was $149.9
million for the nine months ended September 30, 2008, an increase of $16.6
million, or 12%, from $133.3 million for the nine months ended September 30,
2007. Revenues are affected by several factors, such as the mix of charter
types; the charter rates attainable in the market; fleet utilization and 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.
There was an increase of $10.0 million in revenues earned by the ITB Baltimore due to this vessel being out
of service for 56 days during 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 as well as a change in its charter
type from a time charter to a spot charter. Similarly, there was a net increase
in revenues of $4.4 million due to a change in charter mixes for the ITB Groton and ITB Mobile, which both moved to the
spot market in the
second quarter of 2008 as compared to both being on time charters in 2007
partially offset by the ITB New York
which moved to a time charter at the end of the second quarter of 2008 as
compared to being in the spot market during the majority of 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. Revenues on
the remaining ITB fleet decreased by $10.6 million largely due to the impact
and timing of certain grain voyages where revenue is recognized upon discharge
of grain and fulfillment of inland distribution contracts, if any. Revenues of
approximately $15.8 million were not recognized and deferred during the three
months ended September 30, 2008. The Partnerships chemical fleet (excluding
the ATB Freeport and ATB Galveston, which were not in service
during the entire 2007 and 2008 period) realized increased revenues of $2.1
million largely due to higher charter rates. We estimate that our revenue from
the chemical fleet for the 2008 period was reduced by approximately $1.1
million due to Hurricanes Hannah and Ike. Voyage revenue further increased by
$9.8 million and $0.9 million due to the addition of the ATB Freeport and the
ATB Galveston, which were placed in service in July 2007 and late August 2008,
respectively. 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 nine months ended September 30,
2008 included $12.2 million of fuel surcharges, compared to $7.3 million for
the nine months ended September 30, 2007.

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Vessel Operating Expenses. Vessel
operating expenses were $51.5 million for the nine months ended September 30,
2008, an increase of $2.4 million, or 5%, as compared to $49.1 million for the
nine months ended September 30, 2007. We are responsible for vessel operating
expenses regardless of the type of charter under which we are operating. The
increase is primarily due to the addition of the ATB Freeport and ATB
Galveston, which contributed $1.5 million and $0.8 million,
respectively to the increase in vessel operating expenses. Additionally, crew
wages and benefits increased by $1.0 million. The increase in crew wages and
benefits resulted from increased rates as outlined in the unions collective
bargaining agreements that cover the crew members and officers of our vessels
which became effective in the second and third quarters of 2007, respectively
and included annual increases also effective in year 2008. These increases were
offset by a $0.9 million net decrease in expenditures for supplies, and repairs
and maintenance.

Voyage Expenses. Voyage expenses of $51.3
million increased by $23.8 million, or 87%, over the prior year due to the
addition of the ATB Freeport and ATB Galveston, which contributed $3.7
million and $0.2 million, respectively, in additional voyage expenses along
with increases in fuel, port, and commission costs on the remaining fleet of
approximately $20.0 million. Approximately $14.6 million of this $23.8 million
increase related to increased fuel costs, which were partially offset by the
$7.3 million of increased fuel surcharge revenue. In addition, grain voyage
related expenses, including tank cleaning, increased voyage expenses by $6.9
million for the ITB fleet in the first nine months of 2008. The significant
increase in voyage expenses is due to the expiration of time charters for three
of our ITBs in 2008, resulting in the Partnership incurring voyage expenses
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 nine months ended September 30,
2008 do not include approximately $8.3 million of expenses deferred in
connection with grain voyages commenced in the third quarter of 2008 that were
completed in the fourth quarter of 2008.

General and Administrative Expenses.
General and administrative expenses were $14.1 million for the nine month
period ended September 30, 2008 compared to $11.7 million for the nine months
ended September 30, 2007, an increase of $2.4 million or 21%. There was an
increase in professional fees of $2.0 million largely due to an increase in
professional fees, consisting of legal, accounting and consulting fees
primarily related to our review of strategic alternatives and obtaining a
waiver and amendment of our Senior Credit Facility. Additionally, personnel
related expenses increased by $0.4 million, which includes a $1.3 million
increase due to the recognition of the contractually mandated severance payment
due our former chairman and chief executive officer, which will be paid over
the next two years, partially offset by a decrease of $0.9 million in remaining
personnel related expenses mainly due to reduced bonus in 2008.

Depreciation and Amortization.
Depreciation and amortization was $31.6 million for the nine months ended
September 30, 2008, an increase of $3.6 million, or 13%, compared to $27.9
million for the nine months ended September 30, 2007. The increase is primarily
due to additional amortization of drydock expenditures of $2.8 million,
principally resulting from drydocks completed in 2007, $1.6 million is
attributable to the addition of the ATB
Freeport and $0.2 million is attributable to the addition of the ATB Galveston. These increases to
depreciation and amortization expense were offset by a decrease of $1.0 million
resulting from an adjustment upon expiration of the Hess support agreement in
September 2007 to the values assigned to the vessels in the original purchase
of the ITBs due to net payments made to us under the Hess Support Agreement,
which were considered an adjustment to the original purchase price.

Impairment charges. Impairment charges in
the nine months ending September 30, 2008 were $78.1 million, an increase of
100% over the nine months ending September 30, 2008. This increase is mainly
due to an impairment to the ITB fleet of $72.3 million. 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 ITB Fleet above.
Additionally reflected is an impairment loss of $5.8 million related to the
cancellation of a contract to construct one ATB and a loss of $0.1 million
related to the sale of surplus equipment. 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 a non-cash impairment charge of $5.8 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,
$0.5 million of capitalized interest costs, and $0.1 million in accrued
liabilities.

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Other Expense (Income). Other expense of
$1.2 million in the nine months ended September 30, 2008 reflects $1.1 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 nine months ended September 30, 2007, a $3.5
million contract settlement was paid to us, resulting in other income for the
period.

Interest Expense. Interest expense was
$21.8 million for the nine months ended September 30, 2008, a decrease of $0.6
million, or 3%, compared to $22.4 million for the nine months ended September
30, 2007. The decrease is primarily attributable to a decrease in interest
rates and an increase in capitalized interest expense due to the higher
construction in progress balances partially offset by higher average
outstanding debt balance during the 2008 period. The average effective interest
rate for the nine months ended September 30, 2008 was 9.4% compared to 10.0%
for the same period in 2007.

Interest Income. Interest income,
consisting of interest earned on our invested balances, was $1.9 million for
the nine months ended September 30, 2008, a decrease of $5.8 million, or 75%,
compared to $7.7 million for the nine months ended September 30, 2007. 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.

Net Loss (Gain) on Derivative Financial
Instruments.
During the nine months ended September 30, 2008, we recorded a gain of $1.0
million related to derivative financial instruments. 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. Due to
this hedge ineffectiveness, a gain on derivative financial instruments of $0.8
million was recognized in our Consolidated Statement of Operations for the nine
months ended September 30, 2008. Additionally, the Joint Venture recorded a
gain of $0.2 million during the nine months ended September 30, 2008 in
connection with the interest rate cap it had entered into in April 2007. During
the third quarter ended September 30, 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.
Additionally, the Joint Venture recorded a gain of $.05 million in connection
with its interest rate cap. For information on our foreign currency forward
contracts and the interest rate cap, see Item 3. Quantitative and Qualitative
Disclosures about Market Risk.

Provision for Income Taxes. The benefit
for income taxes was $1.6 million for the nine months ended September 30, 2008
compared to a provision of $0.2 million for the nine months ended September 30,
2007. The benefit recorded for the nine months ended September 30, 2008 is
primarily due to a benefit of $5.6 million recorded upon the transfer of the
ownership interest in the limited liability companies of the ITB Groton, ITB New York, ITB
Jacksonville, ITB Baltimore,
and ITB Mobile to the corporate
entity USCS Chemical Pioneer Inc.,
and the elections to treat the ITB
Philadelphia LLC and USCS Sea Venture LLC as corporations for
tax purposes. Additionally, a provision of $4.3 million recorded to provide a
valuation allowance against deferred tax assets created during the period as a
result of these transfers and tax elections and net operating losses generated
in earlier periods. A provision of $0.3 million for unrecognized tax benefits
was recorded during the nine months ending September 30, 2008. Offsetting these
items were losses at the various corporate subsidiaries generating a tax
benefit of $0.2 million. In the third quarter of 2008 a benefit of $0.4 million
was also recorded primarily related to the reversal of existing deferred tax
liabilities in connection with the impairment charges recorded for certain of
our ITBs. For the comparable period in 2007, only the Chemical Pioneer was owned by a corporate
subsidiary subject to federal, state and local income taxes.

Noncontrolling Interest in Joint Venture.
For the nine months ended September 30, 2008, we recorded an unfavorable $0.8
million in noncontrolling interest in Joint Venture compared to an unfavorable
$0.1 million in Joint Venture income for the nine months ended September 30,
2007, relating to the 60% of the Joint Venture owned by third parties. This
unfavorable variance 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
offsetting a year to date favorable allocation of $0.6 million calculated using
the former method.

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Net Loss. The net loss for the nine months
ended September 30, 2008 was $95.9 million, a decrease of $102.1 million from
net income of $6.2 million for the nine months ended September 30, 2007. The
net loss resulted from a decrease in operating income of $98.4 million (which
includes a $79.3 million non-cash impairment charge) and the decrease in net
interest income of $5.2 million. In addition, there was a $0.7 million
unfavorable variance in the non controlling interest in the Joint Venture.
These decreases were partially offset by a $1.8 million favorable variance on
the income tax benefit for the nine months ended September 30, 2007.
Additionally, there was an increase of $0.4 million from the gains on
derivative financial instruments.

Liquidity and Capital Resources

Operating Cash Flows

Net
cash provided by operating activities was $7.7 million and $19.0 million for
the nine months ended September 30, 2008 and 2007, respectively.

The
decrease in operating cash flows of $11.3 million in the first nine months of
2008 compared to the first nine months of 2007 is the result of the decrease in
net income of $102.1 million. This decrease in net income was largely offset by
an increase of $82.7 million in non-cash items, a reduction in capitalized
drydock cost of $7.0 and an improvement in working capital net assets of $1.1
million.

The
increase in non-cash charges of $82.7 million for the nine months ended
September 30, 2008 compared to the nine months ended September 30, 2008 is
largely due to the $72.3 million charge recorded in the third quarter to
reflect the impairment in the carrying value of the ITB fleet, a $5.8 million write-off
of the capitalized costs incurred related to the Partnerships cancellation of
the construction of the fourth ATB in our current ATB newbuild series, an
increase in depreciation and amortization of $3.8 million, a nonrecurring
insurance surcharge of $1.1 million, an increase in the non-controlling
interest in Joint Venture (income) loss of $0.7 million, an increase in costs
for stock issued to directors of $0.1 million and a loss on the sale of surplus
equipment of $0.1 million. These items were partially offset by a decrease in
our deferred tax liabilities of $0.7 million, a decrease in net gains on
derivative financial instruments of $0.4 million and a decrease in the
provision for accounts receivable of $0.1 million.

Dydocking
expenditures decreased $7.0 million for the nine months ended September 30,
2008 as compared to the nine months ended September 30, 2007. Although no
vessels underwent drydockings for the nine months ended September 30, 2008,
there were expenditures for drydockings of $2.6 million related to accrued
expenses for drydockings that took place in previous periods as well as
expenditures for drydockings scheduled to take place in the fourth quarter of
2008. Drydocking expenditures for the nine months ended September 30, 2007 were
$9.7 million, which included drydocking expenditures related to the ITB Baltimore and the ITB Philadelphia, which
underwent
drydockings in the third and fourth quarters of 2007, respectively. Three
vessels are scheduled for drydocking during the fourth quarter 2008 as compared
to two vessels drydocked in 2007. This will negatively impact operating cash
flows in 2008 as compared to 2007 due to increased drydocking expenditures and
reduced revenues resulting from increased off-hire days as a result of such
drydocks.

Our
working capital requirements are affected by the level of our participation in
the spot markets and the timing of our 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 not realized economically until
payment is made to us by the customer. Additionally, payment dates are
generally 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. We expect that the placement
into service of the ATB Brownsville
will increase our working capital requirements.

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Investing Cash Flows

Net
cash used in investing activities totaled $152.1 million for the nine months
ended September 30, 2008; an increase of $95.0 million compared to net cash
used of $57.1 million for the nine months ended September 30, 2007. For the
nine months ended September 30, 2008, the Joint Venture made $169.9 million of
payments toward the construction of product tankers and the Partnership made
$84.9 million of payments toward the construction of the ATBs. Of the $254.8
million spent for the construction of tankers and ATBs, $101.6 million was
funded from our restricted cash accounts, of which $67.4 million was for the
ATBs and $34.2 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 nine months ended September 30, 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 nine months ended
September 30, 2007, we made $82.5 million of payments toward the construction
of the ATBs and the Joint Venture made $28.2 million of payments toward the construction
of the product tankers. Of the $110.7 million spent for the construction of
ATBs and tankers, $55.8 million was funded from our restricted cash accounts,
of which $49.3 million was for the ATBs and $6.5 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 nine months ended September 30,
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.

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 $0.4 million for the nine months ended
September 30, 2007. There were no payments made to Hess under this agreement
for the nine months ended September 30, 2008.

Financing Cash Flows

For
the nine months ended September 30, 2008, net cash provided by financing
activity was $139.9 million. The Joint Venture received a total of $137.0
million from the Joint Venture Investors, of which $85.6 million was pursuant
the Joint Ventures credit facility and $51.4 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. Due to the recent acceleration of the construction of the
product tankers, it is likely that these limits may 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 nine months ended
September 30, 2008 we borrowed $15.5 million under our credit facility, made
scheduled debt payments of $2.3 million and distributed $10.2 million to our
holders of 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. Distributions to partners will decrease in 2008 as compared to 2007 as
under the terms of our Senior Credit Facility we are no longer permitted to
make distributions to any of our unitholders until all outstanding borrowings
under the Senior Credit Facility are repaid. Distributions to our common and
subordinated unitholders and our general partner in the nine months ending September
30, 2007 totaled $25.1 million.

Net
cash provided by financing activities was $50.6 million for the nine months
ended September 30, 2007. We borrowed $54.0 million under our credit facility.
Our Joint Venture received a total of $24.0 million from the Joint Venture
Investors, of which $9.7 million was equity contributions, and $14.3 million
was pursuant to the Joint Ventures credit facility. We also made scheduled
debt payments of $2.2 million in the period and distributed $25.1 million to our
partners (including holders of our subordinated units) in respect to the first
and second quarters of 2007 and the fourth quarter of 2006.

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Payments of
Distributions

Under
the terms of our Senior Credit Facility we are no longer permitted to make
distributions to any of our unitholders until all outstanding borrowings under
the Senior Credit Facility are repaid.

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.

On
May 12, 2008, the Board of Directors of our general partner declared our
regular cash distribution for the first quarter of 2008 of $0.45 per common
unit. 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 $5.1 million.

The
Board of Directors also declared a quarterly distribution to unitholders of
$0.45 per common unit in respect to the quarter ended December 31, 2007 to
common unitholders of record on February 12, 2008. The distribution was paid to
all common unitholders on February 15, 2008. The aggregate amount of the
distribution was $5.1 million.

The
Board of Directors did not declare a dividend on our subordinated units and
general partner units in May 2008 or February 2008.

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. Both domestic
(U.S. Coast Guard) and international (International Maritime Organization)
regulatory bodies require that our vessels be drydocked for major repair and
maintenance 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, results of operations and our ability
to pay the minimum quarterly distribution on our outstanding units. 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 $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. Periodically, we make expenditures to acquire or
construct additional tank vessel capacity and/or to upgrade our overall fleet
efficiency, and in the future may make capital expenditures to retrofit vessels
to meet the requirements of OPA 90. Two ITBs completed UWILD surveys during
the quarter ended September 30, 2008.

Three
vessels are scheduled for drydocking in the fourth quarter. As a result, we
expect our results of operations and operating cash flows to be negatively
impacted in 2008 as compared to 2007 due to increased drydocking expenditures
and reduced revenues due to increased days off-hire as a result of such
drydocks.

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The
ITB Baltimore completed its regularly scheduled drydocking in
August 2007, at a cost of $5.8 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 $5.3 million. For future
drydockings, we estimate that drydocking the ITBs will cost approximately $6.0
million per vessel, the parcel tanker and Houston drydocks will cost approximately
$2.6 million to $6.0 million per vessel, the ATB drydockings will cost between
$1.0 million and $2.0 million per vessel and the new tanker drydocks will cost
between $3.5 million and $4.0 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, each ATB unit will be out of service
for approximately 25 days and each new tanker will be out of service for
approximately 35 to 40 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.

Liquidity Needs

We
are dependent on our cash flow from operations and borrowings under our
revolving credit facility 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;                                                                                                                                                        
| |   |                                                                                                                                                                                                    
| |  | our ability
 to make working capital borrowings;                                                                                                                                                   
| |   |                                                                                                                                                                                                    
| |  | the refusal
 of certain of our vendors to extend trade credit to us; and                                                                                                                           
| |   |                                                                                                                                                                                                    
| |  | the increase
 in the interest rate on our borrowings under our senior credit agreement and
 additional fees and expenses resulting from the October 2008 amendment to our
 senior credit agreement.

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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 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 five of our six 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, until recently, at record levels and are still substantially
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, our
five 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. 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.

Additionally,
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 USS 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 five of our
six ITBs now participating in the spot market and the sixth ITB expected to
enter the spot market beginning in 2009, USS expects its working capital
requirements to increase. We have limited availability under our revolving
credit facility to finance this increase in working capital requirements. The
Partnership understands that Lehman Brothers Commercial Paper, which is a revolving
credit lender under the revolving credit portion of the Partnerships senior
credit facility, has filed for protection under the U.S. bankruptcy laws, and
there can be no assurance that this entity will fulfill its obligations to make
revolving credit loans under the senior credit facility. Of the approximately
$11.2 million currently available under the Partnerships revolving credit
facility, Lehman Brothers Commercial Papers obligation is approximately $4.9
million. The failure of Lehman Brothers Commercial Paper to make revolving
credit loans available to us will have a material adverse effect on our
financial condition and results of operations.

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 relating to leverage (debt to
EBITDA) and fixed charge and interest coverage under our Senior Credit Facility
at September 30, 2008. The senior lenders have waived this non-compliance and
any non-compliance with our financial covenants at December 31, 2008, through
January 31, 2009. However, after January 31, 2009, absent an additional waiver
from the senior lenders or an amendment of the Senior Credit Facility, we will
be in default of these financial covenants. The October 2008 amendment to the
Senior Credit Facility requires us to have a specified minimum cumulative
EBITDA on the last day of October, November and December 2008 and January 2009,
and there can be no assurance that we will meet this requirement.

If
we are not in compliance with our financial covenants, or are otherwise in
default under the Senior Credit Facility, our lenders have a number of
remedies, including declaring all outstanding borrowings to be immediately due
and payable and refusing to make funds available under the revolving credit
facility. In addition, such defaults could cause cross defaults under our other
debt agreements. If all such outstanding indebtedness were declared to be
immediately due and payable, we would not have the financial resources to repay
immediately in full all outstanding borrowings under our various debt
agreements. As such, we would be required to either amend the Senior Credit
Facility or replace it with an alternate credit facility, which given current
market conditions, would be difficult. In addition, the lenders under the
Senior Credit Facility could prohibit us from paying interest on the senior
notes. Even if we are not prohibited from paying interest on the senior notes
by the lenders under the Senior Credit Facility, our ability to pays such
interest will depend on the amount of availability under our revolving credit
facility, cash generated from prior operations prior to the time such interest
payment is due and our other working capital requirements.

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In
response to these challenges, we have retained Greenhill & Co., LLC and
Jefferies & Company, Inc. to assist us in exploring strategic alternatives,
including either the possible sale of the business or the sale of new equity,
and other ways to increase liquidity and strengthen our financial resources.

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 and third quarters of 2008. 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.

Consistent
with generally accepted accounting principles, our condensed consolidated
financial statements included herein have been prepared on the basis that we
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. Our
lenders right to demand immediate payment of our outstanding indebtedness upon
the occurrence of a default under the Senior Credit Facility, coupled with a
substantial doubt about our ability to repay this indebtedness immediately and,
accordingly, in such circumstances to continue as a going concern, leads to the
need to successfully renegotiate our existing, or secure alternative, financing
arrangements. Although the lenders under the senior credit agreement waived
non-compliance with certain financial covenant defaults through January 31,
2009, there can be no assurance that they will grant us an additional waiver at
that date and, given current market conditions, we believe it would be
difficult to secure alternate financing.

Please see Risk FactorsRisks Inherent in Our Business in our Annual Report
on Form 10-K dated December 31, 2007 and Item 1A of Part II of our Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2008, June 30, 2008 and
September 30, 2008 for a detailed discussion of our liquidity requirements and
the events that could impact our liquidity.

Contractual
Commitments and Contingencies

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 and entered service in August 2008. The ATB Galveston was completed at a total
cost of $66.6 million (excluding capitalized interest, which totaled $6.8
million). 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 and will enter service in December 2008. The ATB Brownsville was completed at a total
cost of $67.5 million (excluding capitalized interest, which totaled $5.5
million at September 30, 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 November 2009 at a
cost of approximately $69.8 million (excluding capitalized interest, which
totaled $3.7 million at September 30, 2008). The cost increase over the
originally budgeted amount of $66.0 million was principally due to
contractually provided cost increases related to increases in major components,
customer requested modifications and change orders. As of September 30, 2008,
the Partnership had in escrow approximately $18.0, plus $7.6 of funds drawn
from the escrow account in anticipation of payments due in the fourth quarter
of 2008. Approximately $6.6 will be needed to complete construction of the
final ATB and such amount will be derived from the Partnerships operating cash
flows and borrowings under its revolving credit facility.

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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 the this ATB at zero, 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 September 30, 2008, the Partnership
accrued additional expenses related to owner furnished equipment in the amount
of $0.1, and the Partnership may be required to make additional payments for
certain owner furnished equipment but it has no further financial obligations
with regard to either the tug or the barge.

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 is currently scheduled to
deliver the first tanker in the first quarter of 2009, the second tanker in the
second quarter 2009, the third tanker in the fourth quarter 2009, the fourth
tanker to be delivered in the second quarter 2010, the fifth tanker in the
fourth quarter 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, of which approximately $64.4 million has already
been made and the remainder is in escrow and our obligation to make the
remaining capital commitment is supported by a letter credit. 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.

As
tankers are constructed, we will have 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 are within
the range of fair values as determined by appraisal. If we do not elect to
purchase a tanker within a specified time period, the Joint Venture may sell
the tanker to a third party; however, the Joint Venture must first allow us to
make an offer to purchase the tanker (except in certain limited circumstances).
The Joint Venture will use the proceeds from the sale of the tankers to us, or
to third parties if we do 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 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. We anticipate that the $500.0 million of capital
committed to the Joint Venture, together with anticipated proceeds from the
sale of tankers by the Joint Venture to us or to third parties, will be
sufficient to fund the construction of all of the tankers constructed by the
Joint Venture. 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. The acceleration of the tankers construction may require
additional capital at certain periods of time during the construction period,
as the overlapping vessels under construction but not yet sold will need to be
financed simultaneously by the Joint Venture, at levels above current
commitments. Our ability to take delivery of these vessels from our Joint
Venture will depend 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, is unlikely to be feasible. If the
vessels remain in the Joint Venture, we will not receive the bulk of the
benefits associated with ownership of these vessels, 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, and it is likely that our
interest in the Joint Venture will have little if any value.

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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. The Joint Venture Investors option
to elect to have the Joint Venture assume the rights and obligations to
construct some or all of the remaining four tankers has expired. As a result,
Product Carriers is obligated to obtain alternative financing for their
construction or to transfer the shipyard slots. Given current market conditions
and our financial condition, it is unlikely that Product Carriers will be able
to obtain the necessary financing. If the Joint Venture elects not to construct
the last four tankers, Product Carriers would be obligated to obtain
alternative financing for their construction or to transfer the shipyard slots.
In such event, it is possible that Product Carriers will not be able to obtain
the necessary financing on acceptable terms or at all. If Product Carriers is
unable to obtain the financing for these four tankers, it 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, we
believe that there is substantial doubt that  we will realize any return on or of our $70 million
equity investment in 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. 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 approximately $363 and $507, respectively, and
are reflected in our financial statements at September 30, 2008 other expense.
These premiums are payable in March 2009 and June 2009, respectively. Since the
2008 supplemental premium is of an indeterminate amount but likely that there
will be some additional premium, an estimated $188 has been recognized as other
expense at September 30, 2008 for the current 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 are estimated
to be increased by 12.5% which will be negotiated at the time of our renewal.
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:

| |    |                                                                                                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------
| | 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.                                                       

We have not elected fair value treatment for any financial
 instruments as of September 30, 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.

- 59 -

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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 also forward-looking statements.

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

|  |  |                                                                                                                                                                                             
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability
 to pay satisfy our working capital requirements;                                                                                                                               
|  | 
| |  | our ability
 to pay interest on, and principal of, our indebtedness;                                                                                                                        
|  | 
| |  | our ability
 to remain in compliance with our debt agreements;                                                                                                                              
|  | 
| |  | our ability
 to maximize the use of our vessels;                                                                                                                                            
|  | 
| |  | planned
 capital expenditures and availability of capital resources to fund capital
 expenditures;                                                                                          
|  | 
| |  | future
 supply of, and demand for, refined petroleum products;                                                                                                                              
|  | 
| |  | potential
 reductions in the supply of tank vessels due to restrictions set forth by OPA
 90 and increasingly stringent industry vetting standards used by our
 customers;                  
|  | 
| |  | increases in
 domestic refined petroleum product consumption;                                                                                                                               
|  | 
| |  | our ability
 to enter into and maintain long-term relationships with major oil and
 chemical companies;                                                                                     
|  | 
| |  | the absence
 of disputes with our customers;                                                                                                                                                
|  | 
| |  | expected
 financial flexibility to pursue acquisitions and other expansion
 opportunities;                                                                                                  
|  | 
| |  | our expected
 cost of complying with OPA 90 and our ability to finance such costs,
 including our ability to replace or retrofit our existing vessels that must
 be phased out under OPA 90;
|  | 
| |  | our ability
 to acquire existing vessels and/or to construct new vessels, including our
 ability to finance such acquisitions or construction;                                              
|  | 
| |  | estimated
 future maintenance capital expenditures;                                                                                                                                         
|  | 
| |  | the absence
 of future labor disputes or other disturbances;                                                                                                                                
|  | 
| |  | expected
 demand in the domestic tank vessel market in general and the demand for our
 tank vessels in particular;                                                                          
|  | 
| |  | expected
 increases in charter rates;                                                                                                                                                       
|  | 
| |  | future
 consolidation in the domestic tank vessel industry;                                                                                                                                 
|  | 
| |  | customers
 increasing emphasis on environmental and safety concerns;                                                                                                                       
|  | 
| |  | continued
 outsourcing of non-strategic functions, such as domestic tank vessel
 operations, by companies in the oil and chemical industries;                                               
|  | 
| |  | our
 percentage of qualifying income as defined by the IRS;                                                                                                                               
|  | 
| |  | our ability
 to maintain our qualifying income at levels sufficient to maintain our
 status as a publicly-traded partnership                                                            
|  | 
| |  | our future
 financial condition or results of operations and our future revenues,
 expenses and liquidity; and                                                                              
|  | 
| |  | our business
 strategy and other plans and objectives for future operations.                                                                                                                

These
forward-looking statements are made based upon managements current plans,
expectations, estimates, assumptions and beliefs concerning future events
impacting us and therefore involve a number of risks and uncertainties. We
caution that forward-looking statements are not guarantees and that actual
results could differ materially from those expressed or implied in the
forward-looking statements.

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

- 60 -

---



|  |  |                                                                                                                                                                                                                  
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | insufficient
 cash from operations;                                                                                                                                                                              
|  | 
| |  | a decline in
 demand for refined petroleum, petrochemical and commodity chemical products;                                                                                                                       
|  | 
| |  | a decline in
 demand for overseas transportation of grain for humanitarian purposes;                                                                                                                             
|  | 
| |  | a decline in
 demand for or an increase in tank vessel capacity;                                                                                                                                                 
|  | 
| |  | intense
 competition in the domestic tank vessel industry;                                                                                                                                                       
|  | 
| |  | the
 occurrence of marine accidents or other hazards;                                                                                                                                                            
|  | 
| |  | the loss of
 any of our largest customers;                                                                                                                                                                       
|  | 
| |  | fluctuations
 in voyage charter rates;                                                                                                                                                                           
|  | 
| |  | our ability
 to acquire product tankers from the Joint Venture;                                                                                                                                                  
|  | 
| |  | insufficient
 funds to finance the construction of new vessels we are committed to
 construct;                                                                                                                   
|  | 
| |  | delays or
 cost overruns in the construction of new vessels or the retrofitting or
 modification of older vessels;                                                                                               
|  | 
| |  | adverse
 events affecting the joint venture formed to construct up to nine product
 tankers, including replacement of us as manager of, or our loss of control of
 the board of directors of, such joint venture;
|  | 
| |  | our levels
 of indebtedness and our ability to obtain credit on satisfactory terms;                                                                                                                              
|  | 
| |  | our ability
 to amend our Senior Credit Facility on economically acceptable terms;                                                                                                                               
|  | 
| |  | increases in
 interest rates, including as a result of amending our Senior Credit Facility;                                                                                                                      
|  | 
| |  | limitations
 imposed on our operations and adverse effects on our interest rate hedges due
 to a change in interest rates resulting from the amendment of our Senior
 Credit Facility;                           
|  | 
| |  | the fact
 that absent an amendment to, or further waiver of, the financial covenants in
 the Senior Credit Agreement, we will be in default under the Senior Credit
 Facility after January 31, 2009;            
|  | 
| |  | our
 liquidity;                                                                                                                                                                                                  
|  | 
| |  | our election
 to be taxed as a corporation rather than a limited partnership;                                                                                                                                    
|  | 
| |  | weather
 interference with our customers or our business operations;                                                                                                                                            
|  | 
| |  | changes in
 international trade agreements;                                                                                                                                                                      
|  | 
| |  | our ITBs
 remaining eligible to participate in the UWILD Program;                                                                                                                                                
|  | 
| |  | failure to
 comply with the Merchant Marine Act of 1920 (the Jones Act);                                                                                                                                       
|  | 
| |  | modification
 or elimination of the Jones Act; and                                                                                                                                                               
|  | 
| |  | adverse
 developments in our marine transportation business.                                                                                                                                                     

Please read
Risk Factors in Item 1A in Part II of this report and in our Quarterly Reports
on Form 10-Q for the Quarters ended March 31, 2008 and June 30, 2008, as well
as in Item 1A. of our Annual Report on Form 10-K for the year ended December
31, 2007, 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.

|        |                                                            
|------- | -----------------------------------------------------------
|ITEM 3. | 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 debt
outstanding during the nine months ended September 30, 2008, a 1% change in our
variable interest rates would have increased our interest expense by $1.0
million for the nine months ended September 30, 2008, after taking into effect
the interest rate swap agreements we had in effect as described below.

We utilize
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 our interest rate swap in the
notional amount of $97,750 is Lehman Brothers Special Financing, Inc.,
which the Partnership understands has filed for protection under the U.S.
bankruptcy laws. There can be no assurance that this entity will honor its
obligations under the interest rate swap, although currently the Partnership is
obligated to make, rather than entitled to receive, payments under the terms of
the swap agreement. We do not hold or issue interest rate swaps for trading
purposes.

- 61 -

---



We had two
interest rate swap agreements as of September 30, 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
September 30, 2008 the fair market values of our two interest rate swaps were a
loss of $5.5 million and a loss $3.1 million.

The
following is a summary of the economic terms of these agreements at September
30, 2008 (dollars in thousands):

|                       |  |    |            |  
|---------------------- |  | -- | ---------- | -
|Notional amount        |  | $  | 122,188    |  
|Fixed rate paid        |  |    | 5.355      | %
|Variable rate received |  |    | 3.762      | %
|Effective date         |  |    | 8/15/2006  |  
|Expiration date        |  |    | 8/6/2012   |  
|Fair Value             |  | ($ | 5,533      | )
|                       |  |    |            |  
|Notional amount        |  | $  | 97,750     |  
|Fixed rate paid        |  |    | 4.899      | %
|Variable rate received |  |    | 3.762      | %
|Effective date         |  |    | 12/12/2006 |  
|Expiration date        |  |    | 8/6/2012   |  
|Fair Value             |  | ($ | 3,147      | )

To hedge
the foreign currency exposure in contracts we entered into for the purchase of
owner-furnished items relative to our newbuild ATB series, denominated in
Euros, costing approximately $14.4 million, we entered into a series of foreign
currency forward contracts with an average exchange rate of $1.25 per Euro. As
of September 30, 2008, all contracts for this hedge have been satisfied.
Additionally, during the nine months ended September 30, 2008, a portion of
these contracts were no longer designated as cash flow hedges and the portion
of the gain related to the undesignated contracts has been recognized in earnings.

The
contracts to construct our ATBs with MMG and Eastern are primarily fixed;
however there is an escalator clause related to the price of steel and certain
other equipment. The contract is priced utilizing a steel cost of $900/ton for steel
plate and $1,100/ton for steel shape. The impact of an increase in steel prices
of $100/ton would increase the cost of construction by $0.4 million per vessel.

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 September 30, 2008 was $2.1 million. Changes in the
fair value of those instruments are reported in earnings.

- 62 -

---



The
following is a summary of the economic terms of this agreement at September 30,
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        |  | $ | 2,142    |  

|        |                        
|------- | -----------------------
|ITEM 4. | Controls and Procedures

In
accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of our disclosure controls and procedures as of the end of the period covered
by this report. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of September 30, 2008 to provide reasonable assurance that
information required to be disclosed in our reports filed or submitted 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.

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

- 63 -

---



PART
IIOTHER INFORMATION

|        |                  
|------- | -----------------
|ITEM 1. | Legal Proceedings

We are
subject to various claims and lawsuits in the ordinary course of business for
monetary relief principally from personal injuries, collision or other casualty
and to claims arising under vessel charters. Although the outcome of any
individual claim or action cannot be predicted with certainty, we believe that
any adverse outcome, individually or in the aggregate, would be substantially
mitigated by applicable insurance or indemnification from previous owners of
our assets, and would not have a material adverse effect on our financial
position, results of operations or cash flows. We are subject to deductibles
with respect to our insurance coverage which range up to $0.15 million per
incident, and we provide on a current basis for estimated payments there under.

|         |             
|-------- | ------------
|ITEM 1A. | Risk Factors

The
following information updates the risk factors set forth in Item 1A. of our
Annual Report on Form 10-K for the year ended December 31, 2007 and Item 1A. of
Part II of our Quarterly Reports of Form 10-Q for the quarters ended March 31,
2008 and June 30, 2008:

We may not have
sufficient cash to operate our business.

We may not
have sufficient cash to operate our business. We are dependent on our cash flow
from operations and borrowings under our revolving credit facility 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 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;                                                                                                                                                        
| |                                                                                                                                                                                                      
| |  our
 ability to make working capital borrowings;                                                                                                                                                   
| |                                                                                                                                                                                                      
| |  the
 refusal of certain of our vendors to extend trade credit to us; and                                                                                                                           
| |                                                                                                                                                                                                      
| |  the
 increase in the interest rate on our borrowings under our senior credit
 agreement and additional fees and expenses resulting from the October 2008
 amendment to our senior credit agreement.

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
five of our six 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, until recently, at record levels and are still substantially 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, our five 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. 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.

- 64 -

---



Additionally,
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 USS 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 five of our
six ITBs now participating in the spot market and the
sixth ITB expected to enter the spot market beginning in 2009, USS expects its
working capital requirements to increase. We have limited availability under
our revolving credit facility to finance this increase in working capital
requirements. The Partnership understands that Lehman Brothers Commercial
Paper, which is a revolving credit lender under the revolving credit portion of
the Partnerships senior credit facility, has filed for protection under the
U.S. bankruptcy laws, and there can be no assurance that this entity will
fulfill its obligations to make revolving credit loans under the senior credit
facility. Of the approximately $11.2 million currently available under the
Partnerships revolving credit facility, Lehman Brothers Commercial Papers
obligation is approximately $4.9 million. The failure of Lehman Brothers
Commercial Paper to make revolving credit loans available to us will have a
material adverse effect on our financial condition and results of operations.

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 financial covenants under our Senior Credit Facility at
September 30, 2008. The senior lenders have waived this non-compliance and any
non-compliance with our financial covenants at December 31, 2008, through
January 31, 2009. However, after January 31, 2009, absent an additional waiver
from the senior lenders or an amendment of the Senior Credit Facility, we will
be in default of these financial covenants. The October 2008 amendment to the
Senior Credit Facility requires us to have a specified minimum cumulative
EBITDA on the last day of October, November and December 2008 and January 2009,
and there can be no assurance that we will meet this requirement.

If we are
not in compliance with our financial covenants, or are otherwise in default
under the Senior Credit Facility, our lenders have a number of remedies,
including declaring all outstanding borrowings to be immediately due and
payable and refusing to make funds available under the revolving credit
facility. In addition, such defaults could cause cross defaults under certain of our other
debt agreements. If all such outstanding indebtedness were declared to be
immediately due and payable, we would not have the financial resources to repay
immediately in full all outstanding borrowings under our various debt
agreements. As such, we would be required to either amend the Senior Credit
Facility or replace it with an alternate credit facility, which given current
market conditions, would be difficult. In addition, the lenders under the Senior
Credit Facility could prohibit us from paying interest on the senior notes.
Even if we are not prohibited from paying interest on the senior notes by the
lenders under the Senior Credit Facility, our ability to pays such interest
will depend on the amount of availability under our revolving credit facility,
cash generated from prior operations prior to the time such interest payment is
due and our other working capital requirements.

We are prohibited from making distributions
on our common units until our borrowings under our Senior Credit Facility are
paid in full.

- 65 -

---



In light of
the liquidity pressures faced by us, 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 or third quarters of 2008. 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. We do not expect to pay any distributions on our common units for at
least the next several years.

The quoted market price for our common units
may not reflect the actual value of our common units. Certain of our directors
and officers may sell some or all of their common units in the fourth quarter
for tax-planning purposes.

The trading
price for our common units ranged from $1.37 to $4.28 during the quarter ended
September 30, 2008, and the closing price of our common units on November 12,
2008 was $0.13. Effective November 6, 2008, our common units were suspended
from trading on the New York Stock Exchange because we have 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. Our common units are now
traded on the OTC pink sheets under the symbol USSPZ. Given the substantial
amount of our indebtedness and the increased interest rates we have agreed to
pay our senior lenders, a portion of which is being paid through the issuance
of additional debt, as well as the difficult market conditions we face, we
believe the quoted market price for our common units may not reflect the actual
value of our common units.

Certain of
our officers and directors who beneficially own subordinated units have informed
us that they intend to sell some or all of their common units beginning on the
fourth business day following the filing of this Quarterly Report on Form 10-Q
for tax-planning purposes to offset gains they expect to recognize in respect
of their subordinated units. These sales could adversely affect the market
price of the common units currently outstanding.

We may elect to be taxed as a corporation,
rather than a partnership, for federal income tax purposes effective January 1,
2009.

Because of
the shift in our business away from carrying petroleum products, which produces
qualifying income, to carrying products, such as grain and certain chemicals,
that do not produce qualifying income, the prohibition on our paying
distributions on our common units and the substantial costs of preparing K-1s
for unit holders, we are examining whether it would be better for us to elect
to be taxed as a corporation for federal income tax purposes effective January
1, 2009. This election could have adverse tax consequences for some or all of
our partners, and you should consult with your tax advisors accordingly.

|        |                                                             
|------- | ------------------------------------------------------------
|ITEM 2. | Unregistered Sales of Equity Securities and
 Use of Proceeds

None.

|        |                                
|------- | -------------------------------
|ITEM 3. | Defaults Upon Senior Securities

The
Partnership would not have been in compliance with financial covenants under
its Senior Credit Facility at September 30, 2008. The senior lenders have
waived this potential non-compliance and any non-compliance with our financial
covenants at December 31, 2008 through January 31, 2009. However, after January
31, 2009, absent an additional waiver from the senior lenders or an amendment
of the Senior Credit Facility, we will be in default of these financial
covenants.

- 66 -

---



|        |                                                     
|------- | ----------------------------------------------------
|ITEM 4. | Submission of Matters to a Vote of Security
 Holders

None.

|        |                  
|------- | -----------------
|ITEM 5. | Other Information

On October 20, 2008, the Partnership and its lenders amended the
Partnerships Senior Credit Facility. The material changes to the Senior Credit
Facility include:

|  |                                                                                                                                                                                                                                                                                                                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                                                                                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                             
| | 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 our borrowings will be 8.5%.
 The Partnership estimates that the increase in the margin over LIBOR will
 increase cash interest expense by approximately $1.4 million per quarter.
|  |                                                                                                                                                                                                                                                                                                                                                                                                             
| | The
 Partnership will pay an additional 1.5% per annum in interest on outstanding
 borrowings, which additional interest will be paid-in-kind (PIK interest),
 and under certain circumstances the PIK interest rate will increase to 4.5%
 on January 31, 2009.                                                                                                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                             
| | 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 agreement) 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 agreement was eliminated.
|  |                                                                                                                                                                                                               
| | The Partnership is not permitted to pay any distributions on its
 common units until all borrowings under the senior credit agreement are paid
 in full.                                                      

The
Compensation Committee of the Board of Directors of our General Partner
revised, effective October 1, 2008, 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 $12.5 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 $37.9 in 2007 and
$36.7 in 2008.

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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 approximately $363 and $507, respectively, and
are reflected in our financial statements at September 30, 2008 as other
expense. These premiums are payable in March 2009 and June 2009, respectively.
Since the 2008 supplemental premium is of an indeterminate amount but likely
that there will be some additional premium, an estimated $188 has been
recognized as other expense at September 30, 2008 for the current 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
are estimated to be increased by 12.5% which will be negotiated at the time of
our renewal. Policy years run from February 20 to February 19.

One of our
ITBs is currently transporting petroleum products a time charter that expires
December 31, 2008. The charterer has declined to exercise the option to renew
the time charter and this ITB will enter the spot market on January 1, 2009.

|        |         
|------- | --------
|ITEM 6. | Exhibits

|                |  |  |                                                                                                                                                                                                                                |  | 
|--------------- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | 
|Exhibit
 Number |  |  | Description                                                                                                                                                                                                                    | 
|                |  |  |                                                                                                                                                                                                                                | 
|4.1             |  |  | 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).
|                | 
|10.1            |  |  | 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).     
|                | 
|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.                                                                                                                     

- 68 -

---



SIGNATURES

Pursuant to
the requirements 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: November 14, 2008

| |                              |  |                                              
| | ---------------------------- |  | ---------------------------------------------
| | 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                          
| |                              |  | Chief
 Executive Officer                     
| |                              |  | (principal
 executive officer)               
| |                              |  |                                              
| | by:                          |  | /s/ Albert
 E. Bergeron                      
| |                              |  |                                              
| |                              |  | Albert E.
 Bergeron                          
| |                              |  | Vice
 PresidentChief Financial Officer      
| |                              |  | (principal
 financial and accounting officer)
| |                              |  |                                              

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